State Sees Conflict in Trade Pact

Two years ago, former Gov. Gray Davis signed a law that requires mining companies to restore the earth they disturb in response to concerns that an open-pit gold mine would scar a part of the desert that the Quechan tribe considers holy.

“This measure sends a message that California’s sacred sites are more precious than gold,” Davis said at the time.

California has since learned, however, that international trade pacts are posing a new threat to the state’s authority to pass public health and environmental regulations -- a threat that California lawmakers believe will grow only if Congress approves the proposed Central American Free Trade Agreement.

After California passed the 2003 mining law to protect the Quechan “Trail of Dreams,” a pathway that the tribe has traveled for centuries in a spiritual trek to its ancestral birthplace, Canadian mining company Glamis Gold Ltd. responded by demanding $50 million in compensation from the U.S. government. It argued that the state law rendered its investment in the mining operation worthless -- a violation of the North American Free Trade Agreement with Canada and Mexico.

The firm’s claim, which is pending, contends that California’s law amounts to an “indirect expropriation” of the company’s property, something that is specifically forbidden in NAFTA and may also be barred in CAFTA.

As Congress considers CAFTA this month, California is joining state and local government groups in telling lawmakers that Bush administration trade negotiators failed to heed the lessons of NAFTA. The groups say the administration may again be giving foreign corporations the power to seek payment from U.S. taxpayers when regulators pass laws that diminish a company’s investments.

“California has been a leader in environmental and public health law, and to give foreign investors the authority to effectively nullify these laws under the banner of free trade makes no sense,” said California Atty. Gen. Bill Lockyer.

The broad powers assigned to foreign investors, contained in a provision of CAFTA, exceed the legal protections that U.S. investors enjoy, Lockyer and other critics contend, and thus violate a mandate from Congress that trade pacts should grant “no greater rights” to foreigners than to Americans.

“Sufficient assurances have not been offered to assuage our concerns that American federalism is not placed in jeopardy by the investment chapter of CAFTA,” the National League of Cities, National Conference of State Legislatures and groups representing townships and municipal lawyers wrote last month in a joint letter to Congress.

Although state and local officials support free trade pacts, they do so only if they can preserve the power to “regulate land-use, health, safety, welfare, public morals and environment measures” without fear of violating the agreements, the letter added.

The Office of the U.S. Trade Representative, which negotiated the CAFTA pact, argued that such fears were overblown.

“The United States has never lost a single case under these proceedings and has not paid a single penny” to settle any NAFTA claims, said Assistant U.S. Trade Representative Christopher A. Padilla.

Foreign investors have filed 39 claims under NAFTA, including 11 against the U.S. They include a $970-million claim by a Canadian chemical company, Methanex Corp., that California unfairly took its future profits when the state ordered the phaseout of the gasoline additive MTBE.

Half of the claims are pending or being debated. The disputes are resolved in private arbitration proceedings by a three-person trade tribunal.

The Glamis Gold and Methanex claims, still being debated, have cost the U.S. millions of dollars in defense expenses. The defense must be mounted by the federal government, which can also move to invalidate state or local law on grounds that it violates the trade pact.

Though the U.S. has yet to lose or settle an arbitration case, Canada has suffered defeat in two tribunal disputes and resolved two out of court, including paying $13 million to an American chemical firm, Ethyl Corp., that challenged Canada’s banning of a gasoline additive. Canada has awarded foreign firms a total of $27 million, according to a survey this year by the Canadian Centre for Policy Alternatives.

Mexico has also lost two cases and settled others, including a dispute over a toxic waste dump owned by an American company, Metalclad Corp., that had been refused an operating permit by a Mexican state on public health grounds. Mexico has awarded $18.2 million to companies, according to the Canadian research.

California lawmakers argue that the threat of further NAFTA claims is already having a chilling effect on the state’s ability to continue its tradition of trendsetting environmental and public health laws.

Last year, Assemblyman Lloyd Levine (D-Van Nuys) came up with a creative way to reuse millions of spare tires piling up in dumps around the state. Levine’s legislation would have required that rubber from old tires be used as material to build state roads.

But Gov. Arnold Schwarzenegger rejected the legislation, which was opposed by Mexican and Canadian rubber exporters, writing in his veto message that he feared it would violate free trade pacts. The foreign firms had argued that the provisions favoring U.S. rubber, meant to help California dispose of its mountains of tires, discriminated against them.

“It’s very important that we learn from the mistakes made in NAFTA 10 years ago, and it appears that CAFTA is almost a duplicate, with the same type of pitfalls for states,” said state Sen. Liz Figueroa (D-Fremont), chairwoman of the Senate Select Committee on International Trade Policy and State Legislation.

Figueroa and other state lawmakers wrote the California congressional delegation urging rejection of CAFTA. But 54 lawmakers voted for the pact when it passed the U.S. Senate last month, including California’s Dianne Feinstein.

The agreement still requires approval from the House, where it is expected to face a close vote.

U.S. trade negotiators have made changes to CAFTA in response to the criticism of NAFTA. The changes include a provision that makes it easier to derail frivolous lawsuits, which U.S. officials argue would have led to an early dismissal of the California MTBE case. Negotiators also added language from U.S. court decisions that attempts to clarify when a government action would effectively constitute taking a foreign investor’s property, a key subject of dispute.

Nonetheless, some legal experts remain convinced that CAFTA’s foreign investor protections would repeat the problems of NAFTA.

In particular, they say CAFTA specifically allows foreign firms to demand compensation when a government regulation harms a company’s “expectation of gain or profit.” Under a clause of the U.S. Constitution, companies can seek compensation in domestic court only when a government action decreases the worth of real property.

“You don’t need a law degree to appreciate” that the changes to CAFTA are weak, said Robert Stumberg, a professor at Georgetown University’s Harrison Institute for Public Law. “CAFTA is different from U.S. law in fundamental respects. Whether the new language changes anything is uncertain. But it is very clear that CAFTA still gives greater rights to foreign investors than domestic investors.”