-Caveat Lector-
March 11, 2001
Nafta's Powerful Little Secret
By ANTHONY DePALMA
heir meetings are secret. Their members are
generally unknown. The decisions they reach need not
be fully disclosed. Yet the way a
small group of international tribunals handles
disputes between investors and foreign governments has
led to national laws being
revoked, justice systems questioned and environmental
regulations challenged. And it is all in the name of
protecting the rights of foreign
investors under the North American Free Trade
Agreement.
The corporations — American, Canadian and Mexican
alike — that directly invest in neighboring countries
are thrilled that Nafta provides
some protection. But foes of the trade pact say some
of their worst fears about anonymous government have
become reality. And as
Western economies move toward more free trade and
globalization, environmentalists, consumer groups and
anti-trade organizations are
increasingly worried about how the tribunals influence
the enforcement of laws. The groups are gearing up for
a fight at the Summit of the
Americas next month in Quebec, where President Bush
will be pushing a vast new Free Trade Area of the
Americas, which would provide
for similar tribunals.
Protesters will attack the sweeping powers and broad
impact of the tribunals, along with their very nature
— ad hoc panels drawn from lists
of academics and international lawyers almost unknown
outside their highly specialized fields.
"What we're talking about here is secret government,"
said Joan Claybrook, president of Public Citizen, a
consumer watchdog group in
Washington that has been critical of Nafta and other
trade agreements. Ms. Claybrook said the 16 Nafta
cases that have been filed so far in
the United States, Canada and Mexico showed how
corporations were using Nafta not to defend trade but
to challenge the functioning of
government. "This is not the way to do the public's
business," she said.
The tribunals have been used in Nafta disputes for
only a few years, but the complaints they have handled
have already had many
repercussions, including these:
• The Canadian government lifted restrictions on
manufacturing an ethanol-based gasoline additive that
it considered hazardous after an
American manufacturer said that the ban hurt its
business.
• A tribunal ordered Mexico to pay an American company
$16.7 million after finding that local environmental
laws prohibiting a toxic-
waste-processing plant that the company was building
were tantamount to expropriation.
• A Canadian-based funeral company is asking the
United States government for $725 million in
compensation after a Mississippi jury found
the company guilty in 1995 of trying to put a local
funeral home out of business, and levied $500 million
in damages. The company contends
that the jury sought to punish it because it is
foreign. If the tribunal awards compensation, critics
say, all jury awards involving foreign
investors may be challenged.
• United Parcel Service, the package-delivery company,
has filed a complaint contending that the very
existence of the publicly financed
Canadian postal system represents unfair competition
that conflicts with Canada's obligations under Nafta.
Critics worry that if the tribunal
upholds the U.P.S. claim, government participation in
any service that competes with the private sector will
be threatened.
T is clear that investors have gained a shield far
more powerful than almost anyone had imagined when
Nafta was written in the early 1990's.
"There is no doubt that these measures represent an
expansion of the rights of private enterprises vis-
à-vis government," said Prof. Andreas
F. Lowenfeld, an international trade expert at the New
York University School of Law. "The question is: Is
that a good thing?"
The international tribunals are authorized under a
Nafta clause called Chapter 11, dealing with
investments. Investors who believe they have
suffered a loss because of a breach in Nafta rules can
bring a claim against the government of the country
where they made their investment.
They can have the complaint heard under one of two
existing sets of rules — one from the United Nations,
the other from an independent
office of the World Bank.
These off-the-shelf mechanisms adopted by Nafta have
commonly been used to resolve private disputes between
corporations, and are thus
intended to provide a great degree of confidentiality.
Both critics and proponents agree that the provisions
run headlong into demands for
openness and accountability when public issues are
involved.
"The fact that the drafters of Nafta chose this
secretive process to resolve these disputes is further
evidence that they weren't foreseeing
matters of broad social concern coming before these
panels," said Martin Wagner, director of international
programs for the Earthjustice
Legal Defense Fund, an environmental group in San
Francisco.
Critics say the corporate victories have spawned even
bolder and broader challenges, each one further
undermining public policy. In a
recent case that critics consider one of the most
worrisome, the Methanex Corporation of Vancouver,
British Columbia, is challenging
California's decision to phase out the use of a
gasoline additive containing methanol, which Methanex
makes. The state considers the
additive, MTBE, which was originally intended to
reduce air pollution from motor vehicle emissions, to
be a health hazard when it enters the
water supply. Santa Monica, Calif., with 93,000
residents, had to shut down most of its municipal
wells when gasoline containing MTBE
leached into the drinking water a few years ago.
ETHANEX contends that MTBE poses absolutely no health
hazard and that the state's action would effectively
destroy its market. "The
work that was done to make the decision to move
forward with the ban wasn't extensive enough to draw
the conclusion that MTBE is
hazardous," said Bradley W. Boyd, director of investor
relations at Methanex.
The company recently amended the claim to include
accusations that a decision by Gov. Gray Davis of
California to ban the additive might
have been politically motivated and linked to more
than $200,000 in campaign contributions by the Archer
Daniels Midland Company,
which makes a competing product. A spokesman for the
governor, Gabriel Sanchez, called the accusations
"ludicrous."
Mr. Boyd said Methanex was not asking for the ban to
be lifted, but rather for Methanex to be compensated
if it was prevented from doing
business in California because of the ban. The company
wants $970 million in compensation, which rankles many
Californians.
"It's the height of corporate moxie," said Michael
Feinstein, an environmental activist who is the mayor
of Santa Monica. He said he was
worried that a precedent would be set if the MTBE
phase-out was undermined. Even if the tribunals have
no power to overturn laws, he
said, a decision in Methanex's favor "would have a
devastatingly chilling effect on all such future laws
and standards because of the belief that
they would not stand up to challenge."
The United States government, named as a defendant in
the Methanex complaint, is also concerned that the
case stretches Nafta beyond
recognition. In a statement to the tribunal, the
government contends that "Methanex's claim does not
remotely resemble the type of grievance
for which the states parties to the Nafta created the
investor-state dispute mechanism."
Mr. Wagner has asked the tribunal to consider breaking
with tradition and accepting written statements from
third-party groups like the
Bluewater Network, a citizens' environmental
organization. The three- person tribunal hearing the
complaint is unusual in that its members
include former Secretary of State Warren Christopher.
The tribunal determined in January that it had the
right to accept written arguments,
and said it would decide later whether to do so in
this case.
Mr. Wagner said he was able to keep abreast of the
proceedings by filing periodic Freedom of Information
requests that force the United
States government, when named as a defendant, to
release the documents. Other advocates who obtain the
filings this way post some on a
Web site — www.naftaclaims.com. Canada also has a
public access information law, but Mexico does not.
Officials who oversee the tribunals say that they
understand concerns about the less-than-public aspects
of the panels' work but that anything
that opens the proceedings would undermine the promise
of confidentiality that corporate investors consider
essential. That, they say, would
undermine the primary purpose of the arbitration
mechanisms — to help foster commercial development.
"The whole thing here was to have a mechanism to give
a base level of comfort to foreign investors," said
Ko-Yung Tung, vice president and
general consul of the World Bank and secretary general
of its International Center for Settlement of
Investment Disputes, which handles
Nafta claims. He said that forcing more disclosure
could drive corporations away from the established
dispute-resolution process.
"If increased foreign investment is the prime goal in
this, then making public these proceedings may be less
important" than protecting
investors, Mr. Tung said.
The center occupies a small suite of offices inside
the World Bank's modern headquarters in Washington.
With seven lawyers and four
members of its support staff, it now oversees eight
Nafta cases. There are also 29 other disputes on the
center's docket that arise from some
of the more than 1,400 bilateral treaties involving
more than 130 nations that have signed an
international convention to abide by the World
Bank's investment rules.
For 20 years after the center was created in 1966, it
established panels that heard on average no more than
one case a year. Now, officials
said, about one case is filed every month.
HE center's primary responsibility is to appoint the
arbitrators to the panels, choosing from a list of
internationally recognized experts who
are paid $1,500 a day for their work. The center is
bound by strict confidentiality rules, and only
investors can say whether documents
should be made public.
"It's unfair to call this a closed or secret process,"
said Antonio R. Parra, deputy secretary general of the
International Center. "While it's
clearly not on all fours with a court proceeding, I
don't think it is something that is shrouded in
secrecy."
Under the center's rules, proceedings can be made
public if both the investor and the involved
government agree. But the Nafta proceedings
are never opened to the public, nor have third parties
until now been allowed to submit briefs. Corporations
want the proceedings to remain
closed.
"The majority of claimants in these cases are not
large multinational corporations but small- to
medium-sized companies," said Clyde C.
Pearce, a California lawyer who represented one such
company, the Metalclad Corporation, in a complaint
against Mexico over the
construction of a toxic-waste-processing site. Mr.
Pearce said the obligation of responding to briefs
submitted by third parties could
overwhelm corporate lawyers, who are already
outmatched by the governments they are bringing the
claims against.
"If others want to weigh in on these cases, they have
access to their governments and should use that route
to get their views across, not the
tribunals," he said.
The other set of rules governing Nafta tribunals was
devised by the United Nations Commission on
International Trade Law, based in
Vienna. "Arbitration is really private justice," said
Jernej Sekolec, its secretary. Mr. Sekolec says the
commission's rules for handling
disputes are routinely written into commercial
contracts between investors and, increasingly,
agreements that let private investors bring
complaints against a foreign government.
But he said the commission itself never became
involved in a dispute in any way, not even to select
the arbitrators. "Our overall mission is to
streamline and facilitate negotiations and conclusions
of contracts," he said.
Typically, the parties in a dispute each name one
tribunal member and agree jointly to a third. Each
panel is unique, and critics say this lack
of continuity makes it hard to establish clear legal
precedent.
That is especially important because a tribunal
decision technically cannot be appealed. It can be
submitted to a local court for review, to
ensure that there was no corruption or gross
misinterpretation of the rules. Mexico has recently
filed such a review in the case won by
Metalclad. Another appeal was filed recently by the
Canadian government in a case won by S. D. Myers Inc.,
an Ohio waste-disposal
company that said it was hurt by a Canadian law
banning the export of PCB's.
Barry Appleton, a Canadian trade lawyer involved in
several claims before Nafta tribunals, said critics
were so driven by their opposition to
globalization that they were overstating the power of
the tribunals, which he contends are nothing more than
dispute-resolution panels with
no power to overturn any laws. "What they're doing,"
he said of the critics, "is scaremongering."
Mr. Appleton said the arbitration panels were meant to
provide a nonpolitical alternative to resolving
disputes in court. But he said
controversy had arisen because the drafters of Nafta
appeared to assume that the investor-protection
provisions would be used by
Canadian and American investors to protect their
investments in Mexico from outright expropriation.
"The Canadian and American governments thought this
was not going to apply to them," Mr. Appleton said,
"and now they're disappointed."
HE lack of a traditional appeal process, transparency
and legally binding precedent, along with the wide
scope of what can be challenged
under the free-trade investment rules, have made many
people wary in all three nations, including government
officials. Pierre Pettigrew,
Canada's minister of international trade, has written
to his counterparts in the United States and Mexico to
begin a process of what he calls
"clarifying" the limits of Nafta's investment
protections and perhaps amending the agreement before
negotiations begin in earnest on the Free
Trade Area of the Americas.
Activists planning to go to the Summit of the Americas
in Quebec said they would protest the idea of adopting
similar tribunals in a
hemispheric free-trade pact. "This is an example of
the excessive powers enjoyed by corporations under
Nafta that should not be
expanded," said the Alliance for Responsible Trade, in
a critique of the United States position on the
proposed trade pact.
Critics also object to President Bush's campaign to
gain approval of a so-called "fast-track authority,"
which expired after Nafta was passed
in 1993. Mr. Bush has said he needs it to present the
hemispheric trade pact to Congress for a vote without
possibility of amendment. The
critics contend that the scope of Nafta's
investment-protection chapter was not well understood
because the fast-track process denied
Congress the chance to evaluate the agreement
thoroughly.
The clash between investor rights and public policy is
expected to grow more intense, even within the
agencies entrusted with keeping
aspects of the cases secret.
"The demand for a more transparent process will cause
tension with the more traditional concept of
confidentiality — it's inevitable," said
Margrete L. Stevens, senior counsel of the
International Center for Settlement of Investment
Disputes. She said she believed that there was
room to adjust, to open the process in keeping with
such expectations throughout the world today — but
only, she said, if "the parties have
come under pressure in their own countries to do
this."
Copyright 2001 The
New York Times Company
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