The USMCA reshapes how foreign investors navigate cross-border protections in North America—introducing tighter procedural rules, fewer automatic guarantees, and a sharper distinction between strategic sectors and general investment.
The United States–Mexico–Canada Agreement (USMCA) dramatically shifts the framework for cross-border investment protection in North America. Superseding the Chapter 11 framework of NAFTA, Chapter 14 narrows investor access to investor-state dispute settlement (ISDS), limiting it exclusively to claims between the U.S. and Mexico, and only for defined dispute types. Canadian investors are now directed to alternative agreements—such as the CPTPP—to protect foreign investments.
Dual Pathways: General vs. Government-Backed Investments
The USMCA adopts a two-track model for investment protection. Annex 14-D applies to general investments and offers a narrower set of guarantees:
- National treatment (excluding the right to establish an investment): foreign investors must be treated no less favorably than domestic investors after they have entered the market. This applies to the operation and management of the investment, not its creation.
- Most-favored-nation (MFN) treatment (limited to protections after an investment has been established): investors cannot be treated less favorably than those from other countries with whom the host state has treaties, but this applies only once the investment is in place—not during entry.
- Protection against direct expropriation: a government cannot seize an investor’s assets outright without prompt, adequate, and effective compensation—aligned with customary international law.
Before initiating arbitration, investors must first litigate in domestic courts for 30 months or obtain a final judgment, all within a strict four-year window. This dual procedural barrier significantly compresses the timeframe for recourse and significantly raises the bar for accessing dispute settlement mechanisms.
By contrast, Annex 14‑E applies to investments made under covered government contracts in five strategic sectors: oil and gas, public electricity supply, telecommunications, transportation, and infrastructure management (e.g., bridges, railways). These investments are granted full Chapter 14 protections—including fair and equitable treatment (FET), protection against indirect expropriation, and broader access to ISDS. Although these claims must still be filed within three years of the triggering event, they are exempt from the 30‑month domestic litigation requirement.
NAFTA Sunset Clause and Canada’s Exit from ISDS
Canada opted out of the USMCA’s ISDS provisions, making Chapter 14 inapplicable to disputes involving Canadian government actions or Canadian investors. Annex 14‑C’s sunset clause, however, allowed NAFTA-era claims to proceed until June 30, 2023. In TC Energy v. United States (2024), an ICSID tribunal clarified that the clause preserved only the procedural right to arbitrate, not the substantive protections of NAFTA—limiting post-2020 claims to those filed within the deadline.
Strategic Sectors Retaining USMCA Foreign Investment Protections
Energy and Infrastructure Projects
Energy: The Annex 14‑E carve-outs—particularly for oil, gas, and public electricity supply—underscore energy’s central role in North American investment flows. Investments in these sectors retain broad protections and direct access to arbitration, including disputes based on indirect expropriation and fair and equitable treatment (FET). The framework aims to support capital-intensive, long-term projects that depend on regulatory stability and predictable rules—an essential consideration for major investments like LNG terminals or cross-border power grids.
Infrastructure and Transportation: Government contracts involving roads, bridges, railways, and public transit fall squarely within Annex 14‑E, offering investors in public-private partnerships (PPPs) or concession arrangements a more robust avenue for redress. However, the investment must be tied to a written agreement with a national authority—so precise contract drafting at the outset is essential.
Telecom and Public Utilities Under Chapter 14-E
Telecommunications: As a designated Annex 14‑E sector, telecommunications remains fully within the scope of investor protections—provided the investment is grounded in a government concession or contract. This carve‑in reflects state interest in balancing market liberalization with control over critical digital infrastructure, such as national broadband networks and 5G rollout. With digital infrastructure increasingly tied to national security, treaty protections serve as a key buffer for investors navigating policy shifts in data localization, content regulation, and market access.
Public Utilities: Electricity supply—distinct from upstream energy extraction—is also carved into Annex 14‑E. This includes generation, transmission, and distribution assets developed under government concessions or Power Purchase Agreements (PPAs). These long-horizon infrastructure projects depend on regulatory stability to attract foreign capital. In Mexico, policy shifts involving Comisión Federal de Electricidad (CFE) have already triggered arbitration claims. While water utilities are not explicitly named, they may fall under “infrastructure management” if tied to national-level concessions (e.g., wastewater treatment or supply networks).
Public Interest Carve-Outs and Sovereign Rights
Chapter 14 includes broad exceptions designed to preserve the U.S. or Mexican government’s right to regulate in the public interest. These safeguards operate through several mechanisms:
- Annexes I and II allow each country to exclude entire sectors or specific policy measures from key obligations like national treatment, most-favored-nation (MFN), and restrictions on performance requirements. For example, Canada has reserved the right to limit foreign ownership in cultural industries (e.g., publishing and broadcasting), while Mexico has retained policy space in oil and gas.
- Performance requirements refer to obligations a government might impose on a foreign investor as a condition for approval—such as mandating local content, technology transfer, or export quotas. USMCA generally prohibits these, but Annexes I and II create exceptions where parties have chosen to preserve them.
- Article 14.16 confirms that governments may adopt or maintain regulatory measures to achieve legitimate public welfare objectives—such as protecting health, safety, or the environment—even if those measures negatively impact a foreign investor’s profits. This provision is not unlimited: states must still demonstrate that the regulation is non-discriminatory, based on good faith, and proportionate to the objective pursued.
- “Denial of benefits” clauses give a party discretion to withhold treaty protections from investors with only a nominal presence in its territory or control links to non-party nationals. For instance, a shell company incorporated in Mexico but effectively controlled by investors from a non-USMCA state (e.g., China or Russia) could be excluded from Chapter 14 protections.
The new treaty narrows investor protections while strengthening the right of governments to regulate in the public interest—particularly in politically or economically sensitive sectors. There are now fewer investor protections and stronger state regulatory powers—especially in sensitive sectors.
Practical Legal Constraints for Cross-Border Investors
For investors, navigating USMCA protections requires early planning and sound legal preparation:
- Contract eligibility: To qualify under Annex 14‑E, the investment must be tied to a government contract in a covered sector.
- Timing: Claims must meet strict deadlines—four years for general claims, three for covered contracts—and, in many cases, require investors to litigate in domestic courts for 30 months before initiating arbitration.
- Jurisdiction: Canadian investors must rely on treaties like the CPTPP, while U.S. and Mexican investors should align their transactions to preserve treaty protections from the outset.
- Procedure vs. protection: Procedural hurdles—especially the 30-month rule—can undercut substantive rights, particularly in jurisdictions where courts are slow or politicized.
Legal and Policy Debate Around ISDS Reform
The USMCA’s streamlined ISDS framework shifts the balance toward state control—narrowing investor claims and broadening regulatory discretion. Protective carve-outs for health, safety, and environmental measures, along with stricter expropriation standards, mark a clear pivot from expansive investor rights to stronger public oversight.
Critics argue that procedural hurdles—especially the 30-month domestic litigation rule—can render treaty protections hollow. In jurisdictions plagued by delays or judicial bias, investors may be compelled to pursue remedies that offer no meaningful relief.
Conclusion: A Narrower Framework for Foreign Investment Protection
Chapter 14 of the USMCA marks a clear departure from NAFTA’s broad investor protections. What remains is a narrower, more conditional regime—particularly between the U.S. and Mexico. While key sectors still benefit from ISDS, investors must now navigate stricter procedural hurdles and structure deals with greater legal foresight. For cross-border capital, the era of automatic protections is over. Success under the USMCA starts with structuring investments on solid legal ground.
Frequently Asked Questions (FAQs)
1. What is Chapter 14 of the USMCA and how does it differ from NAFTA Chapter 11?
Chapter 14 of the USMCA narrows investor-state dispute settlement (ISDS) rights compared to NAFTA’s Chapter 11. It limits ISDS access to U.S.–Mexico disputes only, excludes Canada, and introduces stricter procedural requirements.
2. Can Canadian investors still file investment claims under the USMCA?
No. Canada opted out of USMCA’s ISDS system. Canadian investors must now use alternative agreements like the CPTPP to pursue investment arbitration.
3. What types of investments are covered under USMCA’s Annex 14‑E?
Annex 14‑E protects investments made under qualifying government contracts in five sectors: oil and gas, public electricity supply, telecommunications, transportation, and infrastructure management.
4. What is the 30-month litigation requirement under the USMCA?
For most claims under Annex 14‑D, investors must first pursue remedies in domestic courts for at least 30 months or secure a final judgment before initiating arbitration.
5. Are there any exceptions to the 30-month domestic litigation rule?
Yes. Claims under Annex 14‑E involving covered government contracts are exempt from the 30-month domestic litigation prerequisite.
6. What does “direct expropriation” mean in the context of the USMCA?
Direct expropriation occurs when a government seizes an investor’s property outright. The USMCA requires that such actions be compensated promptly and fairly, in accordance with international law.
7. What are performance requirements, and how are they treated under the USMCA?
Performance requirements are conditions placed on foreign investors—like using local inputs or exporting a fixed share of production. The USMCA generally prohibits these, but Annexes I and II allow carve-outs where countries choose to retain them.
8. How can investors protect their rights under the USMCA framework?
Foreign investors should ensure their projects are tied to eligible government contracts (where applicable), structure deals with legal foresight, and carefully monitor procedural deadlines to preserve arbitration rights.