by William Greider
The Nation magazine, April 30, 2001
When NAFTA was adopted in 1993, Chapter 11 in the trade and
investment agreement was too obscure to stir controversy. Eight
years later, it's the smoking gun in the intensifying argument
over whether globalization trumps national sovereignty. Chapter
11 established a new system of private arbitration for foreign
investors to bring injury claims against governments. As the business
claims and money awards accumulate, the warnings from astute critics
are confirmed-NAFTA has enabled multinational corporations to
usurp the sovereign powers of government, not to mention the rights
of citizens and communities.
The issue has exquisite resonance with the present moment.
On April 20 thirty-four heads of state gather in Quebec City to
lead cheers for a Free Trade Area for the Americas. The FTAA negotiations
are designed to expand NAFTA's rules to cover the entire Western
Hemisphere. The Quebec meeting should provide good theater but
not much substance. Tony Clarke of the Polaris Institute, in Ottawa,
says the meeting is intended to be "a face lift for the whole
global agenda, by portraying free trade as democracy." Protesting
citizens will be in the streets, challenging 6,000 police and
Mounties, with an opposite message: Democracy is threatened by
the corporate vision of globalization.
Chapter 11 of NAFTA should become a defining issue for FTAA
negotiations. Many, including Clarke, vice chairman of the Council
of Canadians, believe corporate governance was and is the FTAA's
intent. "There is a conquering spirit at the heart of all
this," he says, adding that the corporations' attitude is:
"We have to get into every nook and cranny of the world and
make it ours."
Chapter 11 provides a model of how this might be accomplished.
The operative principle is that foreign capital investing in Canada,
Mexico and the United States may demand compensation if the profit-making
potential of their ventures has been injured by government decisions-"tantamount
to expropriation." Thus, foreign-based companies are given
more rights than domestic businesses operating in their home Country.
* California banned a methanol-based gasoline additive, MTBE,
after the EPA reported potential cancer risks and at least 10,000
groundwater sites were found polluted by the substance. Methanex
of Vancouver, British Columbia, the world's largest methanol producer,
filed a $970 million claim against the United States. If the NAFTA
panel rules for the company, many similar complaints are expected,
since at least ten other states followed California's lead. The
federal government would have to pay the awards. California State
Senator Sheila Kuehl and others have asked the US Trade Representative
to explain how this squares with a state's sovereign right to
protect health and the environment.
* In Mexico, a US waste-disposal company, Metalclad, was awarded
$16.7 million in damages after the state of San Luis Potosi blocked
its waste site in the village of Guadalcazar. Local residents
complained that the Mexican government was not enforcing environmental
standards and that the project threatened their water supply.
Metalclad's victory established that NAFTA's dispute mechanism
reaches to subnational governments, including municipalities.
* In Canada, the government banned another gasoline additive,
MMT, as a suspected health hazard and one that damages catalytic
converters, according to auto makers. The Ethyl Corporation of
Virginia, producer of MMT, filed a $250 million claim but settled
for $13 million after Canada agreed to withdraw its ban and apologize.
* The Loewen Group Inc., a Canadian operator of far-flung
funeral homes, lodged a $750 million complaint against the United
States, claiming that a Biloxi, Mississippi, jury made an excessive
award of $500 million when it found Loewen liable for contract
fraud against a small local competitor.
* Sunbelt Water Inc. of California has filed the largest and
most audacious claim-seeking $10.5 billion from Canada for revoking
its license to export water by supertanker from British Columbia
to water-scarce areas of the United States.
* Canada's Mondev International is claiming $50 million from
the United States because the City of Boston canceled a sales
contract for an office building with a shopping mall. Boston invoked
sovereign immunity against such lawsuits and was upheld by a local
judge and the Massachusetts Supreme Court. The US Supreme Court
declined to hear the appeal. So the company turned to NAFTA for
"When just the threat of a Chapter 11 action may suffice
to wrest a financial settlement from a government, investors have
unprecedented leverage against states," Lydia Lazar, a Chicago
attorney who has worked in global commerce, wrote in Global Financial
Markets magazine. Mexico, Canada and the United States effectively
waived the doctrine of sovereign immunity, she explained, when
they signed NAFTA.
As many as fifteen cases have been launched to date, but no
one can be sure of the number, since there's no requirement to
inform the public. The contesting parties choose the judges who
will arbitrate, choose which issues and legal principles are to
apply and also decide whether the public has any access to the
proceedings. The design follows the format for private arbitration
cases between contesting business interests. With the same arrogance
that designed the WTO and other international trade forums, it
is assumed that these disputes are none of the public's business-even
though public laws are under attack and taxpayers' money will
pay the fines. The core legal issue is described as damage to
an investor's property-property in the form of anticipated profits.
The NAFTA logic thus establishes the "regulatory takings"
doctrine the right has promoted unsuccessfully for two decades-a
retrograde version of property rights designed to cripple or even
dismantle the administrative state's regulatory powers. "NAFTA
is really an end run around the Constitution," says Lazar.
The fundamental difference in Chapter 11, unlike other trade
agreements, is that the global corporations are free to litigate
on their own without having to ask national governments to act
on their behalf in global forums. Clearly, some of the business
complaints so far are more exotic than anyone probably anticipated.
These initial cases will set precedents, however, that major global
firms can apply later. If nobody stops this process, the national
identity of multinationals will become even weaker and less relevant,
Lazar points out, since they have status to challenge government
as "an open class of 'legal equals."'
In Canada a private lawsuit was filed recently challenging
the constitutionality of Chapter 11, since Canada's Constitution
states that the government cannot delegate justice to other bodies.
The Canadian government, itself embarrassed by the cases against
it, expressed doubt that Chapter 11 should be included in the
hemispheric agreement, though it appears to be backing away from
outright opposition. In US localities, the cases are beginning
to stir questions, but lawmakers and jurists are only beginning
to learn the implications.
Does George W. Bush understand what he is proposing for the
Americas? Did Bill Clinton and Bush the elder understand the fundamental
shift in legal foundations buried in NAFTA's fine print? They
knew this is what business and finance wanted. As the public learns
more, the smoking gun should become a focal point in this year's
trade debate, confronting politicians with embarrassing questions
about global governance. Who voted to shoot down national sovereignty?
Who crowned the corporate investors the new monarchs of public