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
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
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
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
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
* 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
"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
"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 FAST TRACK TO EXPANDED CHAPTER 11
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
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
Mary Bottari is director of Global Trade Watch's Harmonization
/ FTAA page