Toronto Star | By Marc Lalonde | May 1, 2002
No part of the North American Free Trade Agreement, or NAFTA, has generated more controversy than the foreign investor rights provisions in Chapter 11 of the agreement.
This feature of the treaty has become a lightning rod for those who oppose or have concerns about globalization.
Opposition to including similar provisions in a putative Free Trade Area of the Americas, or FTAA, may prove an insurmountable stumbling block on the way to such a pact.
Last July, the U.S., Canada and Mexico felt it necessary to issue Notes of Interpretation to clarify the intent of these provisions - a clear effort to rein in what was seen as a tendency by arbitration tribunals to give Chapter 11 an excessively broad interpretation in favour of foreign investors. Those tempted to conclude that public concerns are the result of the agitation of some far-left movements need only note a background paper released in February, 2002 by the Canadian Conference of Catholic Bishops, Trading Away The Future: Concerns Arising From The Investor-State Mechanism Of The North American Free Trade Agreement And Its Extension Throughout The Americas.
One of the main arguments of that paper is that "the application of Chapter 11 has meant limiting the capacity of governments to safeguard environmental, health and other social values when there are conflicting commercial interests."
For the most part, investor rights, properly applied, leave national governments plenty of policy leeway. They provide the stability and clarity necessary for a company to invest in a foreign country without having to worry about assets being arbitrarily restricted or seized.
An economy like Canada's, driven largely by international trade and foreign investment, must have such safeguards in place to prosper.
However, there are two concerns shared by those on both the left and the right about Chapter 11:
It grants foreign investors broader rights than Canadian investors.
The way in which some companies are misusing this part of NAFTA.
Interestingly, concerns over the potential for abuse of Chapter 11 are now surfacing in Washington as well.
The chair of the Senate finance committee, Max Baucus, has asked the Bush administration to provide assurances that foreign investors will not be given more favourable treatment than that currently offered to domestic investors in the U.S.
Baucus also wants to narrow the scope of Chapter 11.
He wants to avoid interpretations of such terms as "expropriation" and "fair and equitable" treatment that confer rights on foreign investors beyond those provided through customary law.
One case in particular illustrates why efforts to narrow the scope of Chapter 11 are so necessary.
In early 2000, United Parcel Service announced plans to sue the government of Canada for $230 million (U.S.) under Chapter 11, claiming that Canada Post competes unfairly against the private sector because the post office provides parcel and courier service.
UPS is gambling that a tribunal may be prepared to extend the scope of Chapter 11 beyond anything envisioned by the drafters of NAFTA.
What makes this case so problematic is not the strength of the Chapter 11 arguments; these can be refuted. Canada Post was the first entrant into the parcel business in Canada, and has been delivering packages for more than 100 years.
The Competition Bureau has determined on numerous occasions that Canada Post is a fair competitor, and an independent auditor confirms this every year in the corporation's annual report.
The problem is UPS's attempt to expand the rights of foreign investors to seek damages from governments. Under NAFTA, investors have specific and limited rights to sue. Alleged infractions can be challenged only by one government to another.
UPS wants to use Chapter 11 to give foreign companies the right to sue in areas that are currently the exclusive domain of governments.
If this case succeeds in broadening Chapter 11, there is a more fundamental risk, not only to Canada's postal system, but to other important sectors of the economy and national public services.
While health care has an explicit exemption from NAFTA, some (including lawyers for UPS) have argued that the Alberta Health Care Protection Act could open health care to a Chapter 11 challenge. This would effectively extend the reach of NAFTA into an area that was expressly excluded by the signatories.
I am not suggesting this kind of broad interpretation would necessarily hold in an international tribunal. But as with any litigation, there is always the chance of a poor decision.
As well, the mere threat of Chapter 11 challenges can create a policy chill, leaving governments reluctant to legislate around public services for fear of lawsuits from disgruntled foreign investors.
As the softwood lumber dispute has demonstrated, international trade disputes involving U.S. interests can quickly become vehicles for imposing American industrial policy on Canada.
These policies may be good for the U.S., but do not necessarily correspond to the reality nor the needs of our country.
It remains to be seen whether the Notes of Interpretation will lead tribunals to stick more closely to the original intent of the provisions of Chapter 11.
In the meantime, we must hope that the three governments will remain vigilant in opposing the misuse of investor rights by firms across the continent.
If not, they may put at risk fundamental public services that were never intended to be covered by NAFTA and they will certainly put at even greater risk the eventual adoption of a hemispheric trade pact.
Marc Lalonde is a senior counsel with Stikeman Elliott and has extensive experience in arbitration matters. He was a cabinet minister in the government of Pierre Trudeau.Toronto Star:
