THE WORLD TRADE ORGANIZATION
A Guide for Environmentalists

[Table of Contents] [Parts 1 to 5] [Parts 6 to 10]

PART 6: ENERGY

When it comes to trade in energy resources, the provisions of NAFTA are far more important for Canada than those found in the WTO Agreements. This is the case because NAFTA provisions go much further in reducing the scope for government regulation of international energy trade, and include three important trade provisions that cannot be found under the WTO. These NAFTA rules have such far-reaching implications for North American energy development that they deserve at least a brief description.

NAFTA Revisited

The first is the proportional sharing provision of NAFTA which entitles the US to a proportional share of Canadian energy resources in perpetuity, or until those resources are entirely exhausted.¹⁰ The exact proportion of Canadian resources to which the US can lay claim, is equal to the relative share being exported at the time that export constraints are imposed — or in other words — by the unregulated market. There is no equivalent rule in any of the WTO agreements, and in fact this proportional sharing clause does not apply between our other NAFTA partners.

The second unique feature of NAFTA rules for energy trade, prohibits the imposition of export taxes that exceed those applicable to domestic consumption.¹¹ In contrast, WTO rules allow countries to establish two-price energy or resource policies. When coupled with the quantitative control prohibitions of Article XI of GATT,¹² this ban on export taxation effectively and entirely removes government control of energy exports.

The third significant departure from generally applicable trade rules that is found in NAFTA exempts government subsidies for oil and gas exploration and development, from trade challenge.¹³ Again nothing in the WTO Agreement on Subsidies or in any other WTO agreement resembles this astonishing inducement to use public funds to support of the extravagant fossil fuel appetites that Canada and the US share.

Global Trade’s Energy Appetite

This is not to say however that WTO rules are not important to energy trade. They are, and for several reasons. To begin with, all GATT rules relating to trade in goods also apply to energy resources trade, and as we have seen, these rules impose serious constraints on government regulatory options for environmental and resource conservation purposes. However, the most important energy related impacts of WTO rules are probably those that arise from the enormous transportation demands of a global economy.

In fact, the entire edifice of global production and trade depends in large measure upon an unlimited supply of cheap energy required to move an ever increasing international flow of goods and materials. If it were not for the capacity to externalize a large share of the true costs associated with energy use (eg. the costs associated with climate change), the carbon based model of globalization which now dominates, would soon unwind under the enormous real costs of moving more and more materials and goods, further and further.

As noted, the globalization of agricultural production and trade has and will continue to increase the energy intensity of agricultural production and distribution. And it is important to note again that food production processing, packaging, transportation and marketing is arguably the world’s largest industry and likely its largest user of fossil fuels. Exposing this critical relationship between agricultural policies and energy use provides a compelling illustration of the importance of developing a much broader and holistic strategy for confronting such problems as global warming. It is also revealing of the enormity of the problems that can result from failing to integrate environmental analysis with economic, industrial and resource policies. Unfortunately, no government has been willing to submit its trade policies to a meaningful environmental assessment. It is obviously critical for them to do so.

A Carbon Tax as a Border Tax Adjustment

The WTO regime also has considerable potential to affect efforts to implement carbon or energy taxes as part of a strategy to reduce greenhouse gas emissions. As noted, the Framework Convention on Climate Change contemplates the use of energy charges or taxes as tools for combatting global warming. Given the multitude of causes that have given rise to excessive greenhouse gas emissions, it seems inevitable that economic measures will play an important role if reduction goals are to be achieved.

Because of its pervasive impact on most industrial inputs and processes, a significant carbon tax could have a substantial impact on the international competitiveness of many sectors of the economy. Over the long term there is probably no better prescription for a competitive economy than forcing it to become a more efficient user of energy and other resources. Over the short term however, significant price disadvantages can be created for domestic producers by increasing energy costs in the absence of international agreements to implement similar increases in competing countries. It is these competitiveness impacts that presently stand as an important impediment to the implementation of such tax regimes.¹⁴

It is apparent then, that if the use of energy taxes is to become feasible, governments must find effective ways to ensure that such measures not present domestic producers with the choice of either going out of business, or moving to the nearest pollution haven. One obvious way to ameliorate the adverse trade impacts of a carbon tax would be to apply import taxes and/or export rebates to level the playing field as between domestic and foreign producers.

Under WTO rules, the imposition of such taxes would probably be authorized under the heading of "border tax adjustments" as defined in Articles II, 2(a) and III, 2 of the GATT agreement. A GATT working group that explored the meaning of these trade provisions, adopted the following definition for such measures:

any fiscal measures which puts into effect, in whole or in part, the destination principle (i.e. which enables exported products to be relieved of some or all of the tax charged in the exporting country in respect of similar domestic products sold to consumers on the home market and which enables imported products sold to consumers to be charged with some or all of the tax charged in the importing country in respect of similar domestic products).¹⁵

In addition, under these GATT rules, governments can impose border tax adjustments not only on goods, but on the materials used to make these goods.

What all of this means for a prospective carbon tax is this — governments can impose import taxes on energy goods, if the same tax is applied to energy goods produced locally and sold into domestic markets. Conversely a government is free to provide a tax rebate on energy goods sold onto international markets which equals the tax applied to the same goods sold to domestic consumers. From an environmental perspective, this option makes sense only when energy exports are destined to a jurisdiction with a reciprocal system of import taxation.

These same border measures could also be applied to goods that incorporated energy products, such as plastics. In this case, the border tax adjustment would reflect the value of the energy contained in the product, not the value of the product itself.

So far, so good. The problem arises however, with respect to the treatment of taxes that relate to energy inputs that are not incorporated in the final product, e.g. energy used to harvest, extract, transport, produce, process and package the product. For most products, these tax effects will have the largest impact on product price. Here trade rules raise serious problems and according to the GATT Working Group that considered this issue, the use of border tax adjustments to address the competitiveness impacts of taxes on energy and other inputs, is unresolved.

To illustrate the potential problems that would confront such an initiative, consider the use of a border tax measure that intended to reflect the energy used to transport goods to market. Such a border tax adjustment would necessarily discriminate against goods that must travel further. In most cases these will be goods produced in other countries. From an environmental perspective this is precisely the signal that a carbon tax should provide. However, from a trade perspective such a measure would offend the "national treatment" requirements of GATT Article III to treat "like goods" in a like manner.

As we have seen, according to trade panel rulings, no distinctions may be made between products having the same physical characteristics. In this way trade rules would force governments and consumers to ignore the enormous differences that may exist between identical products when account is taken of the environmental impacts associated their production and transportation.

Therefore if a carbon tax border adjustment is to be considered consistent with WTO restraints, it is imperative that a much broader reading be given to "like product" so that account can be taken of all environmental impacts of making and moving that product. This would give governments and consumers the power to favour those products that reflect environmentally sound production, and discriminate against products that fail to meet sustainable standards. There should only be two relevant trade conditions that would potentially restrict such import or export taxes:

• Is the measure part of a bone fide domestic program intended to accomplish environmental objectives, and;
• Is the calculation of the border tax adjustment a reasonable estimate of the taxes that would be applied to goods produced locally, and for domestic markets?

Pending such interpretations or reforms, it is incumbent on governments to ensure that real or perceived trade impediments not stall much needed action to address pressing ecological problems. For example, parties to the International Convention on Climate Change need to make clear their intention to have the provisions of the Convention prevail, in the case of conflict with WTO rules. They can accomplish that goal by declaring that intention as part of any Protocol they may negotiate.

Similarly, should such a multilateral consensus not quickly emerge, it will be important for governments, particularly in countries with extravagant energy habits such as Canada, to proceed on its own with domestic measures needed to reduce greenhouse gas emissions. If needed to address the competitive disadvantages that such measures might create, border tax adjustments could be levied on the premise that a bone fide measure will be sustained by the WTO should a trade dispute arise.

Should such measures raise concerns for our trading partners, then we will simply have to address them. In that process we will contribute to the ultimate narrowing of the chasm that currently divides environmental and trade policy. Simply acceding the primacy of trade rules, without even testing them, is simply not a feasible response in light of the potentially catastrophic consequences of inaction.

PART 7: ENVIRONMENTAL STANDARDS

7.1 Environmental Standards and Other Technical Barriers to Trade

There are many ways in which trade rules limit options for establishing regulatory initiatives for environmental or conservation purposes. The following assessment hi-lights the more important points of contradiction between trade rules and environmental policy goals.

Subsidizing Competitiveness at the Expense of the Environment:

Under the WTO Agreement on Subsidies and Countervailing Measures, governments are not to subsidize domestic producers in ways that enhance their competitiveness internationally. Such subsidies are regarded as distorting true competition, and therefore at odds with the free market model. Some subsidies are prohibited under this WTO Agreement while others are "actionable" and may justify the imposition of counter measures, e.g. countervailing duties, by a country whose producers are prejudiced by the subsidy.

Over the years trade rules have been used on numerous occasions to challenge a wide variety of government programs and practices as unfair subsidies. However, trade officials have been steadfast in resisting the notion that the absence of environmental regulations be treated as an unfair subsidy, and no trade complaint has ever raised this challenge.

Nevertheless, it is demonstrable that the absence of environmental or resource conservation regulations can make domestic producers more competitive in both domestic and international markets. Because such producers are free to externalize the environmental costs of production, they are in a very real sense being subsidized at public expense. It should not matter that the currency of that subsidy is a public natural resource, such as a national forest, or a community’s clean air or water, rather than a public fiscal resource, tax revenue.

In fact, as the Raw Log Export case illustrates, trade panels have not had great difficulty accepting rather ingenious arguments about government regulations (export controls) conferring indirect, but actionable subsidies. Yet no government has initiated a trade complaint to challenge another jurisdiction that has neglected or abandoned environmental regulation in order to attract or keep investment. Because trade complaints are almost always made at the urging of corporations, it isn’t surprising that no country has been keen to challenge government inaction on the environmental regulatory front.

Because environmental regulation can often represent a significant cost of doing business, corporations often weigh the presence of such regulations as a significant factor when deciding where to establish operations. Therefore when trade rules ignore the competitiveness effects of absent environmental regulation, governments are encouraged to compete for investment by offering to become havens for polluters. Conversely companies are free to whipsaw one jurisdiction against another in an effort to drive both down the lowest common denominator of environmental protection.

Environmentalists have described the practice of exporting goods from such havens as "ecological dumping." And under Article VI of the GATT, dumping is "condemned" as the practice "by which products of one country are introduced into the commerce of another country at less than the normal value of the products" and normal value is defined as including "the cost of production." Thus environmentalists have argued that exports from pollution havens are "dumped" onto international markets at prices below the real costs of production. The difference in price being the value of environmental externalities. However, notwithstanding Article VI, GATT officials have been no more receptive to this argument than they have been to the notion that absent environmental regulations be considered subsidies.

The Big Chill

Most environmental regulatory initiative are opposed, often vigorously, by corporations that would be subject to the new law. At times, opposition is motivated by a desire to avoid the costs of pollution prevention or control technologies. On other occasions it is the cost of environmental liability insurance, or reporting requirements that are targets for corporate lobbyists. Even where the environmental program will ultimately reduce the costs of production, or actually improve competitiveness over time, efforts to head-off new regulations are often just as determined.

Whether the costs of environmental regulation are real or merely perceived, they are inevitably front and centre when business groups lobby governments about environmental law reform. A ubiquitous feature of these efforts is the claim that the costs of environmental regulation will put the industry at a competitive disadvantage and force it to relocate or close. These are claims that are notoriously difficult for governments to evaluate, and it is usually impossible for public officials to assess their validity. For these reasons, threats of disinvestment or capital flight have always been potent weapons in the arsenal of corporate lobbyists seeking to defeat regulatory initiative.

In the new global economy, where corporations can establish or relocate operations and trade freely throughout the world, arguments about the costs of regulation have been made significantly more powerful. Moreover for reluctant politicians and public officials, trade constraints (often more perceived than real), become the convenient excuse for not tabling environmental initiatives at all. The overall impact of this WTO spectre hovering in the shadows is to cast a chill over incipient environmental regulations and it is no coincidence that since the advent of free trade regimes, environmentalists now spend almost as much time defending existing laws, as they do fighting for new ones.

7.2 The Technical Barriers to Trade (TBT) Agreement

While the absence of environmental regulation is off limits under the WTO regime, the existence of environmental and other "technical regulations" are considered matters that must be closely scrutinized. That is why an entire WTO Agreement on environmental and other standards — the Agreement on Technical Barriers to Trade — was deemed necessary to ensure that no "non-tariff barriers" interfere, even indirectly, with trade liberalization goals. It is of course telling of the purpose of this WTO Agreement that it defines environmental laws as technical barriers to trade.

Harmonizing Environmental Regulations

From the perspective of transnational corporations, if environmental regulations must be endured, it is critical to the viability of global production and trade, that such standards are homogeneous from one jurisdiction to another. Thus, the essential thrusts of the TBT Agreement are two-fold. First, to create substantial impediments to the introduction of environmental regulations. Second, to force the international harmonization of environmental regulation when public demand for these measures cannot be resisted.

Under Article 2.4 of the TBT Agreement, where international standards have been established, governments that can demonstrate the need for regulatory initiative, are directed to ensure that their own regulations conform to them. Under TBT rules, regulations that implement international standards are presumed to be in compliance with WTO rules. Even in this case however, other countries are free to invoke dispute resolution under WTO to challenge such environmental measures. Thus, even where an international consensus exists, governments must still be prepared to demonstrate that their particular environmental standard is both "necessary" and "the least trade restrictive" way to achieve the conservation or environmental goal it is trying to accomplish.¹⁶ It needs also to be noted that in most areas of environmental regulation no international consensus or standard exists.

As trade dispute panels have interpreted these requirements, this burden of proof has become so onerous that no environmental initiative has ever survived the challenge. There is now a growing list of regulatory casualties that range from marine mammal protection laws to food safety standards (see the case studies included in this guide).

Creating a Ceiling but no Floor for Environmental Regulation

While the TBT Agreement requires no minimal level of environmental regulation — and in fact discourages it — it does create very substantial obstacles for governments that want to regulate where no international standard exists, or go further than international norms. For governments that have the courage to proceed in these circumstances, onerous administrative hurdles must be overcome.

These include the duty to: notify other WTO members of its initiative; provide copies and supporting documentation when requested; provide an opportunity for comment, and; demonstrate how those comments have been taken into account. It is noteworthy that these obligations to provide other WTO members (and their resident corporations) with a right to notice and comment are mandatory, even though they may not be available to local citizens.

After complying with these requirements, a government still intent on proceeding with an initiative, must then provide "a reasonable interval" so foreign producers can adapt to new requirements. Moreover, the TBT Agreement extends these obligations to cover provincial regulatory initiatives, and even seeks to bind some municipal and even non-governmental measures as well. The administrative costs associated with these obligations alone may be enough to discourage would-be regulators, and they are certainly beyond the capacity of all but the most affluent nations. Nevertheless failure to comply with these procedures is itself grounds for trade challenge.

Because international standards require a consensus among governments they invariably reflect a lower common denominator of environmental regulation — and under TBT rules, it is this standard that becomes the de facto ceiling for domestic initiatives.

Following the Leader

By trying to make an international consensus an effective precondition to regulation, the TBT Agreement threatens the underlying "follow the leader" dynamic of law reform which has for years provided a critical impetus to regulatory initiative.

Thus as soon as one jurisdiction is persuaded to blaze a trail, others are then encouraged to follow. In this way environmentalists can point to California’s auto exhaust standards, Sweden’s air pollution laws for waste incinerators, Ontario’s curbside recycling programs or Germany’s packaging laws as demonstrable evidence that tougher environmental laws are possible and practical. The effect of WTO harmonization rules is to stop, or substantially slow, jurisdictions that might otherwise be willing to establish international precedents.

For corporations that oppose environmental regulation the importance of preventing the trend setting initiative is well understood — as the following case study illustrates.

Canadian Asbestos Exports

In 1989, the US Environmental Protection Agency announced that it was introducing regulations to phase out the production, import and use of asbestos. The ban represented the culmination of more than ten years of struggle that had involved several Congressional investigations, and thousands of lives.¹⁷ The EPA estimated that the ban on this cancer causing material could save 1,900 lives by the turn of the century.¹⁸ No sooner was the program announced than it was angrily denounced as insincere and politically motivated. Leading the charge was the government of Quebec, which has a substantial stake in asbestos mining. A Quebec labour leader went so far as to warn other countries "not be duped by the phoney concerns" of the US administration.¹⁹

Intervening to assert the interests of the Quebec asbestos mining industry, the government of Canada joined in a legal challenge to the US EPA initiative. In its brief to the US Court of Appeals, Canada argued that the US asbestos regulations violated its obligations under GATT and FTA. Repeating the proscriptions of international trade agreements, Canada argued that because the EPA had banned asbestos when no international scientific consensus supported the need to do so, that it must therefore be taken to have done so for trade protection reasons rather than for a legitimate domestic objective.

Even more significant however was the motive that inspired Canada’s challenge to regulations in a jurisdiction that did not represent an important market for Canadian asbestos exports. As explained by the Minister of Mines for the Province of Quebec:

"(The) biggest fear is that other countries will follow the US example. The European Community … could, following the US decision, adopt analogous regulation. We also fear the impact of the EPA decision on development projects in countries receiving American economic aid."²⁰

The US Court of Appeals ultimately upheld the challenge to the EPA ban on the grounds that the Agency had rejected alternatives less burdensome to the industry, and failed to observe proper rule-making procedures.

More recently similar concerns have been expressed by Canada and Quebec about the decision by the French Government last year, to follow the lead of several other European nations and implement a ban on the use of asbestos. Again Canada was quick to respond by launching a campaign to persuade the French Government to reconsider its decision.²¹ In fact the Federal Government is funding these efforts to ensure that European initiatives not spread to the developing countries that represent Quebec’s most important export market for this hazardous and carcinogenic substance.²² When those efforts failed, Canada decided in late 1998 to invoke WTO dispute resolution in a bid to defeat France’s regulatory initiative and the case has yet to be resolved.

Thus the TBT Agreement sets out detailed rules for eliminating any constraint that regulatory initiatives might create for free trade. In doing so, it consistently betrays an indifference to the administrative, economic, social, and political realities of environmental regulation. As do all other elements of the WTO regime, it unquestioningly assumes the priority of trade policy objectives, even when on rare occasions it reveals some awareness that other public policy objectives might exist.

Strategies for Environmentalists

As the case notes reproduced here reveals, governments at the behest of large corporations have increasingly resorted to trade challenges to assail environmental and resource conservation initiatives. Unfortunately, the TBT and SPS Agreements have provided substantial new grounds upon which to launch such complaints. It is clear that the establishment of these trade rules represents a significant step backwards for environmental protection and resource conservation. It is imperative that we work to expose the environmental consequences of these trade rules, and expand the scope for environmental initiatives even in the face of these apparent constraints.

It is at least somewhat helpful that both the TBT and SPS Agreements speak of the rights of countries to pursue "legitimate domestic objectives" including the "protection of human health or safety, animal plant life or health, or the environment." If these provisions were to be given broad reading, they would provide some scope for sovereign and democratic decision-making when it comes to public health and environmental protection. Unfortunately, as we have seen, the interpretation that has been given to terms in GATT Article XX has rendered this language all but meaningless. Therefore governments must now be pressured to insist on a broader and more balanced reading of WTO rules, and they must act accordingly by establishing strong environmental and conservation measures at home.

Under Canada’s constitutional arrangements, provincial governments have important powers to deal with environmental protection and conservation matters. It is not therefore within the federal governments constitutional authority to unilaterally usurp provincial jurisdiction by simply signing an international trade agreement that undermines or negates provincial prerogatives. We must therefore encourage the provinces to stand their constitutional ground and reject the purported constraints imposed by WTO rules.

7.3 The First WTO Trade Ruling

The following case study has been left to this point because of its complexity. However, given the fact that the very first case to be resolved under WTO rules involved a successful challenge to an important environmental program, it seemed appropriate to describe the trade panel ruling in some detail. While it repeats many of the conclusions of earlier trade panel decisions concerning environmental or conservation initiatives, it is unfortunately likely to be given greater weight in light of having the benefit of the WTO imprimatur.

Reformulated Gasoline

In the first decision to be handed down by the WTO,²³ US Clean Air Regulations were ruled to be inconsistent with GATT rules, and the US was "requested" to amend its regulations or face retaliatory trade sanctions — in the order of $150 million per year. At issue in this landmark case were regulations developed by the US Environmental Protection Agencies for tackling the serious air quality problems, including excessively high levels of ground level ozone, that persist is certain areas of the US. As part of that strategy the EPA developed regulations intended to reduce pollution by going after a primary cause of air quality problems — gasoline combustion.

Known as the "Gasoline Rule" these regulations established certain compositional and performance specifications intended to reduce emissions from gasoline combustion in "non-attainment" areas, where levels of pollution exceeded air quality objectives. In searching for an effective, and economically feasible regulatory approach, the US EPA had opted for a program that required gradual improvement based on past performance.²⁴ In this way it had sought to create the flexibility needed to allow an orderly transition by domestic and foreign producers that would avoid supply disruptions and other economic distortions. The difficulty of this approach arose in having to determine reliable baseline levels for both domestic and foreign sources of gasoline products.

To do so, various approaches were authorized for determining these baselines that reflected the degree to which information was available about the performance and composition of gasoline sold in the baseline year. Where reliable information was not available, the industry would have to sell gasoline no more contaminated than the industry average for 1990. For corporations that could produce accurate records a more precise determination was allowed. However, in light of the difficulties associated with trying to elicit accurate information from all of the potential foreign sources of US gas imports, the Gasoline Rule held all imported gasoline to the 1990 industry average. In the result, some domestic and foreign producers were treated identically, some domestic producers were held to higher standards than foreign suppliers, some to a lower one.

Predictably, some foreign refiners objected to the costs associated with upgrading their refineries in order to produce cleaner gasoline. Those corporations complained and prompted their governments to file a trade complaint taking issue with the methodology established by the Clean Air Regulations for establishing baseline performance. Thus in early 1995 Brazil and Venezuela filed a formal trade complaint with the WTO claiming that their gasoline products were being held to a higher standard than was being applied to US refiners.

The decision of the trade panel convened to hear the dispute, and subsequently of the WTO’s Appellate Body concluded that US Clean Air Regulations were in violation of the national treatment provisions set out in Article III of GATT. Furthermore the US could not rely on the environmental and resource conservation exceptions set out in Article XX to sustain its regulatory approach.

Before getting into the details of the panel’s decision, it’s important to make an important preliminary point. This is to underscore the fact that the regulations at issue in this case were not established to regulate gasoline trade, nor were they created to improve the competitive position of US fuel refiners. Rather Clean Air Act initiative clearly represented a bone fide effort to achieve important domestic environmental policy goals by addressing serious air quality problems caused by gasoline combustion, particularly in regions of the country suffering from significant levels of air pollution. Whatever the impacts of these Clean Air Act Regulations on foreign gas producers, it is undeniable that those effects were incidental to the environmental goals the EPA was endeavouring to achieve. It is important to keep this context in mind when considering the esoteric reasoning of this trade case.

Because the US declined to appeal several of the findings of the initial trade panel convened to hear the case, it is important to read its decision together with that of the Appellate body. The first finding of the trade panel was that the EPA’s Gasoline Rule violated GATT Article III which requires all countries to treat imports no less favourably than "like" domestic products. This requirement of "national treatment" is, as we know, one of the cornerstones of GATT law. Thus notwithstanding the fact that the Gasoline Rule was applied in precisely the same manner to at least some domestic producers, the Panel had no difficulty in finding the US to be in breach of Article III. Having found this fundamental breach of GATT rules, the panel declined to consider a number of other potential violations that might also have spelled disaster for these Clean Air Act Regulations.

Once it had been found in breach of its obligations under GATT, it was then necessary for the US to demonstrate that its regulations fell within one of the exceptions to GATT rules that are set out in Article XX, which provides in part:

General Exceptions

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:

(b) necessary to protect human, animal or plant life or health;

(g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption;

As to the application of these exceptions, both the decisions of the Panel and the Appellate Body are quite lengthy and filled with convoluted and often contradictory reasoning. Deducing the common and essential conclusions from this murky logic is difficult, but some points clearly emerge. On the essential point there was no disagreement — US EPA regulations did not qualify for protection under Article XX exceptions. As to precisely why Article XX was of no avail, the Panel and Appellate Body had somewhat differing views.

According to the Panel, to qualify under the umbrella created by Article XX (b) a country seeking to defend environmental or resource conservation measures as "necessary to protect human, animal or plant life health," must pass a threefold test and establish:

1. that it had reviewed all reasonably available alternatives for accomplishing its environmental or resource policy objectives and determined that none was consistent with GATT provisions;

2. that it had "adequately" explored the possibility of negotiating multilateral agreements with all of its trading partners that might be affected by the regulatory initiative, in order to find some consensual resolution, and that failing which;

3. it had chosen the least trade restrictive measure for achieving its goals.

The Panel concluded that these were tests the US had failed to meet, and as was true of the Panel’s ruling on violation of Article III, the US chose not to appeal from these findings.

As for the requirements of Article XX(g), the Panel and Appellate Body agreed that a party seeking to rely upon this exception must be able to demonstrate that its regulations were "primarily aimed at" the conservation of exhaustible natural resource. On this point the Appellate Body parted company with the dispute panel and found that the Gasoline Rule did meet this criterion. However it then went on to find that, in any event, Article XX(g) was of no avail in this case because the Gasoline Rule failed to meet the additional burden of satisfying the requirements engendered by the Preamble to Article XX. Moreover, in reading the Preamble as imposing burdens additional to those set out in the subparagraphs, the Appellate Board actually imported the "necessity" test used to evaluate XX(b) claims. In the result, the rigour of proving "necessity" now qualifies recourse to any of the sub-categories of Article XX even though no other subparagraph actually articulates this threshold requirement.

Finally the appellate tribunal concluded that in order to satisfy the requirements expressed in the preamble to Article XX a country must also be able to demonstrate that it had taken into account the cost of compliance for all foreign producers that may be affected by its regulations.

As is now the practice of dispute panels in these cases, Panel members had no hesitation in second guessing environmental officials on the details of complex administrative, economic and policy matters related to their regulatory agendas. Neither did these trade panels have any reluctance to articulate ill defined, subjective and open-ended criteria such as "least trade restrictive" or "reasonably available" alternatives as the necessary preconditions for compliance with Article XX. Nor did they hesitate to impose administrative burdens, such as determining the cost of compliance for foreign corporations, that are clearly impossible to meet.

As preposterous as these interpretations are from an environmental policy perspective, they are almost as questionable as exercises in judicial interpretation. Often guilty of logically flawed reasoning that ignores the plain meaning of GATT provisions, these panels have established compliance tests and other obligations without any textual support from the GATT text, whatsoever. For example, there is nothing in Article XX or in any other GATT provision that speaks of the need to seek international agreement, in order to establish that a bone fide environmental regulation represented a justifiable exception to GATT strictures. Neither is there any GATT language to support several of the other tests that trade panels have articulated to determine whether a measure is "primarily aimed" at conservation, or that it is the "least trade restrictive" of "reasonably available alternatives." Nor have the trade panels that have enunciated these tests felt under any obligation to reveal the authority upon which they relied in developing them.

In consequence, if an environmental or resource conservation regulation is to survive the gauntlet of a trade dispute challenge, it must be able to negotiate its way through a shifting minefield of highly subjective criteria and tests. Moreover the absence of consistent, or logically sound interpretation has meant that the trip must be taken blindfolded. It is very difficult to imagine any environmental initiative surviving this challenge — and none have.

After all of this then, it is important to remember that what was a stake here was the right of foreign gas refiners to export gasoline to the US that is more contaminated than the 1990 industry average. The costs then of this victory for trade policy goals will be measured in increased levels of ground level ozone and other hazardous air pollutants in already polluted urban and industrial areas. The other casualty is the enormous investment of time, resources and political capital that were needed to establish this regulatory regime in the first place, and that must now be arduously repeated.

Strategies for Environmentalists

We must pressure the federal government to challenge the myopic reading given WTO trade provisions and to proceed with domestic law initiatives that would challenge this status quo. While trade dispute panels have shown a great resistance to such arguments, the positions they have expressed are quite vulnerable to challenge. Not only have these panels betrayed a sublime indifference to environmental policy, but their conclusions often rest on questionable and often unsupported interpretations of trade rules. Fortunately, future trade panels are under no formal obligation to adopt the reasoning of these dispute panels, and can come to their own conclusions about the ambit of the GATT subsidies code, or proscriptions against export dumping, or indeed about what constitutes a "like product." It would be a great mistake then for governments to feel constrained by the excessively narrow interpretation that has to this point been given to the scope for environmental regulation in the WTO context.

PART 8: INTELLECTUAL PROPERTY RIGHTS

At law, property ownership can be described as the right to exclude others from use or enjoyment. Accordingly intellectual property rights [IPRs] allow authors, inventors and others to monopolize the fruits of their creative efforts, and many countries have established domestic regimes for creating intellectual property by way of patents, trademarks or copyright. In granting these rights of exclusive ownership, society seeks to reward invention in order to foster further innovation. By denying others in society the right to take immediate advantage new products, technologies or ideas, society is seeking to create a balance with the rights of innovators that will ultimately serve societal goals by assuring the continued flow of new products and processes from which all will benefit.

Historically the extent to which intellectual property rights were recognized and protected was considered to be entirely the prerogative of domestic policy. Seeking to establish the appropriate balance between the rights of innovators and of other citizens was considered best left to those who could judge the particular and often unique needs of their communities.

With the advent of globalization, and the introduction of technologies (VCRs, drug manufacturing techniques) that allowed intellectual products to be easily copied or reproduced the originators of those products (and in particular US based pharmaceutical and media corporations) began to exert pressure on other governments to adopt US-style patent protection laws. A principal device for exerting that pressure was the threat of unilateral trade sanctions against governments who were seen to be turning a blind eye to the "unauthorized" use of intellectual products within their jurisdiction.

The next logical step of course was to establish an intellectual property rights regime in GATT, where it would benefit from the powerful compliance mechanisms engendered in trade agreements. Thus these same corporations spearheaded an international campaign that culminated with the inclusion of the Agreement on Trade Related Aspects of Intellectual Property Rights [TRIPs Agreement] as part of the WTO. In the simplest terms the TRIPs Agreement requires all WTO parties to adopt, as their own domestic law, a system of intellectual property rights protection based on the US model.

Accordingly the TRIPs Agreement sets out comprehensive rules for copyright, trademark and patent protection. Of these intellectual property rights, patent protection is the most important from an environmental perspective. Patent rights, for example, apply to virtually all technological innovation including environmentally sound technologies and many forms of biotechnology. As we will see, the implementation of this global patent protection regime will have considerable impact upon our ability to achieve the environmental goals relating technology transfer, and biodiversity protection.

TRIPs vs. Free Trade

Before examining the impacts that this new trade regime is likely to have on environmental policy and law, there are two general observations that are worth making.

The first is that the essential thrust of the TRIPs agreement stands in stark contrast with the ideology of free markets and deregulated trade. Where virtually every other aspect of the WTO regime seeks to limit the regulatory prerogatives of governments, this regime imposes a positive obligation to legislate, and to do so in very precise terms. This is strong evidence that while the ideology of free trade is important, it is at its root, little more than a rationale for the growth and profit maximization imperatives of large corporations. When those corporate interests conflict with the ideology of unregulated markets, the latter will give way.

The second noteworthy aspect of the TRIPs agreement is that, notwithstanding the qualification that it is about "trade related" IPRs, the provisions of this agreement apply to all products and processes whether these are traded or not. In fact in very large measure this "trade agreement" will apply to goods that are entirely produced and consumed locally. In this way the TRIPs agreement extends the reach of international trade rules directly into a critical sphere of domestic policy and law. In doing so to it represents an unprecedented incursion into the sovereign authority of nation states to determine the conduct of affairs within their national borders.

With this introduction, there are two aspects of the TRIPs agreement that are particularly relevant to environmental policy.

8.1 Biodiversity, Farmers Rights and IPRs

Under the provisions of the TRIPs agreement, governments may exclude various inventions from patentability. These include "plants and animals other than micro-organisms, and essentially biological processes for the production of plants and animals other than non-biological and microbiological processes." But countries must provide "patent protection for plant varieties either by patents or by an effective sui generis (of their own kind) system."²⁵

The likely impact of these provisions on biodiversity and third-world agricultural production has raised considerable concern. In fact, several non-governmental organizations have assailed these rules as authorizing the wholesale piracy of genetic resources from developing countries and the appropriation, without compensation, of traditional and indigenous knowledge. Thus Southern NGOs point to the practices of certain pharmaceutical and agri- corporations which have taken out patents on products and processes derived from genetic resources they have simply appropriated from developing countries. Having thus acquired a global mandate to monopolise the use of these "innovations," those same corporations can then enforce their new proprietary rights even in those countries from which the genetic resources were originally taken.

It is also apparent that in practice, the innovation for which patent protection is acquired is often the product of very modest investment or effort. For example the HR Grace company has been granted a process patent for extracting the active ingredient of the Neem tree which has provided a source of medicine and other products to indigenous cultures for millennia.²⁶ In fact it is unlikely that the process it has patented represents any real innovation of indigenous extractive techniques. However by virtue of having acquired this patent, and because of the TRIPs agreement, this corporation can acquire a global monopoly that can be worth truly astronomical sums during the twenty years for which protection is guaranteed. If the policy rational for patent protection is creating some balance between the interests of society and those of inventors, that balance would appear to be wildly out of proportion in many of the cases where patents have been issued.

Another area of concern relates to the adverse impacts these rules will have on the diversity of cultivated crops and on farmers in the developing countries. Because informal innovation is not accorded any protection, the genetically diverse resources of wild germplasm or "land races" are excluded from the proprietary regimes of the TRIPs agreement. Not only does this mean that these resources can be appropriated without compensation but it also means that no financial incentive exists to conserve these resourses.²⁷ This is just one factor, but nevertheless an important one, in hastening the abandonment of traditional plants in favour of hybrid and genetically modified plants that are vemuch part of the high yield, and even higher input, model of modern agricultural production.

Finally on this subject, it is important to note that this provision of the TRIPs agreement actually requires that it be reviewed in four years (at the Seattle ministerial meeting in late 1999). While all aspects of the WTO are amenable to further negotiation and amendment, the potential enormity of the impacts associated with these types of patents were considered sufficient to warrant mandatory review.

8.2 Technology Transfer

The need to ensure the transfer of environmentally sound technology [EST] is a particularly important priority for the goals of sustainable development. That is why for example, the provisions of the Montreal Protocol, the Biodiversity Convention and the Climate Change Convention each include provisions that make technology transfer a critical element of the strategies those agreements establish.²⁸ It is easy then to see how the provisions of the TRIPs agreement would interfere with this objective, because by its very intent it seeks to constrain the availability, and increase the cost, of using new products and innovations which might for example provide better pollution prevention techniques, improve the efficiency of technology, or represent breakthroughs in solar energy, or photovoltaics.

Thus, the TRIPs agreement will likely slow the transfer of environmentally beneficial technologies to developing countries. However, there is one important way in which these adverse impacts can be ameliorated because of an important exception to IPR protection that can be found in Article 31 of the TRIPs agreement. Under this rule, governments can license the use of patented products and processes without the consent of the patent holder for use either by government or by third parties (ie. individuals and corporations). In order to issue such compulsory licenses, governments must observe certain conditions. The most important of these is the obligation to ensure that the patent holder is "paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization," in other words, royalties.

In fact just such a compulsory licensing regime has been established under the US Clean Air Act which is described the box above.

Strategies for Environmentalists

It is very likely that the compulsory licensing provisions of the TRIPs agreement will be tested as governments take advantage of the opportunity to issue such licenses, and the assessment of what represents "adequate compensation" in this context will largely determine the extent to which the IPR rules interfere with technology transfer objectives. For these reasons it will be important for environmental and development groups to pressure governments to establish compulsory licensing rules to aid technology transfer, and to support a liberal interpretation of this exception to the monopoly protections accorded under the TRIPs agreement. Moreover, compulsory licensing rules should also become the subject of protocols to multilateral environment agreements (MEAs) that include technology transfer provisions.

In the context of Parliamentary Committee Hearings on Canadian drug patent protection legislation, the government has taken the position that NAFTA and the WTO preclude the adoption of compulsory licensing regimes, such as the one maintained by the US EPA.

Yet many other countries have and maintain compulsory licensing systems for patent medicines.²⁹ The protests of powerlessness by Canada’s federal government provided an unfortunate example of how imaginary trade constraints can serve as a smoke screen for politicians to hide behind.

Developing literacy in trade matters seems to be the only sure way to know whether governments are bluffing or not. The provisions of the TRIPs agreement are not particularly lengthy or obtuse, but the government is betting that no one will make the effort to see whether its claims of powerlessness are justified. Environmentalists must prove them wrong.

The Trips Agreement as a Prototype

Finally, perhaps the most noteworthy aspect of the TRIPs agreement has to do with what it reveals about the extent to which a trade regime can be used to accomplish key policy objectives. Imagine if environmental goals were taken as seriously as patent rights. If one does look at the TRIPs Agreement as a model for international agreements for protecting biodiversity, or for confronting climate change, it is easier to appreciate the enormous potential that trade agreements have for securing environmental goals, if they were only written for that purpose.

For example, if the WTO was transformed into an organization that was as concerned about the impacts of climate change, as it is currently preoccupied with the growth of transnational pharmaceutical companies, then we would have an Agreement on Trade Related Measures for Combatting Climate Change. Such an agreement would require all WTO members to:

• Adopt domestic laws (which would be delineated with some specificity) to stabilize greenhouse gas emissions at 1990 levels;
• Provide for customs inspection, seizure and even the disposal of goods that have characteristics or that were produced in ways that violate the provisions of the Agreement;
• Establish administrative, civil remedies and criminal sanctions with respect to any breach of the legislation or regulations mandated by the Agreement, and;
• Authorize the use of trade sanctions, including cross-retaliatory measures such as prohibiting the export of energy or energy products to any jurisdiction that was in breach of its obligations under the Agreement.

If these provisions seem rather ambitious, it is important to recognize that each merely translates the actual requirements and rights that have been established by the TRIPs Agreement into terms that are relevant to confronting climate change. It is an important measure of how much work is ahead of us, that a proposal to treat the goal of addressing climate change as seriously as pharmaceutical patents would no doubt be greeted with complete incredulity by the WTO.

Environmentalists should demand that government’s explain why they consider patent protection a much higher priority than global warming, biodiversity loss, or any number of other pressing ecological crises.

PART 9: TRADE RELATED INVESTMENT MEASURES

The Agreement on Trade Related Investment Measures provides only a rudimentary framework for the investor-rights that the International Chamber of Commerce and others were hoping to entrench in the WTO. Their failure to achieve this goal is in large measure explained by the determined resistance of developing nations that stayed united in their opposition to the investor-rights agenda. Having being turned aside at the WTO, the sponsors of an international treaty for investment protection lost no time in recasting their project as a Mult-lateral Agreement on Investment (MAI) and went in search of more sympathic venues. This they thought they had found in the Organization for Economic Cooperation and Development (OECD).

But when France withdrew from MAI negotiations in October 1998, efforts to establish a global investment regime in under the auspices of the OECD were effectively scuttled. Now, once again, there is talk of moving the MAI initiative back into the WTO. Moreover, the prototype for the MAI is alive and well and can be found in Chapter 11 of NAFTA where it currently serves as an important weapon for attacking government measures for acheiving public health, environmental protection, and other societal goals. Similar investor protections can also been found in dozens of bilateral investment agreements that have very quietly been negotiated over the past few years. For these reasons the MAI is as relevant today as it was before the wheels recently came off the OECD-MAI cart.

In the simplest terms, the investment rules of NAFTA and the MAI create a broadly defined list of investor rights to conduct business free from government oversight or regulatory control. This is accomplished by explicitly prohibiting an extensive catalogue of government policies, laws and programs. To guarantee that governments respect these new limits on their authority these treaties also include very powerful and secretive legal enforcement mechanisms that can be invoked by any foreign investor.

While the investor rights agenda is constructed on the same platform of National Treatment and Most Favoured Nation treatment that is common to all WTO Agreements, it goes much further in two critical ways. The first is to allow individual investors virtually unqualified access to international enforcement mechanisms that may be invoked by them directly against nation states. It would be difficult to overstate the implications of this radical departure from the norms of international treaty law which, with the exception of international human rights, has never created rights to the benefit of individuals, let alone transnational corporations. In other words, under NAFTA and MAI prototypes, for the purposes of enforcement, foreign investors are accorded the same status as nation states.

The other critical departure of this proposed investment regime from the norms of international trade law, is to be found under the heading Performance Requirements, which actually constrains the implementation of domestic investment regulation even when applied only to domestic investors. Thus under the rubric of negotiating an international treaty, governments would abandon their prerogatives to regulate investment even in the most local context.

The following assessment considers these and other key elements of the agenda to establish a global investor-rights agreement in more detail. But first relates the highly secretive way in which this agenda has been pursued.

The "Stealth Agreement"

There can be little doubt that it has been a deliberate strategy of those negotiating international investment agreements to limit public awareness of and debate about such treaties. For example, MAI negotiations proceeded entirely behind closed doors and were to have been concluded well in advance of being made public. The approach appears based on the well founded assumption that the MAI would not survive the light of public scrutiny.

In fact negotiations were such a closely guarded secret that even within government, few ministers were aware of its progress or significance. Indeed some members of the federal Liberal government have denounced the MAI as a "stealth agreement."³⁰ Fortunately a leaked copy of the text became available just before negotiations were originally to have been concluded. Ever since, protests have grown as the profound dimensions of this investment treaty have become apparent to citizens in Canada and other OECD countries. In addition to opposition from public interest and labour groups, a number of governments are now voicing their concerns and opposition to the MAI.

The following analysis should shed light on why this proposed investment treaty has prompted such determined and widespread opposition. While NAFTA represents the real life example of the type of investment protections that are being promoted for the TRIMs agreement of the WTO, the MAI is probably a better guide to this agenda as it is likely to be revived in the WTO context. This distinction is important because in several ways the MAI builds upon and would extend the investor-rights enshrined in NAFTA and many bilateral treaties. For this reason the following assessment notes key points of departure between the MAI and its precedents.

1. Who is a Foreign Investor?

It will be apparent to most, that the investors who are beneficiaries of the protections established by NAFTA and other treaties, will in almost all cases be corporations and that "protection" for them means the freedom to operate without being subject to government regulation. It is also important to note as proposed by the MAI "investment" would be defined very expansively to include every kind of asset owned or controlled, directly or indirectly, by an investor — including any type of business, rights under contract, and even intellectual property.

Particular important from an environmental point of view is that unlike NAFTA, the MAI would have defined investment to include rights arising by way of concessions, licenses, authorizations, and permits [MAI Article II 2.(vii)]. This definition removes any doubt that fishing, mining, energy, or forest licenses — or any other permit to exploit public natural resources — would give rise to enforceable investor rights.³¹ Because the central reference point of any investment treaty is the way in which it defines "investment," the more expansive this definition, the greater the scope and application of the entire agreement.

While MAI and NAFTA based investor rights are predominantly created in favour of foreign investors, the Performance Requirement rules of these treaties apply equally to Canadian or domestic investors. This is one of the more astonishing features of these agreements because, as we will discuss below, under these international treaties Canada is actually abandoning its domestic legislative prerogatives to regulate all investors, including Canadian investors, operating entirely within Canada.

Giving Foreign Investors Preferential Treatment

One aspect of these international investment treaties that has drawn particular criticism from all sectors is the preferential treatment it accords foreign investors.³² Thus, and as we have noted, prohibitions against government regulations in the form of Performance Requirements treat domestic and foreign investors in the same way. Many other aspects of the MAI do not. This is true under NAFTA as well.³³ Instead, these treaties establish an array of new investor rights that are only available to foreign companies and individuals, thus reducing Canadian citizens and companies to the status of second class citizens in their own country.

2. National Treatment: All of the Rights — None of the Responsibility

The first principle of these MAI and its prototypes, is the extension of National Treatment to foreign investors. By doing so these international investment treaties dramatically extend the reach of trade policy into many spheres of domestic economic policy by prohibiting government policies or laws that favour domestic companies or investors. Thus, foreign investors and corporations must be given every right, concession or privilege that a government might extend to local companies or communities. When these rules are considered against the objectives of many domestic resource management policies, several conflicts become readily apparent.

Take British Columbia for example. Like many other jurisdictions, the essential goal of BC forest policy is to optimize the value of public resources to the benefit of the province, its communities and its residents. Section 2 of The Forest Renewal Act of BC puts it this way:

The purpose of this Act is to renew the forest economy of British Columbia, enhance the productive capacity and environmental value of forest lands, create jobs, provide training for forest workers and strengthen communities.

Indeed, these are the common themes of several other provincial laws and programs. The same priority access to crown resources can also be found in federal fishery policy and law. For example priority access to crown fishery resources is explicitly accorded Canadians and First Nations under Canada’s Coastal Fisheries Protection Act, the Fisheries Act, and several federal-provincial agreements such as the Agreement on the Management of the Pacific Salmon Fishery.

By definition however, measures that favour Canadian citizens, companies and communities ù discriminate against foreign citizens and enterprises. In other words, they represent precisely the type of discriminatory treatment that these investment treaties were drafted to eliminate. It is this fundamental contradiction that explains why so many aspects of Canadian natural resources law and regulation are incompatible with the rules of the MAI and NAFTA.

In the context of investor-rights, National Treatment would, for example, prohibit:

• policies that favour community land tenure or resource management rights,
• citizenship requirements for those seeking fishing or woodlot licenses, or,
• subsidies to support community economic development such as are provided by forest or Fisheries Renewal BC.

Another area in which unconstrained foreign access is incompatible with provincial policy and law concerns access to Canadian water resources.

The Special Case of Water

Canada has one of the most abundant supplies of fresh water in the world, but most of our water flows northward far from our major population centres. And where our population is located, in a narrow ribbon along the U.S. boarder, our water supplies are becoming increasingly polluted. While there have been many proposals to divert northern water to southern consumers, the enormous environmental implications of such projects has given rise to determined opposition by environmental groups and others who have managed to thwart such proposals.

Nevertheless many entrepreneurs and some politicians continue their attempts to turn thsi critical public resource into private profits. That is why ever since the advent of free trade Canadians have worried that trade rules would one day be used to challenge Canadian efforts to restrict bulk water exports. They needn’t hold their breath any longer because a US based company, Sun Belt Water Inc., has decided to do just that.

The Sun Belt claim follows the lead of the other US corporations (Ethyl Corporation and S.D. Myers) which have taken advantage of the powerful enforcement provisions in NAFTA’s investment chapter to challenge other Canadian environmental laws. Relying on these rules, Sun Belt is seeking more than $200 million (US) from Canada because of BC legislation banning bulk water exports. The company claims that BC’s law violates several NAFTA-based investor rights including, in this case, its right to export BC water by tanker to California.

Sun Belt argues that it is entitled to the same access to Canadian water as Canadians enjoy. Anything less is discriminatory and offends the principle of National Treatment, a cornerstone of free trade. Having been denied that access by BC’s export ban, it now claims compensation for the profits it would have made, had free trade rules been observed.

For years the federal government has assured Canadians that water would not be subject to the type of claim that Sun Belt has just made. There is only one certain way for Canada to guarantee that protection and this is to negotiate within NAFTA a clear and unequivocal exception for water. But more importantly, Canada, the US and Mexico should also rectify another serious error that was made during NAFTA negotiations, which was to allow foreign corporations direct access to NAFTA’s powerful enforcement machinery.

The "Tragedy of the Commons" and Your Community

The principle of providing foreign corporations precisely the same access to crown resources as is available to Canadian citizens, companies and First Nations offends many people’s sense of fairness or equity. It is also clearly incompatible with any notion of First Nation entitlements or land claims. However, there is also a strong environmental rationale for "discriminating" in favour of local communities and First Nations when it comes to allocating public natural resources.

When access to resources engenders no obligation of stewardship, the result has inevitably spelled disaster. Sometimes referred to as the "tragedy of the commons," these are the dynamics that underlie the current crises affecting global ecosystems from our oceans to the earth’s atmosphere. Because of the absence of any meaningful international controls, the exploitation of these global of common resources is effectively unregulated or supervised.

In this context, there is little incentive for any particular user to practice conservation or restraint. Moreover the logic of "if I don’t, someone else will," is reinforced by the dictates of global competitiveness which punish any corporation that defers immediate profits in favour of longer term or more sustainable returns. This inevitably has meant rapacious rates of resource consumption that soon exhaust non-renewable resources or overwhelm the capacity of renewable resources to regenerate.

By imposing international market imperatives, while reducing local government control, the MAI and NAFTA investment rules would effectively subject domestic natural resources to the same destructive dynamics that have devastated the global commons. In other words, natural resources that were once subject to national priorities and controls, would now become the common property of all foreign and domestic investors. At the same time the capacity of government to impose conservation constraints would be weakened, and in some instances explicitly removed. The result is certain to accelerate already unsustainable rates of resource exploitation.

Indeed the challenge before us is to find new ways to strengthen the role of local communities when it comes to natural resources management. Those that must live with the consequences of destructive resource practices will often have the greatest stake in ensuring long-term sustainable management. They should, therefore, be given a central role in determining local management issues and priorities. But under the MAI and NAFTA such preferential treatment would clearly offend the principle of National Treatment.

3. Performance Requirements: Prohibiting Government Regulation

Under the heading Performance Requirements, the MAI, and to a slightly lesser extent NAFTA’s investment chapter, set out broadly defined lists of prohibited government policies, laws, and program. Moreover, as we have noted, the application of these constraints is much broader than for other provisions of these investment agreements because they apply to investors "of a Contracting Party or of a non-Contracting Party," i.e. to all investors, whatever their country of origin [Article III]. In other words, under the rubric of negotiating an international treaty, Canada would actually agree not to regulate its own investors, or those from any other country, whether that country was a party to NAFTA or the MAI or not.

Performance Requirements also go well beyond the principle of non-discrimination engendered by National Treatment, because this rule prohibits government measures no matter how equitable or even-handed their application to foreign investors. Finally by providing that: "A contracting Party shall not impose, enforce or maintain any of the following requirements....." Performance Requirement constraints may actually apply retroactively to regulations and agreements that predate the Treaty.

Among the list of actions the MAI would prohibit are government regulations that would require an investor to:

• achieve a given level or percentage of domestic content, or to purchase goods or services locally [Article III-1 (b) and (c)];
• transfer environmentally sound technology [Article III-1(f)];
• supply local markets or value-added producers[Article III-1(h)];
• achieve a given level or value of production, investment, employment, or research and development [Article III-1(b)(e)(k)]; or,
• hire local or even Canadian residents [Article III-1(j)].

If we are to contain and ultimately reign in unsustainable resource management practices that are damaging once abundant and diverse ecosystems, we must work together to build more diverse resource economies; promote local economic development; foster environmentally sound technologies; and, ensure "just transitions" for workers. Unfortunately MAI and NAFTA rules will make each and every one of these goals far more difficult, if not impossible, to achieve.

Community Economic Development and Sustainable Resource Management

For many decades, Canadian natural resources policies have sought to maximize the value-added to raw natural resources before being exported. At times these policies have been expressed in the form of bans on the export of raw logs or unprocessed fish. In other instances, Canadian law has actually required investment in value-added processing as a condition for gaining access to Crown resources. For example, the following box contrasts the requirements of the Forest Act with certain performance requirement of the MAI. These contradictions are literally one example of dozens, if not hundreds, of similar conflicts that are revealed when Canadian laws are compared with MAI and NAFTA rules.

4. Expropriation: Private Property Rights in a Global Constitution

While National Treatment and Performance Requirements rules will undermine the economic, community development and industrial policies needed to support truly sustainable resource management, the most direct assault on environmental law and policy can be found under the heading of Investment Protection: Expropriation and Compensation [Article IV.2 of the MAI] which reproduces the wording of NAFTA verbatim:

A Contracting Party shall not expropriate, or nationalize directly or indirectly, an investment in its territory of an investor of another Contracting Party, or take any measure or measures having equivalent effect, (hereinafter referred to as "expropriation") except accompanied by payment of prompt, adequate and effective compensation — equivalent to the fair market value of the expropriated investment. (emphasis added)

It has long been the goal of property rights advocates to have these private rights entrenched in Canada’ constitution. Their campaign is primarily directed at Canadian laws that asserted that private property rights must give way, in certain instances, to the greater public good. Thus challenges to such measures as zoning bylaws or habitat protection laws as interfering with private property rights have been consistently rebuffed by Canadian courts. But what has been unacceptable to the courts, and rejected as part of Canadian constitutional reform, now appears to have been accomplished by NAFTA and would be expanded under the MAI. Moreover, the "constitutional" rights conferred through this back door are far more expansive than those dreamed of by most property rights proponents.

Habitat Protection as Expropriation

The most obvious examples of how these rules will undermine the capacity of all governments to achieve environmental and planning objectives concern land use controls and regulation.

Whether it is for the purpose of preserving salmon habitat, or to protect endangered species, the imposition of habitat protection measures can have significant impacts upon the use of land subject to such protective measures. For example, stream habitat protection measures can substantially limit the extent and character of forest harvesting activities. Similarly, land use bylaws, agricultural land protection, parks creation and other initiatives can impact development activity, whether occurring in remote or urban areas of the province.

By limiting the uses to which land may be put, the imposition of habitat protection measures can significantly reduce the development value of property or the profitability of harvesting licenses or other permits. But under MAI and NAFTA expropriation rules, any government action that even indirectly interferes with the profitability of an investment may give rise to a claim for damages and compensation. Nor are there any exceptions to this prohibition against such government actions. While such measures are permitted when taken for legitimate public purposes, in every instance full compensation must be promptly paid to any foreign investor and for the full market value of any investment "expropriated" [Article IV 2.3 and 2.2]. This is true no matter how compelling the public policy rationale for infringing investor rights.

Environmental and Public Health Regulation as Expropriation

It is also important to understand that this expropriation rule applies to the full range of economic interests that fall within the treaties expansive definition of investment. This means that an investor need not have a direct interest in real property to assert a claim for compensation. Because the MAI defines "expropriation" in the broadest terms, its rules may effectively prohibit a broad array of government regulations that even indirectly reduces the profitability of corporate investment.

In fact, it would be difficult to identify an environmental or conservation initiative that would not have this effect, at least for some investors. Indeed there is recent evidence that environmental regulations are the most likely target of this prohibition against government "taking." One case in point is a law suit brought by Ethyl Corporation, an US-based transnational, against the government of Canada. Because the suit was among the first to be brought under the investment rules of NAFTA, we have summarized the important details in the following box.

"Threat of NAFTA Case Kills Canada’s MMT Ban"

Ethyl Corp, a US multinational corporation, is the only North American manufacturer of MMT, a controversial manganese fuel additive. According to the auto industry MMT damages pollution control systems, increasing emissions of VOCs, CO₂, and Carbon Monoxide. Like other heavy metals, MMT is also a neurotoxin, and its impacts on human health have not yet been adequately assessed.

In fact, understanding how exposure to airborne heavy metals damages human nervous systems is often very difficult. In the case of lead took more than 60 years to finally establish. This explains why many countries have relied on the "precautionary principle" to ban or restrict the use of MMT as a fuel additive. While Ethyl denies that MMT is harmful to human health or the environment, this is the same corporation that stonewalled action on leaded gasoline for years.

When Environment Canada finally decided to regulate MMT in April, 1996 it did so by banning the importation and inter-provincial transport of MMT. But no sooner was the bill proclaimed than Ethyl Corp. filed a claim under NAFTA’s investment rules for $350 million in damages. Ethyl’s suit alleged that by effectively banning MMT, Canada had expropriated its business, and violated the national treatment and performance requirement provisions of NAFTA as well. that can only be considered a complete capitulation to Ethyl’s claims.

Canadians learned of Ethyl’s claim only because the company decided to make it public. When West Coast Environmental Law and other groups sought to intervene in the case, we were rebuffed by the Canadian government, which also denied access to any of the documents relating to the case, either Ethyl’s or its own. Thus during 1997 and early 1998 the case proceeding under the cone of silence imposed by NAFTA’s highly secretive arbitration rules.

While Federal officials publicly discounted Ethyl’s claim, internal memoranda offered a more sober assessment.³⁴ In fact the government was so concerned about losing the case that it decided to settle on terms that can only be considered a complete capitulation to Ethyl’s claims.

On July 20,1998 under front page headlines "Threat of NAFTA Case kills Canada’s MMT ban," the Globe and Mail reported on the settlement that Canada had agreed to rescind the MMT ban, pay Ethyl in access of $19 million, and take the unprecedented step of issuing a statement that MMT was neither an environmental nor a health risk. Not surprisingly even prominent members of the Liberal government "slammed" the deal as a "sell-out of the public interest"; [Southam Newspapers: "MPs defy colleagues on MMT," Vancouver Sun July 24, 1998].

Thus, the first case to invoke the powerful enforcement rules of NAFTA has resulted in a stunning victory for a US -based transnational corporation unhappy with Canadian environmental regulation. Moreover to avoid a whopping damage settlement, the Federal government has set a dangerous precedent that we can expect to invite similar challenges by other foreign investors.

In fact, it is clear that other corporations have already gotten the message because Canada has recently been served with another claim by a US-based corporation, S.D. Myers, for damages arising from a ban (since removed) on the international trade of PCB waste. Even more chilling is the fact that Federal officials have refused to disclose how many other law suits have been made under NAFTA’s investment rules, arguing that even the fact that a claim has been made against the Canadian Government is protected by the secrecy rules of NAFTA’s dispute procedures.

More than one trade lawyer from the corporate sector has warned that there will be many more of these suits as their clients make more frequent use of their rights under these investment treaties to "harass" governments contemplating regulatory initiatives those corporations oppose.

As disturbing as these developments are, they have brought to greater public attention the truly draconian rules for dispute resolution put in place by these investment treaties. Even the editorial boards of the Globe and Mail and Financial Post have criticized the extraordinary and secretive character of these investor-state suits.³⁵ We can also hope that the Ethyl case will spark long overdue attention to NAFTA and the need to eliminate rules that expose Canadian laws and regulation to the withering fire of investor-state litigation.

5. Investor-State Procedures: A "Revolution" in International Law

Rarely is an agreement more effective than the enforcement mechanisms that may be enlisted to ensure that its terms are observed. For this reason, the most important provisions in the MAI are likely to be the ones with teeth — i.e. those that will compel governments to comply with its dictates. These can be found in Article V of the MAI under the heading Dispute Settlement.

The Dispute Settlement rules of both NAFTA and the MAI are virtually identical and establish two distinct enforcement regimes to ensure that governments respect the new limits on their authority these treaties establish. These are: State-State Procedures; and, Investor-State Procedures. As we have noted elsewhere in this guide, State-to-state dispute processes are not without controversy, largely because they exclude public access and participation. However, these concerns pale by comparison with those raised by the latter.

To begin it is important to understand that prior to NAFTA, only national governments had standing to invoke dispute resolution processes under international trade agreements. For this reason, governments often acted to constrain the appetite of their domestic corporations to assail the policies and practices of other governments, by refusing to file trade complaints every-time a domestic corporation asked them to. But under Investor-State procedures the role of national governments as intermediaries would be eliminated.

Thus under NAFTA and MAI rules, all foreign investors would have an unqualified right to sue national governments directly, and for any alleged breach of the very expansive and broadly-worded investor rights they are granted by these investment treaties. These disputes are then decided, not by domestic courts or its judges, but by international arbitration panels operating under the auspices of such institutions as the World Bank and the International Chamber of Commerce.

Arbitration panels would not follow domestic legal principles and procedures, but rather apply international legal rules and operate in accordance with procedures established for resolving international commercial disputes. Because these procedures are so highly secretive, they must be seen as antithetical to the principles of open, participatory and democratic decision-making that are the hallmarks of contemporary legal systems.

For example, under these dispute rules, panel hearings are entirely closed to public view or participation. Nor is public access to documents or evidence is permitted, unless both parties agree. In fact as we have noted, the federal government has taken the position that it can not even reveal whether a claim has been made against it under these procedures. Most astonishingly — under NAFTA and MAI rules, the cone of silence actually includes the decisions made by these international tribunals, even when they involve major damage awards against our government!

In addition to representing a fundamental assault on the democratic traditions of Canadian law, these enforcement regimes also represent a radical departure from the norms of international law. First, by providing corporations with the right to directly enforce an international treaty to which they are neither parties, nor under which, they have any obligations. Second, by extending international commercial arbitration to claims that have nothing to do with commercial contracts and everything to do with public policy and law. This is why even conservative legal experts have described these rules as representing a "revolutionary departure"³⁶ from the principles of international and Canadian law.

Many of us take for granted the fact that we live in countries with open, democratic and accountable judicial systems. We no doubt share the conviction that the public administration of justice is so fundamental to a democratic society that it would be unassailable in the contemporary political context.

But as even this overview makes clear, NAFTA has already established a regime for enforcing investor rights that has supplanted Canadian laws and courts with procedures that exist entirely outside the confines of legal norms of our society. It would be very difficult to overstate the seriousness of this challenge to democratic process.

9.2 Environmental Conditionalities: and Other Greenwash

In response to an environmental critique, defenders of these treaties will quickly point to various provisions that appear to reflect some willingness to accept that investment rights respect some environmental limits. For example, MAI negotiators are presently considering the inclusion of the following provision:

The Parties recognize that it is inappropriate to encourage investment by lowering domestic health, safety or environmental standards or relaxing domestic labour standards

Taken from language in the Investment chapter of NAFTA, and unlike other MAI proposals, this provision is unenforceable and for that reason, virtually meaningless -- particularly in the context of a trade regime that encourages countries to compete for investment by allowing corporations to externalize environmental and other social costs.

Similarly, Performance Requirements include an "exception" that would allow governments to regulate where "necessary":

• to protect human, animal or plant life or health, or:
• for the conservation of living or non-living exhaustible natural resources.

Again what isn’t clear to those unfamiliar with the esoteric rules of trade agreements is that this is identical language to that used in a general exception to GATT rules, where they have proven to virtually useless, as the case summaries included in this Guide readily reveal.

Finally, it is important to recognize that even should this environmental language prove to be far more effective than it has been in other trade agreements, it would still have no impact on the rule against "expropriation," because it simply has no application to this provision of the investment treaty.

9.3 Exceptions and Reservations

When it really matters, governments have been willing to create meaningful exceptions to NAFTA and MAI rules. For example, a broad and unequivocal exemption has been included, at the insistence of the US, for measures deemed necessary for the "protection of essential security interests." But to this point, no government has been willing to argue that a similar exception for government actions deemed necessary for the protection of our essential ecological security.

In addition to this failure, and unlike NAFTA, under the MAI no exception is allowed for measures taken to honor Canada’s obligations under international environmental agreements. Such as those needed to reduce greenhouse gas emissions, protect biodiversity or control trade in hazardous waste or endangered species.

Instead of proposing such exceptions, the federal government is offering only its assurance that it will "reserve" various policies and practices from the full application of MAI rules. There are however, several reasons to discount these assurances as having little value. To begin with, the extent of reservations that Canada may claim is a subject for negotiation and compromise, and may simply not get everything that it has asked for. More to the point however, environmental and many matters aren’t even on Canada’s list of proposed reservations.

Moreover, even if they were, the MAI "standstill" rule effectively precludes new policy or regulatory measures that might even marginally impair investor rights. This means that even for most of the matters reserved, Canadian policy would be frozen in time, becoming increasingly obsolete and irrelevant with each passing day.

Furthermore, Canada isn’t even willing to discuss reservations from the most problematic provisions of the MAI. For example, in the extensive list of draft reservations that Canada has proposed, not one would apply to the Expropriation and Compensation rule. As we have noted, there is no other provision of the MAI that is more likely to be more destructive of environmental law and policy.

Similarly, with the single exception of the Investment Canada Act, no reservation has been put forward concerning the dispute settlement provisions of the MAI, including Investor-State Procedures. Therefore, all other matters, including the effect of a listed reservation, are vulnerable to challenge pursuant to these procedures.

The demands of a growing number of such claims will easily overwhelm scarce and ever declining government resources. As has just occurred in the Ethyl case, the costs of litigation together with the risks of losing a major claim are simply intolerable, particularly when the expedient of simply eliminating offending regulations is available. More and more often governments will simply opt for the safest course, which will be to avoid environmental and other regulatory initiatives altogether. In fact we can already observe the pernicious effect of this new global reality as governments shed regulatory standards in favour of voluntary programs and initiatives.

Finally on this subject, if reservations are broad enough to provide meaningful opportunity for progressive environmental reforms, they would undo much of what NAFTA and the MAI are intended to accomplish. In seeking to entrench the dominant paradigm of market-driven growth by reducing the role of government’s ability to regulate corporate activity in the public interest, these rules are on a collision course with the bedrock principles upon which our environmental agenda is built.

Strategies for Environmentalists

If international investment rules are to foster, rather than undermine our prospects for achieving environmental goals — they will have to be fundamentally overhauled. As noted in the report of the European Parliament that led to France withdrawing from MAI negotiations, it is the basic architecture of the MAI that is the problem.³⁷

There is probably no better way to expose how far off the mark this regime is, than to identify the investment policies and law needed to support the goals of environmental protection, resource conservation and sustainable economic development. Unfortunately, the provisions of Investment Chapter of NAFTA, and of the MAI, represent the antithesis of these principles.

1. All governments have the sovereign right to regulate the activities of both foreign and domestic investors to require their activities to conform to the public interest.
2. In no case are the rights of foreign investors to take precedence over the public policy goals of environmental protection, resource conservation, and sustainable development.
3. All governments have the sovereign right to ensure that the use of natural resources within their territories serve the imperatives of conservation and biodiversity and, secondarily economic development in their communities. In all instances governments, and First Nations have the right to optimize the value of their resources to the particular benefit of their citizens and members.
4. Foreign investors must comply with the highest standards prevailing in either their home or host jurisdiction, whichever is higher.
5. All investor claims arising under any international agreement proceed only at the instance of nation states and then only in accordance with the norms of notice, participation and accountability that are fundamental to the judicial systems of democratic societies.
6. In the event of conflict with international environmental agreements, such the Framework Convention on Climate Change, the Biodiversity Convention, and the Pacific Salmon Treaty — these agreements will prevail over the MAI.
7. Claims for compensation against Canada concerning expropriation shall proceed only in Canadian courts and in accordance with Canadian law.

In many ways the alternative to NAFTA and the MAI means preserving the policies, laws and programs that it would eliminate. Because we have taken these for granted for so long, we have lost sight of the important public policy rationale for the measures that we now risk losing.

The Need for New Investment Controls in the era of Globalization

This analysis of the MAI has focused on the need to preserve and even strengthen the capacity of our governments to regulate investors to ensure that in Canada, they operate in a manner consistent with the broad public interest. But it is also clear that we must also address the need for better controls on the foreign investment activities of the Canadian government and Canadian investors.

For example, the foreign subsidiaries of Canadian based mining companies have recently been responsible for three major mine tailings disasters (see box opposite). At the urging of Quebec’s mining industry the Canadian government has recently filed a trade challenge against France because it is enacted strong asbestos regulations. Apparently the claim was motivated by a desire to protect the investments and markets of Quebec’s asbestos industries in southeast Asia, that might follow the French precedent, should it be allowed to stand. As another example, Canada recently exempted the sale of Candu nuclear reactor to China from federal environmental review.

When Canadian investors, both public and private, are responsible for environmental damage in developing countries, local communities may have little if any recourse. However, even in developed countries foreign investors may simply decide to pull up stakes rather than face clean and compensation costs. Moreover, when the foreign victims of Canadian investors have attempted to recover against them in Canadian courts they have been rebuffed.

We need to find new ways to regulate the activities of our own investors abroad — not through voluntary codes of conduct — but through meaningful, and enforceable domestic legislation and international law. Laws that will be as determined to protect the environment and our communities as the MAI is intent on protecting the interests of foreign investors. We should begin by:

1. ensuring that the foreign victims of Canadian investors have recourse under Canadian law;
2. requiring the investment activities of Canadian investors outside Canada be held to no lower standard of environmental review and performance than would be required of them in Canada;
3. mandating a process for public notice and comment before Canada files a trade complaint against another countries environmental or public health laws in response to behind-closed-door lobbying efforts by Canadian investors; and by,
4. establishing enforceable international regimes to ensure that the investors comply with the lofty principles currently expressed in voluntary codes of international corporate conduct.

PART 10: TERMS AND REFERENCES

Decoding trade speak — a glossary of trade and environment terminology

  [Table of Contents] [Parts 1 to 5] [Parts 6 to 10]

Endnotes

10. NAFTA Article 605.

11. Idem.

12. See discussion of this and other basic GATT rules in Part 2.

13. NAFTA Article 608.2.

14. See Arden-Clark, Environmental Taxes and Charges and Border Tax Adjustment — GATT Rules and Energy Taxes, World Wildlife Fund for Nature, Gland Switzerland, 1994.

15. The Working Party on "Border Tax Adjustments" 1968-1970.

16. See Article 2.2 of the TBT Agreement.

17. Wall Street Journal, Johnathan Dahl, "Perilous Policy: Canada Promotes Asbestos Mining, Sells Carcinogenic Mineral Heavily in Third World," Dec.9, 1989.

18. Globe and Mail, Report on Business; Andre Picard and Harvey Enchin, "Quebec planning to fight US asbestos ban," July 7, 1989.

19. Idem.

20. Mines Minister Raymond Savoie, supra fn. 18.

21. French asbestos ban blow to Quebec — Chain reaction in other countries feared" Globe and Mail July 4, 1996.

22. Government of Canada Stepping up Action to Fight French Asbestos Ban, McLellan and Eggleton say, Natural Resources Canada & Foreign Affairs and International Trade, October 8, 1996.

23. United States — Standards for Reformulated and Conventional Gasoline, WTO Doc. WT/DSR/R (Jan. 29, 1996), 35 I.L.M. 274

24. The Gasoline Rule prohibited the sale of conventional gasoline in these areas and mandated a 15 per cent reduction in VOC and Nox emissions from reformulated gasoline products, as measured against a 1990 baseline year. For conventional gasoline sold elsewhere, levels of contaminants needed to be held at levels no worse than 1990 baseline levels.

25. Agreement on Trade-Related Aspects of Intellectual Property Rights, Article 27.

26. Vandana Shiva and Radha Holla-Bhar, Piracy by Patent: The Case of the Neem Tree, in the Case Against the Global Economy, Ed. Jerry Mander and Edward Goldsmith, Sierra Club Books, San Francisco, 1996.

27. Aaron Cosbey, The Sustainable Development Effects of the WTO Trips Agreement: A Focus on Developing Countries, the International Institute for Sustainable Development, Feb. 1997.

28. See for example the Convention on Biological Diversity (1992) Article 16: Access to and Transfer of Technology.

29. Laura Eggerton, Ministers Reject use of Loopholes to Cut Drug Patents, Globe and Mail, Mar. 6, 1997.

30. See proceedings of the federal Standing Committee on the Environment and Sustainable Development, on Feb. 3, 1998.

31. This is made explicit in annotations to the Oct. ‘97 draft text of the MAI, at p. 102.

32. Before withdrawing from negotiations France described the combined effect of MAI provisions as "explosive" and as creating a dual dyssymmetry by favouring the rights of corporations over those of nations and by favouring foreign over national investors. See Lalumiere and Landau, "Report on the Multilateral Agreement on Investment (MAI)" published b