Article Law360

Trump Tariffs May Violate Investment Treaty Protections

As the America First tariffs have rocked the globe and the capital markets, the question naturally arises: Is there is anything that companies can do? While much has been said about potential trade remedies, those remedies are mostly controlled by government authorities and do not provide monetary relief to affected companies. The focus of this article therefore is on whether there are means for foreign investors to recover for harm suffered.

The America First tariffs, which impose a 25 percent tariff on imported steel, a 10 percent tariff on imported aluminum, a 30 percent tariff on imported solar products and a 50 percent tariff on imported residential washing machines, may violate investment treaty protections. Thus, investment treaties and free trade agreements could potentially allow affected foreign companies to recover damages for losses caused by the tariffs.

For companies that are currently exempt from the tariffs, such as steel and aluminum importers from Argentina, Australia, Brazil, South Korea, Canada, Mexico and the European Union, investment treaty remedies may become relevant in the event the exemptions are discontinued (reportedly due to occur on May 1, 2018).

Investment Treaty and Free Trade Agreement Protections

A foreign investor who invests in the United States is entitled to certain protections when the investment originates from a country with an investment treaty or free trade agreement with the United States. The U.S. currently has over 50 such treaties, including with Argentina, Canada, Colombia, Mexico, Panama and South Korea.

The America First tariffs could potentially face challenge under three of the investment protections provided in most of the investment treaties and free trade agreements that the U.S. has signed: (1) the guarantee of national treatment,[1] (2) the prohibition against performance requirements[2] and (3) the guarantee of fair and equitable treatment.[3] These protections, described below, may be enforced through international arbitration proceedings commenced directly against the U.S. and decided by a panel of neutral decision-makers appointed by the parties.

A series of decade-old cases involving Mexico’s imposition of taxes on imports of sweeteners demonstrate the strength of these protections in confronting trade measures like the America First tariffs. In three such cases, investors recovered over $170 million in damages from Mexico to compensate for lost sales and reduced profits due to the unlawful import tax. Such precedents, described below, may support a similar challenge against the America First tariffs.

The Guarantee of National Treatment

The guarantee of national treatment promises foreign investors the same level of treatment afforded to domestic investors. As provided in the North American Free Trade Agreement, “[e]ach Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the … management, conduct, operation and sale or other disposition of its investments.”[4]

Thus, where a state confers a benefit upon a domestic investor, it must confer the same benefit upon foreign investors covered by this protection. Besides NAFTA, the U.S. has included national treatment provisions in a number of its investment agreements and free trade agreements, including the Argentina-U.S. Bilateral Investment Treaty and the Korea-U.S. Free Trade Agreement (KORUS FTA).[5]

The America First tariffs appear to violate the national treatment standard because the tariffs treat foreign investors differently than domestic investors in order to protect the domestic U.S. industries from foreign competition. After enacting the solar and washing machine tariffs, President Donald Trump explained the tariffs were designed to favor U.S. producers, stating “[w]e want our workers to be protected, frankly we want companies to be protected, so we will not impose tax on any product made in the U.S.A.”[6] In announcing the steel and aluminum tariffs, Trump similarly said, “[w]e’ll be imposing tariffs on steel imports and tariffs on aluminum imports. … And you’ll have protection for a long time in a while.”[7]

In the cases against Mexico, multiple tribunals held that using taxes to protect or confer an advantage on domestic producers was unlawful. In Cargill v. Mexico, the tribunal held that a tax on sweeteners imported into Mexico was unlawful because “as a result of the [tax], the treatment received by suppliers [was] less favourable than the treatment received by [domestic] suppliers.”[8] Similarly, the tribunal in ADM v. Mexico found the tax on imported sweeteners unlawful because “the Tax was enacted for the purpose of protecting the domestic Mexican sugar industry from foreign competitors.”[9] The import tax was deemed unlawful because it favored and protected domestic producers of similar products.

The America First tariffs likewise appear to be designed to protect the domestic U.S. producers from foreign competitors — the precise conduct deemed to violate the guarantee of national treatment by the ADM and Cargill tribunals.

The Prohibition on Performance Requirements

The performance requirement standard prohibits a state from conditioning the receipt of advantages to a foreign investor on the investors’ agreement to prefer domestically-produced goods. NAFTA, for instance, provides that “[n]o party may condition the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party …,on compliance with … requirements … to achieve a given level or percentage of domestic content ... or to purchase, use or accord a preference to goods produced in its territory.”[10] The United States has likewise committed to refrain from imposing performance requirements in a number of its investment agreements and free trade agreements, including the Australia-U.S. BIT and the KORUS FTA.[11]

The America First tariffs potentially violate the prohibition on performance requirements because the tariffs confer the receipt of an advantage (freedom from tariffs) only to companies that sell goods made in the U.S. As President Trump announced in signing the steel and aluminum tariffs, “we are urging all Americans to buy American,” and, “[y]ou don’t want to pay tax? Bring your plant to the U.S.A., there’s no tax.”[12] Likewise, in announcing the solar and washing machine tariffs, President Trump said, “[w]hen we do this, a lot of manufacturers will be coming to the United States to build washing machines and also solar.”[13]

Investors successfully used the prohibition on performance requirements to challenge discriminatory taxes that Mexico imposed on sweetener imports. In ADM v. Mexico, the tribunal held that the tax on foreign imports was unlawful because it conferred a benefit (the tax exemption) only to companies that purchased domestic sweetener producers. The tribunal explained that “[t]he performance requirement in the present case consists of the requirement to use [domestic] cane sugar … in order to benefit from the tax exemption.”[14]

The Cargill tribunal agreed, finding Mexico liable because “[b]y its very design, the performance requirement — conditioning the receipt of a tax advantage on the use … of domestically produced cane sugar — was in connection with the operation of an investment.”[15] This precedent suggests that requiring companies to manufacture their goods in the U.S. in order to gain the benefit of avoiding the tariffs could breach the prohibition on performance requirements.

The Right to Fair and Equitable Treatment

The guarantee of fair and equitable treatment is broad, providing, among other things, that treatment by the state of a foreign investor should “not affect the basic expectations that were taken into account by the foreign investor to make the investment.”[16] By incorporating the fair and equitable treatment provision in treaties, states agree to “an obligation thereunder not to discriminate against foreign investors”; “a measure is considered discriminatory if the intent of the measure is to discriminate or if the measure has a discriminatory effect.”[17] The United States ensures the right to fair and equitable treatment in many investment treaties and free trade agreements, including the Argentina-U.S. BIT, the KORUS FTA and NAFTA.[18]

The America First tariffs may violate the fair and equitable treatment standard because they are discriminatory in intent and effect. For instance, President Trump reportedly said that Samsung and LG were “dumping washers in the U.S.” and thus imposed tariffs to require those companies to build plants in the U.S.[19] Prior tribunals have held that statements targeting specific companies may breach investment treaty protections.[20]

The America First tariffs also may violate the guarantee of fair and equitable treatment because the threat tariffs is being used to leverage policy changes from Canada, Mexico and the EU — conduct which has been deemed impermissible by investment treaty tribunals. President Trump has explained that he is using the tariffs to convince foreign governments to renegotiate trade agreements and existing tariff structures. For example, on March 5, 2018, Trump tweeted that “Tariffs on steel and aluminum will only come off; if new and fair NAFTA agreement is signed.”[21]

With respect to the EU, Trump tweeted: “[i]f they drop their horrific barriers & tariffs on U.S. products going in, we will likewise drop ours… If not, we Tax Cars, etc. FAIR!”[22] These statements suggest that the tariffs are designed to persuade foreign governments to change their trade policies, which could violate the guarantee of fair and equitable treatment.

In Cargill v. Mexico, the tribunal held that a permitting requirement for imported sweeteners breached the fair and equitable treatment standard because it was “intended to injure United States [] producers and suppliers in an effort to persuade the United States government to change its policy on sugar imports from Mexico.”[23] In reaching this conclusion, the Cargill tribunal “acknowledge[d] the dire and difficult circumstances that faced Mexico at the time of the measures in terms of the crisis gripping its sugar industry and the many citizens employed in that industry,” but still found that the measures taken breached the requirement to provide fair and equitable treatment under the NAFTA.[24]

In Pope & Talbot v. Canada, a tribunal held that a tariff regime imposed on U.S. imports of lumber into Canada violated the guarantee of fair and equitable treatment because the investor was forced to incur unnecessary expenses and legal fees, and suffer a loss of reputation.[25] These rulings suggest that tariffs that unfairly discriminate against foreign investors and/or are designed to manipulate foreign policy may breach the fair and equitable treatment standard.

The National Security Defense

President Trump justified the America First steel and aluminum tariffs on national security grounds, explaining, “this tariff is necessary and appropriate to address the threat that imports of steel articles pose to the national security.”[26]

Many investment treaties and free trade agreements preserve the rights of states to take measures to protect national security. For example, the U.S.-Argentina BIT provides that “[t]his Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the Protection of its own essential security interests.”[27]

Other treaties take different approaches to national security measures, giving states explicit discretion to take the security measures they deem necessary. For example, the KORUS FTA provides that “[n]othing in this Agreement shall be construed: […] (b) to preclude a Party from applying measures that it considers necessary for the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security or the protection of its own essential security interests.”

The KORUS FTA also goes further to provide that “[f]or greater certainty, if a Party invokes [the essential security clause] in an arbitral proceeding … the tribunal or panel hearing the matter shall find that the exception applies.”[28]

In the international arbitration context, national security defenses often face serious scrutiny by arbitral tribunals.[29] In several cases, Argentina argued that the measures it took to overcome its 2001 economic crisis were justified under the essential security clause in its BITs. The tribunals construed Argentina’s security defenses as a “plea of necessity”[30] under international law, and virtually all tribunals rejected Argentina’s security defense.

While the tribunals had “no doubt that there was a severe crisis and that in such context it was unlikely that business could have continued as usual,” they found that the measures were not the “only way” to address the issue, and thus were not of sufficient necessity.[31] For instance, the tribunals noted that Argentina could have enacted structural reforms, restructured its debt or adopted alternative currency strategies.[32] The Argentine cases illustrate the high bar that tribunals apply in determining whether national security excuses a state’s otherwise unlawful conduct.

There are indications that the aluminum and steel tariffs were enacted to protect the domestic economy rather than to provide for national security. For example, when signing the memorandum to request an investigation on April 20, 2017, President Trump stated, “[w]e’ve been working on it since I came to office, and long before I came to office. We’re going to fight for American workers and American-made steel.”

In addition, President Trump may have decided to impose tariffs even prior to conducting the prerequisite studies, which suggests the decision to impose the tariffs was predetermined. Even before entering office, President Trump announced, “I will use every lawful presidential power to remedy trade disputes, including the application of tariffs, consistent with Section 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962.”[33] Notably, Section 201 and Section 232 are the very provisions ultimately relied upon to enact the tariffs.

Last August, before starting the investigations to determine whether the tariffs were justifiable, President Trump reportedly told a room of his trade advisors including U.S. Trade Representative Robert Lighthizer that, “I want tariffs. And I want someone to bring me some tariffs.”[34] None of these initial declarations included any stated concerns about national security.

Where national security provisions in a treaty or free trade agreement are invoked in response to investment treaty claims, an arbitral tribunal will need to determine whether the security clause is “self-judging,” which would allow the state the unilateral right to invoke the national security defense with limited grounds for review by the tribunal. In the Argentine cases, the tribunals held that they were empowered to rule on the validity of the security defense since the security clauses in the treaties at issue were not “self-judging.”[35]

As one tribunal explained, “when States intend to create for themselves a right to determine unilaterally the legitimacy of extraordinary measures … they do so expressly,” and pointed to examples from the trade sphere.[36] Meanwhile, certain treaties contain language that suggest the clause could be considered self-judging, including NAFTA: “nothing in this Agreement shall be construed to prevent any Party from taking any actions that it considers necessary for the protection of its essential security interests.”[37] However, that statement expressly defines the narrow circumstances in which a security measure exists, which extends to only policies related to nuclear weapons, actions taken in time of war or emergency, or traffic in arms and other goods undertaken to supply a military or other security establishment.

Companies that Qualify for Treaty Protection

Not all foreign companies are entitled to investment treaty protection. In order to qualify for protection the company must qualify as a protected “investor.”

To start, a foreign company must be a “national” of a country that has a free trade agreement or investment treaty with the U.S. The definition of “national” varies from treaty to treaty, but typically extends to companies incorporated in the signatory country or citizens of that country. In addition, the foreign investor must hold a covered “investment” under the terms of the treaty, which could, for instance, require foreign companies to have operations in the U.S. in order to qualify. The determination of whether a particular company qualifies for investment treaty protection is very much dependent on the particular facts and circumstances.

Foreign companies affected by the America First tariffs should consider the extent to which such tariffs may violate their rights under applicable investment treaties or free trade agreements, and thus may provide them with recourse in international arbitration for the harm they have suffered.

[1] Argentina-U.S. Investment Treaty of 1991, Article II, Paragraph 1; Australia-U.S. FTA of 2004, Chapter Eleven, Article 11.3 for investments; Korea-U.S. FTA of 2007, Chapter Eleven, Article 11.3; NAFTA, Chapter Eleven, Section A, Article 1102.

[2] Argentina-U.S. Investment Treaty of 1991, Article II, Paragraph 5; NAFTA, Chapter Eleven, Section A, Article 1106; Korea-U.S. FTA of 2007, Chapter Eleven, Article 11.8.

[3] Argentina-U.S. Investment Treaty of 1991, Article II, Paragraph 2(a); Australia-U.S. FTA of 2004, Chapter Eleven, Article 11.5; Korea-U.S. FTA of 2007, Chapter Eleven, Article 11.5; NAFTA, Chapter Eleven, Article 1105.

[4] NAFTA, Chapter Eleven, Section A, Article 1102(1). See also id., Article 1102(2) (“Each Party shall accord to investments of investors of another Party treatment no less favorable than that it accords, in like circumstances, to investments of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments”).

[5] Argentina-U.S. Investment Treaty of 1991, Article II, Paragraph 1; Australia-U.S. FTA of 2004, Chapter Two, Article 2.2 for trade in goods and Chapter Eleven, Article 11.3; Korea-U.S. FTA of 2007, Chapter Eleven, Article 11.3; NAFTA, Chapter Eleven, Section A, Article 1102.

[6] Remarks by President Trump at Signing of Section 232 Proclamation on Steel and Aluminum Imports, March 8, 2018. Similarly, Trump announced that the purpose of the solar and washing machine tariffs is to bring production back to the U.S. “It’s a very big industry, and you’re going to have a lot of plants built in the United States that were thinking of coming, but they would’ve never come unless we did this. … And that’s what this is all about.” Remarks by President Trump at Signing of Section 201 Actions, Jan. 23, 2018.

[7] D. Lynch and D. Palatta, Trump announces steel and aluminum tariffs Thursday over objections from advisers and Republicans, Washington Post, March 1, 2018, available at: https://www.washingtonpost.com/blogs/right-turn/wp/2018/03/01/trump-starts-a-trade-war-any-recession-will-be-on-him/?utm_term=.1e99361e7282.

[8] Cargill Incorporated v. United Mexican States, ICSID Case No. ARB(AF)/05/2, Award dated Sept. 18, 2009 ¶ 219.

[9] Archer Daniels Midland Company and Tate & Lyle Ingredients Americas Inc. v. The United Mexican States, ICSID Case No. ARB (AF)/04/5, Award, Nov. 21, 2007 ¶ 210.

[10] NAFTA, Article 1106(3)(b). Similarly, the Korea-U.S. FTA provides that “Neither Party may, in connection with the ... management, conduct, operation or sale or other disposition of an investment in its territory of an investor of a Party or of a non-Party, impose or enforce any requirement or enforce any commitment or undertaking: (b) to achieve a given level or percentage of domestic content; ... (c) to purchase, use or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory.” Article 11.8.

[11] Argentina-U.S. Investment Treaty of 1991, Article II, Paragraph 5; Australia-U.S. FTA of 2004, Chapter Eleven, Article 11.9(c); Korea-U.S. FTA of 2007, Chapter Eleven, Article 11.8(c); NAFTA, Chapter Eleven, Article 1106.

[12] Remarks by President Trump at Signing of Section 232 Proclamation on Steel and Aluminum Imports, March 8, 2018.

[13] Remarks by President Trump at Signing of Section 201 Actions, Jan. 23, 2018, available at: https://www.whitehouse.gov/briefings-statements/remarks-president-trump-signing-section-201-actions/.

[14] Archer Daniels Midland Company and Tate & Lyle Ingredients Americas Inc. v. The United Mexican States, ICSID Case No. ARB (AF)/04/5, Award, Nov. 21, 2007 ¶ 223.

[15] Cargill, Incorporated v. United Mexican States, ICSID Case No. ARB(AF)/05/2, Award dated Sept. 18, 2009 ¶ 317.

[16] National Grid v Argentina, Award, Nov. 3, 2008, at ¶ 173.

[17] LG&E v. Argentina, Decision on Liability, Oct. 3, 2006 ¶ 146. The same tribunal explained that arbitrary measures are “measures that affect the investments of nationals of the other Party without engaging in a rational decision-making process. Such process would include a consideration of the effect of a measure on foreign investments and a balance of the interests of the State with any burden imposed on such investments.” Id. at ¶ 158.

[18] Argentina-U.S. Investment Treaty of 1991, Article II, Paragraph 2(a); Australia-U.S. FTA of 2004, Chapter Eleven, Article 11.5; Korea-U.S. FTA of 2007, Chapter Eleven, Article 11.5; NAFTA, Chapter Eleven, Article 1105.

[19] Remarks by President Trump at Signing of Section 201 Actions, Jan. 23, 2018.

[20] See, e.g. Crystallex v. Venezuela, Award, at ¶¶ 675-83, 701.

[21] Trump Twitter account, March 5, 2018.

[22] Trump Twitter account, March 28, 2018.

[23] Cargill, Incorporated v. United Mexican States, ICSID Case No. ARB(AF)/05/2, Award dated Sept. 18, 2009 ¶ 299 (deciding on grounds of expropriation).

[24] Cargill, Incorporated v. United Mexican States, ICSID Case No. ARB(AF)/05/2, Award dated Sept. 18, 2009 ¶ 304.

[25] Pope & Talbot v. Canada, Award on the Merits of Phase 2, 10 April 2001, at ¶ 181.

[26] Presidential Proclamation, March 8, 2018, available at: https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-steel-united-states/.

[27] Argentina-U.S. Investment Treaty of 1991, Article XI.

[28] Korea-U.S. Free Trade Agreement, Article 23.2.

[29] CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/8, Award, May 12, 2005; Enron Corporation Ponderosa Assets LP v. Argentine Republic, ICSID Case No ARB/01/3, Award, May 22, 2007.

[30] Enron Corporation Ponderosa Assets LP v. Argentine Republic, ICSID Case No ARB/01/3, Award, May 22, 2007 ¶ 344 CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/8, Award, May 12, 2005, ¶ 375.

[31] See, e.g., Enron Corporation Ponderosa Assets LP v. Argentine Republic, ICSID Case No ARB/01/3, Award, May 22, 2007 ¶ 307-08.

[32] See, e.g., Enron Corporation Ponderosa Assets LP v. Argentine Republic, ICSID Case No ARB/01/3, Award, May 22, 2007 ¶ 300.

[33] Donald Trump Details Plan to Rewrite Global Trade Rules, Time, June 28, 2016, available at: http://time.com/4385989/donald-trump-trade-china-speech/.

[34] J. Swan, Exclusive: Trump vents in Oval Office, "I want tariffs. Bring me some tariffs!," Axios, Aug. 27, 2017, available at: https://www.axios.com/exclusive-trump-vents-in-oval-office-i-want-tariffs-bring-me-some-tariffs-1513305111-5cba21a2-6438-429a-9377-30f6c4cf2e9e.html.

[35] CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/8, Award, May 12, 2005, ¶ 375; Enron Corporation Ponderosa Assets LP v. Argentine Republic, ICSID Case No ARB/01/3, Award, May 22, 2007 ¶ 339.

[36] CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/8, Award, May 12, 2005, ¶ 370.

[37] NAFTA, Article 2102.