Meet the least talked-about source of “frivolous” lawsuits: NAFTA and, potentially, its cousin CAFTA.
It was a problem that Lloyd Levine wrestled with for over six years: how to rid the state of a great environmental blight—over 9 million scrap tires filling up California landfills, serving as mosquito incubators, and occasionally igniting into great fires and belching plumes of oily toxic smoke.
As a graduate student at California State University, Sacramento, Levine wrote his master’s thesis on the problem. As a member of the California Assembly representing Van Nuys, he had a chance to do something about it. His bill, AB 338, was simple, even elegant: use all of those tires to pave California streets and highways. Rubberized asphalt has been in use in California for years, albeit in relatively small amounts. Levine’s bill would have required Caltrans to eventually make rubberized asphalt 35 percent of the total asphalt it laid down.
“The asphalt that you can make using recycled tires is better than regular asphalt on all levels” Levine enthused. Rubberized asphalt lasts longer, he explained, it makes for a quieter drive, and, most importantly, it diverts the millions of scrap tires from the landfill.
The bill passed through the legislature easily, and Levine was confident it would become law this year. But he was surprised when, seemingly out of the blue, he learned that Governor Schwarzenegger was going to veto his bill because the administration was afraid that it would violate the rules of the North American Free Trade Agreement.
“I was upset, it came completely out of left field,” Levine complained.
The problem was that AB 338 required Caltrans to buy tires from U.S. scrap-rubber sources. It makes a lot of sense if you’re trying to clean up tire piles here at home.
But according to the governor’s office, the bill would have exposed the state to lawsuits from Canadian and Mexican companies trying to export scrap tires to the United States.
Levine found out the hard way that the investor-protection provisions in NAFTA and other free-trade agreements can trump the ability of local governments to make their own consumer safety and environmental laws, in order to protect their own citizens.
“This is really a new world to me,” Levine explained. “I thought NAFTA was about trade between companies, about removing tariffs and things like that. I never considered for a second that it would impact the ability of the state to solve its own problems.”
Levine since has learned a lot more about NAFTA, in particular one provision called Chapter 11—not to be confused with the bankruptcy law with the same name—which gives foreign investors unprecedented power to challenge the laws of other countries. And some of the most bitterly fought NAFTA battles have been over environmental laws passed by local and state governments to protect their citizens.
Over the years, Chapter 11 claims by foreign investors have mounted. Critics of the trade rules say they hold harsh lessons for the upcoming debate over the Central American Free Trade agreement (CAFTA), which is expected to come before Congress for ratification sometime in the late spring or summer.
In 1999, a Canadian company called Methanex brought the first NAFTA Chapter 11 claim against a California law. The company, which makes the chemical methanol, demanded nearly $1 billion when California decided to phase out the toxic gasoline additive MTBE. Since methanol is a component of MTBE manufacture, the company argued that the California ban amounted to an expropriation of its future profits.
The claim cost the U.S. government $3 million to defend. In 2002, the United Nation’s Commission on International Trade Law ruled against Methanex, finding that since the company made methanol, and not MTBE, that it was too far removed from California’s ban to be harmed. Since then, Methanex has resubmitted its complaint, which is still pending.
In all, over 40 cases claiming $28 billion worth of damages have been brought against the NAFTA-member governments, according to a report by the corporate watchdog group Public Citizen. Of those, only 5 cases have been won by investors, and governments have only had to pay out $35 million to the investors. But the number of pending NAFTA cases by foreign investors against the United States is on the rise.
Among the most recent is an August 2004 complaint by the trade group Canadian Cattlemen for Fair Trade, which is demanding $300 million from the US government for banning the import of live Canadian cattle after mad cow disease was discovered in that country in 2003.
Closer to home, a Canadian gold mining company, Glamis Gold, has filed a $50 million claim against a California regulation that requires mining companies to backfill open-pit mines that would damage Native American lands.
Last month in Sacramento, the California Chamber of Commerce hosted a luncheon for trade ambassadors from Central America and the Dominican Republic. (Because the trade agreement also includes the one Caribbean nation, it is officially called DR-CAFTA.)
Outside, civil rights and labor activists picketed the Chamber of Commerce building and handed out flyers, decrying what they believe is a lack of environmental and labor protections in the new trade agreement.
Inside, the trade ambassadors urged the business community to tell their congressional representative to pass CAFTA as soon as possible.
“The first labor right CAFTA will provide is the right to a job,” said El Salvador’s ambassador León Rodriguez. “I have yet to see a union of unemployed people,” he added, to laughs from the audience.
Chamber of Commerce representatives also touted the economic benefits of CAFTA to California, citing a study that projects California workers would see 13,000 new jobs and earn almost $600 million more in the decade after CAFTA’s implementation.
Nowhere in the program was there any discussion of the investor protection provisions of these trade agreements. As it is written now, CAFTA contains the same provisions as NAFTA’s Chapter 11, and environmental groups fear challenges against local laws will grow.
“That’s a bunch of hot air,” John Murphy told SN&R as the luncheon was winding down. Murphy is vice president of Western Hemisphere Affairs for the U.S. Chamber of Commerce.
“I keep hearing about NAFTA Chapter 11 and how bad it is for the environment. Anybody can bring a frivolous lawsuit anytime,” he said. “The reality is that in 11 years there hasn’t been one case brought against the U.S. that has been won.”
Indeed, of the five cases that have been won, all have been brought by U.S companies.
But that’s no comfort to Martin Wagner, an attorney with Earthjustice Legal Defense. He said that some cases against the US, like the Methanex case, have been unsuccessful on pretty technical grounds. “I don’t think we can say it won’t happen here. It could easily happen,” Wagner replied.
At the same time, he said, we shouldn’t overlook the impact on developing countries. In 1997, Mexico had to pay a U.S company called Metalclad nearly $16 million after a local government refused to grant the company a construction permit for a toxic waste dump.
“So let’s say that sometime after CAFTA, El Salvador really wants to strengthen its environmental laws. As soon as it starts creating stronger laws that impose new restrictions on investors, those investors are going to immediately look to the investment chapter [of CAFTA] and start challenging those new laws left and right.”
Meanwhile, in California and other states, local lawmakers like Lloyd Levine may have to start looking over their shoulders at NAFTA, when they try to write laws that at first seem to have little to do with international trade.
“Here they are trying to protect the environment and do some good,” said Wagner, “and now they have to worry that their measure won’t pass muster because of their impact on the corporate profits of foreign investors.”
It doesn’t appear that there is much, aside from appealing to Congress, that state and local lawmakers can do. But Senator Liz Figueroa, who heads the Senate Select Committee on International Trade Policy and State Legislation, is trying to make some inroads.
“We in California lead the way in so many different areas, in protecting our water, our coastlines and native lands. But these major pieces of legislation can be vetoed because they violate trade agreements. Excuse me?” Figueroa complained.
The governors of the 50 states do consult with the federal government on various trade agreements, particularly smaller pacts with individual countries. However, the state legislatures (and citizens generally) have been largely left out of the loop, Figueroa said.
Which is why she has introduced SB 348, also titled “Accountability in International Trade Policy.”
The bill is still in its infancy, but could require the governor and the state Legislature to agree on whether or not to support trade agreements, before giving the state’s blessing. Or it may wind up doing little more than to air out such agreements in a public forum. But that, Figueroa said, would be a start.
“We’d like to have some input,” she added. “But at least let us know what’s in these trade agreements when they go by the Governor’s desk.”