Trade Pacts Accused of Subverting U.S. Policies

The global push toward a “borderless economy,” already blamed for the turmoil that has impoverished millions from Seoul to Sao Paulo, is increasingly accused of another sin: undermining the sovereignty of governments.

Sweeping free-trade initiatives of the 1990s, such as NAFTA and the World Trade Organization, are coming under attack for handing foreign interests the legal firepower to undercut public policy on economic, health, safety and other issues.

Under the umbrella of international trade pacts, a spate of recent lawsuits by outsiders has toppled environmental laws in Canada and so-called selective purchasing laws in Massachusetts. In Mississippi, a Canadian funeral home operator is using NAFTA to challenge an unfavorable court verdict.

The unexpected volume of legal tumult inspired by the tearing down of trade barriers has given fresh ammunition to critics who have long portrayed international trade deals as sacrificing local political control on the altar of unbridled capitalism.

“As concerned as we were, we underestimated the potential power grab and damage potential to the fundamentals of governance,” said Lori Wallach, director of Public Citizen’s Global Trade Watch, a Washington-based advocacy group.

U.S. suspicion of foreign influence is hardly new, of course: The Founding Fathers used fear of economic colonialism as a rallying cry, and it’s always been easy to stir up protectionist sentiment or criticism of, say, the United Nations.

Congress saw threats to sovereignty when it adopted the hotly debated WTO trade agreement in 1994, and sought to limit the damage by specifying that only the U.S. government--and not foreigners or private firms--could use U.S. courts to enforce WTO agreements.

As trade has exploded in the ‘90s, however, the traditional notions of nation-states and economic sovereignty are increasingly challenged by a maze of international rules and regulatory bodies.

U.S. and Canadian critics are particularly worried about an obscure provision of the North American Free Trade Agreement, or NAFTA, that gives foreign investors a powerful weapon to attack laws they deem discriminatory, particularly in the environmental and health safety arenas.

Last fall, the U.S.-based Ethyl Corp. successfully used NAFTA to overturn a Canadian ban on the import of a controversial Ethyl gasoline additive, MMT, on grounds that the ban discriminated against a foreign company.

Funeral home operators, hazardous-waste management firms and others have filed similar complaints challenging Canadian and Mexican environmental regulations and even the courts of Mississippi.

Canada Wants Part of NAFTA Reconsidered

Canada, since hit with three more NAFTA cases, decries the complaints as an attack on its sovereign rights. It has now asked the U.S. and Mexican governments to reconsider the part of NAFTA that caused the problem--an investor protection provision known as Chapter 11. That review is now underway.

But NAFTA isn’t the only worry.

The 4-year-old World Trade Organization, while opening up lucrative export opportunities for U.S. telecommunication firms, toy makers and chemical manufacturers, has also created new legal levers that can be used to challenge federal, state and local laws.

To date, Uncle Sam has been the biggest beneficiary of the WTO system, racking up the most successful complaints against foreign trading partners.

After years of fruitless bilateral talks, the U.S. used the WTO dispute settlement system to attack the European Union’s ban on hormone-treated beef and Japan’s onerous fumigation process for imported fruit, arguing that those health regulations were thinly disguised protectionist barriers. It won both cases, though the EU is still balking at lifting its beef hormone ban.

The U.S. has also been on the receiving end of a few successful WTO complaints, including challenges to a toughened U.S. environmental standard for gasoline and a ban on tuna imported from countries that fail to use dolphin-safe fishing techniques.

As such challenges gain momentum, the United States increasingly finds itself on the defensive, caught between obligations to its trading partners and corporations and the concerns of state and local authorities and citizen groups.

Thus, even trade advocates are now taking these concerns more seriously.

After all, shouldn’t the democratically elected leaders of Canada--or Mexico or the United States or anywhere else--be free to ban gasoline additives they consider harmful?

Or shouldn’t the Commonwealth of Massachusetts be free to decide whose products to buy with taxpayers’ money? Not according to a federal judge, who just overturned the state’s ban on buying goods from companies that do business in the military-controlled nation of Myanmar, formerly Burma.

For officials like Heidi Heitkamp, the attorney general of North Dakota, which boasts an extensive, and sometimes prickly, trading relationship with Canada, these worries are far from theoretical.

“From my perspective, NAFTA and other trade agreements present the greatest challenge to state sovereignty that we have,” Heitkamp said.

Lower Barriers Have Helped U.S. Most

The United States, whose Fortune 500 firms are increasingly global and rely heavily on foreign operations for their profits, has always had the most to gain by pushing other nations to lower trade barriers and adopt Western-style business practices.

In fact, trade has been one of the fastest-growing parts of the U.S. economy--a big reason for today’s low joblessness and minuscule inflation rate.

Rising criticism of these inroads against local control comes even as the United States seeks to expand NAFTA’s controversial investor protections by including them in the WTO and other proposed regional trade agreements. Similar protections already are built into many U.S. bilateral trade deals.

The high emotion that surrounds the issue of local control, along with the fragility of today’s world economy, has made officials squeamish about even discussing it. The Justice Department and the Office of the U.S. Trade Representative refused to address the issue on the record. Canadian and Mexican officials also declined to discuss the subject.

Chapter 11 of NAFTA provides that foreign investors who believe that they have been discriminated against or that their assets have been unfairly “expropriated” can demand compensation from the country where they are doing business.

These cases are heard by a three-member international trade tribunal whose proceedings are confidential to protect the corporations and governments involved. However, the participants are allowed to make their claims public if they choose.

There is good reason for some sort of protection, particularly in countries with weak judicial systems and a history of government expropriation, according to Newport Beach-based Metalclad Corp.

Two years ago, after Mexican officials invited Metalclad to build a $22-million waste disposal plant in the state of San Luis Potosi, the local government succumbed to pressure from environmentalists and declared the site an ecological preserve, according to the U.S. firm.

Metalclad filed a NAFTA claim seeking $90 million in compensation. The final hearing on the case is scheduled for July 1.

“Neither Canada nor Mexico [has] internal protections for private property, and there is tremendous justification for a treaty to override federal, state or local law to provide protections for foreign investment,” said Grant Kesler, president of Metalclad.

But critics argue that the Chapter 11 provision invites abuse because it defines the rights of foreign investors too broadly and gives multinational firms--whose first obligation is to shareholders, not the public--a legal weapon that was historically reserved for governments.

Legal experts say Canada is particularly vulnerable to NAFTA challenges because of its tough environmental laws.

Gasoline Additive Prompted Reversal

In the Ethyl case, Canada was concerned about the health effects of MMT, a manganese-based gasoline additive also banned in California, and banned its import and transport. Ethyl produces the additive in the U.S. and processes it in Canada.

But after Ethyl Corp. filed its NAFTA complaint, the Canadian government conducted a study that determined it lacked sufficient scientific data to support its MMT ban. Rather than risk losing the case before a NAFTA tribunal, the government revoked the ban and settled with Ethyl.

Emboldened by Ethyl’s success, other firms are following suit. Canada lifted a ban on the export of PCB-contaminated waste after U.S. firms threatened to challenge the law under NAFTA. Ohio-based S. D. Meyers Inc., a PCB treatment company, then sued under NAFTA to recover profits lost while the ban was in place.

In a third case, Santa Barbara-based Sun Belt Water Inc. sued after British Columbia enacted a moratorium on the export of water that invalidated a 1991 water contract Sun Belt had signed with a Canadian firm.

Jack Lindsey, Sun Belt’s chairman and chief executive, insisted that he is not challenging the Canadian government’s right to control its water resources. However, he said the government should compensate his firm for “destroying this business,” which he values at between $105 million to $200 million.

The S. D. Meyers and Sun Belt cases are still pending.

Even Barry Appleton, the Canadian attorney who represented Ethyl in the NAFTA proceeding, agrees that the trade agreement has created an unexpectedly broad avenue for legitimate domestic regulations to be challenged in a court governed by international law.

“No one quite understood or anticipated where it would go,” he said.

Canadian and Mexican courts are not the only arena for these NAFTA disputes. NAFTA is also being used to put the Mississippi judicial system on trial, according to trade experts.

That’s what Loewen Group, a troubled Canada-based funeral home operator, did last summer when it filed the first Chapter 11 complaint in the United States, seeking $725 million in damages.

Loewen’s troubles began in 1991, when Jeremiah O’Keefe, a Biloxi, Miss., funeral home operator, took the Canadian firm to court for allegedly orchestrating an illegal campaign to drive local competitors out of business. In 1995, a Mississippi jury sided with O’Keefe and awarded him $500 million in damages.

In response, the Canadian firm sought compensation from the U.S. government through the NAFTA process. Loewen alleges that its investor rights were violated because the Mississippi courts subjected its officials to “invidious discrimination because they were Canadians.”

Loewen claims that the U.S. government is liable because it is required to “ensure that state governments comply with NAFTA.”

If Loewen wins, damages will come from U.S. taxpayers, not the plaintiffs in the Mississippi lawsuit.

“The absolute frightening part of this thing is that in this particular instance, the United States government has surrendered its sovereignty over a matter of fraud and tort and predatory and illegal practices within its own boundaries,” said O’Keefe’s attorney, Michael Allred.

The WTO’s clout is also evident in a high-profile case that brought the legal wrath of the European Union, Japan and other nations down on a campaign by several dozen state and local governments to send a political message.

In October, a federal judge in Boston overturned a Massachusetts law that restricted the state’s business dealings with companies involved in Myanmar.

The judge found that the law was unconstitutional because it interfered with the federal government’s right to regulate foreign commerce.

Massachusetts Official Decries a U.S. Stance

Thomas Barnico, an assistant state attorney general in Massachusetts, blames the U.S. commitment to the WTO for creating the legal ammunition to overturn his state’s Myanmar law.

The EU, backed by Japan and the Assn. of Southeast Asian Nations, used the WTO system to challenge the Massachusetts statute because it affects foreign as well as domestic firms doing business in Myanmar. In his ruling, Judge Joseph Tauro cited the WTO tensions as an example of the state law’s “disruptive impact on foreign relations.”

Massachusetts officials, who have appealed the case, claim that the ruling violates their sovereign right to control where and how the state spends its money.

Legal experts say the ruling imperils dozens of state and local laws, including selective purchasing laws aimed at the governments of Nigeria and Cuba, “Buy local” programs and recycled-content requirements.

“If the Tauro decision is allowed to stand, it would enable private corporations to avoid the sovereignty protections that kept state governments from opposing the WTO,” said Bob Stumberg, an international legal expert at the Harrison Institute for Public Law at Georgetown University.

In the coming months, officials such as Tom Gede, a California state assistant attorney general, will be testing the loyalties of the Clinton administration.

California has joined North Dakota and eight other states in filing a friend of the court brief backing Massachusetts’ appeal. Similar expressions of support have also been filed by city officials, labor organizations and citizen groups.

“These [trade] agreements can offer a platform from which claimants can attack state laws that are protective of our health, safety and our environment,” Gede said. “The United States has pledged to support the states in protection of those kinds of laws in the international tribunal. But we will be vigilant.”