Published in the April 30, 2001 issue of The Nation
Sovereign Corporations
by William Greider
When NAFTA was adopted in 1993, Chapter 11 in the trade and investment
agreement was too obscure to stir controversy. Eight years later, it's the
smoking gun in the intensifying argument over whether globalization trumps
national sovereignty. Chapter 11 established a new system of private
arbitration for foreign investors to bring injury claims against
governments. As the business claims and money awards accumulate, the
warnings from astute critics are confirmed--NAFTA has enabled
multinational corporations to usurp the sovereign powers of government,
not to mention the rights of citizens and communities.
The issue has exquisite resonance with the present moment. On April 20
thirty-four heads of state gather in Quebec City to lead cheers for a Free
Trade Area for the Americas. The FTAA negotiations are designed to expand
NAFTA's rules to cover the entire Western Hemisphere. The Quebec meeting
should provide good theater but not much substance. Tony Clarke of the
Polaris Institute, in Ottawa, says the meeting is intended to be "a face
lift for the whole global agenda, by portraying free trade as democracy."
Protesting citizens will be in the streets, challenging 6,000 police and
Mounties, with an opposite message: Democracy is threatened by the
corporate vision of globalization.
Chapter 11 of NAFTA should become a defining issue for FTAA negotiations.
Many, including Clarke, vice chairman of the Council of Canadians, believe
corporate governance was and is the FTAA's intent. "There is a conquering
spirit at the heart of all this," he says, adding that the corporations'
attitude is: "We have to get into every nook and cranny of the world and
make it ours."
Chapter 11 provides a model of how this might be accomplished. The
operative principle is that foreign capital investing in Canada, Mexico
and the United States may demand compensation if the profit-making
potential of their ventures has been injured by government
decisions--"tantamount to expropriation." Thus, foreign-based companies
are given more rights than domestic businesses operating in their home
country. For example:
* California banned a methanol-based gasoline additive, MTBE, after the
EPA reported potential cancer risks and at least 10,000 groundwater sites
were found polluted by the substance. Methanex of Vancouver, British
Columbia, the world's largest methanol producer, filed a $970 million
claim against the United States. If the NAFTA panel rules for the company,
many similar complaints are expected, since at least ten other states
followed California's lead. The federal government would have to pay the
awards. California State Senator Sheila Kuehl and others have asked the US
Trade Representative to explain how this squares with a state's sovereign
right to protect health and the environment.
* In Mexico, a US waste-disposal company, Metalclad, was awarded $16.7
million in damages after the state of San Luis Potosi blocked its waste
site in the village of Guadalcazar. Local residents complained that the
Mexican government was not enforcing environmental standards and that the
project threatened their water supply. Metalclad's victory established
that NAFTA's dispute mechanism reaches to subnational governments,
including municipalities.
* In Canada, the government banned another gasoline additive, MMT, as a
suspected health hazard and one that damages catalytic converters,
according to auto makers. The Ethyl Corporation of Virginia, producer of
MMT, filed a $250 million claim but settled for $13 million after Canada
agreed to withdraw its ban and apologize.
* The Loewen Group Inc., a Canadian operator of far-flung funeral homes,
lodged a $750 million complaint against the United States, claiming that a
Biloxi, Mississippi, jury made an excessive award of $500 million when it
found Loewen liable for contract fraud against a small local competitor.
* Sunbelt Water Inc. of California has filed the largest and most
audacious claim--seeking $10.5 billion from Canada for revoking its
license to export water by supertanker from British Columbia to
water-scarce areas of the United States.
* Canada's Mondev International is claiming $50 million from the United
States because the City of Boston canceled a sales contract for an office
building with a shopping mall. Boston invoked sovereign immunity against
such lawsuits and was upheld by a local judge and the Massachusetts
Supreme Court. The US Supreme Court declined to hear the appeal. So the
company turned to NAFTA for relief.
"When just the threat of a Chapter 11 action may suffice to wrest a
financial settlement from a government, investors have unprecedented
leverage against states," Lydia Lazar, a Chicago attorney who has worked
in global commerce, wrote in Global Financial Markets magazine. Mexico,
Canada and the United States effectively waived the doctrine of sovereign
immunity, she explained, when they signed NAFTA.
As many as fifteen cases have been launched to date, but no one can be
sure of the number, since there's no requirement to inform the public. The
contesting parties choose the judges who will arbitrate, choose which
issues and legal principles are to apply and also decide whether the
public has any access to the proceedings. The design follows the format
for private arbitration cases between contesting business interests. With
the same arrogance that designed the WTO and other international trade
forums, it is assumed that these disputes are none of the public's
business--even though public laws are under attack and taxpayers' money
will pay the fines. The core legal issue is described as damage to an
investor's property--property in the form of anticipated profits. The
NAFTA logic thus establishes the "regulatory takings" doctrine the right
has promoted unsuccessfully for two decades--a retrograde version of
property rights designed to cripple or even dismantle the administrative
state's regulatory powers. "NAFTA is really an end run around the
Constitution," says Lazar.
The fundamental difference in Chapter 11, unlike other trade agreements,
is that the global corporations are free to litigate on their own without
having to ask national governments to act on their behalf in global
forums. Clearly, some of the business complaints so far are more exotic
than anyone probably anticipated. These initial cases will set precedents,
however, that major global firms can apply later. If nobody stops this
process, the national identity of multinationals will become even weaker
and less relevant, Lazar points out, since they have status to challenge
government as "an open class of 'legal equals.'"
In Canada a private lawsuit was filed recently challenging the
constitutionality of Chapter 11, since Canada's Constitution states that
the government cannot delegate justice to other bodies. The Canadian
government, itself embarrassed by the cases against it, expressed doubt
that Chapter 11 should be included in the hemispheric agreement, though it
appears to be backing away from outright opposition. In US localities, the
cases are beginning to stir questions, but lawmakers and jurists are only
beginning to learn the implications.
Does George W. Bush understand what he is proposing for the Americas? Did
Bill Clinton and Bush the elder understand the fundamental shift in legal
foundations buried in NAFTA's fine print? They knew this is what business
and finance wanted. As the public learns more, the smoking gun should
become a focal point in this year's trade debate, confronting politicians
with embarrassing questions about global governance. Who voted to shoot
down national sovereignty? Who crowned the corporate investors the new
monarchs of public values?
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