By Michelle Sforza
In January 1997, the US-based waste disposal company Metalclad Corporation filed a complaint with the International Center for the Settlement of Investment Disputes alleging that the Mexican state of San Luis Potosí violated a number of provisions of the North American Free Trade Agreement (NAFTA) when it prevented the company from opening its waste disposal plant. A decision on the case has yet to be issued.
Metalclad took over the plant, which had a history of contaminating local ground-water, with the obligation that it clean up pre-existing contaminants.
After an environmental impact assessment revealed that the site lay on top of an ecologically sensitive underground alluvial stream, the San Luis Potosí governor refused to allow Metalclad to reopen the facility and declared the site part of a 600,000-acre ecological zone.
Metalclad claims that this action expropriated its future expected profits and is seeking $90 million in damages — a figure that is larger than the combined annual income of the whole population in the county where the plant is located.
Environmental zoning has been attacked, especially in the US, by "property rights" activists (also known as the "takings" movement) who seek compensation for complying with environmental regulations.
Metalclad is claiming that the zoning law constitutes an effective seizure of the company's property — a seizure that, under the property rights extended by the NAFTA, requires that the offending government compensate the company. While Metalclad would have a very difficult time convincing a US court that the "taking" should be compensated, the broad language of the NAFTA expropriation provision sets a higher standard for "investor rights".
This case demonstrates how responsibility for certain non-market-related risks of investment could be shifted from companies to governments. Without the NAFTA's strong provision on expropriation, Metalclad alone would be forced to assume the risks of investment and would have learned a valuable lesson about conducting the proper environmental assessments before committing significant resources to an investment.
Under the rights conferred by NAFTA — and the expanded version proposed in the Multilateral Agreement on Investment (MAI) — the government of Mexico could be forced to shoulder the risks and costs of Metalclad's investment should the company win its suit.
The Metalclad case raises another alarming question. Metalclad claims the Mexican federal government is (unofficially) encouraging the company's NAFTA lawsuit so that it can deflect the political fall-out of forcing the state to open the facility.
The local residents — still reeling from water contamination resulting from the illegal storage procedures of the facility's previous owners — was never consulted by the federal or state governments, or Metalclad, about the possibility of reopening the facility and vehemently opposes a toxic waste dump in their area.
If Metalclad's claim that the Mexican federal government supports the suit is accurate, this case raises the possibility that investors can use their rights to collude with governments to force unwanted, even dangerous investments on unwilling populations. A spokesperson for Metalclad stated, "I don't know of anything the federal government could have done and didn't do, short of sending the army in" (Joel Millman, Wall Street Journal, October 14, 1997).
This case also raises the question of how federal governments will enforce the obligations of states and localities through the MAI.
Since the US and other countries intend to bind states and localities to the agreement, state governments are extremely concerned with preserving their control over public interest regulation, as well as their immunity from prosecution by other countries.
While investors will likely be able to sue only signatories to the MAI (i.e. federal governments), federal governments have ways to force states into compliance. The MAI could therefore have profound implications on state law-making in the areas of the environment and labour.
[Abridged from the Internet. Michelle Sforza is research director at Public Citizen's Global Trade Watch, e-mail <msforza@citizen.org>.]