The Right and US Trade Law:
Invalidating the 20th Century
by William Greider
The Nation magazine, October 15, 2001
I. Beyond the Law
The case of Methanex v. United States originated in California
in the mid-1990s, when people began to notice a foul taste in
their drinking water, a smell like turpentine. Santa Monica had
to shut down half its supply wells and purchase clean water from
elsewhere. The contamination turned up in thirty public water
systems, Lake Tahoe and Shasta Lake, plus 3,500 groundwater sites.
The source was quickly identified as methyl tertiary butyl ether
(MTBE), a methanol-based gasoline additive that creates cleaner-burning
fuel, thus reducing air pollution. But even small amounts of MTBE
leaking from storage tanks, pipeline breaks or car accidents made
water unfit to drink-and extremely difficult to clean up. A study
team from the University of California, Davis, added that in lab
tests on rats and mice, MTBE was also carcinogenic, raising the
possibility of human risk.
The state government acted promptly. In 1997 the legislature
authorized a ban on MTBE if further investigations confirmed the
health risks. In March 1999, after more research and lengthy public
hearings, Governor Gray Davis issued an executive order to begin
the phase-out. Other states were acting too. The oxygenating additive
is used in one-fourth of the US gasoline supply, especially in
pollution-prone big cities, so New York, New Jersey and other
places were also discovering MTBE's unintended consequences for
clean water. Up to this point, the story sounded like an alarming
but fairly conventional environmental problem.
Then, four months after Governor Davis's order, a Canadian
company from Vancouver, British Columbia, filed a daring lawsuit
against the US government, demanding $970 million in compensation
for the damage California was inflicting on its future profits.
Methanex Corporation, which manufactures methanol, principal ingredient
of MTBE, claimed that banning the additive in the largest US market
violates the foreign-investment guarantees embodied in Chapter
11 of the North American Free Trade Agreement. Under Chapter 11,
foreign investors from Canada, Mexico and the United States can
sue a national government if their company's property assets,
including the intangible property of expected profits, are damaged
by laws or regulations of virtually any kind. Who knew?
The company did not take its case to US federal court. Instead,
it hired a leading Washington law firm, Jones, Day, Reavis &
Pogue, to argue the billion-dollar claim before a private three-judge
arbitration tribunal, an "offshore" legal venue created
by NAFTA. Each side-the plaintiff company and defendant government-gets
to choose one of the three arbitrators who will hear the case,
then they jointly select the third, who presides. The proceedings
are in secret-no public notice whatever-unless both sides agree
to disclose the case. Sacramento had difficulty finding out what
was happening, though it was California's environmental law that
was under attack.
Methanex and the other controversial corporate claims pending
before NAFTA tribunals are like a slow-ticking time bomb in the
politics of globalization. As nervous members of Congress inquire
into what they unwittingly created back in 1993, environmentalists
and other critics explain the implications: Multinational investors
can randomly second-guess the legitimacy of environmental laws
or any other public-welfare or economic regulation, including
agency decisions, even jury verdicts. The open-ended test for
winning damages is whether the regulation illegitimately injured
a company's investments and can be construed as "tantamount
to expropriation," though no assets were physically taken
(as is the case when a government seizes an oil field or nationalizes
NAFTA's arbitrators cannot overturn domestic laws, but their
huge damage awards may be nearly as crippling-chilling governments
from acting once they realize they will be "paying to regulate,"
as William Waren, a fellow at Georgetown law school, puts it.
On its face, this strange new legal system's ability to check
democratically elected governments confirms a principal accusation
of those much-disparaged protesters against corporate-dominated
globalization. Elite power politics, they contend, is imposing
rules on the global economy that effectively shut out competing
voices and values, that slyly undermine the sovereign capacity
of a nation to defend its own citizens' broader interests. Indeed,
the US multinational community dreams of establishing Chapter
1 l's provisions as the worldwide standard, to be applied next
in the proposed Free Trade Area of the Americas.
The most disturbing aspect of Chapter 11, however, is not
its private arbitration system but its expansive new definition
of property rights-far beyond the established terms in US jurisprudence
and with a potential to override established rights in domestic
law. NAFTA's new investor protections actually mimic a radical
revision of constitutional law that the American right has been
aggressively pushing for years-redefining public regulation as
a government "taking" of private property that requires
compensation to the owners, just as when government takes private
land for a highway or park it has to pay its fair value. Because
any new regulation is bound to have some economic impact on private
assets, this doctrine is a formula to shrink the reach of modern
government and cripple the regulatory state-undermining long-established
protections for social welfare and economic justice, environmental
values and individual rights. Right-wing advocates frankly state
that objective - restoring the primacy of property against society's
broader claims. A tentative majority on the Supreme Court agrees
in theory-the same five who selected George W. Bush as President.
"NAFTA checks the excesses of unilateral sovereignty,"
Washington lawyer Daniel Price told a scholarly forum in Cleveland.
He ought to know, since he was the lead US negotiator on Chapter
11 a decade ago. As for anyone troubled by the intrusions on US
sovereignty, he said, "My only advice is, get over it."
Price, who heads international practice at Powell, Goldstein,
Frazer & Murphy, a premiere Washington firm, says that contrary
to the widely held assumption that suits like Methanex's represent
an unintended consequence of NAFTA, the architects of NAFTA knew
exactly what they were creating. "The parties did not stumble
into this," he said. "This was a carefully crafted definition."
This account, instead of delving further into Chapter 11's
legal complexities, turns to explore its murky political origins.
How could all this have transpired so unobtrusively? And how did
the right wing's novel concept of "regulatory takings"
find its way into an international trade agreement? The story,
in passing, is another devastating commentary on the decay of
representative democracy. These now-controversial legal innovations
were ostensibly adopted in broad daylight, yet the public never
had a clue. Nor did the media, watchful policy experts or members
of Congress. Yet the stakes are as fundamental to public life
as the Constitution itself. The transmission of big ideas among
elite interests is always a more supple and elusive process than
backroom conspiracy- not exactly secret, yet withheld from general
understanding. To fully appreciate the momentous risks for law
and justice, one starts by stepping back in history to see what
exactly the right-wingers are trying to overthrow. The answer,
in their own words, is the twentieth century.
II. Rolling Back the New Deal
Political conflict over property rights has of course been
central to American life since the first colonies, starting most
obviously with human slavery and the brutal confiscation of Indian
lands. But the property issue never really went away; it only
became less visible. The conservative mind sees private ownership
of property (correctly, in my view) as an essential element undergirding
individual freedom. Yet conservatives typically have trouble accepting
that property also regularly comes into collision with society's
other values: claims for the common good, the rights of individual
citizens who own little or nothing. The tension of deciding which
comes first-property or people-has always generated the deepest
conflicts, including the Civil War.
The last great confrontation over property rights occurred
at the dawn of the twentieth century, when modern corporations
emerged with national scope and scale and awesome new influence
over society. A broad tide of reformers, led by labor, arose in
opposition, demanding new social and economic laws to protect
people and social values, but the federal judiciary blocked their
way. The Supreme Court relentlessly defended business and the
old order-the "classical legal doctrine" of limited
government and laissez-faire economics. It spoke most defiantly
in the Lochner decision of 1905, in which the Justices threw out
an early New York State labor-reform law that required a ten-hour
day and safer conditions for bakery workers. The law, they ruled,
unconstitutionally deprived bakery owners of their property rights.
Over the next three decades, the logic of Lochner was applied
to invalidate more than 200 state and federal statutes-the progressive
income tax, minimum-wage laws, health and safety codes, workers'
right to organize independent unions and other public measures
that have since become common features of US governance.
The Lochner era did not actually end until deep into the New
Deal. When a liberal majority was finally achieved at the Supreme
Court in 1937, it promptly upheld the National Labor Relations
Act and declared that social and economic regulatory laws are
constitutional after all. Government, the court affirmed, has
constitutional obligations to protect society's general health
and welfare, and its so-called police powers justify intrusions
into the private sphere-these public necessities come before property
rights. This decision opened the floodgates for expanding government
and elaborating new regulatory powers-in myriad ways.
In our era, conservatives think they have finally found a
way to close the gates. This past March in Chicago, the Federalist
Society organized a lawyers' forum with a provocative title-"Rolling
Back the New Deal"-and its star attraction was Richard Epstein,
law professor at the University of Chicago and intellectual lion
of the right. Epstein's theory of "regulatory takings"
galvanized the movement fifteen years ago when his book Takings:
Private Property and the Power of Eminent Domain first appeared,
describing an ingenious new constitutional interpretation designed
to rein in modern government. Regulations, he argued, should be
properly understood as "takings" under the Fifth Amendment
(". . .nor shall private property be taken for public purpose
without just compensation"), so government must pay those
businesses or individuals whose property value is in some way
diminished by public actions.
Soon after, Ronald Reagan's Attorney General, Edwin Meese,
sent a warning to every agency of the federal government, instructing
civil servants to search for Epstein's "hidden takings"
lurking in regulations. With financing from the usual list of
conservative foundations, the Federalist Society and other groups
began proselytizing lawyers and law students, even sitting federal
judges, in behalf of Epstein's doctrinal counterattack on liberalism.
The professor (outgoing dean at Chicago Law School) has appeared
at many Federalist Society events, alternately pugnacious and
ingratiating in style, with a meticulous intensity that might
put less learned revolutionaries to sleep.
"It will be said that my position invalidates much of
the 20th century legislation, and so it does," Epstein wrote
in Takings. "But does that make the position wrong in principle?.
.. The New Deal is inconsistent with the principles of limited
government and with the constitutional provisions designed to
secure that end." In telephone conversation, I asked the
professor for examples and he obliged with gusto.
"Most of economic regulation is stupid.... What possible
reason is there for regulating wages and hours?" Epstein
said. "If my takings doctrine prevails, you have no minimum-wage
laws. That's fine. You'd have an OSHA a tenth of the size. That's
fine too. You'd have no antidiscrimination laws for privileged
employees, which would be a godsend." Does Professor Epstein
wish to restore the Lochner era of 1905? "Well, God bless,
of course," he said. "But why do you think that's socially
irresponsible?" In fact, he portrays his approach as moderate
compromise because, unlike the Lochner doctrine, it would not
invalidate the regulatory laws that legislatures enact. He would
merely make the public pay for them. "We will allow the majority
to have its way so long as it's willing to buy off its dissenters
at a fair valuation," Epstein told the libertarian magazine
A host of conservative litigation groups have sprung up to
argue n Epstein's doctrine in court and taken a series of cases
to the || Supreme Court. So far, the Court's pro-takings decisions
have dealt only with subsidiary questions and stopped short of
fully embracing Epstein's claim that government must compensate
an owner even if property or a business has been only partially
affected. It is this claim of partial injury that makes Epstein's
theory so radical, because it would freeze government action,
which inevitably has some partial impact on many people. It also
would overturn twentieth-century precedent, even the Rehnquist
Court's. The putative "pro-takings" majority on the
Court has hesitated to go that far. Perhaps for good reason: To
enshrine this radical new definition of property rights would
provoke a grave governing crisis, from local zoning laws to the
Court's own legitimacy.
Professor Epstein, in fact, is bitterly disappointed at the
Supreme Court's hesitation and especially irked at his former
law school colleague Justice Antonin Scalia. "Scalia is terribly
worried, as I'm not, about what will happen to the federal judicial
power if he adopts the kinds of cases I'm championing-that local
zoning cases would be subject to federal scrutiny," Epstein
said. "So he's nervous about a sea change. He looks for ways
to change the doctrine on the margins, but he doesn't want to
go all the way. As a result, his decisions are incoherently decided.
He knows 'takings' is right, but he can't bring himself to do
it.... The only person who holds the 'takings' position in what
I regard as a consistent fashion is Clarence Thomas, not Scalia,
not Rehnquist and so forth. They're much more timid."
Many legal authorities, including conservatives who reject
Epstein, have assumed the Rehnquist Court would not undertake
such a radical leap in behalf of its ideology, but their confidence
was deeply shaken by Bush v. Gore. "The Court is just on
a knife edge," said Georgetown Law Professor John Echeverria,
who studies the takings decisions. "If a liberal member resigned
and was replaced by a Justice who is pro-takings, it is very likely
the Court could swing wildly on that doctrine."
Epstein is perplexed by another matter. While his conservative
brethren on the Supreme Court have so far declined to accept his
radical redefinition of the Constitution, multinational business
has already succeeded in planting his premise in NAFTA and promoting
it for other trade agreements. The claims are being heard, some
companies have already won huge awards for regulatory injury to
investments. The professor's contribution didn't even get a footnote.
"I am aware that what I have said has been very influential
in the NAFTA debate and that, strangely enough, much of what I
say seems to have more resonance in the international context
than it did in the domestic context," Epstein said. "Nobody
from any of those [business] organizations even thought to ask
me to give an opinion, let alone hire me as a consultant. I think
they should have asked me."
III. Think Locally, Act Globally
How did the professor's ideas migrate from one realm to the
other? "The takings stuff is a little like fluoride in the
water," Echeverria said. "It's an advocacy agenda that's
been floating around Washington for fifteen years with a large
number of influential supporters." His colleague professor
Robert Stumberg explained more concretely that NAFTA's investor
protections "are based on a long-term strategy, carefully
thought out by business, with many study groups and law firms
involved in developing them. This is about limiting the authority
of government-that is its central importance."
The American multinational community initiated its first discussions
on the investment problem in the mid-1980s, well before NAFTA
negotiations began but at a time when overseas capital investment
was beginning its great surge-dispersing production worldwide.
The first seminars were attended by both business and government
experts, including Dan Price, who would negotiate NAFTA under
the US Trade Representative; the discussions were organized by
the US Council for International Business (USCIB), a less prestigious
group than the Business Roundtable but with overlapping membership.
Global economic integration, the companies recognized, would no
longer be driven so much by further tariff reductions, already
largely accomplished, but by foreign direct investment-building
and buying factories, banks and affiliated firms in other countries
The problem they foresaw, as US capital invested heavily abroad,
was not the old-style expropriation of outright seizure, but a
more subtle process in which foreign governments, by enacting
progressively stiffer regulatory measures, could effectively take
control of assets and profits. Economist Edward Graham, NAFTA
expert at the Institute for International Economics (IIE), a think
tank supported by international business and finance, thought
the fears were legitimate. "There had been problems in Latin
America, though not so much Mexico, I think, and some other developing
countries, particularly in Southeast Asia, with what came to be
known as creeping expropriation. Measures were taken by governments
that were regulatory in nature but clearly expropriatory in intent.
For example, taxes. You just keep pumping the taxes, you claim
the company had used various tax-avoidance mechanisms in the past.
So the government would present them with a big bill for back
taxes and say, Look, if you don't pay up on this, we are taking
25 percent of equity for the government."
This was about the same time Attorney General Meese was alerting
government agencies to Epstein's "regulatory takings,"
but many important CEOs had probably never heard of the man or
his theory. "The investor-state was not on business's radar
screen," an important corporate trade lawyer says. "The
critical part for American business was getting Mexico to begin
to dismantle its restrictions on investment, which were substantial.
I do not recall any philosophical debate. This was a practical
problem. We've got corrupt courts in a lot of these countries;
companies should have the right of honest redress."
Washington lawyers, in and out of government, were the main
transmission belt. Their role, often underappreciated, is to act
as the keepers of the flame, nurturing long-term policy objectives
over many years and beyond the transient influence of elected
politicians or corporate CEOs. They move in and out of government
themselves, helping to write the official texts and laws they
later use as tools in behalf of corporate clients when they return
to private practice. "Businesses as a general matter do not
understand the subtleties of these legal issues, and they are
led by the lawyers," the corporate lawyer explained, adding,
"A lot of them came out of the Legal Adviser's office at
the State Department-who are great believers in international
law, and they are very enamored of this concept."
Edward Graham, the economist at IIE, thinks Chapter 11 grossly
overreached its purpose, and this was not an accident. "There
are those I've talked to who maintained that there was at least
a subgroup of constituents who really saw this as a way to get
compensation for regulatory actions," Graham said. "There
was strong advocacy that thinks, whenever the government enacts
a regulatory measure, it should compensate. They saw this, I am
told, as a way of getting such a provision into international
law that does not exist in US domestic law."
When NAFTA negotiations began in 1990, the multinationals'
lawyers already had the investor protection scheme in hand, the
arbitration feature borrowed from prior bilateral agreements.
Then they expanded it vigorously during the negotiations. Dan
Price, now the top trade lawyer at Powell, Goldstein, is widely
credited (and admired among his peers) for the design of the "investor-state"
provisions, whose ostensible purpose-and the explanation given
to Congress-was that US investors needed an insurance policy in
Mexico, whose courts were notoriously corrupt. Price had worked
at the State Department's Legal Adviser's office before he became
a key negotiator on Chapter 11 for the US Trade Representative
(his views reinforced by what one diplomat called "investment
groupies" from Treasury and State). "The breadth of
coverage and the strength of the disciplines [in Chapter 11 ]
exceed those found in any bilateral or multilateral instrument
to which the United States is a party," Price has boasted.
Price and other advocates claim that Chapter I l's "enormously
broad" definition of property rights is in accord with US
law-though any diligent law student could demonstrate that the
claim is fallacious.
Price is hailed among some younger lawyers as a negotiating
genius for persuading Mexico to accept such dramatic concessions,
but they misunderstand the lopsided dynamics of the negotiations.
The corrupt regime of Carlos Salinas was so desperate to get the
inflows of US capital that when the Americans kept pushing for
tougher language, the Mexicans regularly agreed rather than risk
losing the deal. Canada had previously refused to include similar
rules in its own bilateral free-trade agreement with the United
States, so Canadian negotiators may have been counting on Mexico
to hold off the American demands. Instead' Mexico rolled over.
Price's arguments and language are a good fit with Epstein's.
| Though other lawyers say he is not a right-wing ideologue himself,
he invokes a moral logic that is identical. Governments, Price
has explained, "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.... Simply designating a government measure
as a conservation measure, or a health and safety measure, does
not answer the basic question about who should bear its costs
and should not be enough to remove that measure from international
investment disciplines. The purpose of the regulation may be very
noble, but it is necessary to examine how that purpose is effectuated
and the impact on the affected investor."
Today, Price represents the USCIB as well as corporate clients.
He also initiated one of the first Chapter 11 cases brought against
Mexico-the Azinian claim, filed by a Los Angeles trash-hauling
firm that lost its contract in a Mexico City suburb. (Price dropped
the case when he discovered the client had no money.) Another
lawyer active in claims cases said, "Dan told me he has two
claims against Canada that he was just waiting to file."
Price declined numerous requests for an interview.
Another influential advocate is Edwin Williamson of Sullivan
& Cromwell, who, by his own description, has always been more
ideological on the subject than Price. His law firm is bluechip
establishment, with an awesome range of international clients
spanning global finance and major multinationals (Sullivan &
Cromwell recently counseled Citigroup on its $12.5 billion purchase
of Mexico's largest bank). Williamson took leave in 1990 to serve
as legal adviser at the State Department under Bush I and monitored
the developing terms for enforcing investor rights. "I was
calling strikes from the bleachers," he told me, but others
described him as a central influence. His office at State "scrubbed"
NAFTA's final text to make sure the language conformed with negotiators'
intentions, and although Williamson described the vetting as uncontroversial,
a Canadian legal adviser said the lawyers at State deleted key
words and phrases that effectively broadened NAFTA's terms even
further. "What we're really trying to protect here are property
rights," Williamson explained. "Property rights are
included in the International Declaration of Human Rights, but
they've always gotten short shrift from an international standpoint
because the international legal community is very left wing and
doesn't care about property rights."
Williamson, it happens, is also active in the Federalist Society
and chairs the society's practice group for international lawyers.
"Well, I'm a conservative, low-government, private-property
kind of person by nature," he said. He returned to Sullivan
& Cromwell after 1992 and became chair of the US industry
expert group at USCIB, where he became a leading advocate for
the Organization for Economic Cooperation and Development's ill-fated
Multilateral Agreement on Investment, designed to spread this
expanded property rights for investors worldwide. That project
was set aside after citizen protesters, led by Canadians and joined
by American activists like Global Trade Watch, raised a global
storm of critical objections. By the late 1990s, Williamson was
lobbying the Clinton Administration-"very, very hard,"
one ex-official remembered-on the same subject. He is still on
the case for the upcoming FTAA negotiations.
Does he regard Epstein's doctrine as sound? "Oh, yeah.
I basically believe we need to recognize that extensive environmental
regulation may still involve a taking. From an international standpoint,
this is an area where we haven't had any real problems of magnitude,
but with increased cross-border investment I think it is incumbent
on the international community to provide protection for property
The first Bush Administration, Williamson pointed out, was
populated with many like-minded advocates, such as White House
counsel C. Boyden Gray, who is now back at Wilmer, Cutler &
Pickering and serves with Ed Meese on the Federalist Society's
board of visitors, and Vice President Dan Quayle, whose White
House staff scrutinized all new regulations for takings issues.
"The ideology was pretty well spread around," Williamson
said. The new Bush Cabinet, likewise, includes many "pro-takings"
devotees, from Attorney General John Ashcroft to Interior Secretary
Yet Williamson worries that the multinational corporations
are insufficiently alert to the cause. "I have a lot of clients
I think ought to be interested in this," he said, "but,
you know, it's the old attitude this isn't going to happen to
us." Likewise, he fears the proposed FTAA talks will not
include investor protection if it doesn't get more aggressive
business support. "If you're not going to include the investor-state
in the FTAA, you're not serious about it," he said.
Among some trade lawyers and ex-diplomats, the conviction
persists that both environmental critics and business advocates
are hyping the implications of "regulatory takings"
for their own different purposes. Charles "Chip" Roh,
now retired as a career civil servant at USTR, was a deputy negotiator
working alongside Dan Price on Chapter 11 ten years ago. Roh explained
the unresolved legal ambiguities at great length and predicted
that once more cases are decided, the terms will prove to be not
very different from long-established practices. "If you got
a trendline of bad cases where it seems as though the regulatory
takings theory appears, I don't think the governments signed on
to that," he said. "If that happens, they should step
in and amend it, and I think they would. Because whether you're
liberal or conservative, people are not going to accept that."
Then I read to Roh from the letter sent in April to US Trade
Representative Robert Zoellick by twenty-nine major US multinationals
and industry organizations, urging him to push for the same NAFTA
investor provisions in the upcoming FTAA negotiations. The appeal
was organized by USCIB and vetted by Dan Price. GE, Ford, GM,
International Paper, Motorola, Dow, DuPont, Chevron, Procter &
Gamble and 3M were among the signers (though not the Business
Roundtable). The business letter sounds a lot like Professor Epstein.
NAFTA, it asserts, includes "protection from regulations
that diminish the value of investors' assets."
"Jesus, they can't mean that," Roh exclaimed. I
read him the text again. "Jesus, if they do that, they're
going to put Middle America on the barricades alongside the environmentalists."
IV A Shield Becomes a Sword
The first Chapter 11 lawsuits against national governments
were pioneered by entrepreneurial spirits from obscure law firms,
starting with a Toronto lawyer named Barry Appleton, who won the
first claims victory for the Ethyl Corporation in 1996, suing
Canada for its ban on the US company's gasoline additive. Appleton
has since opened offices in Washington (his man in DC is a Reaganite
lawyer who held high posts at the White House, Treasury and Agriculture).
Appleton regularly sues the Canadian government and occasionally
issues patriotic warnings that Canada will be flirting with Chapter
11 claims if it goes forward with various actions. Some of his
public alerts sound quite fanciful. Canadian hockey and baseball
teams, he suggested, can sue the United States because American
cities subsidize rival teams with taxpayer-financed stadiums.
The problem is, Appleton might be right. Nobody knows for
sure, including the three NAFTA governments. This twilight zone
where aggressive lawyers search for big scores should endure for
many years, because NAFTA specifies that no arbitration rulings
will be regarded as binding precedent for future cases. Thus,
even if Methanex and others lose, a troubled company willing to
pay for smart lawyers can still take a shot at winning big bucks
in NAFTA's legal lottery.
The pillars of the American bar have decided to play too.
Huge and imaginative cases are being filed by some of America's
premiere law firms, evidently persuaded that NAFTA's novel legal
doctrines are perfectly sound or at least worth a shot. Jones,
Day is handling the Methanex case and also a claim by Loewen for
$725 million that seeks to override a Mississippi jury verdict
against its predatory business practices. Hogan & Hartson
has UPS's claim against subsidy by the Canadian postal system.
Baker & Botts represents Waste Management against Mexico.
White & Case is working for Mondev, a Canadian developer that
accuses the City of Boston of violating a contract for a shopping
center project (Mondev first sued in state courts but lost and
was turned away by the US Supreme Court, so, what the heck, it's
trying NAFTA for $50 million).
I asked Christopher Dugan, lead lawyer for Methanex, why the
company did not pursue its complaint in US courts. One reason,
of course, is that American judges would not accept many of its
arguments, since they are derived from the looser criteria in
NAFTA and international law, not US law. Dugan, however, gave
a different explanation. "We wanted an impartial tribunal,"
he said. "If you look at it, foreign investors do have a
substantial reason to avoid the US judicial process. NAFTA does
clearly create some rights for foreign investors that local citizens
and companies don't have. But that's the whole purpose of it."
This sounds bizarre, considering the original pretext for creating
Chapter 11-that US investors could not trust Mexican courts for
fair treatment. Now, it seems, US courts cannot be trusted either.
But Dugan's remark also illustrates why NAFTA's investor protections
pose a threat to US jurisprudence. Domestic businesses, not to
mention mere citizens, will rightly complain that NAFTA effectively
puts them in a subordinate legal position, since they cannot assert
the same expanded definition of property rights to challenge US
regulations. One obvious solution, which "regulatory takings"
advocates will doubtless recommend, is that the Supreme Court
reconcile these different legal standards by issuing a precedent-setting
revision in constitutional law. Epstein might win through this
backdoor what he has not achieved in straightforward argument.
Meanwhile, the Chapter 11 lawsuits may be more valuable to
multinationals as political weapons used to intimidate governments
with the mere threat that they might file for huge damage claims.
Howard Mann, a Canadian lawyer who advises environmental groups
on the subject, described the impact: "What you see now is
the big law firms talking about Chapter 11, not just as a shield
but as a sword against government action."
The sword is already in use. Carla Hills, the US Trade Representative
who oversaw the NAFTA negotiations for Bush I and now heads her
own trade-consulting firm, was among the very first to play this
game of bump-and-run intimidation. Her corporate clients include
big tobacco-R.J. Reynolds and Philip Morris. Sixteen months after
leaving office, Hills dispatched Julius Katz, her former chief
deputy at USTR, to warn Ottawa to back off its proposed law to
require plain packaging for cigarettes. If it didn't, Katz said,
Canada would have to compensate his clients under NAFTA and the
new legal doctrine he and Hills had helped create. "No US
multinational tobacco manufacturer or its lobbyists are going
to dictate health policy in this country," the Canadian health
minister vowed. Canada backed off, nevertheless.
A former government official in Ottawa told me: "I've
seen the letters from the New York and DC law firms coming up
to the Canadian government on virtually every new environmental
regulation and proposition in the last five years. They involved
dry-cleaning chemicals, pharmaceuticals, pesticides, patent law.
Virtually all of the new initiatives were targeted and most of
them never saw the light of day."
Maybe this leverage is what corporate lawyers had in mind
all along. A major multinational might be reluctant to sue the
host government in a country where it is heavily invested, since
its relationship would be ruptured. But the company can invoke
the threat of NAFTA litigation to intimidate bureaucrats and political
leaders. "One or two cases and suddenly the business guys
understand, Oh my God, look what we have here," said John
Audley, a former EPA official for trade issues. "This thing
either scores us a healthy compensation or gets changes in the
regulation or both. This thing is a winner."
While the legal thicket surrounding Epstein and NAFTA's Chapter
11 seems fiendishly complicated, the core meaning is not fundamentally
an argument over legal doctrine. It involves a profound assault
on community and small-d democracy, as we know it. The point was
made by Lois Schiffer, Clinton's assistant attorney general for
environmental law and one of many who foresee grave damage if
the revised version of property rights should prevail, at home
or abroad. "We live as a community, not as individual, selfish
people," Schiffer said. "Everybody benefits from good
environmental regulation, but I can't clean up a river all by
myself. I mean, it takes me and all the other people who live
on the river to accomplish that. It's a real community enterprise.
People who talk about it in other ways are trying to disaggregate
V. Property vs. People
As the huge Chapter 11 claims accumulated (eighteen or more
so far), Mexico City, Ottawa and Washington gradually awakened
to their problem. Mexico lost the $16 million Metalclad I case,
involving a notorious hazardous-waste site as bad as b Love Canal,
and saw its arguments for protecting health and safety brushed
aside by arbitrators as irrelevant. Mexico City, recognizing that
it is a prime target, assembled an all-NAFTA team of lawyers who
aggressively defend against every case. "Otherwise,"
one of them said' "we were going to become the insurer for
every investment that goes awry in Mexico." Canada was stung
and embarrassed by its own losses and began urging the other governments
to join in issuing a binding "interpretative statement"
that would reduce Chapter 11's scope and wall off legitimate regulatory
powers from attack.
Washington wasn't interested at first and, indeed, assisted
US companies in developing claims. The Clinton Administration
got nervous, however, after Methanex and other provocative cases
were filed. Would Americans accept such foreign assaults on US
law as a necessary part of how "free trade" supposedly
spreads "democracy" worldwide? Meanwhile, unknown to
the public, an intense policy debate developed-EPA, Interior and
Justice's environmental lawyers versus Treasury, State and Commerce.
"Inside the government, the divisions were clear and painful,"
said John Audley, who participated for EPA. "Some agencies
were saying, 'We got it wrong in NAFTA and we have to change it.'
The others were saying, 'No, we don't accept that interpretation.
In fact, we like Chapter 11 so much, let's negotiate it again.'
The substantive differences were pounded out through horrible
meetings and fifty-, seventy-five-page documents. We simply couldn't
work it out." On the last days of Clinton's presidency, the
agencies were still at the table arguing, without resolution.
The interagency conflict has presumably subsided now that
business-friendly Republicans are heading the regulatory agencies,
but Trade Representative Zoellick has revealed his nervousness
too-worried that rising concerns in Congress might get in the
way of fast-track approval for the FTAA negotiations. Zoellick
recently worked out with Mexico and Canada an officially binding
"clarification" that promises more procedural openness
in arbitration panels, rules out one key legal premise and may
deprive Methanex of its best argument. "I think they were
scared to lose the case, so they changed the rules," said
Professor Stumberg. But even if Methanex does lose, the basic
problems are not fixed: Zoellick's corrections do not address
the core issues of expanded property rights versus public regulation.
If he gets the votes for FTAA fast-track negotiations, NAFTA's
"regulatory takings" will be promoted to cover the entire
The political ingredients are present-at the Supreme Court,
in Congress and the White House, and in trade diplomacy-to work
a reactionary transformation of American governance and rights.
I do not say this will necessarily occur. I do not think it can
if Americans at large become sufficiently alert and mobilized
in opposition. But, as this account should make obvious, the danger
exists, and no one can count on conservative self-restraint or
vigilant media or the other self-correcting mechanisms in representative
democracy to prevent it. The cause has gotten this far with very
little recognition or understanding of what's at stake. Many right-wingers
sense they are at the brink of an epic triumph over liberal government's
long domination; their objective is aligned with influential multinationals
that intend to keep what they have already won.
The opposition must purposefully raise the stakes too-forcing
these arcane matters into wider public awareness and delivering
a stark warning to political elites. If they persist in this objective,
they will ignite a grave constitutional crisis that could destroy
the legitimacy of law and representative government in public
consciousness, that could send angry citizens into the streets
to fight for their rights. Democrats, if they have the backbone,
will draw a hard line of opposition, but Republicans should also
consider whether they wish to advance this revolutionary upheaval
in long-established rights at a time when the country is so embattled.
Senate Democrats, given what has already transpired, are fully
justified in rejecting any nominee for the federal judiciary,
especially the Supreme Court, who sympathizes even distantly with
Epstein's radical reinterpretation of the Constitution. Likewise,
it is quite wrong to confirm nominees for law-enforcement positions
at Justice or the regulatory agencies who demonstrably do not
accept the settled terms of property versus public rights.
On the global front, if the Bush Administration wishes to
keep America united, it can promptly defuse this fight-first by
announcing that Chapter I l's peculiar privileges for investors
will not be proposed for any future trade agreements and, second,
by suspending NAFTA's "investor-state" enforcement mechanism
in agreement with Canada and Mexico, at least until the subject
is submitted to serious scrutiny and the full public debate it
never received the first time around. Otherwise, Democrats, including
free traders, should unite to block FTAA or any like-minded proposals.
Opportunistic right-wingers in and out of government may be thinking
they can fog the issue past Americans preoccupied with terrorism.
Democrats might assume an accommodationist stance in the name
of patriotism. If that occurs, both parties deserve contempt and
attack. The antiglobalization movement, which suspended its protests
in deference to the crisis, may have to remobilize quickly. This
time deep throngs should surround not the IMF and World Bank but
the White House, the Capitol and the Supreme Court as well.
The demonstrators should also target the lofty nameplates
of America's multinational corporations and banks. If some sources
are correct, US companies are more ambivalent about Chapter 11
than the lawyers who represent them. Perhaps they did not fully
understand what they were promoting in NAFTA, any better than
politicians or the public did. To test the proposition, these
firms should be pressured directly to back off. If they refuse
to concede, they will find that the controversy generated by their
exclusive rights may well doom their other long-term objectives
in globalization politics. In other words, the mighty are vulnerable
on this issue, and some of them evidently know it. While the ranks
of citizen protesters gather to confront titans of global commerce
and finance, they may also wish to send marchers on some of those
Washington law firms.
William Greider is The Nation s national affairs correspondent.