Elements of the NAFTA National Treatment Obligation

By Jon R. Johnson Goodmans LLP (December 2, 2001)

NAFTA Article 1102(1) applies to investors of other Parties and reads as follows:

“Each Party shall accord to investors of another Party treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.”

NAFTA Article 1102(2), which is similarly worded and applies to investments of investors of other Parties, reads as follows:

“Each Party shall accord to investments of investors of another Party treatment no less favourable 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.”

NAFTA Article 1102(3) establishes a special rule when applying Article 1102(1) and 1102(2) to measures of subnational governments. NAFTA Article 1102(3) reads as follows:

“The treatment accorded by a Party under paragraphs 1 and 2 means, with respect to a state or province, treatment no less favourable than the most favourable treatment accorded, in like circumstances, by that state or province to investors, and to investments of investors, of the Party of which it forms a part.”

NAFTA Article 1102(4)(a) prohibits minimum equity requirements and Article 1102(4)(b) prohibits requiring an investor of another Party, by reason of its nationality, to sell or otherwise dispose of an investment. As Article 1102(4) addresses specific situations, it will not be considered in this paper.

Scope and Essential Elements</h2

Investors and Investments

The expressions “investor”, “investor of a Party”, “investment” and “investment of an investor of a Party” are all defined in Article 1139. The expression “investment” is broad and includes a wide range of items. The definition of “investment of an investor of a Party” is such that an “investment” can be indirectly held. For example, consider a U.S. corporation (an “investor of Party”) that owns a wholly-owned subsidiary incorporated in Canada which in turn owns an office building in Canada. The subsidiary (an “enterprise” under (a) of the definition of “investment”), the shares of the subsidiary (“equity securities of an enterprise under (b) of the definition of investment”) and the office building (“real estate” under (g) of the definition of “investment) all fall within the definition of “investment of an investor of a Party”.

According Treatment With Respect to Investments

Each of Articles 1102(1) and (2) concern the according of treatment “with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.” The effect of the scope and coverage provision in Article 1101(1)(a) is that the treatment must be accorded through a “measure” that is adopted and maintained by a Party.(2) The effect of the scope and coverage provision in Article 1101(1)(b) is that:

the “investment” with respect to which the treatment must be accorded under both Articles 1102(1) and (2) must be within the territory of the Party according the treatment; and
the “investments of investors of another Party” referred to in Article 1102(2) to which treatment is accorded must also be within the territory of the Party according the treatment.

Treatment Accorded Must be No Less Favourable

Articles 1102(1) and 1102(2) each requires that the treatment accorded by a Party to investors of another Party (Article 1102(1)) or their investments (Article 1102(2)) must be no less favourable that the treatment that is accorded by the Party to its own investors (Article 1102(1)) or to “investments of its own investors” (Article 1102(2)). The “no less favourable” treatment language is similar to that found in other national treatment provisions, such as Articles 1202 (services) and 1405(1) and (2) (financial services), as well as those in Article III:4 of the General Agreement on Tariffs and Trade 1994 (“GATT 1994”) and Article XVII of the General Agreement on Trade in Services (“GATS”). There are a number of issues respecting the “no less favourable treatment” that are identified in item (B3) below.

In Like Circumstances

In order for the comparison in treatment in Articles 1102(1) and (2) between investors of another Party or their investments and a Party’s own investors or investments to be required, the treatment must be accorded “in like circumstances”. While the concept of “likeness” is common to all the “no less favourable treatment” obligations referred to above, its expression in Articles 1102(1) and (2) differs from its expression in Article III:4 of GATT 1994 and GATS Article XVII. Likeness in Article III:4 of GATT 1994 is expressed as “like products of national origin” and in GATS Article XVII as “its own like services and service suppliers”. WTO jurisprudence on likeness respecting these differently worded provisions is difficult to apply to Articles 1102(1) and (2).

Note: There are a number of issues here in respect of the application of “in like circumstances” that are identified in other entry (Application of the NAFTA National Treatment Obligation), such as the isse of whether the “circumstances” those of the investor or the investment or these of the according of the treatment.