Home > The Economy > NAFTA’s Chapter 11: The Latest Giveaway

NAFTA’s Chapter 11: The Latest Giveaway

from Jim Stanford

Canada’s federal government made an important announcement this week.  It was kept deliberately quiet: with a news release issued at 4:45 pm on a calm Tuesday in the middle of the late-summer news “dead zone.”  But it should set alarm bells ringing for anyone concerned with the anti-democratic direction of global trade law.  

            Prime Minister Stephen Harper’s Conservative government reached a $130 million out-of-court settlement with the bankruptcy trustees overseeing the restructuring of AbitibiBowater Inc., a failed forestry and paper giant.  The settlement relates to a claim that Abitibi brought against Canada under NAFTA’s notorious Chapter 11 process.  This process is a bizarre kangaroo court in which investors from one NAFTA partner (and only investors – normal people aren’t allowed in) can sue another NAFTA government for actions which are deemed to break NAFTA’s broad investment rights provisions.  If a Chapter 11 tribunal rules against the offending government, it can order damages be paid to the aggrieved investor.

            In its 15 years in existence, the court has interpreted those investor rights clauses very expansively.  Not just outright expropriation is prohibited and subject to penalty.  Any measure which is seen to impose an unfair or unjustified burden on the profitability of a company (whether it has anything to do with the nationality of the investor or not) can be considered “tantamount to expropriation,” and hence subject to penalty.

            In the AbitibiBowater case, the provincial government of Newfoundland and Labrador (led by feisty Premier Danny Williams, a Conservative) took back Abitibi’s timber and water rights in 2008 when that company abandoned its mill that processed wood from that tract.  The company laid off 800 people and destroyed the isolated community of Grand Falls in the process.  Williams’ move was both morally and economically justified: he said if AbitibiBowater wasn’t going to productively use those rights, someone else should have access to them.  The Newfoundland government offered to pay fair value for the real assets (including the plant’s hydro dam) caught up in the action, minus expenses for worker severance and environmental clean-up of the company’s abandoned facility.

            Indeed, today Williams stands by his audacious act, which was hugely popular in Newfoundland.  He recently said, “Of the many things that I’ve done … in government, this is probably one of the actions that I’m the most proud of.”  But Abitibi, predictably, raised a hue and cry.  But they didn’t complain to a Canadian court of law: what Williams’ government did was unusual, but hardly illegal.  Instead, they went straight to NAFTA’s kangaroo court.

            Since NAFTA is an international treaty, it is the federal government who speaks for Canada – even when the claim is directed against a provincial government.  Usually these Chapter 11 cases drag on for years.  Amazingly, however, Canada’s federal officials settled the case out of court this week.  They agreed to pay damages of $130 million, only 6 months after Abitibi formally filed its NAFTA complaint.

            There was no “national treatment” aspect to the seizure of Abitibi’s rights (it was Abitibi’s socially irresponsible actions, not its nationality, that sparked the Newfoundland action).  Indeed, Abitibi is functionally headquartered in Montreal, Canada, and is, for most intents and purposes, a Canadian company (its U.S. “identity” merely reflects a Delaware incorporation – no doubt for tax avoidance reasons).  This makes it all the more bizarre that it could use the NAFTA process (rather than normal courts) to sue its own government.  There should have been plenty of grounds to fight the case as a dramatic over-reaching of NAFTA’s rules (which in theory are supposed to protect one country from discriminating against investors from another country on the basis of their nationality).  Even if Canada eventually lost, it could clearly stretch the process out for years.

            So how do we understand the federal government’s utter and premature surrender, not even bothering to try to defend the Newfoundland actions?  Canada’s strange jurisdictional division of responsibilities comes into play here: it’s the federal government’s responsibility to defend Chapter 11 cases, and even foot the bills.  There is no constitutional way for Ottawa to force Newfoundland to pick up the tab – although Harper threatened this week to try to pass the buck to the provinces for any future Chapter 11 judgements against them.

            The federal government’s expensive white flag will certainly come back to haunt Canada in future Chapter 11 actions.  After all, more claims have been launched against Canada under Chapter 11 than any other NAFTA partner: 28 at last count, claiming total cumulative damages in excess of $14 billion.  (Mexico and the U.S. have each been hit with 19 cases, so far.)  The Abitibi settlement ranks as the largest Chapter 11 payout ever made by any North American government.  Ottawa’s capitulation will clearly encourage more companies to take aggressive action through the NAFTA kangaroo court, over any government action (nationally prejudicial or otherwise) seen to hurt business profits and the interests of any investors, whatever their nationality.

            The only conclusion we can come to is that the hard-line neoliberal Harper government actually wanted to pay this bill, and that’s why they didn’t bother fighting the case.  Naturally they hate the idea of governments taking economic matters into their own hands, like Danny Williams did.  They claim to want to send a signal to global investors that Canada is truly “open for business.”  (Unfortunately in my view, even Williams’ actions haven’t scared off the foreign mining speculators snapping up Canadian resource properties – the latest being the $40 billion takeover war for Potash Corp.)  And they don’t want the Abitibi squabble to interfere with their rush to sign new free trade deals with the EU, Korea, and others.

            Through Harper’s lens, then, $130 million is a small price to pay to reinforce Canada’s full commitment to free trade rules, and free trade ideology.  (So much for this government’s supposed preoccupation with reducing its deficit, at all costs!)  But for Canadians, the bill will only get bigger.  It will get bigger with every new, more aggressive Chapter 11 challenge filed.  With every potential legislation killed by the chilling effect of Chapter 11 (“We can’t do that, we’ll get sued under NAFTA.”).  And with every community that closes down because profit-maximizing foreign conglomerates have no compulsion to consider the social or environmental costs of their decisions – just the way the free trade architects want it.

            Canada should renounce Chapter 11 as an anti-democratic, distortionary, rent-seeking divergence from the genuine processes of trade and investment.  Canadians should be outraged at Ottawa’s $130 million giveaway.  If Abitibi had a genuine complaint, they should take it to a Canadian court (not this unaccountable, shadowy tribunal).  And instead of paying $130 million of taxpayers’ money to a bankrupt company with no promises whatsoever that it will ever create another job in Canada, here are just a few things the Harper government could have done with the money:

  • funded the renovation and retrofit of 5,000 units of low-cost public housing – creating hundreds of construction jobs and alleviating the crisis of under-housing.
  •  funded 370,000 weeks of regular Employment Insurance benefits for Canadian workers (including forestry workers in Newfoundland) who are being thrown off the EI system every week when their benefits expire. 
  • funded 25,000 child care spaces for a year, creating 3000 or more full-time jobs for child care workers.

Pick your own way that a supposedly cash-strapped government should spend $130 million.  You’d be hard-pressed to imagine one more damaging to Canada’s democracy, independence, and long-run economic security than this one.

P.S.  For a full listing of cases filed under NAFTA’s Chapter 11, and decisions rendered, please see the excellent compilation prepared by Scott Sinclair of the Canadian Centre for Policy Alternatives.

http://www.policyalternatives.ca/sites/default/files/uploads/publications/National_Office_Pubs/2008/NAFTA_Dispute_Table.pdf

Scott is working on an update of this table (which currently includes all cases filed up to 2008), which will be published this fall.

  1. August 30, 2010 at 9:30 pm

    This government has to go. It has done enough damage to Canada as it is. The problem is, should we replace it with a Liberal government that doesn’t seem to know where it’s going? Well, at the end of the day, I’d prefer that indecisive Liberal government than the actual undemocratic government.

  2. Podargus
    August 30, 2010 at 10:56 pm

    This situation simply highlights the dysfunctional nature of free trade and globalization.
    National sovereignty has to be paramount otherwise major damage can be done to the economy,industries,citizens and environment of a nation.National sovereignty is not compatible with free trade agreements.

  3. August 31, 2010 at 3:52 pm

    I posted the first part of your article on my website, http://www.albertawest.info, with a link to this blog. Great article. Shows up our politicians and their masters.

  4. Alice
    September 1, 2010 at 10:28 am

    So free trade is free (not for the poor Canadian taxpayers)? What a fallacy – add it to the collection under free market theory.

  5. HL
    October 17, 2010 at 2:29 am

    I think there needs to be some legal analysis to make sense of the situation. Without it, of course it makes no sense, because it is partially (if not mainly) a legal issue.

    First, it is matter of customary international law and treaty (including NAFTA) obligation that we take a corporation incorporated in country A to be a resident of country A (there could be exceptions). So the Antibi qualifying as an American company for the purpose of NAFTA is a norm. Same is true in US – ex. Glamis Gold corp., a Canadian incorporated, but mostly US operated company, successfully applied under NAFTA. No need to get upset for this thus.

    Second,Canadian provinces opted to bind by NAFTA themselves (if I remember correctly…) They wanted NAFTA protection for their residents who invested in US and Mexico. NAFTA clearly states that it is the conducts of the “party” that is subject to NAFTA rules. In ADF steels case, the conduct of a state governmental agency, which did not opt to bind by NAFTA was indeed not bound by NAFTA. Blame your local officials, not the NAFTA…

    Third, NAFTA arbitration is available for “investors” because… well… its about trade and investment. Use your own court otherwise, ex. when you are dealing with cross-border crime or divorce…

    Last, “expropriation” as used in NAFTA comes with pre-defined definition based on customary international law (customary in a sense that it is commonly understood by most nations, including Canada). Canada knew what it meant as it entered into NAFTA and the same definition applies across the border. It is taking of rights (direct or indirect) by a “party.” If government builds a road on my land, I expect the government to compensate based on expropriation. I do not think that it matters why the government does so – may be the road is critical, may be just a casual project. Likewise I don’t think it matters what I used the land for – for productive activities like farming, may be just an idle land for speculation…etc. Expropriation under NAFTA is generally accepted norm, nothing like anti-democratic… whatever you guys are inciting here… I understand that Canadian expropriation law is much restrictive, meaning that the parliament has much more power to curtail people’s property right without compensation, than the US one (in US, property right is constitutionally protected, whereas it is not in the Canadian Charter). So it could be said that NAFTA, at least on expropriation, is more democratic, fair and protective.

    Whoever authored this article should incorporate these legal aspects to it, because it doesn’t seem to add up knowing the law behind it.

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