A Trade Bloc — at what cost?
Economists and negotiators from NAFTA’s three member countries have long praised the trade deals virtues.
And there were many, at least on paper.
The deal allowed the U.S. to remain a competitive exporter of key products, like cars. It also brought in huge sums of money to Mexico in the form of foreign investors, who previously had been nervous to tap into the unstable Mexican economy. And for Canada, the deal opened up exports in the forms of oil and other natural resources.
Not to mention, the deal shredded tariffs between all three countries.
But the trade deal may have also empowered a fourth actor: corporations. A provision in NAFTA, known as Chapter 11, allowed non-state actors to litigate directly with local governments, paving the way for companies to override locally enacted regulations. The provision has allowed for numerous lawsuits, raising questions about NAFTA’s congruence with local democracy.
Baked into the deal
Because NAFTA was meant to invite foreign investment into Canada and the US, Chapter 11 was always a part of the deal. Chapter 11 was meant to make corporations feel safe. It did this by effectively allowing corporations to be able to sue, either directly suing a local government or by way of an international tribunal known as the ISDS.
The deal favored corporations, said critics, which were cleared of any mandate to resolve issues locally (Article 1121), and opened local regulations to legal exposure.
Writing in Foreign Policy in Focus in 2014, Aldo Orellana Lopez and Thomas McDonagh described the arbitration system as “a powerful tool corporations can and will use to blackmail states out of implementing more socially and environmentally responsible policies.”
Meanwhile, defendants of ISDS argued that without Chapter 11, companies would hesitate to invest abroad. Removing it, they said, would scuttle the entire enterprise of NAFTA. Removing it would also hamper job creation, one of the trade deals main objectives, while empowering other foreign actors.
“[A]bandoning or weakening this important enforcement tool would harm the ability of U.S. companies to export and locally provide goods and services to Canada and Mexico,” wrote a group of GOP Congressmen in a 2018 press release.
“In addition, such action would advantage our global competitors — including China — which continue to benefit from ISDS and/or direct government ownership and support,” they said.
Arbitration in Action
One of the first instances of ISDS in action occurred in 1996, when the Ethyl Corporation, a producer of unleaded gasoline, sued Canada.
The lawsuit demanded cash damages in compensation for the passage of a law in Canadian parliament banning the import of MMT (Methylcyclopentadienyl Manganese Tricarbonyl). MMT, which was produced and shipped to Canadian oil refiners at the time, is a known neurotoxin, and therefore deemed a health hazard by the Canadian EPA. It had already been banned in other states, like California, at that time.
Ethyl claimed that the ban was illegal, and sued for $250 million dollars. Winning the suit in court, Ethyl eventually made $13 million from Canadian taxpayers.
Writing in Global Policy Forum in 2017, Michelle Sforza and Mark Vallianatos warned that the successful suit could set a dangerous precedent.
“If such cases were to become commonplace, governments would have to give due consideration to the potential fiscal costs before passing needed regulations,” they wrote. “The threat of suits like Ethyl’s could be used to pressure lawmakers who are considering new regulations.”
Lasting Legacy
These ISDS lawsuits have become symbolic of a broader criticism: that NAFTA favors the privileged few far more than it does the farmer, the employer, and the proverbial “little guy”. And that few member countries understood the leverage that the ISDS would provide when they signed on.
“Some American critics are concerned that Chapter 11 is causing an ‘end run’ around the constitution and are decidedly antidemocratic-the terms and consequences of Chapter 11 were never publicized or debated prior to signing; that there is no room for public comment or even public scrutiny of the arbitration procedures; and limited mechanisms for appeal,” wrote Mary Hallward-Dremier, an economist at the World Bank in 2003.
Journalists like Bill Moyers have dubbed it “The Trojan Horse of NAFTA”. Bloomberg Businessweek called it, “The Highest Court You’ve Never Heard Of”.
And in more recent negotiations surrounding the TPP, ISDS arrangements were fiercely opposed by Senator Elizabeth Warren, who said the courts provide “huge handouts to global corporations while undermining American sovereignty.”
Chapter 11 as we knew it was scrapped in Trump’s 2018 USMCA trade agreement. But it’s historical association as a tool for the global elite will likely haunt future trade negotiations for generations to come. And while it’s inclusion might have been necessary in order to bring trade deals like NAFTA to life in the 1990’s, in today’s global economy it could well be a dealbreaker.