The Environment and the MAI


A Presentation to the Canadian House of Commons Sub-Committee on International Trade, Trade Disputes and Investment

Barry Appleton, LL.B., LL.M.,

Appleton & Associates International Lawyers

November 18, 1997

The Multilateral Agreement on Investment

The Multilateral Agreement on Investment ("MAI"), is a broad based international investment protection agreement currently being negotiated by the member countries of the Organization for Economic Co-Operation and Development ("OECD"). While the Agreement is not yet final, the negotiations have already produced the basic framework of a final text.(1)    The environment is a subject that is basically not discussed in the MAI. Other than bracketed wording in the preamble of the agreement, and a reference in a limited exception to certain performance requirements, this Agreement is silent on environmental matters.

The tension between free trade and environmental protection has never been greater as governments have been forced to deal with the seemingly conflicting goals of accommodating environmental concerns while still expanding trade liberalization. Attempts by states to address environmental issues have often run into two problems: either the measure taken by the government has been accused of constituting an arbitrary means of discriminating against non-nationals; or in dealing with a problem that extends beyond the geographic borders of the country, the measure has attempted to impose burdens upon foreign entities as well as on domestic ones.

The conflict between trade and the environment is complicated by a lack of international consensus on environmental measures. This lack of international consensus has often resulted in countries taking unilateral measures to deal with environmental issues that are critical to them.(2) Against the backdrop of countries finding an increasing need for taking environmental measures, one finds an ever expanding framework of international trade agreements.

Except for a very specific exemption from the performance requirements obligations, the MAI does not contain any environmental exceptions. In addition, Canada has not included any reservations within the MAI that would permit governments to take measures to conserve and protect the Canadian environment. The environmental exemption in the MAI permits a government to require domestic content or provide a preference to local goods or services only if:

the measure is not arbitrary or unjustifiable;
is not a disguised restriction on investment; and
is necessary to protect human, animal or plant life or is necessary for the conservation of living or non-living exhaustible natural resources.

The MAI does not contain any general exception clause that would clearly permit governments to take environmental measures that could otherwise offend the many other obligations in the MAI. Without the inclusion of broad easily accessed exceptions or reservations, the MAI's broad investment rules may result in new limits on the ability of governments to freely meet environmental challenges. There are a number of types of environmental measures that could trigger liability on the part of governments under the MAI. Some of these measures include:

  1. Remediation orders to prevent toxic seepage.
  2. Changes to existing concession licenses to protect fisheries, flora or fauna.
  3. Changes to land use regulations that would reduce the value of property for a foreign investor.
  4. Preventative measures taken to protect public safety that caused loss or harm to foreign investors.
  5. Requirements that only environmentally-acceptable resource extraction techniques be used that would increase the cost of extraction.


The Experience of Environmental Exceptions in Trade Agreements

It has been suggested that there will be no need to make reservations to the MAI for the environment because the agreement may contain a number of environmental exceptions. However the use of environmental exceptions in international trade agreements has demonstrated that they are not an effective means for governments to take measures to protect the environment.

GATT trade dispute panels have interpreted these GATT exceptions narrowly. One of the key concerns over the use of GATT exceptions is their effect which can lead to the distortion of international trade. Thus, measures taken by a country which arguably overshoot their purpose have not been accepted to fit within the trade law exceptions.

For example, to justify an environmental measure governments must prove the "necessity" of a measure. This term was examined in some detail during the GATT Panel on Section 337 of the U.S. Tariff Act. The panel held that a party could not justify its measure as being "necessary" if there could be an alternative measure which could reasonably be expected to be used and which was not inconsistent with GATT obligations. Furthermore, if no GATT-consistent measure was reasonably available to the government, it would be necessary to choose a measure that had the "least degree of inconsistency with other GATT provisions."(3) In essence, the GATT established that in order to rely on a GATT exception, it is up to the justifying party to establish that the measure was the least-trade burdensome alternative available.

The necessary test was examined when Thailand attempted to rely on GATT Article XX(b) to ban foreign cigarettes. The Thai Government imposed an import ban, quantitative import restrictions and discriminatory internal taxes on foreign cigarettes. This issue was raised to a GATT panel which ruled that these broad measures were not consistent with the GATT Article XX(b) exception.(4) The Panel accepted the fact that smoking constituted a serious risk to human health, however the panel did not find that the Thai actions were necessary.(5)

A similar situation was considered in the Canada-U.S. Free Trade Agreement panel on Herring and Salmon,(6) where Canada argued that its export prohibition was made effective in conjunction with restrictions on domestic production, namely, strict domestic production controls limiting the amount of fish caught. The Panel agreed that Canada's fish harvest limitations constituted a restriction on domestic production within the meaning of the GATT Article XX(g). However, in this case, the Panel ruled that the measure was not reasonable as it put too onerous a burden on American fishery workers who had to land their entire catch in Canada for inspection. The panel did suggest that a landing requirement of 20-30% of the catch would have been reasonable under the circumstances.

Finally, in the American Tuna-Dolphin case,(7) a GATT panel dealt with the issue of extra-territoriality. In this case, the U.S. Government passed a law, the Marine Mammal Protection Act,(8) which imposed a ban on all tuna caught by countries using nets that incidentally killed dolphins at a rate 1.25 times higher than the rate of American boats operating in the same waters at the same time.(9) The Government of Mexico challenged this measure as being an import ban that was contrary to GATT Articles XI and XX. Mexico also protested the measure as an extra-territorial regulation of its fishing industry.

The GATT panel hearing this case agreed with Mexico in that the U.S. measure attempted to impose American jurisdiction in areas outside of its jurisdiction. Based on the drafting history of the GATT Article XX exceptions, the Panel held that the GATT Article XX(b) exception could not be used to protect the environment outside of U.S. territory.   Furthermore, the panel also ruled on the "necessary" requirement of the GATT Article XX exceptions. They held that the measure had to be necessary to the product and not to its production process. In other words, the United States could ban all tuna, but not tuna captured by a certain method.

The second GATT Article XX exception that could relate to the environment is Article XX(g). This exception permits Parties to take measures "relating to the conservation of exhaustible natural resources." The 1988 GATT panel on Herring and Salmon (10) held that the term "relating to" meant that the measure had to be primarily aimed at conservation. While this appears to be less strenuous than the "necessary" test contained in Article XX(b), it still imposes a significant burden.

Precautionary Principle

The MAI may include a reference to the Rio Declaration on Environment and Development and Agenda 21 in its preamble. Incorporated in the Rio Declaration is the precautionary principle which states:

In order to protect the environment, the precautionary approach shall be widely applied by States according to their capabilities. Where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation.

In order to comply with the precautionary principle, a government measure must:

(i) be in response to a threat of serious or irreversible damage to the environment;

(ii) be cost-effective;

(iii) be for the purpose of preventing environmental degradation;

(iv) involve some degree of scientific certainty; and

(v) be within the capabilities of the government.

The Rio Declaration is not legally binding. It is a statement of principles based on Agenda 21 and according to which Agenda 21 is to be carried out.(11) As a mere declaration, it has not been signed by any country. Agenda 21 is not legally binding as it states its intention "[t]o promote, through the gradual development of universally and multilaterally negotiated agreements or instruments, international standards for the protection of the environment . . . [and] . . . to ensure the effective, full and prompt implementation of legally binding instruments."(12)

The Permanent Court of International Justice has held that a treaty provision must take precedence over a general rule of international law.(13) This principle was reflected in the recent WTO Panel Report on EC Beef Hormones. In this decision, the Panel held that the precautionary principle could not be used to override the explicit wording of the treaty obligations.(14) Thus, without a clearly stated broad exception or reservation, the investment obligations of the MAI will override environmental measures taken by governments.

What Can Be Done

In each and every conflict between the specific trade obligations contained in a treaty and a narrow environmental exception, the ability of governments to engage in environmental regulation has suffered. It is clear that new international trade agreements must make specific reference to how governments may use their powers over environmental protection in ways that are consistent with these Agreements.

An example of a broad exception clause in the MAI can be seen in the Financial Services section.  Part VII of the MAI contains a very broad exception that allows member countries to fully regulate financial service providers without triggering trade disputes. The "prudential carve-out" reads:

Notwithstanding any other provisions of this Agreement, a Contracting Party shall not be prevented from taking prudential measures with respect to financial services, including measures for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by an enterprise providing financial services or to ensure the integrity and stability of its financial system.

This is a blanket exception that permits governments to take wide-ranging policies for the protection of their citizens. Indeed the only limits on this exception is the limit to the meaning of the undefined term "prudential measures."

It is difficult to comprehend why governments would be careful to ensure that they retained the ability to regulate financial institutions without retaining the ability to regulate public health, safety and the environment. The addition of a simple clause based on the "prudential carve-out" could easily permit governments to maintain their ability to utilize their authority over environmental matters without leaving them subject to situations where they are liable to compensate the polluters.

Conclusion

The goal of environmental protection has suffered from every decision taken by international trade tribunals. This history of loss, including cases involving Canada, clearly indicates that the present wording of environmental exceptions in the GATT is inadequate. However, the MAI fails to contain environmental exceptions that are as broad as the GATT. The MAI environment exception suffers from the same problems as the GATT but covers only one MAI obligation. For every other trade obligation, there is no exception.

Canada has failed to propose reservations to protect the ability of governments to take environmental measures that would otherwise violate the MAI. As a result, Canada has chosen to voluntarily bind itself, its provinces and its municipalities to obligations which protect investments over the environment.

©Appleton & Associates, 1998. All rights reserved.

 

NOTES

Barry Appleton is the Managing Partner of Appleton & Associates in Toronto and New York City. He is the author of Navigating NAFTA: A Concise User's Guide to the North American Free Trade Agreement.   More information on Mr. Appleton can be obtained at http://www.appletonlaw.com and additional information on the MAI is available at http://www.appletonlaw.com/MAI/home.html

1. This presentation is based on the May 14, 1997 draft. DAFFE/MAI (97) 1/REV 2.

2. For example, in 1995, Canada extended its maritime jurisdiction to the entire Grand Banks in order to conserve fish stocks in the wake of extreme fragility. In 1970, Canada also unilaterally asserted jurisdiction to the environmental protection of Arctic waters that were beyond its then-100 mile jurisdiction.

3. United States - Section 337 of the Tariff Act of 1930, adopted Nov. 7, 1989, BISD 36S/345.

4. Thailand - Restrictions on Importation of and Internal Taxes on Cigarettes. GATT Doc. DS10/R, adopted Nov. 1990, BISD 37S/200.

5. In coming to this conclusion, the panel relied on a report from the World Health Organization that found that non-trade discriminatory measures such as product labelling or advertising bans could limit the health risk. Relying on the GATT Panel's interpretation on the term "necessary" in the American dispute on Section 337, the panel in the Thai cigarette case decided that since there was a way of protecting health in a less-trade distorting manner, the panel held that the Thai measures were unnecessary and thus GATT-inconsistent.

6. In the Matter of Canada's Landing Requirement for Pacific Coast Salmon and Herring, Final Report of the Panel under Chapter 18 (Oct. 16, 1989).

7. United States - Restrictions on Imports of Tuna, GATT Panel Report No. DS21/R, (Sept. 3, 1991).

8. Codified in part at 16 USC 1371(a).

9. Trade and the Environment, ECONOMIST, Feb. 27, 1993, at 25, cited in Kelly Jude Hunt, International Agreements in Conflict with GATT-Greening GATT after the Uruguay Round Agreement, 30 INT'L LAW, Spring 1996, at 179.

10. Report of the Panels in Canada - Measures Affecting Exports of Unprocessed Herring and Salmon, adopted Mar. 22, 1988, BISD, 35S/114.

11. Report of the United Nations Conference on Environment and Development, A/CONF.151/26 (Vol. I), Chapter 1 - "Preamble" (adopted 12 August 1992) at para. 1.6. See also, M.F. Strong, "Beyond Rio: Prospects and Portents" 4 Colo. J. Int'l Envtl. L. & Pol'y 21 (1993), in which the author characterises the Rio Declaration as no more than a statement of principles, providing a basis for voluntary cooperation and paving the way for the negotiation of binding agreements. Mr. Strong was UNCED Secretary-General at the Earth Summit, June 1992.

12. A/CONF.151/26 (Vol. III), Chapter 39 - "International Legal Instruments and Mechanisms," at paras. 39.3 (d) and (e).

13. Wimbledon (1923), P.C.I.J. Rep., Ser. a, No. 1.

14. EC Measures Concerning Meat and Meat Products (Hormones), WTO Panel Report No. WT/DS26/R/USA (18 August 1997) at page 202.

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