CAFTA's Chapter
10: "A
Threat to Local Autonomy"
May 18, 2004
The issues surrounding "Chapter
10" of the Central American Free Trade Agreement
are some of the most important and most complicated
of this accord. In the thorny and legalistic
language of this section, local and national
governments lose their authority to invest in
local businesses and to protect the environment.
Tying the Hands
of Government
The laws established in this
section of the agreement deal with investment
regulations between states and investors;
we would like to highlight three of our concerns
pertaining to Chapter 10. The
first concern arises from the fact that Chapter
10 does not allow governments to show a preference
for local industries.
Secondly, Chapter 10 eliminates a country's
ability to direct investment within its boarders.
Finally, Chapter 10 threatens local laws,
particularly labor and environmental laws.
No Local Preferences
Chapter 10 does not allow governments
to discriminate between investors or companies based on their nationality,
i.e. the Salvadoran government can not show
a preference for Salvadoran companies over their
U.S. counterparts
and vise versa.
There are many reasons
to oppose CAFTA. But in the investor-to-state
mechanisms laid out in Chapter 10 many
of these themes come together. |
Example: If
a Salvadoran construction firm is competing
to build a major highway against a U.S. firm, the Salvadoran
government cannot show any preference for the domestic company. The selection criteria
for the Salvadoran government is limited to
price and quality. Therefore,
were the government to select the Salvadoran
firm, while slightly more expensive, in order
to invest in a local industry, the government could be sued by
the U.S. company.
No Control
over Foreign Investment
It has been shown that foreign
investment is an essential ingredient for creating
jobs, transferring technology, and bolstering
local industry - but only when it is properly
directed.
Under CAFTA, governments will
have little to no control on the investment
practices of foreign companies.
In the past, countries have bolstered
domestic economies by creating regulations and
/ or incentives to encourage foreign investors
to use raw and secondary materials produced
within their borders.
Example: When
the US construction
company mentioned above comes to El Salvador, it will be free
to import all its materials from the US, hire Salvadorans
for only the low-paying jobs, while exporting all of its profits
back to the U.S. While
such a project could strengthen or even give
birth to numerous complimentary industries,
under CAFTA the impact of such projects is greatly
diminished.
Every time a country has successfully
used trade to spark development, it has done
so by managing the way investments were made
within its borders to encourage the growth of
home-based competitive industries. Taiwan, India, Chile and
China are
all great examples of this. Unfortunately, CAFTA
ties the hands of its governments, making it
impossible to create a development strategy
unique to each country.
Investors' Rights, Sovereignty,
and the Environment
The murky sections of Chapter
10 that specifically discuss investor-to-states
interaction have put a priority on investors'
rights over local citizens and the environment.
While local, state, and national governments
are allowed to draft laws that protect the environment,
in doing so they open themselves up to heavy-handed
law suits.
Chapter 10, modeled after NAFTA's
chapter 11, legislates that governments cannot
take away private property, either through outright
seizure or indirect confiscation. Private property,
in this context, is understood as not just a
company's assets, but also its potential future
profits. The indirect confiscation
clause is intended to protect businesses from
future governmental policies which could threaten
profits.
Example: Suppose
the Salvadoran government bans the cement used
by the U.S. construction
company because it contains chemical X,
which they discover
is polluting the ground water.
The cement provider, also a U.S. company, claiming
"loss of property" can use Chapter 10 to sue
the Salvadoran government for the lost revenue
which results from this new law.
Under NAFTA's Chapter 1 companies
have already successfully sued municipal governments
for up to $15.6 million, and are now litigating
law suits against Canada, Mexico, and
the US for
up to $1 billion. In one
of the cases, a Mexican town was sued for creating
environmental regulations which prohibited a
U.S. corporation
from building a toxic-waste dump in their community.
In another case, the state of California was
sued by a Canadian corporation for $800 million
for prohibiting the use of a gasoline additive
that was found to pollute ground water.
It is worth noting that the
trade lawyers who make up the tribunals that
deliberate over these cases are not elected
officials. Also, cases are
held behind closed doors
where the proceedings, the final
ruling aside, are not made public.
The Cornerstone
of CAFTA's Flaws
There are many reasons to oppose
CAFTA. But in the investor-to-state
mechanisms laid out in Chapter 10 many of these
reasons intersect. It is in Chapter 10 that
investors' rights are codified above those of
local communities. It is there that countries
trade away the ability to direct foreign investment.
And it is there that the United States has as much at stake as Central
America. In
short, Chapter 10 is reason enough to oppose
the passage of CAFTA.
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