Taylor & Francis | 19 September 2016

Free trade’s chilling effects

by Manuel Pérez-Rocha

Since 2009, the year the United States government officially decided to participate in the TransPacific Partnership (TPP) agreement, U.S. officials, including President Barack Obama, have gone out of their way to tout the trade pact as “the most progressive trade deal in history.” Few claims, however, could be further from the truth. In fact, the TPP’s chapter on investment protection and its dispute settlement mechanism—by which foreign investors can sue sovereign states in closed-door, international courts—demonstrate that the TPP shares a great deal in common with recent free trade agreements, and not in a good way. More specifically, the TPP is a free trade pact that is firmly rooted in one of the most notorious provisions of the North American Free Trade Agreement (NAFTA), its Chapter 11 on investment. Designed to protect foreign investors and give corporations the capacity to operate in ways that ensure their profits are maximized and risks minimized, the TPP now threatens to extend that corporate impunity on an unprecedented scale.

Until a few years ago, the legal framework enumerated in Chapter 11 existed in comfortable darkness. Thanks to the dedicated organizing of civil society organizations around the globe and advocacy of a small group of responsible government officials and parliamentarians, this is no longer the case. In the last decade, three Latin American countries (Venezuela, Bolivia, and Ecuador) have publicized their frustrations with the power that corporate entities have amassed through the inclusion of what are known as “InvestorState Dispute Settlement” (ISDS) clauses by withdrawing from the World Bank’s International Center for the Settlement of Investment Disputes (ICSID), the most common tribunal in which countries that are parties to such pacts can be sued by private corporations. Spurred on by civil society, it is no longer abnormal for countries that are parties to a given Bilateral Investment Treaty (BIT) to denounce the inclusion of ISDS provisions in those agreements. Ecuador, for example, recently began a comprehensive process of auditing all of the BITs to which it is a party, as well as the suits it is involved with at the ICSID. This review process is now being emulated in other countries, like Poland, while governments in places like South Africa, Indonesia, and India have pledged to cancel many of their BITs.

A changed political environment has helped to push the problems of the ISDS system to the forefront of the civil society debate about the TPP and other largescale free trade negotiations, such as the Transatlantic Trade and Investment Partnership (TTIP) and the the EU-Canada Comprehensive Economic and Trade Agreement (CETA). Although many believe the time has come to radically change and rebalance the international legal regime on investment by annulling or renegotiating international investment agreements, the 12 countries that are parties to the TPP, most notably the United States, have continued to ignore such criticisms. This fact alone is reason enough to oppose the ratification of the TPP.

The free trade model that the TPP today embodies goes back at least to the early 1990s, when NAFTA was negotiated and approved by Canada, Mexico, and the United States. [For more on the relationship of NAFTA to the TPP, see Alejandro Álvarez’s piece in this issue of the Report.] Advocates of that pact contended that it would bring prosperity to Mexico by increasing employment opportunities and living standards across the board. However, the opposite has happened. By removing trade barriers, NAFTA took away protections enjoyed by Mexico’s domestic food producers, precipitating greater food insecurity, widespread loss of agricultural livelihoods, and migration, both internally and abroad. Moreover, by removing investment barriers, the deal made it even more profi table for large corporations to set up factories along the U.S.-Mexico border, and then re-export finished goods back to the United States at a lower price. Because the portions of NAFTA dealing with labor protections were extremely weak, the jobs created in Mexico’s maquiladoras have remained low-paying ones over the last two decades and basic labor rights, like the right to form a union, often go ignored.

What’s more, since under the terms of NAFTA national governments cannot impose conditions on foreign investors to use domestic suppliers, the value chains forged between other sectors of the Mexican national economy and new foreign investment have been minimal. (NAFTA’s investment chapter contains a little known clause, known as the “Prohibition of Performance Requirement,” by which governments are not allowed to actively promote connections between foreign investment and national production chains in order to boost national employment.) The result of this all has been a boom in exports from Mexico’s manufacturing and maquiladora sectors that have had very few positive ripple effects in other parts of the Mexican economy.

Basic economic indicators tell a big part of the NAFTA story. Since NAFTA went into effect more than two decades ago, the total number of people living in poverty in Mexico has increased. According to Mexico’s official indicators, in 2014, 46.2 percent of Mexico’s total population lived under the poverty line—a figure that is on par with poverty figures pre-NAFTA, although the country’s total population grew from just 91 million in 1993 to 127 million by 2014. Moreover, today Mexico must import 45 percent of the food it consumes, compared to just 15 percent in 1994. As Mexican civil society organizations critical of NAFTA declared on the agreement’s twentieth anniversary in 2014 : “NAFTA has signified declining levels of production, employment, and income in Mexico, in addition to growing levels of inequality, poverty, and migration.” Moreover, the state’s abandonment of the Mexican countryside has created, in the words of civil society activists, a “vacuum that organized criminal organizations have filled.”

Despite the real concerns of NAFTA, history soon repeated in Central America in 2006, with the passage of the Dominican Republic and Central American Free Trade Agreement (CAFTA-DR). In a March 2016 appraisal of CAFTA-DR, the D.C.-based Committee in Solidarity with the People of El Salvador (CISPES) argued the trade pact “ushered in a decade of deteriorating economic conditions for working people, major new threats to the environment and national sovereignty and the further unraveling of rural economies.” Union leaders in Central America have used similar words to describe the disastrous impacts of CAFTA-DR on Central American workers. The Salvadoran Union Front (FSS), for example, has drawn important connections between the implementation of CAFTA-DR, on the one hand, and the uptick in violence, poverty, and emigration from Central America over the last decade.

Transnational corporations have responded to civil society resistance with their own aggression, using the legal weapons offered by free trade agreements to maintain the profitability and productivity of their operations in the region. At my institution, the Institute for Policy Studies (IPS), we have spent considerable time documenting how transnational corporations operating in the extractives sector are increasingly turning to international arbitration tribunals to resolve resource disputes because of the ISDS mechanisms that are written into trade pacts like CAFTA-DR. Such mechanisms allow corporations to take states to arbitration over a host of questionable issues—everything from state attempts to protect the natural environment to the enactment of national policies that favor the development of domestic industries, to the use of national capital control measures that mitigate against financial volatility.

Using the legal artifice created by NAFTA, CAFTA-DR, and other free trade agreements, the international mining industry has run roughshod over the natural environment that many rural peasant and indigenous groups call home. When governments have acted to protect their natural resources, like water, from the destruction of large-scale mining (and gold mining in particular), corporations have turned to the legal provisions buried in free trade agreements to commence lawsuits against host nations. Over the last two decades, the number of such suits has reached an unprecedented level. Whereas in 1995, there existed only three treatybased cases in which a private corporation sued a national government at the World Bank’s ICSID (one of several international arbitration tribunals that handle investor-state cases but the only one that publishes a full list of cases), at the time of this article’s writing, the total number of known ICSID cases stands at around 700. In 2015 alone, 70 new cases were filed at ICSID. In the last decade, companies connected to the extractive industries’ sector have made 91 of these claims. This is more than three times the number of cases registered in the previous decade and well more than double the number in the three prior decades combined.

Latin America has been at the center of foreign corporations’ use of investor-state lawsuits. As of March 2015, there were a total of 197 pending ICSID cases. Of these, 56 cases (28 percent) were related to the oil, mining, and gas industries. And countries located in Latin America and the Caribbean region were the target of 26 of these cases—that is to say, 46 percent of all cases. Venezuela, at eight, currently faces the largest number of ISDS lawsuits, followed closely by Argentina, with seven.

One of the most egregious and highly publicized ISDS suits to be brought against a sovereign nation in recent years is that of gold mining company Pacific Rim, which is pursuing hundreds of millions of dollars in damages from the government of El Salvador through the World Bank’s ICSID. In 2004, the Canadian company applied to dig for gold in El Salvador. Pacific Rim—which has since been acquired by the CanadianAustralian company OceanaGold—assured the government of then Salvadoran president Antonio Saca that its work would not harm the environment and would generate hundreds of new jobs. When fears about ecological damage to the country’s already-depleted water supply arose—particularly the mine’s threat to the Lempa River, an essential source of water for El Salvador’s six million people—Pacific Rim failed to provide a requested environmental damage assessment. As a result, the Salvadoran government instituted a moratorium on new mining permits. To date, this ban has been maintained and indeed has broad popular support. According to a recent poll conducted by the University of Central America, 79.5 percent of Salvadorans oppose gold mining in their country.

Yet, just one year after the ban went into effect, Pacific Rim fought back against the Salvadoran government, filing a $77 million USD lawsuit with the World Bank’s ICSID. The irony that it was Pacific Rim who, in failing to comply with environmental requirements and defying national laws in the country, caused untold ecological and economic harm, was apparently lost on the Canadian company. As the environmental leader Vidalina Morales said in October 2009, when she came to Washington, D.C., to accept the Institute for Policy Studies’ Letelier-Moffitt Human Rights Award on behalf of the La Mesa Nacional Frente la Minería Metálica en El Salvador (National Roundtable Against Metal Mining), the roles of perpetrator (Pacific Rim) and victim (El Salvador) were reversed in the company’s ICSID suit. “This lawsuit provides another example that illustrates what Uruguayan writer Eduardo Galeano called an “upsidedown world,” Morales said.

The Kafkaesque nature of the Pacific Rim case did not end there. The mining corporation first attempted to bring its claim against El Salvador to court under the provisions of CAFTA-DR. However, when it became clear that the Canadian company was simply “treaty shopping”—seeking to find any legal mechanism possible to sue the Salvadoran government—Pacific Rim, like a magician bringing a rabbit out of a hat, eventually used an outdated 1999 Salvadoran investment law, dictated by the World Bank as part of a structural adjustment program, to bring claims against the government for its mining ban. The Salvadoran government has since amended this law to protect El Salvador from future suits, but the amendment lacked retroactivity, and so the Pacific Rim vs. El Salvador case continues to be tied up in the courts. The total sum demanded by Pacific Rim today stands at $250 million USD. At the time this article went to press, a decision in the Pacific Rim case was imminent.

Since the Pacific Rim case, several other ISDS suits have been filed in Central America, many of them still pending. The case of Infinito Gold vs. Costa Rica involves a Canadian company that claimed it lost $94 million USD when the government of Costa Rica impeded the continued exploitation of an open pit mine there, known as the Crucitas project. A mining permit had been issued by the Costa Rican government to Infinito Gold in 2008, but that license was revoked in 2010 after a court found irregularities and evidence of influence peddling in the issuance of permits. The same court ordered the company to compensate the state for environmental damage caused by the destruction of protected forests. But following this verdict, it was the company that filed suit against the Costa Rican state using the ICSID system—even as the company sold all of its assets in the country to prevent payment of the environmental damage compensation. In 2015, Infinito Gold’s top executives resigned from the company when it became at risk for bankruptcy proceedings. In spite of the companýs uncertain status, the ICSID claim against Costa Rica remains active.

In another case, Dominion Minerals vs. Panama, a North American mining company filed suit in 2016 against Panama for $268 million USD. The suit was motivated by the withdrawal of a mining license that was expected to negatively impact the livelihood and environment of an indigenous group in the area. In the case of Crystallex vs. Venezuela, a Canadian company sued the Venezuelan government after the latter revoked a permit for the Las Cristinas mining project because of environmental concerns in the nearby Imataca Forest Reserve. In April 2016, the ICSID ruled that Venezuela compensate the company to the tune of nearly $1.4 billion USD. Colombia has been sued by three mining companies for undertakings related to its free trade pacts with the U.S. and Canada, and it is estimated that two or three additional lawsuits may be forthcoming, particularly in the mining and hydrocarbons sector.

Even the United States government has found itself in the unexpected crosshairs of the ISDS system. In June 2016, the Canadian company, TransCanada, announced that it will sue the U.S. government for $15 billion USD because of U.S. President Barack Obama’s decision to reject the Keystone XL Pipeline.

In short, what’s at stake with ISDS and investors’ rights in FTAs and BITs is not only the potential cost to governments of expensive lawsuits, but also the ability of every country to make sovereign decisions to advance the common good of its citizens and protect its environments.

Investment rules that allow companies to circumvent national judicial systems and challenge responsible public policies can create what legal scholars have called a “regulatory chill.” This means that countries that might otherwise have curtailed corporate activities won’t do so, simply out of fear of being sued by multinational corporations.

The case of the Marlin mine in western Guatemala is a good example of how the “chilling effect” has worked. In 2010, the Inter-American Commission on Human Rights (IACHR) advised the Guatemalan government to close the Marlin mine on account of the social and environmental impacts that the operation was having on the surrounding region and its indigenous populations. Nonetheless, just a short time after briefly agreeing to suspend operations, the Guatemalan government changed course and reopened the mine. Internal documents obtained by environmental organizations reveal that the Guatemalan government’s decision was based on the fear of a potentially costly investment arbitration case. More specifically, the Guatemalan government maintained that closing the project could provoke the mine’s owners to “activate the World Bank’s [investment court] or to invoke the clauses of the free trade agreement to have access to international arbitration and subsequent claim of damages to the state.” Simply knowing that a company might sue can prevent small, resource-rich countries from standing up for the human rights and environmental protection of their citizens.

Also in Guatemala, the indigenous Puya communities around San José del Golfo—home to some 45,000 people—have engaged in over three years of peaceful resistance to prevent the U.S.-based company Kappes, Cassiday, and Associates (KCA) from constructing a new mine on their ancestral lands. Protesters estimate that 95 percent of families in the region depend on agriculture, which would be virtually destroyed if the water were to be further contaminated. But in that case as well, KCA threatened to sue Guatemala if the mine was not opened. “They can’t afford this lawsuit,” a company representative said. “We had a big law group out of [Washington,] D.C. fire off a letter to the mines minister, copied to the president, explaining what we were doing.”

In the face of threats made by KCA, the Guatemalan courts have made important rulings against the mining company. According to a recent Guatemalan Constitutional Court decision—which upheld a February 22, 2016, Supreme Court injunction against the company on the grounds that a “prior consultation” process was never carried out within the affected communities—KCA should not be operating in the country. The decision is a major victory for the country’s Puya movement and its years of non-violent resistance to the project.

Despite the rulings, the company continues to illegally extract and transport material from within the mine. A recent government raid of KCA’s mining site found 74 sacks, each one filled with 1,000 kilograms of precious metals and several archaeological pieces, probably found during excavations at the site. Moreover, the company Guatemala Mining Explorations (Exmingua), a subsidiary of KCA, has threatened to file a lawsuit against Guatemala after it too was forced to suspend mining operations. The question that remains in this case, as in many other cases, is : How much power does a private enterprise have to change the sovereign decisions of a nation-state using the perverse ISDS system ?

The decision to include ISDS rules into the TPP suggests the battles that have been fought by organized communities in Latin America over the last two decades could continue well into the future—only now on a much larger geographic scale. Such provisions represent an attack on national sovereignty and the ability of nation-states to regulate the economy in the interest of public welfare. Every country under the TPP should not ratify the treaty because of this major flaw. As environmental activists and free trade critics have long argued, the reason is simple : The ISDS mechanism is like playing soccer on one half of the field. Corporations have the freedom to attack, while small countries are forced to merely defend themselves. The best a government can do is reach the end of the game with no goals scored. Therein lies the unfairness of the TPP and why resistance to it is growing across the hemisphere.