Economy & Trade, Environment, Headlines, North America

TRADE: Company Challenges U.S. for Safeguarding Environment

Stephen Leahy

BROOKLIN, Canada, Jun 17 2004 (IPS) - A Canadian company will be nearly one billion dollars richer if it becomes the first firm to win a trade challenge against Washington under the investment section of North America’s free trade deal, but experts say a victory would deal a serious blow to any government’s ability to pass laws to protect health and the environment.

"There’s a huge amount of interest in this case," says Howard Mann, a Canadian lawyer who acts for the International Institute for Sustainable Development (IISD), which won the right to be the first-ever intervener in a hearing on chapter 11 of the North American Free Trade Agreement (NAFTA).

"It’s a clear example of a challenge to a government’s ability to regulate foreign investment to protect health and the environment," Mann told IPS.

Experts point out that similar foreign investment rights protections are found in the new Central America Free Trade Agreement (CAFTA) between the United States and five developing nations, in thousands, of bilateral trade agreements (BITs) between countries, and are also proposed for the 34-nation Free Trade Area of the Americas (FTAA).

Under NAFTA’s chapter 11, governments cannot expropriate property of foreign investors or apply different standards to foreign-owned companies than to national ones.

The provision also permits firms to initiate a binding dispute resolution process for monetary damages before a trade tribunal if they believe a government violated their investor rights.

Canada-based Methanex filed its complaint to a NAFTA tribunal in 1999, when the State of California banned the gasoline additive methyl tertiary butyl ether (MTBE), of which Methanex was the largest supplier.

While MTBE is reputed to reduce air pollution, California found the additive contaminated some of the state’s waterways, groundwater and soils, forcing the closure of many public and private wells. The long-term health effects of the additive are unknown and the U.S. Environmental Protection Agency (EPA) considers MTBE a possible carcinogen.

This week is Methanex’s last chance to persuade a tribunal of commercial arbitrators at the International Centre for the Settlement of Investment Disputes (ICSID) in Washington, DC that California could have controlled MTBE contamination with stricter regulation of underground gasoline storage tanks.

The company also argues the state discriminated against a foreign investor in banning MTBE and replacing it with domestically produced ethanol.

If Methanex wins – a decision that will likely be made before the end of the year – it would take home 970 million dollars in compensation from the U.S. government, the largest award in NAFTA’s decade-long history.

North America’s free trade deal, which includes Mexico along with the United States and Canada, has been the prototype for other agreements’ investor rights guarantees, says Steven Shrybman, a lawyer with the Toronto-based firm Sack Goldblatt Mitchell.

"These agreements give corporate rights supremacy over human and democratic rights," he said in an interview.

Martin Wagner, an attorney with U.S. environmental law group Earthjustice, agrees.

"It goes against common sense that a state or national government trying to protect the public’s interest ends up paying companies that are threatening that harm," Wagner said in an interview.

Later this year, Shrybman will lead a constitutional challenge of NAFTA’s chapter 11 in the Province of Ontario’s Superior Court, alleging that the provision delegates the authority of Canadian courts to un-elected commercial tribunals, which are almost always held in private.

The lawyer says many companies have tried but none has won a case against Washington, even though most investors have triumphed against Canada or Mexico.

In a similar case, in 1997 Canada banned another fuel additive, known as MMT, because of health and environmental risks. Although a MMT ban existed in the United States, the U.S. manufacturer, Ethyl Corporation, filed a 250-million-dollar lawsuit against Canada under NAFTA.

Ottawa rescinded the ban in 1998, reportedly apologising and paying Ethyl 13 million dollars.

Foreign investment protections in trade agreements like NAFTA are extremely powerful corporate tools, says Scott Sinclair, trade expert at the Canadian Centre for Policy Alternatives. "There have been much fewer environmental protections enacted in Canada since NAFTA," he adds.

Just the threat of being brought before a trade tribunal, which are usually staffed with high-profile commercial lawyers, legal academics and retired judges, is enough to make elected officials reconsider what may be very sensible public policies, Sinclair told IPS.

For instance, to curb skyrocketing premiums for auto insurance, Canada’s province of New Brunswick promised in 2003 to create a public-owned insurance scheme. U.S. and international insurance companies have already threatened to take the province before tribunals of NAFTA and the World Trade Organisation (WTO) if it proceeds, says Sinclair.

"They ought not to win such a case," he predicts, "but trade tribunals are very capricious."

According to Mann, nations, especially developing countries, sign trade agreements with investor guarantees because the World Bank and other international development agencies insist that millions of investment dollars will come their way.

But that is not what really happens, according to many recent studies, including one by the World Bank itself, he adds.

"Trade agreements don’t in themselves generate much investment and when they do, it’s rarely good for the environment nor helps the poor in a country," Mann argues.

While aid and lending agencies do pressure developing countries into signing BITs, it is not always clear why they do so, says M Sornarajah, an expert in international trade law at the National University of Singapore.

There are between 2,000 and 2,500 BITs in force globally but they have received little public attention, unlike FTAA and NAFTA. "The public does not understand the significance of BITs, even in the more advanced societies such as Canada," Sornarajah wrote in an email interview.

But enthusiasm for such agreements may be waning, as the growing number of arbitration cases is making governments more anxious about BITs, he added.

Should Washington lose the Methanex case, the result might prompt the biggest player in the global trade game to rewrite the rules on foreign investment protection.

But almost everyone believes the United States will win.

Methanex might have a good case, but it is unlikely the private adjudicators on the NAFTA tribunal will upset the current system, predicts Shrybman.

"There is an increasing tendency in the U.S. to see its national security concerns tied to its corporate interests," he observes.

In other words, if a U.S. corporation is having difficulties with a local government, then that is increasingly being perceived as a national security issue. Just as a foreign company challenging a U.S. government will be viewed through the same "security" lens.

While the absolute protection afforded by these trade agreements provides a high level of security for U.S. corporate interests (primarily), it undermines democratic societies, Shrybman says.