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New Study Analyzes Seven Years of Corporate Investor Challenges to Democratic Governance and State Sovereignty Under NAFTA

Victory: A new report documents the growing threat to democratic govenanace posed by the corporate rights already granted under NAFTA to be expanded under the Free Trade Area of the Americas.
September 4, 2001
Sacramento, CA —

In what is becoming a growing threat to democratic governance and state sovereignty, corporations are using new rights and privileges granted under the North American Free Trade Agreement (NAFTA) to challenge a variety of national, state and local policies and decisions, a new report has found.

The report, "NAFTA Investor-to-State Cases: Bankrupting Democracy," documents the track record of cases brought under NAFTA's investment chapter, which granted expansive new rights and privileges to foreign investors operating in the three NAFTA signatory nations: Mexico, Canada and the United States. State lawmakers joined Public Citizen in releasing the report today in Sacramento.

Since NAFTA was implemented in 1994, corporate investors in all three countries have used these new investor rights to challenge a variety of national, state and local policies and decisions. Corporations claim that these governmental regulatory policies are "tantamount to" an expropriation of private property and therefore they deserve compensation from the taxpayers of the country in which they are investing. Of the 15 cases reviewed in the report, companies have claimed more than $13 billion in compensation for actions that many consider to be normal regulatory activity.

The issue is particularly timely because in the spring of 2001, President Bush asked Congress to delegate to him six years of constitutional authority over international trade through a process called Fast Track. Bush seeks Fast Track trade authority to expand NAFTA rules to an additional 31 Latin American nations by 2005 through the Free Trade Area of the Americas (FTAA). As a battle over Fast Track looms in Congress, analysis of the impacts of seven years of NAFTA is urgently needed.

"These nefarious provisions of NAFTA undermine the basic principles of our federal system of government, where states are permitted to establish their own protections for their citizens," said U.S. Rep. George Miller (D-Martinez). "Under NAFTA Chapter 11, the U.S. government is forced to place the interests of foreign corporations over the interests of individual states in our union."

The study shows how a variety of government policies and actions have been challenged by corporations as NAFTA violations, including environmental and public health policies, a state judicial decision upheld by the U.S. Supreme Court, a jury verdict in a civil suit, a U.S. federal procurement law and even a government's provision of postal services.

"The study documents a number of extraordinary attacks on normal government activities that are part of operating the civil justice system or legislative work establishing environmental or public health regulation," said California State Sen. Sheila Kuehl. "State legislators need to be aware that under NAFTA, the U.S. could be required to compensate any foreign corporation that feels that a state measure is negatively impacting its investment. Protecting the interests of the citizens of their state is a legislator's first job, not protecting the investment rights of foreign corporations."

The study also found that under NAFTA, foreign corporations are granted legal rights and privileges that are not available to U.S. companies or citizens on U.S. soil.

"U.S. law does not allow companies to seek compensation for the cost of complying with government health and environmental regulations," said Mike Dolan, Deputy Director, of Public Citizen's Global Trade Watch. "U.S. companies can't appeal jury verdicts, state or U.S. Supreme Court decisions to a secret trade tribunal to escape liability. There is no U.S. law providing corporations with legal powers to attack public services to garner a larger share of the market, but that is what foreign corporations are doing under NAFTA."

One of the best-known NAFTA cases involves the state of California. Methanex Corporation of Canada has filed a NAFTA case for $1 billion over California's decision to phase out the gasoline additive MTBE.

"Methanex company is attempting to hold taxpayers hostage to the tune of nearly $1 billion, or 1.2 percent of our state budget, because we had the nerve to ban a product that was contaminating water supplies all over the state," said Martin Wagner of Earthjustice, who has attempted to intervene in this NAFTA suit on behalf of California environmentalists. "This is not what California was promised when NAFTA passed."

Other key findings include:

Foreign Investors Granted Greater Rights Than U.S. Corporations or U.S. Citizens: The cases analyzed in this report show how NAFTA's investor protections are being used by foreign investors to demand payment not for "expropriations" or seizure of property, but more commonly for any government action that impacts an investor's expected future profits. Yet this notion of "regulatory takings" does not exist in U.S. law. Given that it would eviscerate basic government policymaking, it has been rejected by Congress and the courts. Attempts to legislate a broader definition of property rights through regulatory takings legislation has been repeatedly rejected by Congress.

Private Corporate Enforcement of NAFTA Privileges: NAFTA provides foreign investors the ability to privately enforce the new rights and privileges granted by NAFTA in trade tribunals. Called "investor-to-state" dispute resolution, this extraordinary mechanism empowers private investors and corporations to sue NAFTA signatory governments for an unlimited amount of taxpayer dollars, behind closed doors and outside the nation's judicial system.

Foreign Investors Could Evade Legal Liability: NAFTA's investor-to-state tribunals provide an avenue for foreign litigants to escape liability and seek government compensation for damages ordered by U.S. courts. One Canadian corporation is seeking $725 million from U.S. taxpayers because of an adverse jury verdict in a private breach-of-contract case in a Mississippi court. This special right of "appeal" is a privilege enjoyed only by foreign investors; domestic companies must abide by the decisions of domestic courts.

Principle of Sovereign Immunity Attacked: In addition to the implications for state sovereignty when governmental decisions are second-guessed and undermined by NAFTA panels, the long-standing common law legal principle of sovereign immunity itself has been attacked in a NAFTA case. A Canadian corporation involved in a contract dispute with the city of Boston is challenging a Massachusetts Supreme Court ruling (upheld by the U.S. Supreme Court) that the city agency involved in the dispute was immune from liability due to sovereign immunity.

Chilling Effect on Public Interest Policy: In the first NAFTA corporate case, the U.S. Ethyl corporation filed a suit challenging a Canadian environmental and public health measure restricting a gasoline additive it developed as the ban was being debated in parliament. The Canadian government caved into pressure, revoked its law and compensated the corporation $13 million, demonstrating that the potential to bully even governments of wealthy developed countries under Chapter 11 is enormous.

NAFTA Environmental Protections Meaningless: In the NAFTA corporate investor challenges decided to date, NAFTA text language purporting to protect the environment has been given such short shrift by NAFTA tribunals as to render these so-called protections meaningless. In one case involving the construction of a toxic waste treatment facility in Mexico, the environmental and health concerns of the community were given little to no consideration by the NAFTA tribunal that ruled in the company's favor.

Governments Subject to Endless Second-Guessing by NAFTA Tribunals: A tribunal in one case found that Canada's temporary ban of PCB exports based on environmental concerns was reasonable. However, the tribunal also ruled that Canada's actions were a NAFTA violation and the company deserved compensation because the manner in which Canada sought to implement its environmental goal was not in the least trade restrictive manner possible.

Potential Cost to the Taxpayers in the Billions: In the end, it is the taxpayers of the challenged country who must pay the compensation to a corporation if it succeeds in its NAFTA suit. In the first seven years of NAFTA, with only a small number of cases filed, an astonishing $13 billion has been claimed by corporations in their initial filings: $1.8 billion from U.S. taxpayers, $294 million from Mexican taxpayers and a whopping $11.3 billion from Canadian taxpayers.

From Defense to Offense: Although the NAFTA provisions on expropriation or actions "tantamount to" expropriation were originally supposed to protect investors against nationalization or state seizure of property, a number of corporations using NAFTA's private enforcement are not attempting to claim expropriation of their property when initiating NAFTA Chapter 11 cases. Rather, they are relying on other provisions of NAFTA to bring a private trade case in an effort to improve their strategic position in the marketplace.

Contacts

Brian Smith, Earthjustice, (415) 627-6700

Mike Dolan, Global Trade Watch, (510) 719-9304

Mary Bottari, Public Citizen, (608) 255-4566

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