Expropriation Madness 

Trade interests have again trumped citizen interests, as a chemical company has used an obscure but powerful provision of the North America Free Trade Agreement (NAFTA) to roll back a Canadian environmental and public health measure -- and to exact a reported $13 million from the Canadian government for its troubles.

In 1995, the Canadian parliament banned the import or inter-provincial trade of MMT, a gasoline additive that is manufactured only by the Richmond, Virginia-based Ethyl Corporation. MMT is used as a substitute for lead additive, which Ethyl also produced until recently.

Many scientists believe MMT, which contains the heavy metal manganese, to be a potential public health hazard. Automakers allege it gums up car engines.

Ethyl responded to the MMT ban with an unprecedented lawsuit.

It invoked a provision of NAFTA which allows companies to sue governments directly for expropriation of their property.

Then it argued that the government's ban on trade in MMT -- which had the same real-world effect as, but was technically different from, a direct ban -- discriminated against Ethyl. "Theoretically," said Ethyl Canada President David Wilson at the time the suit was filed, "in order to continue operating as a business, Ethyl is being required to build manufacturing and blending facilities in each of the provinces and territories of Canada. This is a local content preference that violates Canada's NAFTA obligations."

The company also argued that its reputation was damaged by the claim that MMT was harmful to human health. Proponents of the ban acknowledge that the scientific evidence around the health effects of MMT is uncertain, but say there is substantial cause for worry. They urge erring on the side of safety.

In sum, the company argued, the government's action effectively expropriated its property, including its expected future profits and goodwill.

While this argument may sound like the exaggerated rants of a bleary-eyed NAFTA critic who has spent too much time with his or her head buried in the NAFTA text, it turned out to be convincing enough to persuade the Canadian government to settle the case.

In July, the Canadian government agreed to rescind the MMT regulation, pay Ethyl a reported $10 million and issue a statement giving MMT a clean bill of health. Canadian government lawyers reportedly told officials they stood to lose much more if they failed to settle.

NAFTA critics blasted the settlement. "NAFTA leaves the government powerless to protect the health of Canadians, when big business interests are at stake," says Jo Dufay, national campaign coordinator of the Council of Canadians. "The makers of MMT have been given rights once reserved for governments -- and ordinary citizens, health and the environment are just left standing in the dust."

One particularly interesting perspective on the settlement was provided by lawyer Lawrence Herman, who was briefly consulted on the case in 1995 and thought its theory far-fetched. "The main reason I thought a trade case would be problematic in 1995 was because the investor-state arbitration provisions of NAFTA seemed confined to cases where governments took assets away by direct action and refused to compensate the investor," he wrote in The Financial Post in July.

"The intelligent and astute counsel to Ethyl Corp. has proved, however, the legal concept of expropriation and the protection afforded under NAFTA provisions go far beyond these traditional legal concepts," Herman wrote.

The MMT case "illustrates governments are at peril if they adopt measures having the 'effect' of expropriating foreign-owned assets, directly or indirectly," he wrote. "It shows using trade instruments to achieve public policy goals must be meticulously thought out and supported with impeccable scientific backstopping. Even then, there must be no hint of discrimination."

To prove the point, Barry Appleton, the lawyer who brought the MMT case, has filed in Canadian courts a notice of intent to file another, this time on behalf of a Tallmadge, Ohio-based company called S.D. Myers.

The S.D. Myers claim seeks $6.3 million in damages to compensate the company for a temporary Canadian ban on toxic PCB waste. The ban was in effect for 15 months, from 1995 to 1997. The Canadian government says it lifted the ban when it received information that the PCBs were being handled safely in the United States, but critics say the ban was lifted in anticipation of a potential NAFTA challenge.

In any case, S.D. Myers is not satisfied with a lifting of the ban. It is claiming in its suit that the ban amounted to an expropriation of the company's Canadian business, and that it is entitled to lost profits for the period while the ban was in effect.

"The effect of the PCB Export Bans has been to totally frustrate the Canadian operations of the Investor," says Myers' notice of intent to sue. "This has resulted in the deprivation of the benefits of the Investor's investment in Canada, constituting a measure tantamount to expropriation."

"Our company decided to seek compensation under the NAFTA for Canada's actions that prevented us from carrying out our lawful activity in Canada," says S.D. Myers President Dana Myers. "This was an attempt to substitute sales from an American company to our Canadian competitors. We believe that this action violates both the spirit and the text of the NAFTA."

"Canada's actions on the PCB export ban do not treat S.D. Myers fairly under NAFTA's investment chapter. Canada's decision to close the border to PCB exports makes poor policy sense and even worse trade sense, says Appleton."

"Myers used NAFTA to complain about Canada's PCB export ban, so the ban was lifted," says Maude Barlow of the Council of Canadians. "Now they are using NAFTA to demand payment for lost profits when the law was in effect. NAFTA empowers a company to force our government to have to pay for trying to protect the environment."

"Chalk this up to another NAFTA broken promise," says Lori Wallach, director of Public Citizen's Global Trade Watch.

"Ethyl's and now Myers' lawsuits show that trade agreements will be used to subvert environmental goals, something the United States [government] repeatedly denied would happen under NAFTA."

Environmentalists and consumer groups find the Ethyl and Myers cases particularly disturbing because the NAFTA provisions allowing companies to sue governments directly for expropriation closely track provisions in the proposed Multilateral Agreement on Investment (MAI).

The MAI is an international treaty now under negotiation among the rich countries of the Organization of Economic Cooperation and Development (OECD). It would extend NAFTA-like rules to investments in all signatory countries, with exceptionally broad definitions of what constitutes unfair burdens on foreign investors.

-- Robert Weissman