05-26-2001
ECONOMICS: Talk About Unintended Consequences! Every day in Virginia, thousands of suburban Washington rush-hour drivers
inch their way through the years-long reconstruction of a key interchange
where Interstate 95 crosses the Capital Beltway. Not many of the drivers
know it, but the interchange is involved in legal action that could have
far-reaching implications for international-trade agreements.
As prescribed by U.S. law, the steel and cement being laid down all around
the drivers is made by American workers. But the "buy-American"
requirements of federal highway programs could soon be a thing of the past
if a Canadian company, ADF Group Inc., wins its pending suit before an
investment arbitration panel that was created by the North American Free
Trade Agreement to negotiate disputes between Canada, Mexico, and the
United States. ADF hoped to provide the interchange project with steel
beams that had been drilled and cut in Canada. ADF contends that
buy-American rules denied it a business opportunity, violating the
free-trade agreement's prohibition against such domestic content
requirements. If ADF prevails, American taxpayers could owe the company at
least $90 million in damages. Other suits will be sure to follow. Before
long, it could be bye-bye, buy-American.
The steel-beam suit highlights a series of NAFTA investment disputes that
threaten to extend the reach of the agreement's fine print in ways
unforeseen by the pact's drafters, or by the members of Congress who
approved the deal in 1993. Mexican environmental regulations, Canada's
control of its postal service, and even Massachusetts and Mississippi jury
decisions are either directly or indirectly at question in current NAFTA
investment controversies.
The prospects of these cases undermining governmental and judicial
decisions has made Chapter 11, the heretofore little-noticed investment
protection provision of NAFTA, the new cause celebre among free-trade
critics. The cases have already begun attracting attention on Capitol
Hill. The spotlight on the trade-deal provision may soon intensify, said a
House Democratic committee aide, because "if only one of these cases
goes the wrong way, the predictions made by Chapter 11's critics will have
been fullfilled."
To date, the Bush Administration has paid little attention to this issue.
The White House will have to take off its blinders sooner rather than
later. That's because the Bushies' chances for obtaining the
trade-negotiating authority they are now seeking hinges on securing
moderate Democratic support in Congress. To nail down those votes, the
Administration could use the endorsement of mainstream environmental
groups, such as the National Wildlife Federation and World Wildlife Fund,
with their millions of members. But these groups, mindful of the upcoming
negotiations on creating a Western Hemisphere free-trade area, place a
high priority on limiting the scope of investor-protection provisions that
can conceivably override a nation's environmental regulations.
NAFTA's safeguards for foreign investments were, at the time they were
negotiated in the early 1990s, a noncontroversial matter. Encouraging
foreign investments was Mexico's principal objective in the deal. The
United States, the region's largest investor, had a great deal to gain
from such safeguards.
Under Chapter 11, all types of investments, including stakes in factories
and real estate and shareholding, are protected from government measures
that might undermine their value. Such investor rights have long been a
part of the investment treaties that the United States negotiated with
other nations. To deal with investment disputes, Chapter 11 permits
individual companies to challenge their treatment before a panel of
independent arbiters-that previously included Warren Christopher and
Benjamin Civiletti-who determine whether a government's actions violate
its NAFTA investment commitments. The decision is binding, and the process
is closed to the public.
Both the sweep of these arbiters' recent decisions and the scope of the
pending cases have prompted concern. A case brought by Metalclad Corp., a
U.S. waste-management company, forced a Mexican municipality to approve a
hazardous-waste landfill facility. S.D. Myers Inc., a hazardous-waste
disposal company, challenged a Canadian ban on the export of PCB wastes.
The Loewen Group Inc., a Canadian funeral firm, has challenged a jury
finding and damage award against it in a Mississippi court. And Mondev
International, a Canadian real estate development company, has gone to the
Chapter 11 panel after the U.S. Supreme Court refused to hear an appeal of
a case the company lost.
Critics, such as Howard Mann, an international lawyer and the author of
Private Rights, Public Problems: A Guide to NAFTA's Controversial Chapter
on Investor Rights, published by Canada's International Institute for
Sustainable Development, assert that industry has turned the defensive
tools embedded in NAFTA that were designed to protect foreign investment
against traditional expropriation into offensive weapons used to handcuff
foreign government regulators. They argue that Chapter 11 is being used as
a backdoor means of extending the definition of a government
"taking" subject to compensation to include a whole range of
regulatory activities that would not now require compensation under
domestic U.S. law. And they charge that Chapter 11 gives foreign investors
opportunities to challenge U.S. government actions that American firms now
lack.
"[The] track record hardly demonstrates that arbitration tribunals
have overstepped their bounds," retorted Daniel M. Price, who
negotiated Chapter 11 while deputy general counsel in the U.S. Trade
Representative's Office, in recent testimony before the Trade Subcommittee
of the House Ways and Means Committee. Price is now a partner in the
Washington law firm of Powell, Goldstein, Frazer & Murphy.
He argued that critics misrepresent many of the cases. The S.D. Myers
challenge, he said, was not about controlling PCBs but about domestic
protectionism, and, similarly, that the Metalclad matter was not about
hazardous waste but about a municipality trampling on a contract.
So far, there have not been enough arbitration decisions to justify
definitive conclusions about Chapter 11. But that has not kept critics
from quickly refurbishing old assertions that globalization poses new
challenges to environmental regulations and other national lawmaking
functions that were previously considered to be purely domestic.
Needing to craft less controversial investment provisions for future
free-trade agreements, the Clinton Administration in its waning days
wrestled with possible changes to Chapter 11. But the effort was doomed by
the political calendar and by disagreements among the Justice Department,
the Interior Department, and the Environmental Protection Agency, which
advocated limiting the scope of investor protections, and USTR and the
Commerce Department, which feared such limitations would expose U.S.
investors abroad to government harassment.
The Bush White House faces a similar challenge in preparing for the
current Western Hemisphere trade discussions. But Administration officials
who've weighed the potential long-term impact of Chapter 11 say that they
do not yet see the need for changes.
USTR, however, is considering what might be usefully discussed with Canada
and Mexico this summer. The Canadian trade minister has called for
"clarification" of Chapter 11, but he's opposed by both the
influential Canadian Chamber of Commerce and the Canadian Council for
International Business. Mexico, which was against any Chapter 11 dialogue,
is now more open to such discussions, according to U.S. officials.
For now, Chapter 11 critics and supporters fundamentally disagree about
whether any government regulation that diminishes the value of a business
activity should require compensation for the involved business. In any
event, this dispute must first be decided domestically before it can be
resolved internationally.
But all sides seem to agree that procedural improvements are possible. The
corporate community and environmental groups support friend-of-the-court
briefs in the investment arbitration process, and they agree on opening
the proceedings to greater public scrutiny. They are also amenable to
creating an appellate body that could review arbitration awards for legal
errors.
Whether this will be enough to quell mounting U.S. environmental group
opposition to Chapter 11 is doubtful. Nor is it likely to satisfy the
governments of Latin America, which already see how Chapter 11 has been
used to force (in their view) intrusive changes in Mexico and Canada's
domestic regulations, and are likely to resist similar investor
protections in the future Western Hemisphere free-trade pact. But in
attempting to respond to such concerns, the Bush Administration's
flexibility is limited by the U.S. business community's adamant defense of
investor rights.
This stalemate will continue until more panel decisions give a better
sense of the full implications of Chapter 11. If disputes-such as the buy
American case-invalidate a significant number of environmental and
non-environmental regulations, Congress may suddenly get even more
interested in Chapter 11. Stay tuned.
Bruce Stokes
National Journal
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