Unintended Costs of Trade

June 13, 2001

Dear Colleague:

We encourage you to read the attached article, “Talk About Unintended Consequences!”, published in the May 26 National Journal.

As the article shows, NAFTA has stripped authority from democratically elected lawmakers and placed it in the hands of private corporate investors. For the first time in history, a private corporation from one country can sue a government from another to overturn laws and regulations, such as the “buy-American” provisions, which are a staple of the federal highway program. Without accepting petitions or testimony from third parties, NAFTA tribunal members can effectively repeal a law enacted through the democratic process in the United States or elsewhere.

As power shifts from governments to corporations, more and more foreign companies are likely to .attempt to compromise American sovereignty. The inclusion of Chapter 11 suggests that when one country’s laws collide with a foreign corporation’s profits, democracy loses.

Recently, the USTR head, Bob Zoellick noted that NAFTA’s Chapter 11 provisions would be included in the Free Trade Area of the Americas (FTAA). Please read this article, and keep it in mind as we engage in debate on Fast Track, FTAA, and other upcoming trade issues.

Sincerely,

SHERROD BROWN	CHARLES NORWOOD
Member of Congress	Member of Congress

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TALK ABOUT UNINTENDED CONSEQUENCES!

by Bruce Stokes, National Journal, 5/26/01

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 serve ice, 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 cues have already begun attracting attention on Capitol Hilt. 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 fulfilled.”

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 & 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 Chanter 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 — 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.