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Analysts Examine Mixed Results of NAFTA - 2002-06-04

Two years ago, a private Canadian company got permission from a provincial government to ship water from Lake Huron to water-starved countries in Southeast Asia. When the federal government got wind of the deal, the contract was revoked. But environmentalists feared that another assault on Great Lakes water could arise under a provision of the North American Free Trade Agreement.

Chapter 11 is a clause that allows private foreign investors to sue local governments if they believe their trade rights have been violated. In the case of Great Lakes water, that could mean that trade laws could trump environmental regulations, and that businesses could overturn a government's ability to protect natural resources and human health.

At a recent U.S.-Canada law conference held in Cleveland, Ohio, government officials, policymakers, and trade lawyers gathered to discuss the environmental consequences of Chapter 11 and other trade issues. In the Great Lakes region, the sharpest impact may have been to air quality.

"Increased freight transportation linked to NAFTA has led to significant air pollution at both borders," she said.

Jannine Ferretti heads the North American Commission on Environmental Cooperation, an international agency established to address environmental concerns under NAFTA. She has admitted that as yet, there's been only limited assessment of those impacts. But she said what data there is, shows it's not all bad news.

"The Mexico steel, because of NAFTA's investment provisions, actually enabled Mexico steel to upgrade its technology, making the sector actually in some ways cleaner than that of the U.S. and Canada. But what about the effects of trade rules on environmental policy? And this is where we go to NAFTA's Chapter 11," she said.

"Chapter 11 is a chapter designed to protect investors from one NAFTA country that invested in another NAFTA country and it has led to a number of cases that have worried the environmental community," Mr. Loy said.

Frank Loy served as Under Secretary of State for Global Affairs under the Clinton administration. He has said under Chapter 11, a number of private investors have successfully sued foreign governments for millions of dollars, contending that meeting local environmental regulations violated their rights under free trade laws.

"I would say the cases worry me a lot. My guess is there already is a regulatory chill, a timidity on the part of governments to take certain actions for fear of subjecting the state to liabilities," Mr. Loy said.

Part of that regulatory chill may derive from the concern that it's not an open process. One of the sharpest criticisms of Chapter 11 is that the cases are heard and decided by a closed-door, three-person tribunal, with no mandate to hear testimony from third parties. So while the public has a hard time benefiting from NAFTA, companies have it relatively easy. In one of the first challenges under the provision, U.S.-based Ethyl Corporation won nearly $20 million in damages from the Canadian government for its ban on a gasoline additive called MMT. Canada has since dropped the ban. Another case involved an Ohio company, S.D. Meyers, that treats the chemical compounds known as PCBs.

James McIlroy, a trade lawyer from Toronto has said the company wanted to import the waste from Canada, despite a Canadian prohibition. "The government of Canada said we are prohibiting this for environmental reasons. But the real reason, when you really looked at it hard, the real reason was there was a PCB plant in Alberta in western Canada that the government of Canada wanted to promote," he said.

Mr. McIlroy is not alone when he said a number of Chapter 11 cases apparently based on environmental protection have proved on closer scrutiny to be a cover-up for government trade protection. While he doesn't dismiss the environmental issues, he does caution against blowing them out of proportion.

"I think it's fair to say, whether the cases are valid or not, there haven't been a whole lot of them. And therefore this is not this huge, massive problem that people are talking about. And this has been around since, what, 1994, and you can still count the number of cases on both hands," he said.

Ohio Democrat Congressman Sherrod Brown voted against NAFTA. He disagreed with Mr. McIlroy's assessment. "Their arguments are specious. Perhaps in the opinion of trade lawyers, these challenges have served as a cloak for protectionism. But to trade lawyers, everything's seen as a cloak for protectionism," Mr. Brown said.

Congressman Brown said while companies began making use of Chapter 11 only about four years ago, there have been plenty of other trade challenges to environmental laws.

"Time after time after time, both in NAFTA and in every public health challenge under the WTO, 33 straight times, public health laws, environmental laws, and food safety laws, every single time they've been struck down. That's wrong, whenever a trade law can be used to undercut or repeal a democratically-attained rule or regulation," Mr. Brown said.

Both opponents and supporters agree it's unlikely NAFTA will be revised anytime soon. But the precedents set under NAFTA could affect future trade agreements. Arguments on both sides of the issue will undoubtedly be aired again as Congress takes up approval of new fast track trade legislation with similar investor protections this spring. Environmental groups believe equitable settlement of future trade challenges may have to rely on the strength of public opinion to sway government decisions.