12. NAFTA’s Chapter 11 Overrides Public Protection Laws of Countries

by Project Censored
Published: Last Updated on


The Nation “The Right and US Trade Law: Invalidating the 20th Century”
October 15, 2001
Title: The Right and US Trade Law: Invalidating the 20th Century”
Author: William Greider,

Fall 2001
Title: Seven Years of NAFTA
Author: David Huffman

Faculty evaluator: Elizabeth Martinez
Student Researchers: Sarah Potts, Chris Salvano

Mainstream coverage; Bill Moyers, PBS Documentary; Trading Democracy, 2/5/02
Washington Times, 2/4/02,

Certain investor protections in NAFTA (the North American Free Trade Agreement) are giving business investors new power over sovereign nations and providing an expansive new definition of property rights.

Chapter 11 of NAFTA, which allows a corporation to sue a government, contains a particularly disturbing “regulatory takings” clause. Under this “takings” clause, intangible property, such as a corporation’s potential future profits, is considered private property. Any law or regulation that is imposed to protect the public interest is considered “taking” that company’s potential to make a profit. Therefore, the government should be required to compensate the owners for lost property/profit. This expanded definition of private property goes beyond established terms in US jurisprudence and supercedes domestic law. NAFTA’s investor protections and the “regulatory takings” idea mimic a radical revision of constitutional law that the right wing has been pushing for years.

Richard Epstein galvanized the idea of “regulatory takings” in the 1980s with his book Takings: Private Property and the Power of Eminent Domain. Regulations, Epstein argues, should be properly understood as “takings” under the Fifth Amendment. This would require governments to pay corporations whose property, tangible or intangible, is in some way diminished by public actions. Since any regulation will have some economic impact on private assets, the “takings” doctrine is therefore a vehicle for shrinking the reach of government and crippling its regulatory procedures. This has the potential to undermine long-established social welfare and environmental regulatory protections. “Takings” protections will also have a chilling effect on a government’s future laws and regulatory procedures as they realize that any new legislation may leave them vulnerable to corporate lawsuits. A government may be confronted with enormous financial penalties simply for enacting or upholding regulations that protect the basic health and human rights of its citizens.

The Methanex v. United States case illustrates the type of lawsuit made possible by Chapter 11. Methanex is a Canadian company that manufactures the gasoline additive MTBE. Although MTBE was intended to mitigate the air pollution caused by gasoline use, in the mid-nineties it was identified as a hazard to California’s water supplies. Even small amounts of MTBE leaking from pipelines or storage tanks caused water to become unfit to drink. After testing the chemical was also found to be carcinogenic.

In 1999, California Governor Gray Davis issued an executive order to begin the phase out of MTBE. Four months later, Methanex Co. filed a lawsuit against the U.S. government, asserting that California’s new regulations damaged their future profits, and requested $970 million in compensation. But Methanex did not pursue its case in U.S. federal court, where the legitimacy of “potential profits” might have been publicly questioned. NAFTA provides for a three-judge arbitration tribunal, an offshore venue where suits can be resolved in secrecy. Although matters vital to public welfare are being decided in the unelected tribunals, the public is given no notice of the proceedings unless both parties agree to disclose the case.

The Methanex vs. United States case is pending, but other companies have already triumphed in their quest to acquire financial compensation for the loss of potential profits. In 2000, the Metaclad Corporation won a suit against the Mexican government. The outcome of the case means that $16.7 million of Mexican taxpayers’ money will go to Metaclad in compensation for profits lost because the government stopped it from building a toxic waste dump.

“Regulatory takings” laws have not yet been adopted into US domestic law. The Supreme Court has so far declined to accept this redefinition of the Constitution. However, NAFTA’s precedent has opened the door for the “takings” premise to become a standard facet of international law, and corporations are working to realize that goal.

In April of 2001, a collection of 29 major US multinational corporations and industry organizations (including GE, Ford, GM, International Paper, Motorola, Dow, DuPont, Chevron, Procter & Gamble and 3M) wrote to US Trade Representative Robert Zoellick, urging him to push for a Chapter 11-type provision in upcoming FTAA negotiations. The letter applauded NAFTA’s regulatory takings clause, saying it provides “protection from regulations that diminish the value of investors’ assets.” Although FTAA negotiations are not yet complete, at present the draft of the agreement includes a provision nearly identical to Chapter 11 that allows for “investor-to-state” lawsuits.

If the potential profit laws succeed to the degree that some companies hope they will, such basic government regulations as minimum wage and OSHA standards may become null and void in favor of corporate profit. As Epstein writes in his Takings book, “It will be said that my position invalidates much of the 20th century legislation, and so it does.”

COMMENTS BY R. RICHARD WILLIAMS, ATTORNEY AT LAW: A relatively small cadre of people have used the recent international treaty known as NAFTA to bring into law a radical definition of “governmental taking” that will, if honored by the signatory countries, destroy governmental regulatory programs in the United States, Canada, and Mexico. Totaling probably fewer then 1000 people, this group includes international businessmen, lawyers, and government professionals, with little or no loyalty to the United States, or any other country, or to the laws of the US enacted during the 20th Century as social welfare and environmental protection law.

Led my men such as Daniel Price and Richard Epstein, such law firms as Powell, Goldstein, Frazer & Murphy and Sullivan & Cromwell, the Federalist Society, and such large business enterprises as Methanex (Canada) and Ethyl Corporation (US), the engineering of Chapter 11 of NAFTA places the fate of all laws being attacked in the hands of private arbitration/adjudication tribunals chosen by the parties and outside the reach of review or appeal by any Canadian, US, or Mexican courts. If allowed to prevail, Chapter 11 will revolutionize the law in such a way as to force “the international community to provide protection for property rights” (Edwin Williamson, Sullivan & Cromwell), defined as any expectation of profit, to an extent unimaginable since the 1940’s. They even hope to destroy such laws as wages and hours laws.

This is really important stuff that will impact all three countries and communities all over the Western Hemisphere without any legislative input from any of us.

UPDATE BY AUTHOR WILL GREIDER: The story of NAFTA’s Chapter 11 and its stark implications for American democracy is finally getting a little attention in the major media (WSJ April 30-02 most recently) but mainly because the critics have succeeded in rallying opposition in Congress and especially among state local officials who recognize that this irregular, private court for capital subverts their sovereign right to enact laws to protect public health and the environment. My account in The Nation may have helped in educating at least elite public. I hope so.

This issue is central to the globalization debate because, despite the usual bromides about free trade, the international agreements are now mainly about setting rules for investment in countries where capital goes. The debate and development of these rules remains a closed and undemocratic exercise and for good reason. Multinational business and finance shapes the terms, write the new rules and seeks to throttle the ability of individual nations and governments to resist. The big media has been, on the whole, quite reluctant to look at this dimension of globalization. It is simpler and less contentious to describe the new rules as “free trade” agreements when, in fact, they are designed to encircle the public’s right to set rules for society.

The challenge to reform the global system is a long, difficult struggle and won’t be won by one issue or one crisis. But I am actually fairly optimistic. The truth is getting through to people generally, despite the barriers of propaganda and the media’s general inclination to play cheerleader rather than serious reporter.

UPDATE BY AUTHOR DAVID HUFFMAN: Since the writing of “Seven Years of NAFTA,” Phillip Morris has joined the ranks of corporations threatening to sue under the investor “protection” provisions of NAFTA’s Chapter 11. Phillip Morris’ threat illustrates the new vulnerability of public health and environmental regulations. Phillip Morris has been subject to government restrictions on cigarette advertising for years, but now NAFTA offers a way to block such restrictions. In response to a proposal by the Canadian government to ban the words “mild” and “light” from cigarette packaging, Phillip Morris has warned that it may sue for damages. The Canadian and the US governments have both been considering such a ban, because of evidence that mild and light cigarette brands confuse or mislead consumers into believing that these are safer than other types of cigarettes. Although Phillip Morris has not yet filed a suit, the threat alone may be enough to discourage implementation of the ban.

How did democracy come to such a pass? It may seem astonishing that the NAFTA member governments so seriously compromised their ability to regulate in the public interest, on matters of vital importance like health and safety. In the case of the US, part of the explanation certainly lies in the process through which congress approved NAFTA. Congress severely limited its ability to deliberate on the contents of NAFTA when it gave approval in 1993, by first agreeing to fast track legislation. Fast track is a mechanism created during the Nixon administration that allows the executive branch to push international trade agreements through the legislature quickly, by allowing a maximum of only 20 hours of debate. In the whirlwind of fast track, congress accepted the rationale that strong investor protections were needed to prevent expropriation of US companies by the Mexican government, apparently without fully appreciating the ramifications for the US. In his October 15th article in The Nation, “The Right and US Trade Law: Invalidating the 20th Century,” William Greider explores, in-depth, the story behind the adoption of NAFTA. Greider finds evidence that the corporate interests involved in the drafting of NAFTA were fully aware of the wider implications of Chapter 11, and pushed for the agreement’s radical re-definition of property rights in order to force all three member governments, not just Mexico, to be more hesitant when it comes to regulations that interfere with corporate profits.

What can be done? The Canadian government has become sufficiently alarmed to propose an amendment to NAFTA that limits the extent of investor protections in Chapter 11. The US federal government has yet to respond in kind, but state governments in the US are mobilizing in response to the threat to state sovereignty highlighted by cases like Methanex vs. US, in which the Canadian company Methanex is suing for $970 million over California’s ban on the toxic gasoline additive MTBE.

Beyond the obvious need to fix NAFTA, there is the need to prevent the same mistake being made on a larger scale with the FTAA, which will extend NAFTA to the entire western hemisphere. The mainstream media should recognize this impulse in its coverage of protests against the FTAA. President George W. Bush has been pushing for fast track for the FTAA. This fall, fast track will be in the House for a second time, and there is a good chance that it can be defeated with sufficient public opposition. To find out more about NAFTA, the FTAA, and the specifics on how you can help stop fast track, check out the following sources:

Public Citizen
(202) 588-1000

Global Exchange
(415) 255-7296

The mainstream media should also be screaming about the FTAA, which will potentially extend NAFTA-style investor provisions to the entire western hemisphere.