U.S. Corporation Wins Right to Build Toxic Plant in Mexico

by Danielle Knight

The tribunal found that Mexico violated NAFTA's Chapter 11 investor provisions by not allowing the California-based Metalclad Corporation to open a hazardous waste treatment and disposal site in San Luis Potosi, a state in central Mexico. Local government opposition to the project, says the tribunal, amounted to expropriation of the company's profits.

The tribunal's decision is increasing concern that trade accords and institutions like the World Trade Organization (WTO) can be used to trump local and national laws.

"It's a nightmare," said Dan Seligman, director of the Sierra Club's sustainable trade campaign.

Seligman, who helped organize the protests last year in Seattle against the WTO, said the tribunal's decision is a "wake-up call" to anyone who cares about environmental protection.

While the provisions in Chapter 11 were designed to ensure a corporation's investment would not be expropriated, they have become a strategic offensive weapon against environmental, public safety and health laws, he said.

"What we've seen in this case is that a corporation can sue governments successfully under NAFTA rules," said Seligman.

The facility was ready to begin operation in 1995 but public protests against the plant prompted local authorities to begin investigating the potential environmental impacts of the treatment site.

Local residents said they were never consulted about the facility by either the federal or state governments or Metalclad, and vehemently opposed locating a toxic waste dump in their backyard.

When an environmental impact assessment revealed that the site lies atop an ecologically sensitive underground alluvial stream, the governor refused to allow Metalclad to reopen the facility. Eventually, the governor declared the site part of a 600,000 acre ecological zone, despite federal support for the project.

Metalclad claimed that this action effectively expropriated its future expected profits and sought $90 million in damages. Local environmental activists note that this figure is larger than the combined annual income of every family in the state where Metalclad's facility is located.

The company filed its NAFTA claim in January 1997. Hearings were held last year and since then nothing was heard until the announcement August 30.

The three-judge NAFTA tribunal, under the International Center for Investment Dispute Settlement, an arm of the World Bank, gave the Mexican government 45 days to begin making the $16.7 million payment to Metalclad. If it does not pay by that time, 6 percent interest, compounded monthly, will be added to the award.

Grant S. Kesler, president and chief executive of Metalclad, said the $16.7 million was a token sum and did not reflect the value of the project.

"The biggest losers of all are the people of Mexico who continue to have to live in a country that produces 10 million tons of hazardous waste a year and had only one facility in the whole country to handle it," he told reporters.

The Metalclad case is just one of several cross-border disputes between companies and the three NAFTA countries. So far, at least seven cases challenging domestic environmental policies have been filed by corporations under the Chapter 11 clause in the three NAFTA countries.

In one instance, the Canada-based Methanex Corporation filed claim against the United States, arguing that the state of California's decision to phase out the use of its gasoline additive methyl tertiary butyl ether (MTBE) cost the company $970 million.

California's governor, Grey Davis, ordered the use of MTBE halted by the end of 2002 after studies revealed unusually high -- and potentially harmful -- levels of MTBE in California's drinking water supply. Methanex's claim is still pending.

In another case, the U.S.-based Ethyl Corporation attacked a Canadian ban on the inter-province sale and import of a gasoline additive it produces known as MMT.

Ethyl originally claimed $250 million in damages for expropriation, or seizure of its potential profits. In July 1998, Canada withdrew the ban and paid the company 13 million in damages.

"Anytime any investment is infringed upon by regulation, anytime any worker safety protection puts any burden on a company, these companies may use this Chapter 11 system to directly sue sovereign governments -- it's crazy," said Mary Bottari of Global Trade Watch, an advocacy group affiliated with Public Citizen.

Unfortunately, added Seligman, the provisions under Chapter 11 are likely to be expanded in new trade accords, including the Free Trade Area of the Americas agreement, or FTAA.