NAFTA's Investor "Rights"
A Corporate Dream,
A Citizen Nightmare
By Mary Bottari
The North American Free Trade Agreement (NAFTA) includes an array of new
corporate investment rights and protections that are unprecedented in scope
and power. NAFTA allows corporations to sue the national government of a
NAFTA country in secret arbitration tribunals if they feel that a regulation
or government decision affects their investment in conflict with these new
NAFTA rights. If a corporation wins, the taxpayers of the "losing" NAFTA
nation must foot the bill. This extraordinary attack on governments' ability
to regulate in the public interest is a key element of the proposed NAFTA
expansion called the Free Trade Area of the Americas (FTAA).
NAFTA's investment chapter (Chapter 11) contains a variety of new rights and
protections for investors and investments in NAFTA countries. Specifically,
Article 1110 of NAFTA guarantees foreign investors compensation from the
NAFTA governments for any direct government expropriation (i.e.,
nationalization) or any other action that is "tantamount to" an "indirect
expropriation." In addition, Article 1102 provides for "national treatment,"
which means that governments must accord to companies of other NAFTA
countries no less favorable treatment than they give to their own companies.
Article 1105 contains a "minimum standard of treatment" provision, which
includes vague prose about fair and equitable treatment in accordance with
international law.
If a company believes that a NAFTA government has violated these new
investor rights and protections, it can initiate a binding dispute resolution
process for monetary damages before a trade tribunal offering none of the
basic due process or openness guarantees afforded in national courts. These
so-called "investor-to-state" cases are litigated in the special
international arbitration bodies of the World Bank and the United Nations,
which are closed to public participation, observation and input. A
three-person panel composed of professional arbitrators listens to arguments
in the case, with powers to award an unlimited amount of taxpayer dollars to
corporations whose NAFTA investor privileges and rights they judge to have
been impacted.
Corporate investors have used these unprecedented NAFTA investment
protections to challenge national and local laws, governmental decisions and
even governmental provision of services in all three NAFTA countries. To
date, companies have filed more than a dozen cases, claiming damages of more
than US$13 billion [see "The Chapter 11 Dossier"].
"Tantamount to Extortion"
In the largest Chapter 11 suit yet brought against the United States, the
Canadian corporation Methanex in 1999 sued the U.S. government for $970
million because of a California executive order phasing out the sale of a
Methanex product. Methanex claims that California's phase-out of methyl
tertiary butyl ether (MTBE), a gasoline additive, violates the company's
special investor rights granted under NAFTA because the California
environmental policy limits the corporation's ability to sell MTBE. If a
NAFTA tribunal decides that California's environmental policy violates
NAFTA's investor protections, the U.S. government can be held liable for the
corporation's lost profits from not selling MTBE.
The case is "a clear threat to California state sovereignty and democratic
governance," says Martin Wagner of the California-based Earthjustice Legal
Defense Fund. If Methanex succeeds, California will be under pressure to
rescind its executive order, to lessen the damage award.
Associated with human neurotoxicological effects, such as dizziness, nausea
and headaches and found to be an animal carcinogen with the potential to
cause human cancer, MTBE has been found in ground water and drinking wells
around California. On March 25, 1999, California required the removal of MTBE
from gasoline sold in the state by December 31, 2002. Governor Gray Davis
declared that "on balance, there is significant risk to the environment from
using MTBE in gasoline in California."
Methanex claims that adding MTBE to gasoline reduces air pollution. However,
a 1998 University of California at Davis (UC-Davis) report, which informed
the government action, found that "there is no significant additional air
quality benefit to the use of oxygenates such as MTBE in reformulated
gasoline." The report found "significant risks and costs associated with
water contamination due to the use of MTBE." The report noted that "MTBE is
highly soluble in water and will transfer readily to groundwater from
gasoline leaking from underground storage tanks, pipelines and other
components of the gasoline distribution system." It also noted that the use
of MTBE in motor boat fuel results in contamination of surface water. The
report concluded that "[w]e are placing our limited water resources at risk
by using MTBE."
On the basis of the UC-Davis findings, California moved to ban MTBE.
Methanex's response was to drag the California policy into NAFTA Chapter 11
litigation, demanding MTBE be allowed or $970 million be paid.
In its amended claim, Methanex alleges that the California ban discriminates
against MTBE in favor of ethanol, a similar U.S. product, and is therefore a
violation of NAFTA's national treatment rules. As evidence, Methanex cites
the executive order which requires the California Energy Commission to look
into development of a California ethanol facility. Methanex alleges that
Archer Daniels Midland (ADM), a principal producer of ethanol in the United
States, influenced the governor's decision with $210,000 in campaign
contributions, arguing that the ban stands in violation of NAFTA's fair and
equitable treatment rules. Finally, Methanex claims that the ban was not the
"least trade restrictive" method to fix the water contamination problem, and
thus violates NAFTA requirements that companies be treated fairly and "in
accordance with international law." The relevant laws cited by Methanex are
the rules of the World Trade Organization, which require countries to use the
least trade restrictive means to achieve environmental and public health
goals.
"These cases are tantamount to extortion," says Martin Wagner. "This is a
situation in which someone is causing a harm and then making the assertion
that they will stop that harm only upon payment of a fee. In the California
case, Methanex is selling a chemical and saying to the U.S. government, 'If
you want us to stop, you have to pay us.' This is even more appalling when
you consider that the victims of this extortion are the people of California,
who don't want their drinking water contaminated by MTBE."
The California case has drawn comparisons to the 1998 case brought against
Canada by the U.S.-based Ethyl Corporation [see "Another NAFTA Nightmare,"
Multinational Monitor, October 1996]. In that case, Ethyl sued Canada for
$250 million after Canada banned the gasoline additive methylcyclopentadienyl
manganese tricarbonyl (MMT) because of health risks. The state of California
had banned MMT and the U.S. Environmental Protection Agency (EPA) was working
on a similar regulation. Ethyl claimed the Canadian ban violated NAFTA
because it "expropriated" future profits and damaged Ethyl's reputation.
After learning that the NAFTA tribunal was likely to rule against its
position, the Canadian government revoked the ban, paid Ethyl $13 million for
lost profits to date, and, as part of a settlement with Ethyl, agreed to
issue a public statement declaring that there was no evidence that MMT posed
health or environmental risks.
Methanex brought its NAFTA case to the United Nations Commission for
International Trade and Law (UNCITRAL), the arbitration regime of the United
Nations. The case is now pending. Under UNCITRAL rules, not only are the
citizens of California shut out of this proceeding, but so are the governor
and the attorney general of California, the state whose policy is in
question. California officials must rely on the Office of the U.S. Trade
Representative (USTR) to defend the interests of California residents in this
closed tribunal.
Deliver This
In a case that seeks to push the limits of Chapter 11, the U.S.-based United
Parcel Service (UPS) is pursuing a NAFTA Chapter 11 case against Canada for
$100 million, arguing that the fact of the Canadian postal service's
involvement in the courier business infringes upon the profitability of UPS
operations in Canada.
In this case, the first NAFTA investor-to-state case against a public
service, UPS is attempting to stretch the NAFTA Chapter 11 provisions in an
entirely new direction. Canada Post is a "Crown corporation" owned by the
people of Canada. Canada Post has not received direct taxpayer support for
about a decade and has been paying income tax since 1994.
UPS claims that by integrating the delivery of letter, package and courier
services, Canada Post has cross-subsidized its courier business in breach of
NAFTA rules. For example, UPS argues that permitting consumers to drop off
courier packages in Canada Post letter mail postal boxes unfairly advantages
Canada Post as against other courier services. Other alleged forms of
cross-subsidization include:
Using letter carriers to pick up courier packages from the mail boxes and
"transport them in vehicles that form part of the infrastructure of the
Canada Post monopoly."
Sorting courier packages at "Canada Post's letter mail monopoly sorting
facilities across Canada."
Transporting courier packages on airplanes and trucks chartered by the mail
service.
Selling courier services at post offices.
"Precluding franchisees at Canada Post retail outlets from selling of any
courier product other than Canada Post's."
Permitting courier consumers to use postal stamp meters on courier packages.
"Having the regulatory definition of 'letter' changed from 450 grams to 500
grams in order to expand its letter mail monopoly."
"UPS is entitled to receive the best treatment available in Canada with
respect to the treatment of its investment," UPS argues in its claim. "This
treatment would include having equal access to the postal distribution system
provided" to the postal service's courier operations. Failure to provide such
equal treatment, UPS alleges, violates the national treatment obligations of
Chapter 11.
In a cable by the U.S. Embassy in Ottawa that Public Citizen obtained under
a Freedom of Information Act request, UPS Canada Legal and Public Affairs
Vice President Allan Kaufman was characterized as "very confident the
Government of Canada stood to lose its fourth and largest Chapter 11
challenge with the UPS case," and Kaufman signaled that the corporation would
be open to settlement.
Former Canadian Foreign Minister Don Mazankowski responded to these arguments
in a February 2001 column in the Globe & Mail. He argued that Canada treated
UPS with an even hand by allowing UPS access to the market on the same terms
as any Canadian corporation, that UPS is not subject to any additional taxes
or duties and that the company is governed by the same laws as any Canadian
corporation.
"The UPS claim is unique. Unlike the other NAFTA-based foreign investor
claims which have sought to recoup investments, UPS is using NAFTA Chapter 11
provisions in a strategic offensive to secure a greater share of the Canadian
market," asserts Canadian trade attorney Steve Shrybman. "UPS is arguing that
because Canada Post provides public mail services, it shouldn't also be
providing integrated parcel and courier services. In an era when monopoly and
commercial service delivery is commingled, few public services including
health care and education would be immune from similar corporate challenges."
This case is also proceeding under UNCITRAL rules and the Canadian Union of
Postal Workers and other interested parties are attempting to intervene.
The Fast Track to Expanded Chapter 11
The "expropriations" that have been challenged under Chapter 11 are nothing
like the government seizure of property that is generally conveyed by the
term. Instead, corporations have used the provision to challenge or seek
compensation for what are called "regulatory takings" in the United States -
regulations which supposedly take away the entire value of a property.
While a conservative legal movement has worked for two decades to espouse
the theory of regulatory takings, with some success, regulatory takings suits
continue to face significant judicial hurdles in U.S. courts. The Chapter 11
cases take this "regulatory takings" logic to a new extreme. While these
expansive investor rights currently are included only in NAFTA, plans are
underway to incorporate similar provisions in the FTAA. FTAA is a proposed
NAFTA expansion to all 34 countries of the Western Hemisphere (but for Cuba).
The Bush administration has signaled that it wants the controversial
fast-track trade negotiating authority in order to negotiate the FTAA. Once
Congress delegates its trade negotiating authority to the president via fast
track, it limits its own role to a single up-or-down vote on trade
agreements' implementing legislation, which cannot be amended.
There is no guarantee the Bush administration will succeed in its effort to
win fast track, or in its attempts to impose investment provisions in the
FTAA.
Canada, which has been badly burned in a series of Chapter 11 cases, is no
longer a believer. Canadian Trade Minister Pierre Pettigrew has declared that
Canada will not sign FTAA if investor-to-state enforcement of broad
regulatory takings rights are included, and Canada has called for a review of
Chapter 11 within NAFTA.
Whether Canada will hold to these positions, and whether it can organize
other countries to join it amidst the complex FTAA negotiations in which the
United States is the dominant player, remains to be seen. In the meantime,
environmentalists, public health groups, California residents and many others
concerned about the broad regulatory takings provisions will continue to
press for their removal from NAFTA and their exclusion from the FTAA.
