Cargill vs. Mexico

The North American Free Trade Agreement, NAFTA, opened the market for Mexico to import high-fructose corn syrup (HFCS) from the US, a cheaper sweetener than the sugar produced in Mexico. Cargill, which controls much of the world’s international trade in grains and cereals,ⁱ was the main producer of HFCS and therefore benefited the most from NAFTA’s market liberalisation. Since the price of HFCS became much cheaper than that of refined sugar, companies producing soft drinks and other food products began to use the imported sweetener instead of domestically produced sugar.ⁱⁱ In 2001, in order to defend its sugar industry, the Mexican government decided to impose a 20% tax on beverages containing sweeteners such as HFCS. As a result, beverage companies in Mexico reverted to using cane sugar.ⁱⁱⁱ Cargill considered this measure to be discriminatory and in 2005 filed a claim at ICSID invoking NAFTA rules. In this third case of the so-called ‘corn syrup trilogy’,^iv Cargill demanded US$128.3 million in compensation.^v In 2009, the arbitration tribunal ruled in favour of Cargill and ordered Mexico to pay US$77.3 million in damages plus interest,^vi and an extra US$2 million to compensate Cargill’s legal fees.^vii At the time, this was the largest award ordered by a tribunal under NAFTA rules.^viii

The case is interesting for several reasons.

First, it shows that no investment is necessary to benefit from the protection of treaties such as NAFTA: the Tribunal ruled in favour of compensation for Cargill even though it had never invested in Mexico nor even build a HFCS production plant in the country. After NAFTA ratification, the company prefered to import HFCS from the United States where it massively expanded its sweetener production during the 1990s. While the case had more to do with cross-border trading than investments,^ix it reveals not only the problem of NAFTA’s broad concept of protected investment^x but also the expansive (pro-investor) interpretation of the arbitrators,^xi who considered that the tax had damaged Cargill’s expectations of future profits and was tantamount to expropriation, awarding the company a total of US$128.3 million in compensation.

Second, it illustrates that protecting the national industry can result in multi-million dollar lawsuits: sugar production from sugarcane is one of the pillars of Mexico’s agriculture, employing approximately 3 million people.^xii The privatisation of sugar mills in 1988 and the entry into force of NAFTA in 1995 had devastating effects on the Mexican sugar industry, bringing it to the brink of collapse.^xiii The Mexican government took measures such as the introduction of a tax on the sale and import of beverages containing non-sugarcane sweeteners, among other policies, which had a positive effect on the Mexican sugar industry. This is clear from the employment statistics, for example, as the industry went from generating 420,000 jobs in 2003^xiv to more than 500,000 in 2017, making it the country’s main agribusiness.^xv However, the arbitrators determined that the tax on HFCS was not a justified measure to rehabilitate a depressed industry.^xvi

Third, it shows that investors can receive compensation for alleged lost profits in their home country, in this case the United States: in its dispute against Mexico before the arbitration tribunal, Cargill’s claim was not based on the loss of its investment in Mexico but on the loss of sales of its US factories because of the drop in exports to Mexico. Mexico argued that allowing investors to sue for domestic losses was not the intention when they signed NAFTA. Mexico’s main argument in its attempt to overturn the Tribunal’s ruling makes total sense: why create protection measures for companies that produce and manufacture domestically and simply export goods to other parties, when these companies create no jobs or transfer technology to the countries to which they export their products?^xvii

Both the governments of Canada and of the United States intervened during the annulment process and supported Mexico’s position. Yet, the arbitrators and the judges chose to dismiss the argument and decided against cancelling the award.^xviii