NAFTA's Investor "Rights"

A Corporate Dream, A Citizen Nightmare

by Mary Bottari

Multinational Monitor magazine, April 2001


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.

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." 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.


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 Kauffman 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 "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.


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