Will Free Trade Trump Democracy?
By Joseph Gainza

Much of the news coming out of the trade ministers’ meeting in Miami and the concurrent demonstrations of resistance to the Free Trade Area of the Americas is about the failure of the western hemisphere nations (less Cuba) to reach an accord and the (mis)behavior of the Miami police. Certainly these are important stories and deserve more and better coverage than main stream media has so far provided. For me, as part of the 25 member AFSC delegation in Miami in November, one of the biggest stories centers on how “free trade” agreements undermine our federal system of state and local government.

So-called trade agreements such as the North America Free Trade Agreement (NAFTA), The Central America Free Trade Agreement (CAFTA) and, if an accord can be reached, the Free Trade Area of the Americas (FTAA) are primarily investment agreements allowing the free flow of investment capital across national borders with little or no government regulation. These unregulated capital flows can and have disrupted entire national economies and have the potential to undermine democratic governance.

The rights and privileges granted to international investors under these agreements have already begun to undermine the ability of governments to protect the health and welfare of their citizens and the natural environment.

NAFTA’s investor protections are unprecedented in a multinational trading agreement and provide foreign investors the ability to privately enforce their new investor rights. In effect since January 1, 1994 NAFTA, an agreement between Mexico, Canada and the United States, serves as a model for CAFTA and FTAA which are still being negotiated. Chapter 11 of NAFTA is described as a “groundbreaking investment chapter which granted expansive new rights and privileges for foreign investors operating in the three… nations” (1). Corporate investors have used them “to challenge a variety of national, state and local environmental and public health policies and domestic judicial decisions, in addition to a federal procurement law and even a government’s provision of parcel delivery services as NAFTA violations” (2) The planned inclusion of Chapter 11 provisions in both CAFTA and the FTAA would multiply the opportunities for private firms to sue local and state governments.

Minnesota State Representative Karen Clarke was so concerned about Chapter 11 that she asked the State Office of the Revisor of Statutes to investigate how Minnesota law would be affected. The resulting report serves as a wake up call to state legislatures and everyone who cares about states rights and indeed the entire federal system on which American government is founded.

The section of the report on “Investor Challenge” describes how foreign investors have rights which domestic investors do not and how inherently opposed to open government is Chapter 11:

Instead of a judge or a jury hearing the case, as in domestic disputes, a three person tribunal listens to the case. The tribunal consists of one person chosen by the host country, one chosen by the foreign investor, and one chosen by NAFTA. The tribunals (sic) decision is based on NAFTA or WTO (World Trade Organization), rather than on precedence which the United States legal system is based on and there is no appeal process. The proceedings of the tribunal take place in private and the tribunal has no duty to disclose the nature of the proceedings. The tribunal is under no obligation to disclose how it came to its determination. The fact that a dispute has been settled and damages awarded often remains secret. Probably the most important factor in this process is that the decisions made by the arbitration tribunals are enforceable in domestic courts, thereby giving a private foreign investor the opportunity to sue in order to receive damages. Foreign investors are able to bring a case in a domestic court and if they don’t like the result, they can access NAFTA’s investor-to-state dispute resolution system, where only the parties to NAFTA can be sued. (3)

Under Chapter 11 a Canadian company sued the state of California for 1 billion dollars after the state prohibited the use of a gasoline additive found to be contaminating drinking water. The company, which manufactures the major component of the additive, claimed that the regulatory action caused a decline in its market value. While this case was settled on a technicality without California having to pay, it demonstrates that no state law, regulation, zoning ordinance or other decision made in the interest of public health and safety is immune from attack by foreign investors using the expansive new rights and privileges granted them under NAFTA and to be expanded throughout the hemisphere under the FTAA.

As the Minnesota report says: “It is the broad, undefined and seemingly unfettered scope that Chapter 11 offers investors that causes alarm for state governments.” It warns that “since there is no body of law or case precedent that is controlling on investor-to-state tribunals, the following areas of state law may be subject to Chapter 11 challenges…” (4) and lists 27 areas of state law including: health care and public health laws, public education laws, zoning laws, water management laws, state contracts, court decisions, land use laws, banking and investment laws, business practice laws, regional environmental plans, pollution control, environment laws; most of what state and local governments do to protect public health and safety.

The alarm has reached the National Conference of State Legislatures who supported the reauthorization of “Fast Track” presidential trade authority which confines Congress to a simple “yes or no” vote on trade agreements. The NCSL “sought explicit language” in the Fast Track reauthorization bill, “affirming that foreign investors should receive no greater rights than U.S. citizens based on the U.S. Constitution and U.S. legal principles and that state and local public purpose laws should have safe harbor protection”(5). The NCSL reports that is provision was defeated on the Senate floor 42-57.

There are many problems with “free trade” as it has been structured by governments compliant to the wishes of private corporations and investors. The undermining of basic democratic structures ranks high among them. Over the next months the AFSC in Vermont will be working to raise this issue. Contact us of you want to join the effort. Democracy should not be trumped by investor greed.

Joseph Gainza is the AFSC Vermont Program Coordinator

(1) NAFTA Chapter 11 Investor-to-State Cases: Bankrupting Democracy, Public Citizen, September 2001, p.i
(2) ibid
(3) Memorandum To Representative Karen Clark (undated); From: Office of the Revisor of Statutes, Minnesota State Legislature, p.3.
(4) ibid.
(5) Web Page of the National Conference of State Legislatures, www.ncsl.org Issues for 2002.