Trading Human Rights for Corporate Profits

Global trade policy weakens protections for health, the environment

By Martin Wagner

In 1995, a small town in central Mexico refused to allow the California-based Metalclad Corporation to build a hazardous waste landfill that studies showed could have contaminated local groundwater and jeopardized a fragile ecosystem. The following year, the company sued Mexico, claiming that special rules under the North American Free Trade Agreement (NAFTA) entitled it to millions of dollars in compensation for its lost business opportunity. Although the Mexican government had approved the project, it also acknowledged in the NAFTA proceedings that local communities have the right under Mexican law to oppose hazardous waste facilities. A NAFTA tribunal disagreed, holding that Mexico had violated Metalclad’s rights and owed the company almost $17 million.

This ruling made clear that international trade rules have become a weapon to undermine the health and environmental sovereignty of nations and local governments. How did such an injustice come to be?

Enshrined in international human rights law is the notion that people everywhere have intrinsic rights to life and health, and to a healthy environment. It is the responsibility of governments at all levels to protect these fundamental human rights. Recently, however, the United States and other nations have relinquished much of their power to protect such rights when doing so would interfere with corporate profits.

This abdication of responsibility is occurring in international trade agreements that give foreign corporations the right to compensation for profits lost as a result of government regulations. Companies have already used rules to challenge protections for drinking water, health and the sacred sites of Native Americans. Multimillion dollar awards in several cases create a strong disincentive to new government regulations, substantially reducing human rights protections around the world.

Trade Rules Trump Rights
Most of the late–twentieth-century wave of trade liberalization focused on facilitating the movement of goods—from plastic toys to commercial aircraft—around the world. With the success of this effort, multinational corporations sought to expand their geographic and economic reach by moving operations overseas to exploit cheap labor and materials. To strengthen their position, corporations began to demand special rules guaranteeing the profitability of their investments in foreign countries. Their first major success was NAFTA, which devotes an entire chapter to guaranteeing foreign profits irrespective of government regulations. Subsequent trade agreements have applied the same rules to more nations, and efforts are underway to make them apply throughout the Americas and around the world.

Under the provisions of NAFTA’s Chapter 11 and its progeny in other international agreements, foreign investors can sue governments in special international tribunals when they believe a government action has treated their investment unfairly or otherwise interfered with their investment. The judges are private lawyers, and the proceedings are frequently closed to the public. The tribunals’ decisions are automatically binding on the governments and generally cannot be appealed. Because each tribunal’s interpretation of the investment rules influences subsequent tribunals, each decision sets a precedent that may apply worldwide.

Corporations’ interpretation of these investment rules establishes a system akin to legalized extortion: governments can only protect against an environmental or health threat posed by the activities of a foreign investor if they are willing to pay the investor to remove the threat. Even defending the most frivolous claim—which usually requires hiring private U.S. or European lawyers—can be beyond the means of many developing countries, dooming many regulations before they are even implemented.

Threats to Water, Sacred Sites
The growing influence of international investment rules presents a particular threat to the human right to water. United Nations agencies have recognized that access to clean water is fundamental to the fulfillment of all human rights, including the right to life. Yet as worldwide demand for fresh water rises, more and more governments are succumbing to pressure to grant water privatization contracts to multinational corporations. The international investment rules are already working to undermine the ability of governments to protect freshwater resources.

These international investment rules do not only interfere with government action to protect health and the environment, but also with efforts to protect the right of Indigenous communities to their cultural heritage. Another NAFTA case demonstrates this threat. A Canadian gold-mining company, Glamis Gold Ltd., holds a mining claim in a pristine desert ecosystem in Southern California’s Imperial County. The company planned to exploit its claim with an open-pit gold mine less than a mile from several sites sacred to the Quechan Indians. During the Clinton administration, the U.S. Department of Interior denied a permit for the mine based on a federal historic preservation agency’s finding that the project would irreparably damage the tribe’s sacred sites. In 2001, President Bush’s Interior Secretary, Gale Norton, rescinded the decision based on her agency’s determination that U.S. law does not allow the government to deny a mining permit on the basis of cultural concerns.

In the meantime, however, California passed two measures requiring mine operators to refill open pit mines when they complete operations, particularly if the mines are near Native American cultural sites. Such backfilling is one of the best-known methods of preventing the massive toxic contamination that can accompany open-pit mines. Glamis argues that the actions of the United States (in delaying the permit) and California (in requiring backfilling) violate its rights under NAFTA and is using the investment rules to demand $50 million in compensation. If Glamis’s claim is successful, it would set a dangerous precedent that corporate profits take precedence over the rights of Indigenous communities.

Undemocratic Decisions
The threat posed by international investment rules is not limited to the special protections they give multinational corporations. The processes by which the cases are resolved also undermine many traditional safeguards against abuse.

Before the new investment rules came into effect, investors could not sue governments directly for violations of international agreements; an investor would have to convince its government to bring a challenge on its behalf. This practice allowed governments to filter out challenges that could undermine rights considered important to protecting the public interest. Thus Glamis’s claim might have been prevented because Canada, Glamis’s home nation, might have been unwilling to support a challenge establishing a precedent that would undermine its ability to protect the rights of its large Indigenous population.

International law also generally requires claimants to take their claims to national courts before using international ones. As in the Glamis and Metalclad cases, disputes about domestic law often underlie investment challenges. National courts are much better qualified to resolve such questions than international tribunals made up of foreign lawyers.

Domestic courts also provide an important element of democratic legitimacy to disputes. Domestic judges have a much better understanding than international tribunals of the public policy concerns underlying government actions. Because their processes are generally open to public scrutiny and participation, concerned individuals and organizations can ensure that the courts do not ignore important points. However, the protections provided by public participation are unavailable in international investment disputes, which are often resolved in secrecy and have only permitted minimal public participation.

Future of Free Trade
Decisions ordering governments to pay millions of dollars to foreign corporations have not stemmed the tide of nations adopting these investment rules. To the contrary, the United States and other governments are pressing for the inclusion of the rules in numerous new free trade agreements, including the Free Trade Area of the Americas agreement, which would apply to every nation of the Western Hemisphere but Cuba.

Foreign investment can play a valuable role in the sustainable development of nations around the globe. According to World Bank economists, developing nations can attract foreign investment without accepting the rules presently being advocated by multinational corporations. Nations must adopt investment rules that explicitly guarantee their ability to protect the environment and other fundamental public values. Human rights should always take precedence over corporate profit.

Martin Wagner is managing attorney for the International Program at Earthjustice (www.earthjustice.org), a public-interest environmental law firm. Alyssa Johl is the Program’s research associate. The International Program has been instrumental in opening international investment disputes to participation by environmentalists and other advocates of the public interest.