Vermont Commission on Vermont Commission on International Trade and International Trade and

State SovereigntyState Sovereignty

Overview ofOverview of

International TradeInternational Tradeand Its Impact on and Its Impact on

Vermont’s EnvironmentVermont’s Environment

Vermont Legislative CouncilVermont Legislative CouncilNovember 13, 2007November 13, 2007

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The Commission on International Trade The Commission on International Trade and and

State Sovereignty Shall:State Sovereignty Shall:

• annually assess the legal and economic impacts of annually assess the legal and economic impacts of trade agreements on state and local laws, state trade agreements on state and local laws, state sovereignty, and the business environment;sovereignty, and the business environment;

• provide a forum for citizens and legislators;provide a forum for citizens and legislators;

• make recommendations to the general assembly, make recommendations to the general assembly, governor, and congressional delegation that are governor, and congressional delegation that are designed to protect the state’s job and business designed to protect the state’s job and business environment and state sovereignty from any environment and state sovereignty from any negative impacts of trade agreements;negative impacts of trade agreements;

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• work with interested groups from other states to work with interested groups from other states to resolve the conflicting goals and tensions between resolve the conflicting goals and tensions between international trade and state sovereignty;international trade and state sovereignty;

• on request from the governor or the general on request from the governor or the general assembly, develop recommendations regarding assembly, develop recommendations regarding challenges and opportunities posed by a particular challenges and opportunities posed by a particular agreement;agreement;

• submit an annual report.submit an annual report.

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The Commission on International Trade The Commission on International Trade and and

State Sovereignty May:State Sovereignty May:

• recommend legislation or preferred recommend legislation or preferred practices;practices;

• develop recommendations regarding develop recommendations regarding challenges and opportunities posed by a challenges and opportunities posed by a particular agreement.particular agreement.

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What is International Trade and What is International Trade and What are International Trade What are International Trade

Agreements?Agreements?

• International Trade is the exchange of International Trade is the exchange of goods and services across international goods and services across international boundaries or territories. boundaries or territories.

• International Trade traditionally was International Trade traditionally was conducted according to agreements conducted according to agreements between two countries. Such agreements between two countries. Such agreements are referred to as bilateral agreements.are referred to as bilateral agreements.

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What is International Trade and What is International Trade and What are International Trade What are International Trade

Agreements?Agreements?

• Beginning in 1944 at Bretton Woods, trade Beginning in 1944 at Bretton Woods, trade began to be considered in a global manner and began to be considered in a global manner and global economic institutions were created global economic institutions were created to help regulate its conduct.to help regulate its conduct.

• Some of these organizations include:Some of these organizations include:

The World BankThe World Bank

The International Monetary Fund (IMF) The International Monetary Fund (IMF)

The Global Agreement on Tariffs and Trade The Global Agreement on Tariffs and Trade

(GATT)(GATT)

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Evolution of the International Trading Evolution of the International Trading SystemSystem

In the U.S. …In the U.S. … • 1974 — “Fast-track” authority was established, 1974 — “Fast-track” authority was established,

streamlining congressional consideration of streamlining congressional consideration of trade bills.trade bills.

• 1979 — Office of U.S. Trade Representative (USTR) 1979 — Office of U.S. Trade Representative (USTR) was created by Executive Order. USTR is part of was created by Executive Order. USTR is part of the Executive Office of President. It is not subject to the Executive Office of President. It is not subject to Freedom Of Information Act (FOIA) requests.Freedom Of Information Act (FOIA) requests.

• USTR consults states through the Inter-Governmental USTR consults states through the Inter-Governmental Policy Advisory Committee (IGPAC) and State Policy Advisory Committee (IGPAC) and State Single Points of Contact (SPOCs).Single Points of Contact (SPOCs).

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Evolution of the Evolution of the International Trading SystemInternational Trading System

• In 1994, the “Uruguay Round” global trade In 1994, the “Uruguay Round” global trade discussions were completed and the discussions were completed and the World Trade Organization (WTO) World Trade Organization (WTO) was createdwas created..

• The WTO now has 149 members.The WTO now has 149 members.

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Evolution of the Evolution of the International Trading SystemInternational Trading System

• WTO agreements include:WTO agreements include:

Goods Goods Services Services Government procurement Government procurement Agriculture Agriculture Intellectual property rightsIntellectual property rights A binding dispute resolution systemA binding dispute resolution system More than a dozen separate agreementsMore than a dozen separate agreements

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Evolution of the Evolution of the International Trading SystemInternational Trading System

Since the Uruguay Round…Since the Uruguay Round…

North American Free Trade Agreement (NAFTA)North American Free Trade Agreement (NAFTA) U.S. – Singapore Free Trade AgreementU.S. – Singapore Free Trade Agreement U.S. – Chile Free Trade Agreement U.S. – Chile Free Trade Agreement U.S. – Australia Free Trade Agreement U.S. – Australia Free Trade Agreement Central American Free Trade Agreement (CAFTA)Central American Free Trade Agreement (CAFTA)

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Land UseLand Use

Under the General Agreement on Trade in Services Under the General Agreement on Trade in Services (GATS), the state’s ability to regulate land use under (GATS), the state’s ability to regulate land use under Act 250 and the towns’ planning and zoning powers Act 250 and the towns’ planning and zoning powers under Ch. 117 may be subject to attack regarding under Ch. 117 may be subject to attack regarding regulation of:regulation of:

• the wholesale or retail sales sectors, orthe wholesale or retail sales sectors, or

• the hotel and restaurant sectors.the hotel and restaurant sectors.

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Land UseLand Use

Grounds for attack may be that those Grounds for attack may be that those regulations may limit:regulations may limit:

• the number of service suppliers, the number of service suppliers, • the total value of service transactions, the total value of service transactions, • the quantity of service output, or the quantity of service output, or • the number of natural persons that a business the number of natural persons that a business

may employ. may employ.

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Utility RegulationUtility Regulation

Under GATS, Vermont’s ability to regulate electricity may be Under GATS, Vermont’s ability to regulate electricity may be subject to attack:subject to attack:

• for not being “objective,” because the law for not being “objective,” because the law requires a subjective finding that a project requires a subjective finding that a project serves the public good;serves the public good;

• for requiring an “economic needs test”; for requiring an “economic needs test”;

• for setting contingent portfolio standards for setting contingent portfolio standards that require renewable resources but that require renewable resources but exclude large hydro;exclude large hydro;

• for limiting the number of service suppliers for limiting the number of service suppliers in a given service territory, e.g. where a municipality in a given service territory, e.g. where a municipality operates an electric system. operates an electric system.

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Utility RegulationUtility Regulation

• Services “supplied in the exercise of Services “supplied in the exercise of government authority” are exemptgovernment authority” are exemptfrom GATS if “supplied neither on a from GATS if “supplied neither on a commercial basis, nor in competition commercial basis, nor in competition with one or more service suppliers.”with one or more service suppliers.”

• Thus, a municipal power system would Thus, a municipal power system would not appear to be exempt.not appear to be exempt.

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Water ServicesWater Services

• The European Union has requested that the The European Union has requested that the United States commit to including water services under United States commit to including water services under GATS.GATS.

• Water services would include municipal Water services would include municipal drinking water services and supplies.drinking water services and supplies.

• If water services were included under GATS, traditional If water services were included under GATS, traditional state and municipal regulation of state and municipal regulation of water services and supply would likely be water services and supply would likely be in conflict with “market access” rules. in conflict with “market access” rules.

• Market access rules restrain governments from limiting Market access rules restrain governments from limiting the number of service suppliers, the number of outlets, the number of service suppliers, the number of outlets, or the degree of foreign ownership. or the degree of foreign ownership.

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Water ServicesWater Services• Most U.S. drinking water systems are in public hands and Most U.S. drinking water systems are in public hands and

limit the ability of other water treatment plants or providers limit the ability of other water treatment plants or providers to sell into the same service area. These limitations would to sell into the same service area. These limitations would violate the market access rules.violate the market access rules.

• The USTR has stated that public water services The USTR has stated that public water services are exempt from the definition of services are exempt from the definition of services because they are “supplied in the exercise of government because they are “supplied in the exercise of government authority.” authority.”

• But the exemption requires services to be “supplied neither But the exemption requires services to be “supplied neither on a commercial basis, nor in competition with one or more on a commercial basis, nor in competition with one or more service suppliers.”service suppliers.”

• Presence of a private provider or assessment of fees would Presence of a private provider or assessment of fees would defeat the exemption. defeat the exemption.

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Water ServicesWater Services

• If U.S. commits water services under GATS, If U.S. commits water services under GATS, state grants or loans that are funded by the state grants or loans that are funded by the E.P.A.’s state revolving fund could violate the E.P.A.’s state revolving fund could violate the national treatment rules, if the grants are issued national treatment rules, if the grants are issued only to public providers. only to public providers.

• ““National treatment rules” require governments National treatment rules” require governments to treat foreign service providers at least as well to treat foreign service providers at least as well as domestic providers. as domestic providers.

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Investment ClaimsInvestment Claims

• ““Investor-state provisions” or “Chapter 11 Investor-state provisions” or “Chapter 11 provisions” allow foreign investors themselves to provisions” allow foreign investors themselves to bring arbitration proceedings against Party countries, bring arbitration proceedings against Party countries, as opposed to the historical approach which only as opposed to the historical approach which only allowed a government to sue another country.allowed a government to sue another country.

• Many U.S. companies establish offices in Party Many U.S. companies establish offices in Party countries, from which they may sue the U.S. under countries, from which they may sue the U.S. under arbitration procedures, thereby possibly avoiding arbitration procedures, thereby possibly avoiding state law and gaining a competitive advantage over state law and gaining a competitive advantage over companies that obey state law.companies that obey state law.

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Investment ClaimsInvestment Claims

• For example, NAFTA Chapter 11 prohibits For example, NAFTA Chapter 11 prohibits a country from directly or indirectly a country from directly or indirectly expropriatingexpropriating an investment of an an investment of an investor of another country or taking investor of another country or taking measures measures tantamount to expropriationtantamount to expropriation, , except with just compensation.except with just compensation.

• But “expropriation” and “tantamount to But “expropriation” and “tantamount to expropriation” are not defined in the expropriation” are not defined in the agreements.agreements.

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Investment ClaimsInvestment Claims

Although U.S. law urges that foreign investors should get Although U.S. law urges that foreign investors should get no greater substantive rights than U.S. investors, no greater substantive rights than U.S. investors, arbitration opinions allow broader recovery than is arbitration opinions allow broader recovery than is possible under U.S. law. possible under U.S. law.

• ““Investments” are defined broadly, to include Investments” are defined broadly, to include commitment of capital, expectation of gain or profit, and commitment of capital, expectation of gain or profit, and assumption of risk; assumption of risk;

• U.S. takings cases consider property rights “as a whole.” Under U.S. takings cases consider property rights “as a whole.” Under arbitration, each component of a property right – physical, arbitration, each component of a property right – physical, functional, and temporal – may be considered individually, and functional, and temporal – may be considered individually, and each may be expropriated; andeach may be expropriated; and

• U.S. takings cases require a finding of “significant” economic U.S. takings cases require a finding of “significant” economic impact. Arbitration panels noted that impact. Arbitration panels noted that partial or temporary deprivations of rights can partial or temporary deprivations of rights can constitute expropriation.constitute expropriation.

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Investor-State Disputes:Investor-State Disputes:Glamis Gold Ltd. v. U.SGlamis Gold Ltd. v. U.S

• Glamis, a Canadian mining company, is a target of Glamis, a Canadian mining company, is a target of large protests over forest destruction and water large protests over forest destruction and water contamination in Honduras.contamination in Honduras.

• Glamis proposed massive open-pit cyanide “heap-leach” Glamis proposed massive open-pit cyanide “heap-leach” gold mining involving use of large amounts of water, in a California gold mining involving use of large amounts of water, in a California pristine area near tribal ancestral sites.pristine area near tribal ancestral sites.

• Clinton administration denied permit, Bush administration reversed. Clinton administration denied permit, Bush administration reversed. California passed law requiring backfilling of California passed law requiring backfilling of open pit mines near sacred sites.open pit mines near sacred sites.

• In 2003, Glamis filed a NAFTA claim for $50 million, In 2003, Glamis filed a NAFTA claim for $50 million, claiming violation of minimum treatment and expropriation without claiming violation of minimum treatment and expropriation without compensation. The claim is still pending.compensation. The claim is still pending.

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Investor-State Disputes:Investor-State Disputes:Metalclad Corp. v. United Mexican Metalclad Corp. v. United Mexican

StatesStates • Permits were issued for a Mexican company to Permits were issued for a Mexican company to

construct a hazardous waste facility … U.S.-based construct a hazardous waste facility … U.S.-based Metalclad bought the Mexican company.Metalclad bought the Mexican company.

• Mexican state and municipality objected to the facility, Mexican state and municipality objected to the facility, arguing that the site was on an important aquifer, and it arguing that the site was on an important aquifer, and it never opened.never opened.

• Metalclad filed a NAFTA claim against Mexico for $90 Metalclad filed a NAFTA claim against Mexico for $90 million, alleging violation of minimum treatment rules million, alleging violation of minimum treatment rules and expropriation without compensation … NAFTA and expropriation without compensation … NAFTA panel agreed and awarded $16.7 million.panel agreed and awarded $16.7 million.

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Investor-State Disputes:Investor-State Disputes:

Methanex Corp. v. U.SMethanex Corp. v. U.S • Canadian Methanex makes methanol, a key Canadian Methanex makes methanol, a key

component of MTBE, a potential carcinogen … component of MTBE, a potential carcinogen … …in 1997, California ordered a phaseout of MTBE.…in 1997, California ordered a phaseout of MTBE.

• In 1999, Methanex filed a NAFTA claim for $900 In 1999, Methanex filed a NAFTA claim for $900 million: violation of national treatment rules and million: violation of national treatment rules and minimum treatment rules (favoring ethanol) and minimum treatment rules (favoring ethanol) and uncompensated expropriation.uncompensated expropriation.

• ““Minimum treatment rules” for investors require Minimum treatment rules” for investors require treatment consistent with international law.treatment consistent with international law.

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Investor-State Disputes:Investor-State Disputes:

Methanex Corp. v. U.SMethanex Corp. v. U.S

• 2005, decision: Methanex failed to prove 2005, decision: Methanex failed to prove discriminatory intent … a non-discriminatory discriminatory intent … a non-discriminatory regulation for a public purpose, enacted with regulation for a public purpose, enacted with due process, is not expropriation unless due process, is not expropriation unless “specific commitments” are given by the “specific commitments” are given by the regulating government … also, one may not regulating government … also, one may not compare different products (MTBE and ethanol). compare different products (MTBE and ethanol).

• Remaining issues: What kind of “commitment” Remaining issues: What kind of “commitment” could lead to expropriation? What will other could lead to expropriation? What will other panels do?panels do?

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Investor-State DisputesInvestor-State Disputes

• Thus, plaintiffs in international trade disputes have Thus, plaintiffs in international trade disputes have attacked legitimate traditional exercises of the attacked legitimate traditional exercises of the police power for basic environmental protection police power for basic environmental protection purposes, in areas such as:purposes, in areas such as:

product bans designed to protect the groundwater product bans designed to protect the groundwater from pollutants (Methanex);from pollutants (Methanex);

disposal site requirements designed to protect disposal site requirements designed to protect aquifers from contamination (Metalclad);aquifers from contamination (Metalclad);

land reclamation requirements for open pit mining land reclamation requirements for open pit mining (Glamis Gold); and(Glamis Gold); and

bans on certain extractive industries so as to bans on certain extractive industries so as to preserve important cultural assets (Glamis Gold).preserve important cultural assets (Glamis Gold).