North American Free Trade Agreement (NAFTA)

Another problematic issue which feeds into the undermining of democracy with regards to Chapter 11 is the lack of public access and accountability as it provides no transparent checks and balances that are common in other institutions that hold as much power as foreign investors do in the public sphere.  While ordinary citizens are not made aware of the details of cases pending in the Tribunals they are still made to carry the levy of compensation if it is awarded to the foreign investor as it comes out of tax dollars.  In the first seven years of NAFTA though cases that were filed were limited in numbers, thirteen billion dollars were claimed by corporations in their initial filing. Of this thirteen billion dollars; 1.8 billion dollars were paid by US tax payers, 294 million dollars were paid by Mexican taxpayers and the remainder of the11 billion dollars were paid by Canadian tax payers.  

The defining principle of nation states, “sovereign immunity” has been blatantly attacked under chapter eleven of NAFTA.  This founding principle of the nation state holds to the fact that governments of a given country may not be sued by external forces unless the lawsuit is prescribed under law.  This utter disregard of this principle under Chapter 11 is currently being challenged in the case Mondev who is challenging a ruling by the Supreme Court of Massachusetts. Mondev is a Canadian company, who has been in combat with the City of Boston over its’ right to purchase a parcel of land.  When, Mondev took the City of Boston they lost as the Supreme Court on the grounds of sovereign immunity.  Upset with the decision, Mondev than decided to appeal this decision to a NAFTA tribunal and in effect was able to challenge a country’s Supreme Court decision and a country’s right to utilize its’ own sovereign immunity protections.

Perhaps the most troubling aspect is the fact that corporations have exploited Chapter 11 in many of their cases as they had nothing to do with expropriation, but rather their desire to obtain a dominating position in the marketplace.  A prime example of this is the UPS case against Canada Post.  UPS contended that since Canada Post provides a public mailing system, it should not be able to “monopolize” on the parcel and courier industries as well.  UPS proclaimed that by the way of Canada running a subsidized parcel and courier service it was in breach of the NAFTA investment chapter as it gave UPS an unfair advantage in the Canadian marketplace.  This UPS case directly threatens whether the few public subsidized services that we have left, as many wonder whether such services would be immune under the investment chapter in the age of privatization and intermingling between public and private sectors.

Over the past years, many civil society NGO’s in Canada, Mexico, and the United states have become increasingly concerned about the effects that Chapter 11 of NAFTA have had on the deterioration of  democracy in their respective countries.  They expose the negative consequences that affect the daily lives of citizens as foreign investors neglectfully pollute their environments, challenge their judicial systems, and destroy public policy.  

Part 2: Chapter 11 and Controversial Articles

Chapter eleven of NAFTA grants a set of liberalization and protection rights to foreign investors and obligations that the government has in order to facilitate these rights. In a nutshell, the rational behind the Chapter eleven is to “facilitate the flow of investment among the parties by imposing limitations upon capacity of a host government to impose discriminatory or market distorting measures upon such investments or investors.”   If foreign investors feel as though their investment rights have been violated by one of the signatory countries, the corporation essentially has the authority to sue host governments.  While many of the provisions covered under Chapter 11 are met without debate as they are considered to be standardize aspects of investment chapters in trade agreements, there are a few chapters that manage to create quite the commotion. Amongst the most controversial articles within the context of Chapter eleven are: National treatment and most-favored nation treatment (Art.1103), Minimum international standards treatment (Art. 1105.1), Prohibition of performance requirements (Art. 1106), and Prohibitions on expropriation (Art. 1110).

The logistics behind the national treatment and most favored nation article is to ensure the governments treat foreign investors no less “favorably” than they would domestic companies or companies from any other nation.  Though, this article at first seemed rather harmless the precedent that has been set in the S. D. Myers case challenges this notion.  S.D. Myers, an Ohio based waste management company used this article to sue Canada for 20 million dollars in compensation during the 16 months that Canada suspended the export of polychlorinated biphenyls(PCB) for disposal in its’ plant located in Ohio. At the time of the suspension, Canada had a legal obligation to get the approval of the EPA before exporting such a substance to the US for disposal coupled with the fact that Canadian laws that were in place at the time favored the local disposal of  PCB’s.  Nonetheless, S. D. Myers won the case as they were able to skew the legal realities of the case by suggesting that its’ company was treated “less fairly” because of the fact that it was not a Canadian company.

The minimum international standards treatment article provides guidelines by which host countries must treat foreign investors in a “fair and equitable” manner that provides full protection and security to the given entity.  In the Metalclad case, a California-based toxic waste company utilized this article to sue Mexico on the grounds that it was unfairly treated when it was denied authority to expand its’ operations only on the grounds that it failed to obtain a construction permit.  In the end, the tribunal found Mexico guilty because it “failed to provide a transparent, predictable, framework for business planning and investment, and demonstrated a lack of orderly process and timely disposition in relation to an investor.” The interpretation of this article was in the broadest of terms and provides proof of the means in which NAFTA tribunals systemically favor corporate interests.  

The goal of the prohibition of performance article 1106, is to restrain a host government from imposing measures on an investor that would interfere with its’ ability to achieve maximize economic efficiency and profits.  Under article 1106, host governments are prohibited from exporting a given portion of production, requiring local inputs or services in local business operations, generating foreign exchange flows based on the firm’s levels of imports or exports, the transfer of technology or employing specified types or levels of personnel.  This article serves as a great deal of worry, as it prevents elected officials from interfering in the exports and imports into their countries even if it potentially causes undue harm to human health or the environment.  

Article 1110 which deals with issues involving expropriation is a direct threat to the security of humans and the environment of member countries.  The article requires that regardless of the reason that if an investors “property” be expropriated by the state, such action is committed compensation to the investor must be awarded.  Though this article may seem to have a certain degree of legitimacy the real difficulties are rooted in the interpretation of what constitutes as expropriation of property.  Under this article there are three types of expropriation that are recognized: Direct expropriation, indirect expropriation and, measures that amount to expropriation.  The true conflict with this article arises with the latter two forms of expropriation as they can include anything from the investors being subjected to what they would consider to be high taxes to governments establishing environmental laws that would protect the environment or human health.  The mentality behind this interpretation is that under these conditions investors have no choice other than to relocate their business which in the view of the investor and that of the tribunal equivocates to indirect expropriation.  

        It is clear that the fundamental problem that is rooted in these provisions is the way in which the Tribunal chooses to interpret these articles.  These articles of the investments chapter bring into question whether this chapter can co-exist with new laws enacted by government to protect human health and the environment.  It is clear, that the existing case decisions of the Tribunal are evidently erroneous in their current interpretations and distort the actual intent and language of the provisions.  

Part 3: Chapter 11 and Trade Tribunals

 When a country is found to be in breach of the NAFTA policies, the rules are enforced through a Tribunal that operates outside of the domestic court system. Trade tribunals, are often a source of grave criticism as they deny the due process and openness which are the supposed foundations of the court systems in Canada, the United States and Mexico.  Trade tribunals for NAFTA cases; follow the precedents of those for the World Trade Organization and the United Nations as they are held in secrecy denying the general public any participation, observation or input. If the tribunal finds the participating country to be guilty, it is the citizens of the country as a whole that are made to pay the price, as stated before cash compensation to these corporations comes directly from tax dollars.  

The structure of the trade tribunals where NAFTA cases are conducted is quite democratic in its visible foundations.  The trials are heard by a three person body whereby, the state and the investor both elect an arbitrator to the tribunal and there exists a third impartial arbitrator whom both parties can agree on. However, the internal dynamics of the system reveal a completely conflicting situation. For the most part, the backgrounds of the appointed arbitrators served in the tribunal are in the fields of commercial law, with little knowledge of public policy and concerns.  Essentially, what this means is that these trails are quite hegemonic in their natures as diversity in understanding of numerous public policy issues are undermined as it is not the arbitrators field of expertise.  

At the heart of the controversy surrounding public tribunals, is the fact that these trials are held in secrecy outside of the public realm.  This policy of privacy is reaffirmed under Chapter 11 as it states that “governments are not legally bound to make the notice of pending cases in the Tribunal aware to the public”. This policy often serves to the interests of state investors as while their case is not exposed to the public, it gives them an opportunity to exploit the perceived threat of the potential case and lobby government officials and decision makers to cave into their demands.

        The whole process of NAFTA tribunal investor-state cases proves to lack transparency, be extremely biased and to be quite undemocratic in its’ actual nature.  The foundations of legitimacy seem to be undermined by the fact that foreign investors have the capability bypass local laws and legal proceedings.  The current investor-state process in the tribunal, fails to provide any balance of sorts between private rights and public good in determining case outcomes.

                Conclusion        

Since the implantation of the NAFTA agreement, chapter 11 has justifiably been an issue of grave contention as it includes new corporate investment rights that are unprecedented in their scope and power. It has proven to be no more than an assault on national sovereignty preventing governments from defending the rights of citizens and the protection of the environment. The roles of governments in Canada, the US and Mexico have been undermined by foreign investors bent on bringing pricey and unprovoked litigation in their quests to maximize their profits.  The whole systematic workings of the tribunals in which cases are heard are fundamentally flawed as they lack the foundations of the judicial system denying citizens any sort of openness, input or accessibility.   Chapter eleven articles lack any sort of definition and are extremely subjective in their interpretation.  Despite the numerous complications that have arisen from Chapter 11, plans are now underway to incorporate an investment chapter in the Free Trade Area of the Americas.  Canada, who has been the country most financially burdened by chapter 11, views the investment chapter with a great deal of cynicism.  Pierre Pettigrew, Canada’s former trade minister, has stated that if such an investment provision would be included in the FTAA agreements Canada would have no choice but to opt out of the agreement.   Though the long term implications of Chapter 11 are ambiguous, it is clear that it currently poses a threat to environmental standards, sovereignty and democracy at large.