http://www.nytimes.com/2001/03/11/business/11TRIB.html?pagewanted=print
March 11, 2001
Nafta's Powerful Little Secret
By ANTHONY DePALMA
Their meetings are secret. Their members are generally unknown. The decisions they reach need not
be fully disclosed. Yet the way a small group of international tribunals handles disputes between investors
and foreign governments has led to national laws being revoked, justice systems questioned and
environmental regulations challenged. And it is all in the name of protecting the rights of foreign investors
under the North American Free Trade Agreement.
The corporations American, Canadian and Mexican alike that directly invest in neighboring
countries are thrilled that Nafta provides some protection. But foes of the trade pact say some of their
worst fears about anonymous government have become reality. And asWestern economies move
toward more free trade and globalization, environmentalists, consumer groups and anti-trade
organizations are increasingly worried about how the tribunals influence the enforcement of laws. The
groups are gearing up for a fight at the Summit of the Americas next month in Quebec, where
President Bush will be pushing a vast new Free Trade Area of the Americas, which would provide for
similar tribunals.
Protesters will attack the sweeping powers and broad impact of thetribunals, along with their very
nature ad hoc panels drawn from lists of academics and international lawyers almost unknown
outside their highly specialized fields.
"What we're talking about here is secret government," said Joan Claybrook, president of Public Citizen,
a consumer watchdog group in Washington that has been critical of Nafta and other trade agreements.
Ms. Claybrook said the 16 Nafta cases that have been filed so far in the United States,
Canada and Mexico showed how corporations were using Nafta not to defend trade but to challenge the functioning of government.
"This is not the way to do the public's business," she said.
The tribunals have been used in Nafta disputes for only a few years,
but the complaints they have handled have already had many repercussions, including these:
- The Canadian government lifted restrictions on manufacturing an ethanol-based gasoline additive
that it considered hazardous after an American manufacturer said that the ban hurt its business.
- A tribunal ordered Mexico to pay an American company $16.7 million after finding that local
environmental laws prohibiting a toxic- waste-processing plant that the company was building were
tantamount to expropriation.
- A Canadian-based funeral company is asking the United States government for $725 million in
compensation after a Mississippi jury found the company guilty in 1995 of trying to put a local funeral
home out of business, and levied $500 million in damages. The company contends that the jury sought
to punish it because it is foreign. If the tribunal awards compensation, critics say, all jury awards involving
foreign investors may be challenged.
- United Parcel Service, the package-delivery company, has filed a complaint contending that the very
existence of the publicly financed Canadian postal system represents unfair competition that conflicts
with Canada's obligations under Nafta. Critics worry that if the tribunal upholds the U.P.S. claim,
government participation in any service that competes with the private sector will be threatened.
It is clear that investors have gained a shield far more powerful than almost anyone had imagined
when Nafta was written in the early 1990's. "There is no doubt that these measures represent an
expansion of the rights of private enterprises vis- à-vis government," said Prof. Andreas F.
Lowenfeld, an international trade expert at the New York University School of Law. "The question is:
Is that a good thing?"
The international tribunals are authorized under a Nafta clause called Chapter 11, dealing with
investments. Investors who believe they have suffered a loss because of a breach in Nafta rules can
bring a claim against the government of the country where they made their investment. They can have
the complaint heard under one of two existing sets of rules &emdash; one from the United Nations, the other
from an independent office of the World Bank.
These off-the-shelf mechanisms adopted by Nafta have commonly been usedto resolve private
disputes between corporations, and are thus intended to provide a great degree of confidentiality.
Both critics and proponents agree that the provisions run headlong into demands for openness and
accountability when public issues are involved.
"The fact that the drafters of Nafta chose this secretive process toresolve these disputes is further
evidence that they weren't foreseeing matters of broad social concern coming before these panels,"
said Martin Wagner, director of international programs for the Earthjustice Legal Defense Fund, an
environmental group in San Francisco.
Critics say the corporate victories have spawned even bolder and broader challenges, each one
further undermining public policy. In a recent case that critics consider one of the most worrisome, the
Methanex Corporation of Vancouver, British Columbia, is challenging California's decision to phase
out the use of a gasoline additive containing methanol, which Methanexmakes. The state considers
the additive, MTBE, which was originally intended to reduce air pollution from motor vehicle emissions, to
be a health hazard when it enters the water supply. Santa Monica, Calif., with 93,000 residents, had to shut
down most of its municipal wells when gasoline containing MTBE leached into the drinking water a few
years ago.
ETHANEX contends that MTBE poses absolutely no health hazard and that the state's action would
effectively destroy its market. "The work that was done to make the decision to move forward with
the ban wasn't extensive enough to draw the conclusion that MTBE is hazardous," said Bradley W.
Boyd, director of investor relations at Methanex.
The company recently amended the claim to include accusations that a decision by Gov. Gray Davis
of California to ban the additive might have been politically motivated and linked to more than
$200,000 in campaign contributions by the Archer Daniels Midland Company, which makes a
competing product. A spokesman for the governor, Gabriel Sanchez, called the accusations "ludicrous."
Mr. Boyd said Methanex was not asking for the ban to be lifted, but rather for Methanex to be
compensated if it was prevented from doing business in California because of the ban. The company
wants $970 million in compensation, which rankles many Californians.
"It's the height of corporate moxie," said Michael Feinstein, an environmental activist who is the mayor
of Santa Monica. He said he was worried that a precedent would be set if the MTBE phase-out was
undermined. Even if the tribunals have no power to overturn laws, he said, a decision in Methanex's
favor "would have a devastatingly chilling effect on all such future laws and standards because of the
belief that they would not stand up to challenge."
The United States government, named as a defendant in the Methanex complaint, is also concerned
that the case stretches Nafta beyond recognition. In a statement to the tribunal, the government contends
that "Methanex's claim does not remotely resemble the type of grievance for which the states parties to the
Nafta created the investor-state dispute mechanism."
Mr. Wagner has asked the tribunal to consider breaking with tradition and accepting written
statements from third-party groups like the Bluewater Network, a citizens' environmental organization.
The three- person tribunal hearing the complaint is unusual in that its members include former
Secretary of State Warren Christopher. The tribunal determined in January that it had the right to
accept written arguments, and said it would decide later whether to do so in this case.
Mr. Wagner said he was able to keep abreast of the proceedings by filing periodic Freedom of
Information requests that force the United States government, when named as a defendant, to release
the documents. Other advocates who obtain the filings this way post some on a Web site &emdash;
www.naftaclaims.com. Canada also has a public access information law, but Mexico does not.
Officials who oversee the tribunals say that they understand concerns about the less-than-public
aspects of the panels' work but that anything that opens the proceedings would undermine the
promise of confidentiality that corporate investors consider essential.That, they say, would undermine
the primary purpose of the arbitration mechanisms &emdash; to help foster commercial development.
"The whole thing here was to have a mechanism to give a base level of comfort to foreign investors,"
said Ko-Yung Tung, vice president and general consul of the World Bank and secretary general of its
International Center for Settlement of Investment Disputes, which handles Nafta claims. He said that
forcing more disclosure could drive corporations away from the established dispute-resolution
process.
"If increased foreign investment is the prime goal in this, then making public these proceedings may be
less important" than protecting investors, Mr. Tung said.
The center occupies a small suite of offices inside the World Bank's modern headquarters in
Washington. With seven lawyers and four members of its support staff, it now oversees eight Nafta
cases. There are also 29 other disputes on the center's docket that arise from some of the more than
1,400 bilateral treaties involving more than 130 nations that have signed an international convention to
abide by the World Bank's investment rules.
For 20 years after the center was created in 1966, it established panels that heard on average no
more than one case a year. Now, officials said, about one case is filed every month.
The center's primary responsibility is to appoint the arbitrators to the panels, choosing from a list of
internationally recognized experts who are paid $1,500 a day for their work. The center is bound by
strict confidentiality rules, and only investors can say whether documents should be made public.
"It's unfair to call this a closed or secret process," said Antonio R. Parra, deputy secretary general of
the International Center. "While it's clearly not on all fours with a court proceeding, I don't think it is
something that is shrouded in secrecy."
Under the center's rules, proceedings can be made public if both the investor and the involved
government agree. But the Nafta proceedings are never opened to the public, nor have third parties
until now been allowed to submit briefs. Corporations want the proceedings to remain closed.
"The majority of claimants in these cases are not large multinational corporations but small- to
medium-sized companies," said Clyde C. Pearce, a California lawyer who represented one such
company, the Metalclad Corporation, in a complaint against Mexico over the construction of a
toxic-waste-processing site. Mr. Pearce said the obligation of responding to briefs submitted by third
parties could overwhelm corporate lawyers, who are already outmatched by the governments they
are bringing the claims against. "If others want to weigh in on these cases, they have access to their
governments and should use that route to get their views across, not the tribunals," he said.
The other set of rules governing Nafta tribunals was devised by the United Nations Commission on
International Trade Law, based in Vienna. "Arbitration is really private justice," said Jernej Sekolec,
its secretary. Mr. Sekolec says the commission's rules for handling disputes are routinely written into
commercial contracts between investors and, increasingly, agreements that let private investors bring
complaints against a foreign government.
But he said the commission itself never became involved in a dispute in any way, not even to select the
arbitrators. "Our overall mission is to streamline and facilitate negotiations and conclusions of
contracts," he said.
Typically, the parties in a dispute each name one tribunal member and agree jointly to a third. Each
panel is unique, and critics say this lack of continuity makes it hard to establish clear legal precedent.
That is especially important because a tribunal decision technically cannot be appealed. It can be
submitted to a local court for review, to ensure that there was no corruption or gross misinterpretation
of the rules. Mexico has recently filed such a review in the case won by Metalclad. Another appeal
was filed recently by the Canadian government in a case won by S. D. Myers Inc., an Ohio
waste-disposal company that said it was hurt by a Canadian law banning the export of PCB's.
Barry Appleton, a Canadian trade lawyer involved in several claims before Nafta tribunals, said critics
were so driven by their opposition to globalization that they were overstating the power of the
tribunals, which he contends are nothing more than dispute-resolution panels with no power to
overturn any laws. "What they're doing," he said of the critics, "is scaremongering."
Mr. Appleton said the arbitration panels were meant to provide a nonpolitical alternative to resolving
disputes in court. But he said controversy had arisen because the drafters of Nafta appeared to
assume that the investor-protection provisions would be used by Canadian and American investors to
protect their investments in Mexico from outright expropriation.
"The Canadian and American governments thought this was not going to apply to them," Mr.
Appleton said, "and now they're disappointed."
The lack of a traditional appeal process, transparency and legally binding precedent, along with the
wide scope of what can be challenged under the free-trade investment rules, have made many people
wary in all three nations, including government officials. Pierre Pettigrew, Canada's minister of
international trade, has written to his counterparts in the United States and Mexico to begin a process
of what he calls "clarifying" the limits of Nafta's investment protections and perhaps amending the
agreement before negotiations begin in earnest on the Free Trade Area of the Americas.
Activists planning to go to the Summit of the Americas in Quebec said they would protest the idea of
adopting similar tribunals in a hemispheric free-trade pact. "This is an example of the excessive
powers enjoyed by corporations under Nafta that should not be expanded," said the Alliance for
Responsible Trade, in a critique of the United States position on the proposed trade pact.
Critics also object to President Bush's campaign to gain approval of a so-called "fast-track authority,"
which expired after Nafta was passed in 1993. Mr. Bush has said he needs it to present the
hemispheric trade pact to Congress for a vote without possibility of amendment. The critics contend
that the scope of Nafta's investment-protection chapter was not well understood because the
fast-track process denied Congress the chance to evaluate the agreement thoroughly.
The clash between investor rights and public policy is expected to grow more intense, even within the
agencies entrusted with keeping aspects of the cases secret. "The demand for a more transparent process
will cause tension with the more traditional concept of confidentiality &emdash; it's inevitable," said Margrete L.
Stevens, senior counsel of the International Center for Settlement of Investment Disputes. She said she
believed that there was room to adjust, to open the process in keeping with such expectations throughout
the world today&emdash; but only, she said, if "the parties have come under pressure in their own countries to do
this."
Copyright 2001 The New York Times Company
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