Why Are Some Trade Agreements ‘Greener’ than Others?

NAFTA versus the European Union


The North American Free Trade Agreement (NAFTA) and the European Union (EU) have done much towards erasing borders and boundaries between nations in the name of free trade. This movement towards a new global era, however, raises concerns on the environmental front. An examination of two toxic disposal controversies – one in Mexico and one in Greece – serves to illuminate NAFTA’s and the EU’s significantly different takes on environmental regulation.

NAFTA Dumps on Mexico

Concerns about NAFTA and toxic dumping are twofold. The most obvious problem is one of increased waste production with decreased accountability. Glaring examples can be seen in the industrialized maquiladora border region, where Mexican factories produce goods for US consumption with significantly less regulation than north of the border.

In theory, all waste generated from materials in these factories must be returned to the country from which the raw materials originated, a requirement stemming from Article 55 of the Mexican Environmental General Law and the 1983 La Paz Agreement.

Indeed, thousands of tons of hazardous waste are returned to the US each year, mostly to California and Texas. Much of this waste, however, never makes it over the border and is illegally dumped, creating serious health and environmental risks.

The current debate regarding NAFTA and hazardous waste has focused on local sovereignty rather than unregulated production. Mexico produces an estimated 10 million tons of hazardous waste annually. According to Mexico’s National Ecological Institute (INE), only 12 percent is ultimately processed in a legitimate manner, with the rest illegally finding its way into municipal drainage systems, landfills, rivers or abandoned lots.

Mexico possesses only one officially licensed disposal plant. Until more are constructed, any increased regulations relating to hazardous waste disposal will be rendered irrelevant.

In January 1993, the Delaware-based Metalclad Corp. sought to capitalize on this opportunity by purchasing a chunk of land near the city of Guadalcazur as the site of a hazardous waste landfill. The company was issued an INE permit, which authorized the expansion of annual processing capacity to 360,000 tons within two years. But as Metalclad proceeded with investment and development, opposition mounted. Before the plant could officially open in 1995, it was shut down by protests.

Metalclad was forced to abandon its assets, and insult was added to injury in 1997, when the departing state governor declared the plant property to be in the confines of a newly established ecological preserve.

Instead of seeking compensation in a Mexican court, Metalclad demanded arbitration under NAFTA’s Chapter 11, a controversial provision that allows investors to sue foreign governments. Metalclad argued that under NAFTA, Mexico was responsible for the conduct of its political subdivisions.

In August 2000, a three-man NAFTA dispute tribunal met in secret and found in favor of Metalclad. The panel (which is not required to provide any public record of its deliberations) ruled that NAFTA’s requirements for “fair and equitable treatment” of investments had been violated and that failure to allow construction of the plant was “tantamount to expropriation without compensation.”

Furthermore, the tribunal found that the Mexican government itself had “failed to ensure a transparent and predictable framework for Metalclad’s business planning and investment.” Mexico was ordered to pay Metalclad $16.5 million (plus interest) in damages.

What makes the Metalclad ruling particularly disturbing is that the arbitration panel ruled that the decision to operate hazardous waste processing plants rested solely in the hands of the Mexican federal government. State and municipal environmental concerns were characterized as “incidental interference with the use of property.”

In an October 27, 2000 New York Law Journal essay, Stephen L. Kass and Jean M. McCarroll note that the Metalclad decision “caused concern among environmentalists in all three NAFTA countries… because of the panel’s overly broad language and its apparent downgrading of ’environmental concerns’ that conflict with investors’ expectations.”

With the support of the Canadian provinces of Ottawa and Quebec, as well as the Vancouver City Council, Mexico appealed the tribunal’s decision in a Vancouver high court. This marked the first time a NAFTA-related decision had been challenged.

On May 7, 2001, in a mixed ruling, the court ordered Mexico to pay Metalclad damages but scolded the three-man tribunal for going “too far” in interpreting how much protection from government policy NAFTA grants to private companies.

Metalclad Chief Financial Officer Anthony Dabbene called the court’s decision a loss for his company. “Mexico won, in that Chapter 11 can’t hurt them as much anymore,” Dabbene stated. “Our case has shown it is almost frivolous to pursue your rights.” Dabbene now doubts that Metalclad will ever recoup its estimated $20 million investment.

NAFTA’s Regulatory Process

The NAFTA environmental regime’s capacity to cope with trade-related challenges suffers from fundamental impediments. Under NAFTA, domestic environmental laws should not discriminate against trade; thus NAFTA’s dispute settlement provisions allow firms to challenge environmental regulations. Since these rules obligate governments to compensate investors for regulations that expropriate an investor’s future property, states and provinces may retreat from imposing tough environmental regulations out of the fear of penalization.

Flaws in procedures and programs also impair NAFTA’s environmental institutions. Restrictions on Commission for Environmental Cooperation’s (CEC) autonomy, problems with its citizen submission and government-to-government dispute resolution processes, are hindrances to its effectiveness. The government of Mexico, for example, has vowed to withhold its support for CEC programs contingent on external approval of the commission’s projects.

Under the North American Agreement on Environmental Cooperation’s (NAAEC) Articles 14 and 15, citizens are allowed to instigate investigations of alleged non-enforcement of domestic environmental laws. Unfortunately, these citizen-initiated complaints face numerous procedural hurdles and may be terminated by the commission. Rules of procedure have not yet been established for resolving government-to-government disputes under NAAEC’s Chapter V – a process that could actually result in penalties – rendering this highly publicized provision virtually toothless.

The Border XXI Program, which shoulders the burden of border area environmental management, has generated some useful initiatives, with 127 projects currently on its docket. Yet Border XXI remains a morass of programs dominated by federal agencies on each side of the border. Projects are moving in haphazard fashion and are contingent on available funds.

All these post-NAFTA initiatives suffer from governmental neglect. None have been adequately funded. The CEC has limped along on $9 million annually (down from the $15 million originally promised). CEC’s US staffing is the most inadequate of the three governments.

The Border Environmental Cooperation Commission’s operating fund has been in jeopardy from the start. Financing for its certified projects though the Environmental Protection Agency (EPA) and North American Development Bank (NADBank) is also threatened.

Holding Greece Accountable
The European Union (EU) offers an alternate example of environmental regulation in a regional trade organization. The EU’s April 7, 2000 decision to fine Greece highlights the contrast between European and North American trade regimes, their institutionalized environmental protections, and the corresponding environmental enforcement efforts.

Greece was the first nation to be fined under Article 171 of the European Community Treaty, which gives the Court of Justice the right to fine nations delinquent in establishing firm plans for waste disposal. Greece has allowed toxic dumping to continue on the island of Crete despite charges from the local community that the pollution was damaging the environment.

The waste, which was being dumped at the tip of the Kouroupitos River near the city of Chania, came from hospitals, common sewage and industrial sources. Unable to dispose of or recycle the waste, Greece was in violation of a 1981 directive requiring that dangerous waste be disposed of “without endangering human health or the environment.”

The Commission of the European Communities, a region-wide oversight board, challenged the Greek government for not adequately protecting its citizens from health and environmental risks. The fact that the Greek government could not find a site for the waste disposal facility was ruled irrelevant by the Court of Justice because treaty obligations were binding regardless of internal conditions.

‘Upward Harmonization’

The directive’s sweeping nature provides an example of “upward harmonization” in environmental standards. The EU provides its member states with a right to ban imports from other member states that do not reach domestic levels of health, safety or environmental protection. In order to continue the free exchange of trade within this context, the EU has engaged in a massive exercise to gradually harmonize member states’ protection by raising them all to an equal level.

The EU’s firm response to the waste problem surprised Greece, and it has cautioned the rest of Europe against violating EU treaties. The fines in Greece have reverberated throughout Europe, causing EU members and prospective members to consider their own shortcomings in abiding by environmental regulations.

The industrial waste problem remains unsolved and no comprehensive waste disposal plan exists. The Greek government now makes monthly payments of 20,000 euros ($17,491) to the European Union for each day that it infringes on the environmental and health integrity of the Chania region with illegally dumped waste.

The fines levied against Greece illustrate a concern for protection of the environment throughout EU territory – concerns often neglected in traditional trade treaties.

While NAFTA regulations have served only to maintain (or even degrade) domestic environmental protection, the EU’s upward harmonization has maintained the high standards in its greenest nations – like Germany. EU landfill regulations are only one example of strict regulations typical of Germany’s legislation that were instituted throughout the EU in order to raise every member state to an equal level.

The landfill legislation is a revealing example of the overall trend of strong EU environmental policy. In marked contrast to NAFTA’s tacked-on environmental protections, the EU’s trade-environment rules are well developed and environment-friendly.

There are several explanations for this general policy of upward harmonization: the large influence of green-friendly Germany over EU policy; the centralized legislative control of the European Parliament; and the expansive interpretation by the European Court of Justice of the “least trade-restrictive means necessary” clause of trade block treaties.

Germany’s influence is the result of the EU’s use of qualified majority voting (QMV) and the German economy’s large market power. QMV is a form of voting that grants representation to each member state on a population-weighted basis, rather than giving each member nation one representative. Therefore, the use of QMV in the EU guarantees Germany considerable sway because it has the largest population of any EU member state. Because of its rich markets, Germany also has the ability to threaten or encourage poorer member nations into agreeing to higher regulation standards.

During the mid-90s debates over auto-emissions standards, for instance, Germany repeatedly threatened to shut its markets to automobiles that did not meet German emission standards, which would have been disastrous for outside car companies. Germany would only accept imported cars if the EU significantly strengthened its standards. Under this pressure, the EU eventually did legislate tougher auto regulations.

With Germany’s almost unparalleled levels of environmental protection and the domestic influence of the German Green Party, German leadership in the EU has given a distinct green tinge to the block’s policies. Germany’s insistence on high levels of environmental protection has spread throughout EU member states.

This push for environmental protection is given added weight because, unlike NAFTA regulations, EU law enjoys unqualified supremacy in all member states. This gives the EU Parliament in Brussels the ability to legislate environmental standards that must be enforced by the courts of all member nations – even if the national legislature is unwilling to pass similar domestic regulation.

NAFTA was not designed to legislate new standards. NAFTA regulations only have the ability to tear down national legislation to a uniformly low level through Chapter 11 court cases. The EU’s legislative authority, on the other hand, allows it to uniformly raise European environmental standards.

Examining the sources of environmental protection within the EU indicates that the further development of environment-friendly trade can only take place along regional paths. In a small enough area, nations that are strong proponents of environmental protection can spread their influence to “green” trade treaties and pull other nations’ standards up.

Looking ahead, the Free Trade Agreement of the Americas (FTAA) poses additional dangers. The FTAA draft, as it now stands, contains no safeguards for the environment. It is a vital time to look back at what has and has not worked in the examples of NAFTA and the EU in order to increase awareness of the environmental issues that can and will affect all of us in the years to come.

This investigative report was prepared by Jung Lah, Martha Roberts, Ian Monroe, Dan Serres and Veen Dubal in collaboration with EIJ and Stanford University Consulting Professor Armin Rozencranz.

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