A decade ago the North American Free Trade Agreement (NAFTA) burst onto the scene in the United States. The complex trade pact between the United States and its two neighbors became an issue in the 1992 presidential election, and its ratification ignited a vociferous debate in the Senate.
But amid the din of voices fighting to be heard in the struggle — Ross Perot's warning of a "giant sucking sound" of jobs fleeing to Mexico, stirrings of the nascent antiglobalization movement, environmentalists forecasting assaults on bedrock legislation, free-traders trumping the rise of a world marketplace — something was missed.
Overlooked by NAFTA opponents and proponents alike, something virtually ignored in congressional deliberations on the agreement, was one inconspicuous provision: Chapter 11, a clause so important Dan Seligman, director of the Sierra Club's Trade Program, argues that it may lead to a "fundamentally different world in the degree of power corporations hold on democratic governments." Written in the ambiguous, innocuous-sounding prose that makes clever attorneys rich, the chapter spells out terms under which investors (i.e., multinational corporations) can be compensated for losses incurred by expropriation — government action.
The crafters of Chapter 11 included these "investor-to-state" protections out of a fear of political or economic instability in the Third World. Their intent, as Stephen Canner of the Unites States Council for International Business (USCIB) explained it, was to ensure that "U.S. investors abroad receive the same type of protection that foreign investors get in the United States with or without a treaty." The concern with Chapter 11 — and what has engendered protest from state and federal legislators and environmental activists alike — is the danger the clause poses to environmental protection efforts.
In the United States the assets of property holders are protected by the Fifth Amendment ("... nor shall private property be taken for public use, without just compensation"). This constitutional safeguard shields parties from direct expropriation, also referred to as takings. If a government wants to build a freeway or football stadium and your home happens to be in the way, the government can force you out but they have to compensate you for your loss. Chapter 11 recognizes this precedent and goes much further.
Under Chapter 11 the signatory nations are prevented from "directly or indirectly nationaliz[ing] an investment" or taking measures "tantamount to nationalization or expropriation" (emphasis added), and therein lay the distinction. By expanding government responsibility for compensation beyond direct takings, the architects of Chapter 11 have enabled foreign corporations doing business in Mexico, Canada, or the United States to seek reimbursement for any government law, rule, or regulation that impinges upon the company's profits. An illustration of the implications of this seemingly minor alteration of language is a feud between the Methanex Corporation and the state of California.
Methanex, a Canada-based company, produces methanol, a crucial ingredient in the gasoline additive MTBE. Because MTBE improves air quality by enabling gasoline to burn cleaner, it was added to fuel in cities throughout the United States. The problem, as California residents soon realized, is that MTBE causes cancer in laboratory animals. By 1995 MTBE, a chemical almost impossible to remove from groundwater, had infiltrated 30 public water systems in the state. Out of concern for public safety, the California Legislature authorized the governor to ban MTBE if further testing of the substance confirmed its deleterious health effects. In 1999, after additional laboratory testing, Gov. Gray Davis authorized the phase out of the chemical.
Faced with the prospect of losing a significant market for one of its products, Methanex sought a remedy to replace the revenue to be lost to the California ban. It found its answer with Chapter 11. Claiming that Gov. Davis' action amounted to a taking of the company's future profits and market share, Methanex filed suit against the United States seeking $970 million in compensation. Yet because of rules that are a departure from protections afforded in the United States' courts, California cannot even participate in its own defense.
As specified in NAFTA, investor-state disputes such as the one between Methanex and the United States are not heard in a courtroom in front of a judge or jury. Instead, the parties convene in a tribunal before a three-member panel of arbiters. The arbiters, usually experts in international trade law, are appointed by the parties themselves. The arbitration sessions are held with no public access behind closed doors at the United Nations and the World Bank. In the Methanex case, California has no role in the proceedings — even the state attorney general is not permitted to speak before the tribunal.
This challenge to the sovereignty of the state of California and to the ability of its elected officials to legislate in the public interest has not gone unnoticed. State Sen. Sheila Kuehl formed the Senate Select Committee on International Trade Policy and State Legislation, a body she now chairs. Sen. Kuehl has become a formidable voice in the effort to reconcile the benefits of free trade with safeguards for state sovereignty and environmental protection.
Sen. Kuehl has emerged as a thorn in the side of the U.S. Trade Representative, Robert Zoellick, as an exchange of letters between the two of them attests. In one such letter, dated Jan. 31, 2001, Kuehl and her senate colleagues cautioned Zoellick, "that as presently administered, NAFTA … diminish[es] the sovereignty of states such as California and, in doing so, shift[s] decision-making power from elected officials to unelected international trade officials." They warned that they do not wish to see environmental standards "disrupted by trade negotiators who may not have fully comprehended the potential implications of open-ended language."
Trade Representative Zoellick responded in a March 2001 letter reminding the California legislators that under NAFTA governments "continue to have an absolute right to set workplace, environmental, health, and safety safeguards at the levels they consider appropriate." Martin Wagner, the director of International Programs at Earthjustice Legal Defense Fund, regards this as a "misleading statement." He concedes it is true that language in NAFTA denies tribunals the power to overrule state or local laws but says that doesn't mean the laws are completely safe.
In 1997, in a case similar to Methanex v. the United States, an American company, the Ethyl Corporation, brought a suit under Chapter 11 against the Canadian government. Canadian authorities had implemented a ban on an Ethyl product, the gasoline additive MMT. The tribunal hearing the case found for Ethyl, and Canada was forced to pay the company US$13 million. Canada subsequently withdrew its ban of MMT.
The trend appears to be that if significantly large monetary damages are awarded in Chapter 11 cases or if corporations simply threaten to bring Chapter 11 suits, governments confronting a potential damage award of several million dollars (or, as in the case of Methanex, close to $1 billion) may yield under the financial pressure. Martin Wagner argues that the financial burden may threaten environmental statutes and regulations as governments will be "unlikely to maintain them if it costs them too much money."
In testimony before the Subcommittee on Trade of the House Committee on Ways and Means in May 2001, Daniel Price, the principal architect of Chapter 11, spoke in defense of his creation. Price beseeched members of Congress to recognize that investor protections "... foster the development of the rule of law, respect for private property, and a market-based free enterprise system that are essential hallmarks of a democratic society." Price expanded this argument in comments made to William Greider in an Oct. 15, 2001, article in The Nation. He said, "Governments recognize that it would be unfair to force an investor to bear the entire cost of a change in social policy. These costs, at least under certain circumstances, should be borne by society as a whole."
Daniel Price's thoughts on Chapter 11 are shared by the U.S. Council for International Business (USCIB), a collection of some 300 multinational corporations. This shared vision is no coincidence, as Price was speaking on behalf of the USCIB before the House Ways and Means Committee. The USCIB has not been timid in its own defense of Chapter 11 provisions. In an April 19, 2001, letter sent to Trade Representative Zoellick, signed by 29 business heavyweights, including General Motors, Honeywell, and Texaco, the group asserted its support "for the inclusion of effective investment provisions in the proposed Free Trade Area of the Americas (FTAA)."
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The Free Trade Area of the Americas would in effect expand NAFTA to 31 other nations in the Western Hemisphere, creating the largest free trade zone in the world. Participating nations have set a January 2005 deadline to complete a draft of the new trade document. However, preliminary drafts reveal that the section on investor disputes in the FTAA looks strikingly similar to that in Chapter 11 of NAFTA. In a report on the investment chapter of the FTAA titled "NAFTA Investor Rights Plus," the Hemispheric Social Alliance concluded, "Although virtually the entire draft is enclosed in brackets (indicating areas where there is not yet official consensus), the draft text closely mirrors NAFTA Chapter 11."
While business interests mobilize to defend Chapter 11, and even expand its reach, opposition is emerging — sometimes from the most unlikely places. Documents recently posted online at the U.S. State Department Web site reveal the dubiousness with which factions, even inside the federal government, hold for investor protections found in Chapter 11.
In the government's Statement of Defense in the Methanex case, attorneys for the United States write that Methanex's claim "does not remotely resemble" the type of grievance for which NAFTA parties created Chapter 11. They deem "absurd" the notion that "whenever a state takes action to protect the public health or environment, the state is responsible for damages." Even a participant in the NAFTA negotiations, Daniel Esty, a professor of environmental law and policy at Yale University who was the EPA's lead negotiator, now believes that Chapter 11 "could have been and should have been more tightly crafted" and that these "significant negative precedents" should not be replicated in the FTAA.
In his State of the Union address, President Bush urged Congress to grant him "trade promotion authority" to expedite the completion of trade agreements like the FTAA. Yet in the fight over construction of the FTAA, unlike the debate over NAFTA, environmentalists believe they are ready to thwart investment conditions that threaten the sanctity of environmental legislation.
They need to convince Congress to include restrictions on investment that protect environmental, health, and safety laws in the authorization it grants the president to negotiate trade agreements. As Dan Seligman of the Sierra Club puts it, environmentalists need to ensure that they "hold negotiators accountable to listen to a broad array of public interests." Wagner, the Earthjustice attorney, is cautiously optimistic about the inclusion of the safeguards and believes that at this point legislators would have to be "blind or completely in the pocket of the corporate lobby" to allow FTAA to pass with investment conditions intact.
The long-term ramifications of Chapter 11 are uncertain, but the danger it poses to environmental standards, our judicial system, and to democracy at large has convinced its detractors to argue for its demise. Sen. Kuehl from California said, "If I were a smart United States, I would move to amend NAFTA." Dan Seligman went further, saying, "If we knew then what we now know, NAFTA would have been defeated."
