In The News Today

March 11, 2001

Nafta's Powerful Little Secret

By Anthony De Palma
New York Times

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 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 similar tribunals.

Protesters will attack the sweeping powers and broad impact of the tribunals, 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 - 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 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 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 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 - 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 - 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 - 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 - but only, she said, if "the parties have come under pressure in their own countries to do this."