-Caveat Lector-
The NAFTA ruling on Metalclad vs. Mexico
- - The Broader Context -
Gerard Greenfield
Two weeks ago (August 25) the NAFTA Tribunal for the case of Metalclad Corp
vs. Mexico ruled in favour of Metalclad, ordering the Mexican government to
pay US$16.7 million in compensation.
It is the first ruling in an investor-to-state lawsuit under NAFTA.
BOX 1: Metalclad vs. Mexico
In October 1996, Metalclad Corporation, a US waste-disposal company, accused
the Mexican government of violating Chapter 11 of NAFTA when the state of
San Luis Potosi refused it permission to re-open a waste disposal facility.
The State Governor ordered the site closed down after a geological audit
showed the facility would contaminate the local water supply. The Governor
then declared the site part of a 600,000 acre ecological zone. Metalclad
claimed that this constituted an act of expropriation and sought US$90
million in compensation.
An earlier suit against the Canadian government by US-based Ethyl Corp. was
settled before a ruling was made.
BOX 2: Ethyl Corp vs. Canada
In 1997 the US chemicals giant, Ethyl Corp, used NAFTA Chapter 11 to sue the
Canadian government for a ban imposed on MMT, a gasoline additive produced
by Ethyl which is toxic and hazardous to public health. Ethyl claimed that
the ban "expropriated" its assets in Canada and that "legislative debate
itself constituted an expropriation of its assets because public criticism
of MMT damaged the company's reputation." Ethyl sued the Canadian government
for US$250 million. A year later, in June 1998, the Canadian government
withdrew environmental legislation banning MMT, and paid Ethyl Corp US$13
million to settle the case.
Three more suits are outstanding against the Canadian government, three
against the Mexican government and two against the US government.
The case against the US by a Canadian corporation, Mexthanex, also gained
attention on the weekend, with an article in The National Post (September 5)
announcing that Methanex will seek US$970 million in compensation from the
US government for environmental laws in Califorina which are "tantamount to
expropriation."
All of these cases are based on the "rights" of investors guaranteed in
NAFTA's Chapter 11, where a broad definition of "expropriation" is combined
with the right of investors to directly sue governments for compensation
(under 'investor-to-state' dispute resolution).
An article in the The Globe & Mail (September 1) on the Metalclad ruling
(again) drew attention to the threat posed by NAFTA Chapter 11 to government
regulations protecting the environment and public health. Similar articles
will be published in the coming weeks. This may even add to the ongoing
(though low-key) debate on whether the wording of investment rules under
Chapter 11 should be revised.
However, it is important to understand the Metalclad ruling in its wider
context. It is not only significant in terms of the assault on environmental
regulation, but in the politics of government regulation as a whole.
Local struggle as the root of the 'problem'
In most reports on the Metalclad vs. Mexico case the 'problem' was that
state legislation caused Metalclad to lose the value of its investment. The
debate is then carried out in terms of the validity of the legislation in
protecting the environment and public health.
However, we should remind ourselves that this kind of legislation does not
just appear out of thin air. Nor is it the result of the kindness of
government officials or 'common sense.' As with most social and
environmental regulation protecting the rights and interests of working
people, it was the result of sustained local struggle.
BOX 3: "Metalclad wants to re-open and expand a toxic dump site in
Guadalcazar County in the northern part of the north-central state of San
Luis Potos�. That the company might succeed in doing so - despite the
opposition of many local officials and citizens - has kept Guadalcazar
residents on edge. Residents do not trust the federal government to enforce
environmental laws. When the Mexican company that Metalclad bought its toxic
dump from refused to obey federal orders to close down in 1991, local
residents - brandishing machetes - enforced the order themselves."
Multinational Monitor (October 1995)
BOX 4: "When local authorities ignored the complaints of outraged community
members, citizens brandishing machetes mobilized in September 1991,
preventing tractor trailers from unloading more toxic wastes."
Multinational Monitor (October 1995)
>From this perspective it is clear that the 'problem' began not with the
environmental regulations banning the toxic waste disposal plant planned by
Metalclad, but with a well-organised protest by the local community. This
struggle from below forced the municipal government of Guadalcazar to impose
the ban, which in turn forced the state governor to respond.
What this means is that the NAFTA ruling in favour of Metalclad is not just
an assault on environmental regulation. It is an assault on the original
local struggle that brought this legislation into being.
BOX 5: People vs. Metalclad
In another case, it was reported that "... peasants held a week-long sit-in
at the end of September 1998, at Metalclad's construction site for the
latest proposed industrial toxic waste site in Mexico, in El Llano,
Aguascalientes."
Federal-Local Conflict
Another important political implication concerns the relationship between
national and sub-national regulations.
>From the very beginning the federal government of Mexico supported
Metalclad's investment project and attempted to force the state of San Luis
Potosi to reverse its ban. Even though the NAFTA ruling against Mexico
means that the federal government must pay compensation to Metalclad, the
federal government can still treat it as a 'victory' against the state of
San Luis Potosi and a warning to other states.
This not only appiles to the case of Mexico. In the US and Canada the
reality is that federal governments are often willing to lose these cases in
order to discipline provincial, state or municipal governments which have
adopted progressive social and environmental policies. Where federal
governments do not have the legal or political power to reverse such
legislation, it can allow the 'external' intervention of NAFTA to act on its
behalf.
'Regulatory expropriation'
Over the last 10 years the concept of 'regulatory expropriation' has become
an important part of the neoliberal or 'free trade' agenda. It is well known
that this agenda involves breaking down barriers to trade and investment,
creating more freedom for corporations to pursue profits at any social or
ecological cost. These barriers include the regulation of corporate
activities by governments, such as laws on employment, environmental
protection and public health. It also includes government regulation in the
form of public sector services and utilities, where private industry is
excluded.
>From the perspective of corporations, this kind of government regulation
reduces the value of their potential profits. In other words, it prevents
them from making even higher profits.
This then is tied to the concept of expropriation. According to a strict
legal definition, expropriation is understood as the taking of private
property (land) by the government. For example, if a government builds a
highway that goes through private property, then the 'taking' of the land is
considered an act expropriation. Usually compensation is paid to the private
land owner as a result.
However, NAFTA and other recent international treaties use an expanded
definition of expropriation.
There are three important aspects of this expanded definition:
1. Private property not only refers to land and physical assets, but the
market-determined commercial value of property, including a company's asset
value and future profit earnings.
2. Traditionally compensation was awarded only when the whole value of
property was lost. Under the new definition it applies when any part of its
commercial value is lost.
3. It is not only expropriation but acts "tantamount to expropriation" that
require compensation. This means that a wide range of government policies,
laws or administrative measures can be treated as having a similar effect as
expropriation.
In this way the neoliberal attack on government regulation is combined with
a very broad definition of expropriation to produce the new legal-political
concept of regulatory expropriation:
Any national or sub-national government regulations (laws, treaties,
administrative measures, policies) which reduce or limit the value of the
private commercial property can be considered a form of regulatory
expropriation.
Regulatory expropriation not only changes the meaning of expropriation,
adding to the list of foreign investors' rights, but redefines the meaning
of government regulation. A wide range of government policies,
administrative measures and laws which restrict, moderate, guide, adapt or
deter the activities of foreign investors can now treated as acts of taking
away the property of these corporations.
The Takings Movement
It is important to recognise that regulatory expropriation is not just a new
concept in international trade and investment treaties, but is a political
project of a well-organized corporate movement. This movement started in the
US under the Reagan administration and is referred to as the 'takings
movement' or 'takings project.'
Under Reagan, right-wing judges and lawyers used a series of supreme court
cases to redefine the meaning of the 'takings clause' in the Fifth
Ammendment of the US Constitution. This clause in the Constitution reads:
"... nor shall private property be taken for public use without just
compensation."
By applying an expanded definition of 'private property' and 'taking', it
was ruled that government regulations which limited the commercial value of
investment projects or restricted profit earnings could be treated as acts
of expropriation.
Most of these cases concerned lawsuits by property developers against local
and state governments for their laws on ecological zoning and environmental
protection. Property developers claimed that this kind of legislation
negatively affected their commercial value (including future profits). As a
result local governments were forced to pay compensation to these companies
for "regulatory takings" (expropriation).
In some states laws were passed to protect companies against "regulatory
takings." However, by the end of the 1980s attempts to pass this kind of
legislation were less successful. When attempts to pass federal laws on
"regulatory takings" failed, this right-wing judicial/corporate movement
shifted its focus to NAFTA.
One of the most important outcomes of the 'takings movement' was that local
governments were forced to do a 'takings assessment' before introducing new
laws. Draft laws were being watered down or revised to avoid the possibility
of expensive lawsuits in the future. This fear of being sued for
expropriation by corporations became part of the law-making process.
NAFTA has had a similar effect at a tri-national level.
Conclusion
* Regulatory expropriation and the FTAA?
A Free Trade Area of the Americas (FTAA) negotiating group on investment
rules was formed in 1998 and is currently drafting the investment chapter of
the FTAA. This will be ready by January 2001 at the latest, and will be
finalised in Argentina in April 2001 immediately before the Summit of the
Americas in Quebec City.
Despite opposition to the inclusion of NAFTA Chapter 11 or MAI-like rules in
the FTAA, there are strong indications that this is going ahead.
Although an investor-to-state complaint system might be successfully
opposed, there is a real risk that the expanded definition of expropriation
will be included.
* Regulatory expropriation clauses in bilateral investment treaties
It is important to recognise that the US 'takings movement' and NAFTA model
of an expanded definition of expropriation has already been included in
several new bilateral investment agreements in the region.
The US has signed such agreements with Argentina, Bolivia, Ecuador,
Honduras, Jamaica, Nicaragua, and Trinidad & Tobago.
Canada has signed such agreements with Argentina, Barbados, Costa Rica,
Ecuador, Panama, Uruguay, Venezuela and Trinidad & Tobago.
The vague wording "tantamount to expropriation", "equivalent to
expropriation"or "expropriation, nationalization or measures which have a
similar effect" allows a broad definition of acts of expropriation to
include government regulations.
* A strategy of exclusion
As part of the broader fight against free trade and investment regimes, we
must fight to exclude the concept of regulatory expropriation from
international agreements.
This involves reinstating the primacy of national regulations on public
health, health care, education, environment, community development,
employment protection, trade union and labour rights, natural resources
(e.g. water), genetic resources (e.g. seed), etc, over and above trade
agreements.
This means effectively excluding the above-mentioned social sectors from the
overall terms of trade agreements.
With regard to investment rules on regulatory expropriation, in the
short-term we must:
1. Severely restrict the defintion of expropriation.
2. Narrowly define the meaning of property so that it cannot be interpreted
to include market-determined commercial asset value or future profit earnings.
3. Expand the definition of "public purpose" that allows for expropriation
without compensation. Therefore regulations on the social sectors listed
above should be treated as a legitimate public purpose. This would
effectively exclude these regulations from corporate compensation claims.
.............................................
Bob Olsen, Toronto [EMAIL PROTECTED]
.............................................
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