The Right and US Trade Law: Invalidating the 20th Century
I. Beyond the Law
The case of Methanex v. United States originated in California in the mid-1990s, when people began to notice a foul taste in their drinking water, a smell like turpentine. Santa Monica had to shut down half its supply wells and purchase clean water from elsewhere. The contamination turned up in thirty public water systems, Lake Tahoe and Shasta Lake, plus 3,500 groundwater sites. The source was quickly identified as methyl tertiary butyl ether (MTBE), a methanol-based gasoline additive that creates cleaner-burning fuel, thus reducing air pollution. But even small amounts of MTBE leaking from storage tanks, pipeline breaks or car accidents made water unfit to drink--and extremely difficult to clean up. A study team from the University of California, Davis, added that in lab tests on rats and mice, MTBE was also carcinogenic, raising the possibility of human risk.
The state government acted promptly. In 1997 the legislature authorized a ban on MTBE if further investigations confirmed the health risks. In March 1999, after more research and lengthy public hearings, Governor Gray Davis issued an executive order to begin the phaseout. Other states were acting too. The oxygenating additive is used in one-fourth of the US gasoline supply, especially in pollution-prone big cities, so New York, New Jersey and other places were also discovering MTBE's unintended consequences for clean water. Up to this point, the story sounded like an alarming but fairly conventional environmental problem.
Then, four months after Governor Davis's order, a Canadian company from Vancouver, British Columbia, filed a daring lawsuit against the US government, demanding $970 million in compensation for the damage California was inflicting on its future profits. Methanex Corporation, which manufactures methanol, principal ingredient of MTBE, claimed that banning the additive in the largest US market violates the foreign-investment guarantees embodied in Chapter 11 of the North American Free Trade Agreement. Under Chapter 11, foreign investors from Canada, Mexico and the United States can sue a national government if their company's property assets, including the intangible property of expected profits, are damaged by laws or regulations of virtually any kind. Who knew?
The company did not take its case to US federal court. Instead,it hired a leading Washington law firm, Jones, Day, Reavis & Pogue, to argue the billion-dollar claim before a private three-judge arbitration tribunal, an "offshore" legal venue created by NAFTA. Each side--the plaintiff company and defendant government--gets to choose one of the three arbitrators who will hear the case, then they jointly select the third, who presides. The proceedings are in secret--no public notice whatever--unless both sides agree to disclose the case. Sacramento had difficulty finding out what was happening, though it was California's environmental law that was under attack.
Methanex and the other controversial corporate claims pending before NAFTA tribunals are like a slow-ticking time bomb in the politics of globalization. As nervous members of Congress inquire into what they unwittingly created back in 1993, environmentalists and other critics explain the implications: Multinational investors can randomly second-guess the legitimacy of environmental laws or any other public-welfare or economic regulation, including agency decisions, even jury verdicts. The open-ended test for winning damages is whether the regulation illegitimately injured a company's investments and can be construed as "tantamount to expropriation," though no assets were physically taken (as is the case when a government seizes an oil field or nationalizes banks).
NAFTA's arbitrators cannot overturn domestic laws, but their huge damage awards may be nearly as crippling--chilling governments from acting once they realize they will be "paying to regulate," as William Waren, a fellow at Georgetown law school, puts it. On its face, this strange new legal system's ability to check democratically elected governments confirms a principal accusation of those much-disparaged protesters against corporate-dominated globalization. Elite power politics, they contend, is imposing rules on the global economy that effectively shut out competing voices and values, that slyly undermine the sovereign capacity of a nation to defend its own citizens' broader interests. Indeed, the US multinational community dreams of establishing Chapter 11's provisions as the worldwide standard, to be applied next in the proposed Free Trade Area of the Americas.
The most disturbing aspect of Chapter 11, however, is not its private arbitration system but its expansive new definition of property rights--far beyond the established terms in US jurisprudence and with a potential to override established rights in domestic law. NAFTA's new investor protections actually mimic a radical revision of constitutional law that the American right has been aggressively pushing for years--redefining public regulation as a government "taking" of private property that requires compensation to the owners, just as when government takes private land for a highway or park it has to pay its fair value. Because any new regulation is bound to have some economic impact on private assets, this doctrine is a formula to shrink the reach of modern government and cripple the regulatory state--undermining long-established protections for social welfare and economic justice, environmental values and individual rights. Right-wing advocates frankly state that objective--restoring the primacy of property against society's broader claims. A tentative majority on the Supreme Court agrees in theory--the same five who selected George W. Bush as President.
"NAFTA checks the excesses of unilateral sovereignty," Washington lawyer Daniel Price told a scholarly forum in Cleveland. He ought to know, since he was the lead US negotiator on Chapter 11 a decade ago. As for anyone troubled by the intrusions on US sovereignty, he said, "My only advice is, get over it." Price, who heads international practice at Powell, Goldstein, Frazer & Murphy, a premiere Washington firm, says that contrary to the widely held assumption that suits like Methanex's represent an unintended consequence of NAFTA, the architects of NAFTA knew exactly what they were creating. "The parties did not stumble into this," he said. "This was a carefully crafted definition."
This account, instead of delving further into Chapter 11's legal complexities, turns to explore its murky political origins. How could all this have transpired so unobtrusively? And how did the right wing's novel concept of "regulatory takings" find its way into an international trade agreement? The story, in passing, is another devastating commentary on the decay of representative democracy. These now-controversial legal innovations were ostensibly adopted in broad daylight, yet the public never had a clue. Nor did the media, watchful policy experts or members of Congress. Yet the stakes are as fundamental to public life as the Constitution itself. The transmission of big ideas among elite interests is always a more supple and elusive process than backroom conspiracy--not exactly secret, yet withheld from general understanding. To fully appreciate the momentous risks for law and justice, one starts by stepping back in history to see what exactly the right-wingers are trying to overthrow. The answer, in their own words, is the twentieth century.