Hazmat trade deal: negotiators in San Diego to focus on the TPP investment chapter

From July 2 through 10 in San Diego, negotiators from the U.S. and eight other countries will resume talks on drafting a Trans Pacific Partnership trade agreement, potentially the most expansive deal of its kind for the United States.  The U.S. Trade Representative’s office will focus on pushing other Pacific countries to agree to the U.S. model for a TPP investment chapter – potentially the most environmentally hazardous and socially unfair TPP provision under negotiation. Its adoption would put U.S. environmental policies at risk, and hit developing countries even harder.

Consider the following hypothetical example that illustrates the issues raised by the U.S. proposal for a TPP investment chapter.

Let’s say that on 2 July 2015, Hazmat Global, a (mythical) Australian corporation, wants to invest in Illinois. Hazmat is encouraged by officials at the U.S. Department of Commerce to open a hazardous waste disposal facility near the small central Illinois town of Havana.  Officials from the Romney administration in Washington D.C. tell Hazmat executives that a plot of land adjacent to the Illinois River in Havana is the perfect site and that state and local authorities can be taken care of. Hazmat invests $20 million in the site, based on a business plan that projects as much as $30 million in net profits for the first seven years of operation.

The proposed Hazmat plant site is located on top of an aquifer from which local residents draw their drinking water. The site also abuts the Chautauqua National Wildlife Refuge– in the middle of the Mississippi Flyway along the Illinois River.  The refuge is a resting and feeding place for waterfowl and other migratory birds, and is recognized as a Globally Important Bird Area.

Havana residents and Illinois environmentalists are furious. Public meetings are held. The local land use board denies the permit needed to open the plant.

Attorneys for the U.S. Department of Commerce assure Hazmat that the local land use board has acted illegally and that Hazmat should go ahead with the project. Local officials and Lisa Madigan, the Illinois Attorney General, seek an injunction to stop the company from opening the plant. An Illinois state court issues the injunction. Hazmat then sues the United States under the investment chapter of the Trans Pacific Partnership trade agreement. Hazmat seeks $50 million in compensation for the actions of the local land use board and the Illinois court.

An international tribunal is constituted under the auspices of a unit of the World Bank to hear Hazmat’s claims against the United States.  After three years of deliberations, the tribunal finds in 2018 that the local land use board and the state of Illinois failed to satisfy standards of expropriation and minimum treatment for foreign investors under international law. Hazmat is awarded $16.6 million in compensation for the cost of complying with Illinois law and absolved of responsibility to remediate the site. Under the terms of the U.S. implementing legislation for the TPP agreement, the $16.6 million award to Hazmat is automatically drawn down from the U.S. Treasury, without the need for congressional action. Over the 3 year period of litigation, the State of Illinois and the U.S. federal government each incur an estimated $3 million in legal costs.

Is this hypothetical example far-fetched?   Regrettably, no!  The hypothetical is based in large part on Metalclad Corp. v. The United Mexican States, a real-life case with similar facts involving environmental regulation by a Mexican locality, in which a NAFTA tribunal found Mexico liable for damages on 30 August 2000.

In the Metalclad case, Mexican state and local officials used their authority over land use and environmental regulation to stop a U.S. multinational from operating a hazardous waste disposal facility located on top of an aquifer that provides drinking water to the village of Guadalcazar in the state of San Luis Potosi. Metalclad then brought a suit against Mexico under the North American Free Trade Agreement’s  chapter 11 on investment, claiming that the company’s property rights had been violated. A NAFTA tribunal agreed that Metalclad’s rights had been violated and ordered the Mexican national government to pay damages.

As the crusading journalist Bill Moyers described the consequences of the Metalclad decision, “NAFTA may have established a private court for capital, but there is no private court for the citizens of San Luis Potosi – who are left with 20,000 tons of toxic waste that the Mexican government now owns and must find the money to clean up.”

The U.S. model for a TPP investment chapter could lead to a proliferation of cases like Metalclad v. Mexico across the Pacific region because of six fundamental flaws in its design that favor corporations over the public interest.

A separate court for foreign capital. Foreign investors may bypass domestic courts and bring suit before special international tribunals designed to encourage international investment. Investors no longer are required to work through trade ministries to pursue an international claim. They may seek awards of money damages, of unlimited size, in compensation for the cost of complying with environmental and other public interest regulations.  They may even seek compensation for lost future profits.

Greater rights for foreign investors than the under domestic constitutions. The U.S. model for the TPP investment chapter would allow foreign investors rights that are more broadly defined than in U.S. constitutional law or the practice of nations, generally. In the U.S. proposal for a TPP investment chapter, substantive rights such as “expropriation” and especially the “minimum standard of treatment under international law” are vague. Some tribunals have read similar language broadly, including the Metalclad panel, but others have read it more narrowly, making it difficult to predict the outcome of future cases.

Inappropriate suits by subsidiaries.  International subsidiaries of corporations may sue the home country of their parent company if they have a substantial business presence in a country that is a party to the TPP.  As a hypothetical example, a U.S. subsidiary of an Australian multinational mining company could sue Australia, in the right circumstances. This is practically an invitation to circumvent the domestic court system and opens wide the door of investor state arbitration to corporations from around the world that are able to meet the low legal threshold of the “substantial business presence” test.

Arbitrator bias.  Arbitrators in these cases are typically international commercial lawyers who may alternately serve as arbitrators one day and return as corporate counsel the next, thus raising questions of conscious or unconscious bias. One of the members of the Metalclad tribunal, Benjamin Civiletti, is known for becoming one of the first U.S. lawyers to charge corporate clients $1,000 an hour. It is also disturbing that most arbitrators are from the United States and Western Europe, while most defendant countries, like Mexico in the Metalclad case, are from the Global South.

No exhaustion of domestic remedies.  Contrary to the general practice in international law, the U.S. model for international investment agreements does not require the exhaustion of domestic remedies. Domestic courts and administrative bodies, therefore, are unable to resolve disputed facts and points of domestic law prior to review by international arbitrators who have limited competence in these matters. One of the most disturbing aspects of the Metalclad case was its controversial interpretation of Mexican law without the benefit of having Mexican courts first resolve issues of Mexican law.

Potentially crippling awards of money damages. U.S.-style investment agreements provide a highly effective enforcement tool: the assessment of money damages. Such damage awards can be large enough to severely stress the public budgets of both small and medium size countries. The fear of such ruinous judgments can force a country to settle unjust investor claims and to back away from protecting the environment and the public interest.

The award of damages in the Metalclad case was a modest $16.6 million because of some exceptional circumstances.  The tribunal denied Metalclad‘s claim for an   award of money damages for the loss of projected future earnings because the hazardous waste landfill operation was not a going concern with the financial resources to continue operating.  And, the award of monetary compensation for the Metalcladcorporation’s direct costs was very significantly reduced because the Mexican government, not Metalclad, would have to bear the costs of cleaning up the toxic waste dump in San Luis Potosi.

Arguably, the big win for Metalclad in this case was the tribunal finding that the property had been expropriated, thus allowing the U.S. company to wash its hands of financial and other responsibility for remediating the hazardous waste site because the Mexican government was now the de facto owner.

In a large number of other international investment cases, awards of money damages or the mere threat of such damages can be devastating. In Chevron v. Ecuador, for example, a tribunal ordered that the small South American country pay $700 million, about 1.3 percent of its gross national product.  And, in a pending case, a U.S. holding company, Renco Group, is seeking $800 million from Peru, even though its smelting operation at La Oroya is one of the most polluted industrial sites in the world.

As bad as all this is for U.S. environmental protection – over the mid and long term, U.S. laws and regulations would be targeted by foreign investors – it is worse for our trading partners in the developing world.  With its structural bias against developing and emerging economies in the Global South, the U.S. model for a TPP investment chapter is terribly unfair. If the U.S. has its way, environmental laws and regulations – especially those related to sectors fraught with potentially devastating environmental and socioeconomic harm such as mining, oil drilling, and extraction of natural resources in Asia and South America – would immediately become a favored target of corporate plaintiffs in TPP investment suits.

This one-sided U.S. template for a TPP investment chapter would favor global corporations that seek to exploit natural resources in Asia and South America, rather than contribute to the sustainable development of emerging economies in those regions. As a report from the Institute for Policy Studies documents, investor-state lawsuits brought by global corporations engaged in mining, oil and gas projects are multiplying, especially in Latin America. At the World Bank’s International Center for Settlement of Investment Disputes, for example, of 137 pending cases, 43 relate to mining, oil or gas.

Sarah Anderson and her colleagues at the Institute for Policy Studies have thoroughly documented this situation in their landmark report, Mining for Profits in International Tribunals.  With a specific reference to one of the most outrageous of these cases, Pac Rim v. El Salvador, Anderson sums up the whole situation, “Unfortunately, the international regime for handling investment disputes doesn’t pay much heed to the will of the people.”