Does NAFTA trump countries' laws?

Free trade is supposed to be about leveling the playing field and clearing out the thicket of unfair regulations and tariffs.

But seven years into the North American Free Trade Agreement, the three signatory countries are still wrestling to get the right balance between free-trade principles and local regulation.

Take the case of Metalclad Corp., a hazardous-waste treatment company from California. The firm bought a landfill in Guadalcazar, in central Mexico, with plans to build a waste-treatment center. The company, which already had plants in 11 Mexican states, obtained the required federal permits and started building.

But by the time Metalclad completed the $20 million, state-of-the-art treatment plant in 1995, things had soured. Protesters had demonstrated against the plant, and the state governor designated the site an ecological preserve. Metalclad was forced to withdraw, and eventually it pulled all its business out of Mexico.

Metalclad sought redress under a controversial provision of NAFTA. Chapter 11, which is designed to protect investors from arbitrary or underhanded treatment by governments, allows companies to sue governments directly. Metalclad argued that restrictions put on its property were "tantamount to expropriation" and won $16.7 million last August. In February, Mexico appealed the judgment to a court in Vancouver. A final decision is expected in coming weeks.

This case comes at a critical moment. President Bush has made a hemisphere-wide free-trade pact a pillar of US foreign policy. Later this month, 34 leaders from Canada to Chile will gather in Quebec City to consider how to make it a reality. And that's raising anew questions about whether NAFTA dispute mechanisms such as Chapter 11 are working.

NAFTA's impact

Some free-trade critics say the Chapter 11 provision gives too much power to investors. Last week, Canadian activists and labor leaders filed a constitutional challenge to the provision in Ontario's Superior Court of Justice. The Council of Canadians and the Canadian Union of Postal Workers reportedly argued that Chapter 11 undermines their government's right to protect the safety, health, and well-being of its citizens through the regulatory systems and court.

But advocates say in the world of free trade, investors need the protection of Chapter 11.

In its judgment, the NAFTA panel issued a broad ruling that Mexico's treatment of Metalclad amounted to a denial of "fair and equitable treatment" - which is the benchmark of fairness in the trade world. "They invited us, they welcomed us, and then they delayed and obfuscated," says Grant Kessler, chief executive of Metalclad, noting that his case has been cited in some 30 subsequent legal actions.

But free trade is about encouraging investment and economic development. And, says Fred McMahon, an analyst at the conservative Fraser Institute in Vancouver, the Mexican governor's actions are just the kind that will discourage the outside investment Mexico needs.

This case has nothing to do with limiting local autonomy, he says, but "everything to do with getting sensible regulations in place in the first place."

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