Of all the provisions of the NAFTA, chapter 11, covering investment, arguably became the most consequential. Yet it was not necessarily the most controversial – at least, not at first. Indeed, critics of the NAFTA generally seldom mention investment as a major source of weakness in the agreement. However, to those who have watched the postwar evolution of rules governing capital flows, seeing them suddenly embedded in a free trade agreement such as the NAFTA was a novelty, with important consequences for the future evolution of both investment rules and the NAFTA itself.

The NAFTA marked a turning point in the global evolution of foreign direct investment rules. It was the first instance in which developed economies (Canada and the United States) with substantial investment flows between them had subjected themselves to a powerful set of dispute settlement mechanisms, known as investor– state dispute settlement (ISDS). A by-product of the postwar evolution of international law, ISDS procedures were designed to install rules under which foreign private owners of investment capital could pursue legal means of compensation from the state in the event of expropriation or nationalization of that property by the state.

Yet, whereas the NAFTA was a significant innovation in investment arbitration, the NAFTA’s recently negotiated successor, the United States–Mexico–Canada Agreement, has significantly curtailed the role of ISDS between the United States and Mexico while eliminating it entirely between Canada and the United States.

The origins of NAFTA chapter 11, its impact on the debate over global investment rules and ISDS’s evident demise in the newly negotiated USMCA are the subject of this chapter. The conclusion is that, whereas the United States once aggressively pursued strong investor protections in bilateral investment treaties (BITs) with numerous developing countries, the NAFTA experience shook the confidence of all three governments in the merits of ISDS. The NAFTA experience prompted a significant rethink of the role ISDS should play in the broader governance architecture around global capital flows. This rethink was well under way prior to the NAFTA’s renegotiation in 2017/18, for reasons that aligned with broader concerns about sovereignty, the regulatory power of the state and the role of multinational corporations in the evolution of the global economy.