NAFTA's Hidden Impact
Chapter 11 provisions
challenge national sovereignty
NAFTA supporters say that the free trade agreement opens up the gates to international trade to each country’s benefit. But, in reality, an obscure clause of the treaty will potentially cost the governments of the United States, Canada and Mexico billions of dollars from judgments made by tribunals that operate under internationally agreed rules.
For instance, in 1999 California Governor Gray Davis ordered a phase-out and eventual ban of a potentially carcinogenic gasoline additive that contaminated some of the state’s drinking water. Methanex, the Canadian manufacturer of methanol, a key component of that additive, then sued the United States for $970 million in lost business.
Neither California nor U.S. law will decide the matter. A three-person arbitration panel operating under procedures established through the United Nations is hearing the lawsuit.
Under NAFTA’s Chapter 11, “foreign companies from Canada or Mexico don’t have to go through the U.S. court system,” explains Steve Beckman, of the UAW’s Governmental and International Affairs Department. “They have an advantage in the U.S. that American companies and citizens don’t.”
Methanex is one of four cases in which the United States has been sued under Chapter 11. Altogether, the plaintiffs seek a total of $1.885 billion in compensation. Two other investors have filed notices of intent and could file claims against the United States at any time. In total, 14 suits have been filed under Chapter 11, six against Mexico, and four against Canada.
Chapter 11 protects foreign investors from one NAFTA nation from unfair or discriminatory treatment by another NAFTA country, and prevents the nation receiving the investment from taking the property or assets of a foreign investor without paying “fair” compensation.
Although Chapter 11 was intended to protect corporations from unfair treatment by foreign governments, many environmental and citizen groups and organizations representing local governments — including bipartisan groups that favor NAFTA-type treaties — fear it threatens state and local government sovereignty and makes it difficult for those governments to implement local environmental, health, safety or labor regulations.
The NAFTA investment protections, modeled after similar language in other U.S.-negotiated investment treaties, were mainly designed to prevent countries from nationalizing U.S. investors’ property. The restrictive Chapter 11 provisions were reportedly included in NAFTA to protect U.S. and Canadian investors from unfair treatment by Mexico. Some observers feel the number of claims filed against the United States and Canada took those nations by surprise.
“I think what they had in mind was, they didn’t trust the Mexican government,” says Canadian attorney Todd Weiler, an international law professor at the University of Windsor (Ont.). “They never, I guess, thought that maybe some people don’t get a fair shake in the U.S. or Canada.”
Commercial bias
Chapter 11 cases are arbitrated according to rules set by either the United Nations’ UNCITRAL Arbitration Rules or the World Bank’s ICSID Convention, depending on which venue the plaintiff-investor chooses. In either case, each party to the dispute chooses an arbitrator from an approved panel and the disputing parties jointly choose the third arbitrator. The host nation is the defendant. The hearings are closed to the public and appeals are strictly limited.
Four Chapter 11 cases have been decided so far (see table).
A U.S. company, Metalclad, achieved the biggest victory to date. Metalclad received federal and state permission to build a landfill in Mexico, but didn’t receive a municipal permit. Metalclad built its facility but the municipality, fearing pollution to its water supply, prevented it from opening.
A Chapter 11 panel using the World Bank’s International Centre for the Settlement of Investment Disputes ruled that Metalclad had a right to rely on the Mexican government’s approval and that, under Mexico’s constitution, the municipality couldn’t veto construction on environmental grounds. The panel granted Metalclad a $16.6 million award (which was reduced to $15 million on appeal).
Critics believe the tribunal overstepped its jurisdiction by interpreting Mexico’s constitution. Dan Seligman, the Sierra Club’s Responsible Trade Program Director, calls the Metalclad decision “fundamentally outrageous. What it shows is that the investor rules and these NAFTA tribunals are making decisions of constitutional significance. The kinds of decisions they make will affect the ability of governments across the board to perform basic functions like protecting the health and safety of citizens.”
Beckman agrees that “any health and safety regulation could be at issue if it affects a foreign corporation’s ability to make money.”
The tribunal can’t require a change in any government’s actions. It can only order a host government to compensate an investor. But can the threat of a NAFTA suit have an indirect, chilling effect on government regulatory action?
Weiler notes that despite a threatened Chapter 11 suit, Canada is considering new regulations on cigarette packaging. If Canada eventually backs down, “you’ve got a good argument” for the chill factor, he says. A spokesperson for Health Canada says the proposed regulations are undergoing the review process mandated under Canadian law.
Seligman believes the chill factor is real.
“The risk here,” he says, “is that you’ve got secretive international tribunals that are biased towards commercial interests making decisions of fundamental importance to our domestic legal system. And those courts have a very broad, open-ended mandate and because of their bias are almost certain, over time, to build up a body of law that increasingly favors the big corporations over local governments, over labor unions, over air-breathing and water-drinking citizens, and erodes our social safety net.”
Undermining protections
Many Chapter 11 observers are watching the Methanex case closely.
“If the case goes wrong,” Beckman says. “It will demonstrate clearly the extent of the damage. If California can’t regulate carcinogens, what can it regulate?”
NAFTA supporters insist that if future tribunal decisions are unreasonable the three nations will clarify or amend Chapter 11. However, the one “clarification” so far by the NAFTA governments, issued July 31, 2001, simply directed the arbitral panels to abide by “customary international law” in making their decisions on whether companies received fair and equitable treatment. This very narrow change in the directions given to panels has had no visible effect on the handling of recent cases.
Meanwhile, Chapter 11 critics hope to limit investors’ rights to sue under future trade agreements.
Recently Sen. John Kerry, D-Mass., attempted, unsuccessfully, to amend the fast-track bill. “You'll never convince me that anyone who supported NAFTA intended to infringe on U.S. sovereignty and leave American cities and states liable to foreign companies for literally billions of dollars wasted in frivolous lawsuits aimed at undermining hard-fought environmental and worker protections in the United States,” he said. Kerry’s efforts were supported by the UAW and by many bipartisan, pro-trade groups representing local government, including the National Association of Attorneys General, the National League of Cities, the National Conference of State Legislatures and the U.S. Conference of Mayors.
In a letter to Senators, the UAW said that, because of the Kerry amendment’s rejection, “future trade agreements may compound the serious problems that have already been created under Chapter 11 of NAFTA.”
In another recent letter to the Senate, the independent budget watchdog Taxpayers for Common Sense said it is “concerned that should Congress renew trade promotion authority (i.e. fast track) for the President in order to negotiate major new agreements like the proposed Free Trade Area of the Americas (FTAA) and a new round of World Trade Organization (WTO) negotiations, the result will be a substantial growth in the number of (Chapter 11) lawsuits and a significant financial exposure for American taxpayers.”
A recent Tufts University study of potential U.S. liability under Chapter 11 is alarming. For example, assuming that the dollar amount of Chapter 11 claims remains proportional to the amount of Mexican and Canadian imports, and using conservative economic growth assumptions, it’s estimated that the U.S. could face over $14 billion of new potential liability by 2005. If Chapter 11 language is added to new FTAA or WTO treaties, that estimate rises to $52 billion of potential liability.
It’s hardly surprising, therefore, that the recent UAW Constitutional Convention adopted a resolution that criticized Chapter 11 for providing foreign investors with broader rights than U.S. citizens and firms and concluded that, “This travesty must not be allowed to continue.”
With only four final decisions so far, Chapter 11’s impact isn’t clear. Nevertheless, the UAW and organizations from across the political spectrum are increasingly concerned about Chapter 11, and the investor protection provisions of future trade agreements.
