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Multinational Monitor
Trade Madness!
April 2001 · VOLUME 22 · NUMBER 4
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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.
Mary Bottari is director of Global Trade Watch's Harmonization
Project.
The Chapter 11 Dossier:
Corporations Exercise Their Investor "Rights"
Corporations have filed more than a dozen cases under
NAFTA's Chapter 11 investment provisions, which enable
corporations to sue governments for infringements of their
"investor rights." Since they are conducted in confidential
arbitral processes, inaccessible to public scrutiny and
participation (in contrast to open proceedings in domestic
courts), information on ongoing cases is sketchy. Available
information on 15 of the cases is summarized below.
Suits against Canada
Ethyl Corporation
In this first investor-state case, Ethyl Corporation of the
United States sued the Canadian government for $250 million
and obtained, in 1998, a settlement of $13 million for the
Canadian ban on the gasoline additive, MMT, a nerve toxin
[see "Another NAFTA Nightmare," Multinational Monitor,
October 1996]. The ban was reversed.
S.D. Myers
In October 1998, U.S.-based S.D. Myers Inc., which treats
transformers containing toxic PCBs, filed a claim for $30
million for losses it claims to have incurred during a
one-and-one-half-year ban (1995 to 1997) on the export of
PCB wastes from Canada. The Canadian federal government
states that Canada is bound by international conventions
that stipulate that PCBs must be destroyed in an
environmentally sound manner, and that U.S. standards for
PCB disposal are not as high as Canada's. The wastes were
destroyed in a Canadian facility in Alberta, and the export
ban was revoked in 1997. The U.S. government also controls
cross-border movement of PCBs. In November 2000, the
arbitral tribunal found that the ban did contravene the
investment chapter regarding national treatment and minimum
standards of treatment of foreign investors, and it is now
determining whether S.D. Myers suffered damages. In the
meantime, the Canadian government has applied to the
(domestic) Federal Court to have the tribunal's partial
award set aside, arguing that the case concerned
cross-border trade, not a Canadian investment, and that the
award conflicts with a well-established Canadian policy
requiring disposal of PCBs and PCB wastes in Canada to
comply with the Basel Convention on the Control of
Transboundary Movements of Hazardous Wastes and Their
Disposal.
Sun Belt Water Inc.
This California-based company is suing Canada for the
decision of the provincial government of British Columbia to
refuse consent for the company to export bulk water from BC.
The government subsequently enacted the Water Protection
Act, which bans bulk water exports and inter-basin
diversions by domestic and foreign investors alike. In a
colorful claim which alleges a decade of "smelly" actions by
successive BC governments, Sun Belt Water expounds on the
growing world-wide demand for water, assumes that water
export must be a positive benefit (ignoring environmental
and conservation requirements) and makes extreme claims of
improprieties by the BC government and BC courts. In a BC
court action, Sun Belt did not achieve its desired result.
It is therefore using NAFTA Chapter 11 to seek damages of
"between" $1 billion and $10.5 billion. Besides using the
investment chapter for very dubious business practices, the
case raises the fundamental issues of the uses of the
investment chapter to evade the result of an action in a
domestic court, and to challenge a non-discriminatory policy
and legislation by a subnational (provincial) government.
Pope and Talbot
The US-based lumber company Pope and Talbot has sued Canada,
claiming approximately $510 million for alleged breaches of
the NAFTA investment chapter related to changes in the
profitability of its timber export business in Canada.
Softwood lumber exports from Canada to the United States
have been a source of contention and repeated trade disputes
for decades. Forest products are among the most important
exports from Canada, representing billions of dollars in
export earnings, and over 90 percent of these products are
exported to the United States. In 1996, in yet another
attempt to resolve the ongoing timber wars, the Canadian and
U.S. federal governments signed the Canada-US Softwood
Lumber Agreement, governing exports of softwood lumber from
four Canadian provinces, British Columbia, Alberta, Ontario
and Quebec. The agreement, which will expire at the end of
March 2001, establishes quotas for exports for each
province, and requires producers to provide certain
information regarding exports and pay an export levy if
their exports exceed their particular quota. In arriving at
such export agreements, the Canadian government consults
extensively with industry.
Pope and Talbot claimed that Canada has breached the NAFTA
investment requirements regarding national treatment,
most-favored nation treatment, minimum standard of treatment
and performance requirements. The company's lawyers are
critical of the Canadian government for its public release
of the Notice of Intent to Submit a Claim, calling the
release a "serious breach of international procedure."
Pope and Talbot's operations are located in British
Columbia. During the period of the softwood memorandum, BC's
share of total softwood exports has declined relative to
total Canadian softwood exports; Pope and Talbot argue that
this decline is related to the agreement, and amounts to a
breach of the NAFTA chapter. (Others point to the loss of
BC's traditional markets in Asia, related to the Asian
economic crisis.)
In an interim award, the tribunal rejected the claim that
expropriation had occurred, but decided to continue hearings
on claims relating to national treatment and minimum
standards of treatment.
This case is an important indication of how far-reaching the
impacts of the NAFTA investment chapter are and of how
broadly multiple governmental powers and decisions may be
challenged by an individual corporation for a huge
compensatory claim.
United Parcel Service
UPS has filed a notice of intent to sue Canada for $100
million, alleging that Canada favors the public postal
service, Canada Post, regarding provision of courier
services [see "NAFTA's Investor "Rights""].
Ketcham Investments
and Tysam Investments
U.S.-based Ketcham Investments and Tysam Investments jointly
own West Fraser Mills, a timber company. Ketcham and Tysam
allege in a December 2000 notice of intent to file a claim
that their timber quota under the U.S.-Canada Softwood
Lumber Agreement was arbitrarily cut, denying them rights
afforded Canadian companies. They are seeking C$10 million
in damages.
Suits Against the United States
Loewen
The B.C-based Loewen Group is suing for compensation arising
from alleged discrimination, denial of minimum standard of
treatment and expropriation, claiming that a $500 million
Mississippi state court verdict against it amounts to a
breach of NAFTA. The verdict came in a suit brought against
Loewen by a Mississippi company, O'Keefe, alleging
fraudulent practices and other anti-competitive practices.
Loewen was denied an appeal of the court decision due to a
state law which requires an appellant to post 125 percent of
the damage award ($625 million in this case) which Loewen
could not post. (Loewen eventually settled the claim for
$175 million.)
The company seeks to recover $775 million in damages,
interest and legal expenses through this investor-state
claim and alleges that the Mississippi decision against it
was based on anti-Canadian bias. A tribunal has agreed to
hear the case.
This case demonstrates, as does Sun Belt, the use by a
corporation of the NAFTA Investment chapter to essentially
reverse the results of domestic court proceedings, and to
circumvent the course of normal commercial civil litigation.
Having lost to a competitor in the courts, it claims
compensation from the U.S. federal government.
Methanex Corp.
In June 1999, this Vancouver-based company announced that it
will sue the U.S. government for $970 million due to a
California order to phase out use of the chemical MTBE
(methyl tertiary butyl) a methanol-based gas additive, by
late 2002 [see "NAFTA's Investor "Rights""].
Mondev
In September 1999, Mondev International Ltd., a
Montreal-based real estate development firm, filed a claim
against the U.S. government for $16 million. The case arises
from the refusal of the city of Boston to permit it to
expand a mall into a vacant lot in the 1980s although Mondev
had a contract with the city. Mondev successfully sued the
city and its redevelopment authority for $16 million, but
the court decision was reversed on appeal due to state law
protecting the redevelopment authority from liability.
Mondev seeks to recover the damages through the NAFTA
Chapter 11 investor-state route.
ADF Group
ADF, a Canadian fabricator of structural steel for complex
structures, is suing the United States, seeking $90 million
in compensation. ADF entered into a contract with Shirley
Contracting Corporation to provide materials for
construction of a Virginia highway interchange. ADF sought
to fabricate products in Canada, using U.S.-made steel. U.S.
federal government authorities held that this arrangement
ran afoul of a "Buy America" requirement. ADF proceeded to
attempt to fulfill the contract using its U.S. facilities
and subcontracting to other U.S. facilities. It alleges the
Buy America rules violate Chapter 11 requirements for
national treatment and for bans on performance requirements.
Suits Against Mexico
Metalclad
This case involves a claim by U.S.-based Metalclad, a
waste-disposal company, that the Mexican state of San Luis
Potosi breached Chapter 11 of NAFTA in refusing permission
for a waste disposal facility.
The governor deemed the plant an environmental hazard to
surrounding communities, and ordered it closed down on the
basis of a geological audit performed by environmental
impact analysts at the University of San Luis Potosi. The
study had found that the facility is located on an alluvial
stream and therefore would contaminate the local water
supply. Eventually, the governor declared the site part of a
600,000 acre ecological zone.
Metalclad sought compensation of some $90 million for
expropriation and for violations of national treatment, most
favored nation treatment and prohibitions on performance
requirements. This figure is larger than the combined annual
income of every family in the county where Metalclad's
facility is located.
In August 2000, a tribunal found that Mexico had breached
the Investment chapter and awarded Metalclad $16.7 million,
the amount it had spent in the matter. In this case,
Metalclad proceeded to begin construction of the facility
without having local approvals, claiming that it had
assurances from the Mexican federal government. The case
raises important questions about whether governments retain
the authority to enact environmental controls on foreign
investors and about the powers of local governments.
The Mexican government has appealed the award to the Supreme
Court of British Columbia, since hearings of the case were
held in British Columbia, and the Canadian government and
government of Quebec have intervened.
Waste Management Inc.
This case involves a claim filed in 1998 against the Mexican
government for $60 million by Waste Management, Inc. It
concerns an exclusive 15-year concession to its subsidiary
to provide solid waste management to Acapulco. The company
claims that it was guaranteed payment by the state of
Guerrero and the Mexican federal development bank, Banobras,
and that the obligations have not been met, constituting
actions tantamount to expropriation.
Desona/Azinian
U.S.-based DESONA and its individual investors, Robert
Zinian et. al. filed this claim for over $14 million and
costs in 1997 against the Government of Mexico. The claim
related to a waste management business in Mexico. Desona
claimed that a long series of unfair and conflicting
decisions and actions by local authorities contributed to
its losses, and culminated in the forcible removal of its
managers from its waste collection and landfill business in
Naucalpan, a suburb of Mexico City on four days notice.
The case was dismissed by the arbitral panel in November
1999, in a scathing decision critical of the company's
actions and record of dishonesty. However, since the case
turned on the finding of invalidity of the contract on which
the claim was based, it does not assist governments and
citizens regarding the problem of the impact of Chapter 11
claims on legislative actions.
Cemsa/Feldman
This is the first NAFTA investor-state suit involving a tax
issue. U.S. investor Feldman, sole owner of the corporation
CEMSA, filed a claim against the Mexican government in May
1999 for $50 million, alleging that his company was wrongly
denied excise tax rebates and export rights for its
cigarette exporting business. Again, allegations of numerous
irregular actions by Mexican authorities are made, including
that CEMSA was required to provide invoices from its vendors
which stated the amount of tax included in the purchase
price. However, CEMSA claims that the tax authorities did
not require that manufacturers provide this information, so
that CEMSA could not comply with the requirement.
Adams
This case involves a dispute over title to and use of land
on which U.S. investors had built vacation homes. A group of
Mexican landowners won a claim in Mexican courts that the
disputed land had been illegitimately taken from them by the
Mexican government, which later authorized its use by the
U.S. investors. The Mexican Supreme Court ordered the land
returned to the landowners, and Mexican authorities did
subsequently return the land, including the vacation homes
on it. The U.S. investors are seeking $75 million in
compensation under Chapter 11.
-Michelle Swenarchuk
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