Trade is no longer primarily about tariffs and quotas. It's about changing domestic laws: Representative Robert Matsui

By Margot Roosevelt, Santa Monica, Time Magazine, Vol.159 no.12, 25 March 2002

In Santa Monica, a beach town known for its movie stars, the sun shines almost every day, palm trees sway on the boulevards—and the groundwater is poisoned. All over town, ugly drilling rigs mounted on trucks are boring 300-foot holes to trace the plumes of a pollutant that has leaked from the underground tanks of gasoline stations. The culprit: methyl tertiary butyl ether (MTBE), an additive that makes gasoline burn cleaner but one the U.S. Environmental Protection Agency has classified as a potential carcinogen. Half of Santa Monica's water supply is undrinkable—MTBE makes water taste like turpentine—and the city (pop. 85,000) faces a $300 million cleanup that could take as long as 30 years. As lawsuits against 18 oil companies drag on, California has ordered a phaseout of the chemical, and a dozen other states have followed suit.

If this were an ordinary tale of one more controversial pollutant, it could be resolved in U.S. courts. But the MTBE conflict has exploded into an international fistfight, a test case for globalization and a key issue in President Bush's effort to win new trade-negotiating powers from Congress next month. That's because METHANEX, the Canadian company that makes a key ingredient of MTBE, is challenging California's ban under the 1993 North American Free Trade Agreement. The case has raised doubts about whether a state can protect its drinking water as it sees fit. Do such health regulations amount to a trade barrier?

Methanex wants U.S. taxpayers to compensate it for $970 million in profits it would lose as a result of a California MTBE phaseout. CEO Pierre Choquette asserts, We believe the ban of MTBE was politically motivated to favor the U.S.-made gasoline additive ethanol and has no scientific merit. The company's director of investor relations, Brad Boyd, says, Time California should make sure its underground gas tanks don't leak. That's what would protect the public.

The issue will be decided, under terms of international treaties, by a panel of arbitrators, chosen in this case by the U.S. State Department and Methanex, meeting behind closed doors. A U.S. loss could be challenged in federal court—but only on narrow procedural grounds. Critics fear that a Methanex win would upend the principle that the polluter pays. Instead, the polluter would be paid. A California senate committee questioned whether hundreds of state and local laws—from fishing-fleet fees to truck-inspection rules to a preference for recycled paper—could be challenged by foreign investors. Says state senator Sheila Kuehl: A secret tribunal is going to decide whether a private company can trump laws passed by a democratically elected government.

The Methanex case is complicating Bush's efforts to win trade promotion authority, which would require Congress to vote yes or no, without amendment, on any treaty the President offered. The idea is to protect hard-bargained agreements from pork-barrel politicking. The bill passed the House by only one vote last December, as even longtime free traders worried about the potential threat to the U.S. of the Methanex case and other investor challenges. Waving 5,000 pages of trade agreements, Representative Robert Matsui, a California Democrat, argued that new treaties could affect federal laws on matters from food safety to monopolies. Trade is no longer primarily about tariffs and quotas, he said. It's about changing domestic laws. In the Senate, Massachusetts Democrat John Kerry wants to amend the bill to make it harder for companies to file claims. NAFTA was never intended to infringe on U.S. sovereignty in such a way, he said.

The stakes are high. The Administration wants to extend NAFTA to 31 more countries in Latin America. If investor protections are also offered through the World Trade Organization, Methanex-style suits could spread through the global trading system. That would open the U.S. to corporate claims from scores of countries, but the effect on Third World nations might be even more dramatic. Could a developing country stand up to a timber giant wanting to clear-cut the rain forest? A multinational retailer flouting labor laws? Says Mary Bottari, of Public Citizen's Global Trade Watch, a liberal activist group: The mere threat of a vast damage award could make poorer nations concede before the fight.

American businesses want trade treaties to protect their property from seizure abroad. Says Stephen Canner, vice president of the U.S. Council on International Business (USCIB): If there's a taking of property, a government has to pay. NAFTA's investor clauses were strengthened partly because American investors did not trust Mexico. The idea was to protect factories from being taken over in some banana republic, says Segundo Mercado-Llorens, a labor lobbyist. No one contemplated these provisions would be used to invalidate our environmental laws.

Methanex further disputes California's reasons for banning MTBE, saying benzene and other gasoline components are more hazardous. It accuses California Governor Gray Davis of ordering the ban because he received campaign contributions from a U.S. manufacturer of ethanol. Davis denies the charge. State officials cite studies showing that MTBE causes cancer in lab animals and symptoms such as headache and nausea in humans. The federal EPA is also considering a ban. Unlike other gasoline components that stick to the soil when they leak, MTBE is unusually solvent, escaping from even reinforced tanks and moving rapidly into nearby water wells. Water experts say ethanol, a corn derivative, would be less harmful, but California is lobbying Congress to let gasoline be sold in the state without either MTBE or ethanol.

The U.S. State Department says the Methanex claim does not remotely resemble the type of grievance envisioned under NAFTA. But the Canadian firm is only one of more than a dozen multinationals that have taken advantage of the treaty's broad provisions. The LOEWEN GROUP, a Canadian funeral conglomerate, wants the U.S. government to pay $725 million in damages because a Mississippi jury harbored what Loewen claims were anti-Canadian, racial and class biases when it found the company guilty of contract fraud. METALCLAD, a California firm that was prevented from opening a toxic-waste plant in Mexico, won $15.6 million from that country. UPS is seeking $160 million from Canada because its public postal service competes unfairly against the Atlanta-based firm.

The USCIB's Canner calls investor rights leveling the playing field. But if the global field is leveled, can Mississippi punish fraud? Can Canada subsidize its postal service? Can Mexican towns ban toxic waste? These questions go to the heart of the debate over globalization. And they're being decided right now, behind closed doors.