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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 Ñ American, Canadian and Mexican alike Ñ 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 as
Western 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
Protesters will attack the sweeping powers and broad impact of the
tribunals, along with their very nature Ñ 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
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
¥ 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-a-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
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 Ñ 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
used to 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 to
resolve 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
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 Methanex makes. 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.
METHANEX 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
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
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 Ñ 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 Ñ 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
"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
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
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 Ñ 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 Ñ but only, she said, if "the
parties have come under pressure in their own countries to do this."Ê
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