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Our Future Under the Multilateral Agreement on Investment

In January 1997, the U.S.-based waste disposal company Metalclad Corporation filed a complaint with the International Center for the Settlement of Investment Disputes (ICSID), alleging that the Mexican state of San Luis Potosí violated a number of provisions of NAFTA when it prevented the company from opening its waste disposal plant. Metalclad took over the facility, which had a history of contaminating local groundwater, with the obligation that it clean up preexisting contaminants. After an environmental impact assessment revealed that the site lie 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. Metalclad claims that this action effectively expropriated its future expected profits and seeks $90 million in damages. This figure is larger than the combined annual income of every family in the county where Metalclad s facility is located.

Environmental zoning has been attacked, especially in the U.S., by "property rights" activists (also known as the "takings" movement), who seek compensation for complying with environmental regulations. In a vein similar to that of Ethyl Corp.s claims, Metalclad is claiming that the zoning law constitutes an effective seizure of the company s property a seizure that, under the property rights extended by NAFTA, requires that the offending government compensate the company. While Metalclad would have a very difficult time convincing a U.S. court that the "taking" is compensable, the broad language of the NAFTA expropriation provision sets a higher standard for investor rights.

This case demonstrates how responsibility for certain non-market-related risks of investment could be shifted from companies to governments. Without the NAFTA s strong provision on expropriation, Metalclad alone would be forced to assume the risks of investment and would have learned a valuable lesson about conducting the proper environmental assessments before committing significant resources to an investment. Under the rights conferred by NAFTA and the expanded version proposed in the MAI -- the Government of Mexico could be forced to shoulder the risks and costs of Metalclad s investment should the company win its suit.

The Metalclad case raises other alarming questions. Metalclad claims the Mexican federal government is (unofficially) encouraging the company s NAFTA lawsuit so that it can deflect the political fall-out of forcing the state to open the facility. The local community -- still reeling from water contamination resulting from the illegal storage procedures of the facility s previous owners -- was never consulted about the possibility of reopening the facility by either the federal or state governments or Metalclad, and vehemently opposes locating a toxic waste dump in its area.

If Metalclad s claim that the Mexican federal government supports the suit is indeed accurate, this case raises the disturbing possibility that investors can use their rights to collude with governments to force unwanted, or even dangerous investments on unwilling populations. A spokesman for Metalclad states, "I don t know of anything the federal government could have done and didn t do, short of sending the army in" (Millman, Joel. "Metalclad Suit is First Against Mexico Under NAFTA Foreign Investment Rules," The Wall Street Journal, October 14, 1997, p. A2, A11.). It remains to be seen whether the facts bear out the claims and counterclaims. But until this case is decided, MAI negotiators must keep in mind the possibility that some national governments could use the agreement to run roughshod over the will of their citizens.

This case also raises the more general question of how federal governments will enforce the obligations of states and localities through the MAI. Since the U.S. and other countries intend to bind states and localities to the agreement, state governments are extremely concerned with preserving their sovereignty over public interest regulation as well as their immunity from prosecution by foreign sovereigns. While investors will likely be able to sue only signatories to the MAI meaning federal governments federal governments have a variety of means by which to force states into compliance. With this in mind, the MAI could have profound implications on state lawmaking in the areas of the environment and labor, especially since state and local governments cannot defend their own laws from investors challenges, but must rely on the federal government, which may or may not be committed to the local legislation to do so.

Dispute proceedings began in May 1997. Metalclad filed its complaint, termed a "memorial," which is reportedly several thousand pages in length. In February 1998, Mexico filed a response. The tribunal can now either issue a decision, call for a hearing or request more documentation.

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