Corporations Secretly Using NAFTA to Sue Canada, Mexico

by Abid Aslam

When Canada moved to protect its citizens' health from a potentially harmful fuel additive, the chemical's U.S. manufacturer sued on the grounds that this would obstruct free trade -- and in July succeeded in overturning Canadian law.

Another U.S. company, having used similar means to force Canadian authorities to rescind a ban on chemical waste exports, now says it will sue to be compensated for business lost while the ban was in force.

A third U.S. firm awaits the outcome of its complaint, that it had been prevented from opening a waste disposal plant because of environmental zoning laws in the Mexican state of San Luis Potosi.

Opponents warn that similar actions could be taken against countries signing on to the Multilateral Agreement on Investment (MAI) and other international pacts modeled on NAFTA, which was forged by the United States, Canada, and Mexico.

"Trade agreements will be used to subvert environmental goals, an occurrence that the U.S. government repeatedly denied would happen under NAFTA," says Lori Wallach, director of Public Citizen Global Trade Watch, a Washington-based research and advocacy group.

"Yet, rather than slowing down and reassessing its trade policy, the (U.S.) administration is negotiating agreements that would apply these same anti-regulatory rules worldwide," Wallach adds. MAI negotiations are set to resume in October and talks on investment rules for a "Free Trade Area of the Americas" are scheduled to begin this month.

In July, the Canadian government agreed to lift its prohibition against importing and inter-province trading in the fuel additive MMT (methylcyclopentadienyl manganese tricarbonyl). It further agreed to pay MMT maker Ethyl Corporation some $10 million and issued a public statement that the formula posed no health risk -- just as new evidence surfaced, linking the manganese used in the octane enhancer to nervous-system problems.

In return, Ethyl agreed to drop a $250 million suit alleging that Canada had, in effect, seized its property -- in this case, its anticipated profits -- by banning MMT. The U.S.-based company also claimed that its reputation had been damaged by parliamentary debate before the ban was imposed in April 1997.

A far-reaching precedent has been set, according to trade lawyer Lawrence Herman. "The investor-state arbitration provisions of NAFTA seemed confined to cases where governments took assets away by direct action and refused to compensate the investor," he notes in The Financial Post. Ethyl Corporation's case, however, "illustrates governments are at peril if they adopt measures having the 'effect' of expropriating foreign-owned assets, directly or indirectly."

Canada also banned exports of industrial waste containing carcinogenic PCBs (polychlorinated biphenyls) between 1995 and early 1997, when it abandoned its policy after U.S. firms threatened a challenge under NAFTA. According to lawyers for S.D. Myers Inc., which specializes in PCB treatment, the company has served notice to the Canadian government that it intends to sue for cash damages. The firm's argument is that the ban denied it opportunity to profit and therefore amounted to a seizure of its assets outlawed by the regional trade pact.

Yet, "under U.S. law, Myers cannot import PCBs from Canada," counters Wallach, who notes that the U.S. Environmental Protection Agency in July 1997 banned all imports of PCBs. "This suit is about extorting money from the Canadian government during the few months the U.S. allowed PCBs to be imported."

Myers's actions show that "NAFTA empowers a company to force our government to have to pay for trying to protect the environment," says Maude Barlow, a leading trade activist who chairs the non-governmental Council of Canadians. The promise of secrecy to anyone requesting it, she adds, "is undemocratic and simply outrageous."

Metalclad had taken over a waste disposal plant on condition it clean up existing problems. State authorities declared the site an ecological zone and refused to allow the firm to reopen the facility, however, after an environmental impact assessment revealed that it was perched atop delicate underground streams. The company is seeking some $90 million in damages.

"In a vein similar to that of Ethyl Corporation's claims, Metalclad is claiming that the zoning law constitutes an effective seizure of the company's property," says Michelle Sforza, research director at Public Citizen.

"Without NAFTA's strong provision on expropriation, Metalclad alone would be forced to assume the risks of investment and would have learned a valuable lesson about conducting the proper environmental assessments before committing significant resources to an investment," Sforza notes. "Under the rights conferred by NAFTA... the government of Mexico could be forced to shoulder the risks and costs of Metalclad's investment should the company win its suit."

Under NAFTA, disputes can be referred to ICSID, a legal secretariat housed at the World Bank's Washington headquarters, or the Vienna-based U.N. Commission on International Trade Law (UNCITRAL). The tribunal handling the Metalclad case -- an American and Mexican presided over by a Briton -- was appointed by the parties in May 1997, says a legal source. The Ethyl case had been registered with the U.N. body because Canada is not a member of ICSID.