Nafta and the Debate Around Mmt

The Debate Around NAFTA’s Chapter 11:
The Case of MMT and Canada

Introduction
The North American Free Trade Agreement (NAFTA) is an agreement liberalizing trade and investment between Canada, the United States, and Mexico. From the moment it took effect on January 1, 1994, the agreement has sparked controversy and fiery debate from groups across the political spectrum regarding its benefits and costs.[i] Much of this debate revolves around Chapter 11, the section of the agreement that deals with investor-state relations. Chapter 11 gives foreign investors the right to sue the host government for damages if they believe they have been treated unfairly. In 1996, the Ethyl Corporation filed a $250 million claim against Canada under Chapter 11 regarding a gasoline additive they produced called MMT.

Background

• Methylcyclopentadienyl manganese tricarbonyl (MMT)

MMT is an octane-improving fuel additive. The chemical compound was developed in the 1950s by what became the Ethyl Corporation (today part of the Afton Chemical Corporation, but hereinafter referred to as “Ethyl”).[ii] MMT was widely used in the United States and Canada, during the 1960s and 1970s in leaded gasoline. However, due to public health concerns, MMT was banned in the late 1970s by the U.S. Environmental Protection Agency (EPA).[iii] The health effects of exposure to manganese through its use in MMT are under research. Manganese, the main component of MMT, is a common element of our diets in low levels. However, at high levels, manganese has been shown to be a neurotoxin that can cause irreversible neurological damage.[iv] For example, manganese is among the leading toxins that are linked to developmental disabilities.[v] Ethyl claims “MMT has demonstrated no identifiable risk to public health;”[vi] however, the EPA says, “Although it is not possible based on present information to conclude whether adverse health effects will be associated with [MMT] exposures…, neither is it possible to conclude that adverse health effects will not be associated with such exposures.”[vii] Despite this uncertainty, Ethyl was able to overturn EPA’s ban on MMT through court action in 1995.[viii] Interpretation of the scientific data was crucial to the case.

• The Legal Context

In 1997, the Canadian Parliament adopted a law banning both the import of MMT into Canada and the trade of MMT between provinces.[ix] While the law did not directly ban the sale of MMT in Canada, it would have had this effect since Ethyl was the only source of MMT, and it produced MMT only in the United States. The government had two main concerns about the product: first, the public health concerns, which were still not fully known; and second, that MMT caused car exhaust systems to malfunction.[x] On September 10, 1996, while the Canadian Parliament was still discussing the law, Ethyl initiated a complaint against the government of Canada. Ethyl sought $250 million in damages and lost revenues due to the ban. The legal framework under which it made this claim was NAFTA’s Chapter 11.

Chapter 11: A Primer

While NAFTA is called a “free trade agreement,” it is also an investment agreement. While investment agreements have been around since the 1950s, the push for investment liberalization in the 1980s greatly expanded their scope. For the first time, investment obligations began to appear in trade agreements, including the Canada-United States Free Trade Agreement, the main precursor to NAFTA.[xi]

Chapter 11 provides rights to foreign investors and their investments. A foreign investor is defined as any person or company who makes an investment into another NAFTA party. Investments are broadly defined, encompassing both traditional foreign direct investment and portfolio investment (stocks, bonds, and other financial instruments). These investors and investments are protected from a range of measures taken by governments, including certain types of national, state, or local laws; regulations implemented by these laws; and policies that affect business-government relations. The issues covered range from damages suffered during wartime to expatriating profits to prohibitions on expropriation. Many of these rights are standard and widely accepted; however, others have provoked substantial controversy.[xii] Many of these more controversial issues are at the heart of the case between Ethyl and Canada.

Ethyl Corporation versus Canada: Chapter 11 in Action

• Ethyl posited three main arguments under Chapter 11:

1. National Treatment: First, Ethyl claimed the ban on imports, which did not include a ban on internal production or the sale of MMT, amounted to a breach of the obligation to treat foreign and domestic investors in a “no less favorable” manner.[xiii] This is arguably the most fundamental of the investment agreement principles. 2. Performance Requirements: Second, Ethyl argued that the import restriction was a “performance requirement” that would force them to produce MMT in Canada or to use other Canadian-made products instead.[xiv] Requirements which seek to regulate the operations of foreign investors by mandating, for example, that they use a certain amount of domestically-produced goods or services, are banned by Chapter 11. 3. Expropriation: Third, Ethyl claimed that the ban was a measure “tantamount to” expropriation of its business for which it should be fully compensated.[xv]

• For its part, Canada responded to the claim on two grounds.

1. No Jurisdiction: First, Canada argued that the MMT law was not a performance requirement but instead a type of trade measure that fell outside the scope of Chapter 11. Therefore, it continued, the Tribunal established by Chapter 11 to hear the complaint had no jurisdiction in the matter.[xvi] 2. No Measure in Place: Second, Canada said that since Ethyl had filed the complaint before the measure was even enacted, it had violated certain procedural requirements of the dispute resolution process.[xvii]

Outcome of the Case
On June 24, 1998, the Chapter 11 Tribunal rejected Canada’s arguments on both counts.[xviii] Shortly thereafter, Canada decided to settle with Ethyl. It withdrew the ban on MMT, paid Ethyl $13 million in damages and legal fees, and issued the corporation a letter to use in advertising saying that current scientific information failed to demonstrate MMT’s health risk or impact on car exhaust systems.

Ethical/Political Issues • Data-spinning:
All sides in this case used data in a manner that attempted to justify their political perspective. Critics have argued that the onus should have been on Ethyl to show that MMT was safe, in accordance with the “Precautionary Principle”.[xix] This principle is understood to mean that if there are public health or environmental risks then one should err on the side of caution. This raises the issue of whether the requirement of such a burden of proof can stand up against the government regulations under NAFTA, GATT (the General Agreement on Tariffs and Trade), and other trade agreements.

• Power of NAFTA over government:
The Council of Canadians put forward the assertion that NAFTA placed Canadians' health secondary to corporate interests. “NAFTA leaves the government powerless to protect the health of Canadians when big business interests are at stake,” it wrote.[xx] The issue of subordinating national sovereignty to a trade agreement has strong implications for the democratic process.[xxi] However, oweUS trade officials have argued that this is a healthy innovation.[xxii] Others point out that, without the Chapter 11 legal framework, many companies would not invest in other countries, especially those that have less established institutions. In this way it can be argued that international trade agreements help to spread the ideal of legal rights to other places.[xxiii]

• Power of corporations and accountability:
The influence of corporations over government’s decision-making process also has implications for the democratic process.[xxiv] NGOs worry that these corporate ‘trade challenges’ have a chilling effect on public interest policies. There was concern that the case set a precedent for the legal right of corporations to be compensated when public health regulations affect a company's profits. Profits then become as important as the public's right to good health. This also raises the ethical question of utilitarianism: what is more important here, investor rights or the greatest good for the greatest number of people?[xxv] NGOs also argue that Ethyl’s claim that the Canadian regulations “expropriated” its investment, even though Canada did not actually take any property from the company, “constitutes a significant and potentially dangerous new limit on the exercise of basic government functions....Governments must retain the ability to regulate…without having to pay a corporation…to exercise this normal function.”[xxvi] Questions of accountability are also relevant. Democratic governments are accountable to citizens, and corporations, who have shareholders, are arguably more accountable than NGO, who are not necessarily accountable to anyone. Therefore, one must examine their claims to speak on the behalf of the public as well.

• Lack of Transparency:
The dispute settlement process is initiated directly by a foreign investor against a host state. It convenes a panel of three arbitrators (one chosen by the investor, one by the government, and the third jointly agreed to), whose decision is binding. The arbitration takes place with limited public access to documents and no access to the actual proceedings. Yet the outcome of the process can have significant public impact.[xxvii]

Conclusion

This case was significant in that it was the first one to raise many of these political and ethical dilemmas. It was also the first to go to arbitration under Chapter 11. Several other cases have since touched upon many of these same issues, and the debates show no sign of abating as long as Chapter 11 continues to play a role in public policy.

Published by: Rachel Hawkins, James Gresham, Olivia Taylor, and Douglas Kandt
[pic]
-----------------------
[i] For a sample of opposing viewpoints, see for example the NAFTA page of the non-profit organization Public Citizen, online at: http://www.citizen.org/trade/nafta/; and the NAFTA section of the U.S. Chamber of Commerce’s website, at: http://www.uschamber.com/issues/index/international/nafta.htm.
[ii] Afton Chemical Corporation website, “MMT Fuel Additive” page, available at: http://www.aftonchemical.com/Products/MMT/index.htm. Accessed on November 5, 2006.
[iii] Public Citizen, “NAFTA’s Threat to Sovereignty and Democracy: The Record of NAFTA Chapter 11 Investor-State Relations Cases 1994-2005,” p.21. Available at: http://www.citizen.org/documents/Chapter%2011%20Report%20Final.pdf. Accessed on November 10, 2006.
[iv] EPA website, “Comments on MMT” page, available at: http://www.epa.gov/oms/regs/fuels/additive/mmt_cmts.htm. Accessed on November 3, 2006.
[v] Learning Disabilities Association of Canada. http://www.ldac-taac.ca/environment/report_chemicals-e.asp. This is also supported by the Canadian Institute of Child Health (CICH) and the Greater Boston Physicians for Social Responsibility (GBPSR). Also see In Harm’s Way: Toxic Threats to Child Development, published by GBPSR.
[vi] Afton website, op. cit.
[vii] EPA website, op. cit.
[viii] Public Citizen, “NAFTA’s Threat to Sovereignty and Democracy,” op. cit.
[ix] Manganese-based Fuel Additives Act, S.C. 1997, Ch. 11.
[x] International Institute for Sustainable Development (IISD), “Private Rights, Public Problems: A Guide to NAFTA’s Controversial Chapter on Investor Rights,” 2001, p. 71. Online at: http://www.iisd.org/pdf/trade_citizensguide.pdf
[xi] IISD, “Private Rights, Public Problems,” op. cit., pp. 5-8.
[xii] IISD, “Private Rights, Public Problems,” op. cit., pp. 9-11.
[xiii] NAFTA Tribunal, “Award on Jurisdiction in the NAFTA/UNCITRAL Case between the Ethyl Corporation and the Government of Canada,” June 24, 2998, p. 3. Online at: http://www.naftaclaims.com/disputes_canada_ethyl.htm. Accessed on November 8, 2006.
[xiv] NAFTA Tribunal, “Award on Jurisdiction,” op. cit., p. 4.
[xv] NAFTA Tribunal, “Award on Jurisdiction,” op. cit., p. 4.
[xvi] NAFTA Tribunal, “Award on Jurisdiction,” op. cit., p. 5.
[xvii] NAFTA Tribunal, “Award on Jurisdiction,” op. cit., p. 6.
[xviii] NAFTA Tribunal, “Award on Jurisdiction,” op. cit., pp. 47-48.
[xix] Multinational Monitor website, online at: http://multinationalmonitor.org/hyper. Accessed on November 5, 2006.
[xx] Council of Canadians website, online at: http://www.canadians.org. Accessed on November 5, 2006.
[xxi] Turning Point Project. “Globalization v. Nature.”
[xxii] Global Policy Forum website, “NAFTA and Environmental Laws,” online at: http://www.globalpolicy.org/socecon/envronmt/ethyl.htm. Accessed on November 3, 2006.
[xxiii] Sebastian Malloy, “A Slanted Take on Trade,” Washington Post, February 18, 2002.
[xxiv] Global Policy Forum, op. cit.
[xxv] L.Withers. “Utilitarianism and rights-based ethics: further issues.” Food and Agriculture Organization (FAO). FAO/17259/L.
[xxvi] Public Citizen, “NAFTA’s Threat to Sovereignty and Democracy,” op. cit., p. 22.
[xxvii] IISD, “Private Rights, Public Problems,” op. cit., p. 11.

-----------------------
4