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NAFTA Chapter 11 investor-state cases: Lessons for the CAFTA

Public Citizen Press Release
February 22, 2005

Canadian Cattlemen’s NAFTA Challenge Demanding U.S. Taxpayer Compensation for Mad Cow Import Restrictions Is Latest Example of Trade Model’s Assault on Democratic Policymaking, Vital Consumer Safeguards

New Study by Public Citizen’s Global Trade Watch Analyzes 42 NAFTA Investor-State Challenges; Illustrates How Proposed CAFTA Would Extend Threat

WASHINGTON — February 22 — The looming congressional fight over the Central America Free Trade Agreement (CAFTA) will be greatly affected by the growing list of NAFTA “investor-state” cases, now totaling billions in compensation demands, in which foreign investors are attacking regulatory and other government actions before closed, extra-judicial tribunals, Public Citizen said today. Passage of the proposed controversial CAFTA-NAFTA expansion would extend the investor-state tribunal system, which allows private enforcement of extraordinary investor privileges granted in international “trade” pacts, to corporations and investors operating in six additional nations.

In a new report, "NAFTA Chapter 11 Investor-State Cases: Lessons for the Central America Free Trade Agreement", Public Citizen describes how Canadian cattle producers are using NAFTA to demand $300 million in compensation from U.S. taxpayer funds, claiming that the Canadian cattle import ban instituted after mad cow disease was found in Canada violates their NAFTA rights. In addition, a Canadian tobacco company is using the private NAFTA tribunals to attack the U.S.tobacco settlements. The report is available here and is being released today at events in Washington, D.C., Sacramento and Olympia, Wash.

These claims are among the 42 cases filed thus far by corporate interests and investors under NAFTA’s “Chapter 11” investor provisions, which grant foreign interests more expansive legal rights and privileges than those enjoyed by U.S. citizens or corporations. With only 11 of the 42 cases finalized, some $35 million in taxpayer funds have been granted to five corporations that have succeeded with their claims. An additional $28 billion has been claimed from investors in all three NAFTA nations. The U.S. government’s legal costs for the defense of just one recent case topped $3 million. Seven cases against the United States are currently in active arbitration.

“It’s unbelievable that the Bush administration is pushing a NAFTA expansion to Central America that would expose the United States to yet greater liability, given the grim track record of successful attacks on the most basic health protections and government functions and millions in taxpayer funds already paid out to special interests under the NAFTA-style investment model,” said Lori Wallach, director of Public Citizen’s Global Trade Watch.

“That foreign producers can attack vital public health measures like the mad cow import ban or the U.S. tobacco settlements demonstrates yet again how the NAFTA investor protection model included in CAFTA constitutes an extraordinary threat to policies vital to protecting public health,” Wallach said. “We wonder what role this secretive $300 million NAFTA challenge is playing in the Bush administration’s irresponsible proposal to reopen the border to Canadian beef and cattle imports in March. It is hard to imagine why else the administration would expose U.S. consumers to risk of such a deadly disease except that this NAFTA-created $300 million in liability prompts the administration to once again allow trade concerns to trump public health.”

Corporate investors also have used NAFTA’s investor-state enforcement system to challenge domestic court rulings, local and state environmental policies, municipal contracts, tax policy, federal controlled substances regulations, federal and state anti-gambling policies, a federal government’s alleged failure to provide water rights, and even the provision of public postal services. In most instances, challengers have sought millions of dollars in damages, claiming that regulatory measures and government actions negatively affected their profitability. If an investor prevails in its NAFTA claim, the losing nation is obliged to compensate the firm from the national treasury. Among the 42 cases detailed in the report:

 Aspects of the U.S. state tobacco settlements of the late 1990s, which have resulted in a dramatic drop in the rate of teen smoking in the United States, have been challenged as arbitrary and unfair by Canadian tobacco traders.

 A California regulation requiring the backfilling of open-pit mines has been challenged by a Canadian mining enterprise, which plans to develop a giant open-pit cyanide gold mine in Imperial Valley, Calif., and which owns and operates similar mines around the world.

 UPS is seeking $160 million in compensation from Canada, claiming that its government-run parcel delivery system undermines UPS’ market share.

 Bans or phase-outs of toxic substances have been challenged three times. A challenge to Canada’s phase-out of certain uses of the pesticide lindane has been initiated by a U.S. company. Canada’s proposed ban on the gasoline additive MMT was challenged, but before the case was finalized Canada reversed the policy and paid $13 million to an American firm; California’s ban on the gasoline additive MTBE has been challenged by a Canadian firm, and that multimillion-dollar case is still pending.

"These cases show that there is a growing threat to democratic governance and state sovereignty as more and more state and local government policies, even court decisions, are targeted by NAFTA investors,” said Mary Bottari, a policy analyst at Public Citizen and author of the report.

Wallach added, “In addition to the record trade deficit generated in the NAFTA-WTO decade, the NAFTA-style investment provisions in trade agreements are eroding the democratic process. While President Bush speaks of a new doctrine of aggressively promoting democracy, in fact the international trade pacts he is pushing export the worst of anti-democratic values around the world.”

The report documents how “fixes” to the NAFTA investor protection model required by Congress in the 2002 “Fast Track” legislation were not included in the proposed CAFTA. CAFTA’s investment provisions include several cosmetic, ineffective tweaks to the NAFTA investor protection language, but otherwise expand the system of new privileges and private enforcement to investors in six additional nations. These rights include the ability to demand compensation when public health and environmental policies - even when applied equally to domestic and foreign firms - might undermine a foreign firm’s profitability. On this ground and others, CAFTA fails to meet Congress’ most significant Fast Track requirement regarding investment rules in future pacts by granting foreign firms greater rights when operating within the United States than U.S. firms or residents enjoy under constitutional property rights interpreted by the U.S. Supreme Court. CAFTA was signed in 2004 but has not yet been brought up for congressional consideration; support for the deal is limited, in part because of its investment provisions.

“Congress should reject any new trade agreement, such as CAFTA, that contains this seriously flawed investor-protection scheme, which subjects the U.S. government to challenges demanding huge payments of our taxpayer funds because of the most basic government regulatory or legal actions,” said Public Citizen President Joan Claybrook. “These cases would not be permitted in U.S. courts for U.S. citizens, and they undercut the ability of government bodies to act in the public interest.”

Said Wallach, “Rather than pare back these outrageous rules, which grant greater rights to foreign corporations than U.S. corporations enjoy, CAFTA expands the NAFTA investment model to six more nations in the hemisphere. This not only will lead to new attacks on U.S. law, but now large U.S. firms will have a new avenue for bullying Central American nations. Just one or two large damage awards could severely harm the already tight budgets of these small countries.”

The United States has not yet lost a case, thanks to an array of lucky technical breaks - such as an investor relocating into the United States and thus losing foreign investor standing under NAFTA. However, with the overall win-loss ratio of NAFTA investor-state cases running around 50-50, it is just a matter of time before a NAFTA claimant is successful against the United States.

Full report in PDF (959kb)

 source: Public Citizen