Column

HOW NOT TO DO IT

NAFTA’s section on protecting foreign investors has become a textbook case

MARY JANIGAN March 10 2003
Column

HOW NOT TO DO IT

NAFTA’s section on protecting foreign investors has become a textbook case

MARY JANIGAN March 10 2003

HOW NOT TO DO IT

Column

MARY JANIGAN

NAFTA’s section on protecting foreign investors has become a textbook case

ROY ROMANOW vividly recalls bruising debates in the late 1980s over the hazards of Canada-U.S. free trade. The former Saskatchewan premier found himself in televised disputes, earnestly advocating caution before signing anything. And that was well before the 1994 North American Free Trade Agreement, which added an unusual section allowing foreign investors to receive compensation if governments treated them unfairly. So it is not surprising that, buried in his recent report on health care, there is a final grim chapter on how trade agreements could hamper the expansion of the health system. The extension of medicare to include drugs or publicly provided home care could squeeze out private insurers and services. But few of these firms are foreign. So, Romanow argues, Canada should extend medicare now before NAFTA rules become a big factor. “Medicare is exempt,” he says. “But if we want to expand its publicly delivered aspects, we should move now before we could get trapped into compensation at enormous cost. We are in a yellow-light zone: move with caution.”

It is advice that will dog health ministers as they grapple with reform. In theory, NAFTA’s Chapter 11 seemed a wonderfully sophisticated innovation: the first inclusion of investor protection in a major trade pact. It is certainly the right idea: with transnational companies increasingly dabbling in both cross-border trade and investment, with Canada competing for foreign direct investment, some form of investor protection will eventually become standard in all trade deals.

But NAFTA has become a textbook case on how not to draft such protection. Chapter 11 allows foreign private investors to bring grievances against federal governments in order to get redress for unfair treatment. But its provisions are wildly vague: lawyers have asserted, like Humpty Dumpty, that the words mean just what they choose them to mean. Conferences on Chapter 11 alone have become a cottage industry. The

concern runs so deep that the signatories have intervened against their own private investors in a bid to curb extravagant judicial interpretations. “It is providing scope to litigate between the private sector and the public,” says Michael Hart, distinguished fellow at Carleton University’s Centre for Trade Policy and Law. “We need to do a better job of drafting these provisions.”

That’s an understatement. Mercifully, the situation is not as bad as many feared. Instead of the predicted flood of litigation, there have been only 30 cases in nine years, including at least seven where the investor has simply filed an intent to claim. There have been eight decisions: Canada lost two—and mostly won a third; Mexico lost two and won one; and the U.S. has won two. The judges have leaned toward a more conservative definition of terms. And they have generally been respectful of governments’ right to regulate, largely limiting their findings of justified grievance to clearly discriminatory conduct. “They have been cautious, balanced and fair,” says University of Windsor law professor Todd Weiler. “The panelists know that governments have to govern.” But we cannot relax. Each three-member panel, while it may consult its predecessors’ rulings, is not bound by them. The panels themselves are cobbled together on an ad hoc basis: each side gets to nominate a member—and they agree on a third. So panels have differed in their interpretation of the treaty’s scope. In 2001, the three governments were so alarmed that they issued a binding interpretative note, insisting that the clause’s pledge of “fair and equitable treatment” means only “the customary international law

The provisions are wildly vague: lawyers have said, like Humpty Dumpty, that the words mean just what they choose them to mean

minimum standard of treatment of aliens.” Now some claimants are arguing that this note is really an amendment—and does not apply until the treaty is amended.

There is also a huge scuffle about the clause that protects against government action “tantamount to expropriation.” So far, panels have been hesitant to apply this rule to regulations that merely restrict profitable activities. Instead, it has usually meant “equivalent to expropriation.” The clause does not appear to have cast a regulatory chill: Canada alone has introduced more than 40 environmental regulations since 1994. And there has not yet been a case where disgruntled investors have successfully challenged measures clearly passed for the public good in an equitable, open way. But that doesn’t mean it won’t happen.

So what do we do? Hart calls for the creation of a permanent Chapter 11 tribunal, composed of dispassionate experts in international economic law, committed to following precedents. Alan Alexandroff, research director at the Munk Centre for International Studies, says governments could resort to more interpretative notes, or amend their lists of exclusions. “The motivation was spot-on,” he says. “But clarity is always an issue.” Last December, the Commons international trade committee urged the three governments to review—“as soon as possible”—all problem areas in Chapter 11. “The mere fact that Chapter 11 has generated so much widespread commentary indicates something is seriously wrong with the status quo,” it observed.

Sound advice—but hard to follow. Canada desperately wants to limit the expropriation clause—and the U.S. would likely support us. But Mexico is jittery about any changes because it fears pressure to open up its protected energy and agricultural sectors. Meanwhile, Canada is adamant that talks underway at the World Trade Organization and the Free Trade Area of the Americas must produce clauses on investor protection that are much more limited. The lesson? “To be more careful and to learn from experience,” says Toronto trade lawyer Lawrence Herman. “Creative lawyers can use provisions far beyond their intended scope.” Health ministers should expand medicare— as soon as we can afford it. What we cannot afford is the price tag for doddling. lil

Mary Janigan’s column appears every other issue. mjanigan@macleans.ca