April 2001
The Unintended Consequences of Ottawa's Two-Pronged Attack on NAFTA
by Owen Lippert
Taking time out of their busy schedule preparing to disrupt (at taxpayers' expense) the Summit of the Americas to be held in Quebec City this April, Canada's anti-trade Left applauded trade minister Pierre Pettigrew's recent efforts to dilute one of the North American Free Trade Agreement's (NAFTA) most effective protections, the investment protection provisions contained in NAFTA's Chapter 11. Pettigrew's attack is two-pronged. First, he is supporting the Mexican government in trying to overturn the NAFTA dispute panel ruling in the Metalclad case (see sidebar). Second, he has taken Ottawa's own challenge to Chapter 11 to the Federal Court in attempting to escape a similar dispute panel ruling in the S.D. Myers case, which I'll explain shortly. These two prongs raise a larger problem. In taking these actions, Pettigrew risks accidentally giving a veto over national trade policy to the two groups guaranteed to wreak the most havoc—provincial politicians and American lawyers.
I don't think that's a terribly wise thing for the federal trade minister to do. My interpretation may sound dramatic, but it is no less tortured than the government's assertion that local environmental laws can somehow override national trade commitments, and that domestic courts can make that determination.
The S.D. Myers and Metalclad cases were both filed this February. In the former, Ottawa initiated its own action in the Federal Court of Canada to attempt to avoid paying compensation stemming from the panel judgment in the S.D. Myers case (then-Environment Minister, Sheila Copps discriminated against that US company by arbitrarily prohibiting the export of PCB waste). Ottawa has also appealed in BC Supreme Court for intervenor status on behalf of the Mexican government in its legal effort to overturn the panel ruling in the Metalclad case (see sidebar). Mexico chose to sue in Vancouver because the original hearings took place there.
How could the nightmare scenario unfold? In its Metalclad brief, Ottawa asks the BC Supreme Court for intervenor status to argue for invalidating the panel's ruling because its members failed to weigh the environmental platitudes in NAFTA's Preamble against the investment protection clauses in Chapter 11. Without getting into the nitty-gritty here, Ottawa is asking for NAFTA to be interpreted as a political speech rather than as a legally-binding treaty. The reason for trying to muddy the waters is that on the facts, the Mexican government did discriminate against the Metalclad company and was held accountable. Its decision to fight the NAFTA panel has little to do with environmental protection—it had already decided that issue in Metalclad's favour —and everything to do with federal-state relations. Sounding familiar?
What's the precedent here? It's not legal, but political. Provincial or local governments can essentially ignore international trade commitments if they dress up their discriminatory measures as environmental regulations. Naomi Klein, the Globe and Mail‘s trendspotter for inane leftist causes, along with the Council of Canadians and the Canadian Union of Public Employees (CUPE) all support this triumph of "local democracy" over international trade law. For reasons of raw politics, so, too, do the provinces. Perhaps Minister Pettigrew noticed that Quebec, Ontario, and British Columbia also sought intervenor status in the Metalclad case, in Mexico's favour. Were they showing "green" solidarity with their Mexican counterparts? Think harder.
By its Metalclad intervention, Ottawa offers provincial politicians the choice of whether or not to comply with trade agreements signed by Canada. Of course, Victoria and Quebec City welcome such new powers. They chafe under any interference with their industrial ward-heeling. Witness that despite 10 years of wrangling, they still cannot agree on inter-provincial free trade.
What is really odd is that Ottawa may also unleash American lawyers to pick apart Canadian trade policy. This brings us to the S.D. Myers case. The federal government has asked the Federal Court to rule that it should not have to pay any compensation arising out of the panel judgment in the S.D. Myers case. The panel ruled that then-Environment Minister Sheila Copps discriminated against the US company by arbitrarily legislating a ban on the export of PCB waste to favour a Canadian competitor. Ottawa contends the panel exceeded its jurisdiction as somehow determined by the Canadian Commercial Arbitration Act! The argument is ingenious. The problem is that, even if it's correct, it delivers this message to the US bar: if a NAFTA panel rules against your client, ignore it and get the matter into a domestic court just as the Canadian government did.
Ottawa's legal actions set the stage for this scenario: a NAFTA panel rules against US quotas on Canadian softwood lumber imports. Montana then declares that BC and Alberta lumber passing through the state poses an environmental risk due to some pest or other. Canada complains only to be told, "See you in the state courthouse, located, by the way, in picturesque Helena." Who knows how the legal hostage-taking of Canadian trade policy by US courts would end? Except, of course, expensively.
More is at stake than money in urging Ottawa to keep its trade disputes out of Canadian courts, lest they end up in American ones. To sneak around the S.D. Myers decision, Ottawa, inadvertently, may make all trade panel rulings vulnerable to domestic litigation. Wound these investment dispute panels and you cripple the enforcement of rule-based trade. Without enforcement, trade treaties become intentions, not agreements. Ottawa has lost sight of the fact that it gains more from strong trade rules than it "loses" to strong investment protection rules.
My colleague, Gordon Gibson, talks about "subsidiarity." Gordon's point is simple: different levels of government should do what they can do best. Arguably, the national government is the level at which national trade policy should be managed. In its February legal adventures, Ottawa may have undercut its own trade authority by allowing the provinces to opt out of complying with international trade treaties.
Minister Pettigrew, you don't want this. Get out of court, before you end up making yourself and your successors irrelevant.
What is the Metalclad case?
by Miriam Bixby & Fred McMahon
Last year, a NAFTA panel, sitting in Vancouver, ordered Mexico to pay US$17 million in damages to California-based Metalclad after the Guadalcazar municipality frustrated the opening of Metalclad's hazardous waste facility. Mexico exercised its right to appeal the penalty to a local court.
Under Mexican law, regulation of hazardous-waste sites is primarily a federal responsibility. Federal regulators approved Metalclad's proposal. The state governor, who later opposed the project, acknowledged his statements at the time could have led a "reasonable person" to assume he and the state government also supported the project. Independent environmental reviews by the federal government and the local university approved the project.
Metalclad also applied for a municipal permit, even though, as the NAFTA panel noted, "There is no evidence that the municipality ever required or issued a municipal construction permit for any other construction project... There was no evidence that there was an established administrative process with respect to municipal construction permits."
Thirteen months later, at a meeting to which Metalclad was not invited, the municipality rejected the application. Outside environmental leaders had been lobbying against the plant, but they had no interest in giving Metalclad a chance to tell its story.
The NAFTA panel agreed with Metalclad that the municipality failed to show it even considered the relevant facts— either the environmental studies approving the project or Metalclad's compliance with state and federal laws, permits and construction requirements.
Metalclad made its investments in good faith. It met all regulations and passed all environmental reviews. The NAFTA ruling has nothing to do with overturning municipal regulations, as Canada's anti-trade activists claim, even though municipal regulation is clearly consistent with NAFTA. The ruling is about capricious post-hoc decisions.
Owen Lippert (owenl@fraserinstitute.ca) is a Senior Fellow in Law and Markets at The Fraser Institute. He received his Ph.D. in History from the University of Notre Dame, Indiana.
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