Pac Rim Cayman v. Republic of El Salvador: confronting free trade's chilling effect on environmental progress in Latin America.

• Author: Zaunbrecher, Katie

Because of the disparity of environmental regulation between the United States and its southern neighbors, multinational corporations have long viewed the resource-rich countries of Central America as attractive locations for factories and extractive industry. (1) However, as liberal democracy has gradually penetrated the region in the post-Cold War period, Central American states like Costa Rica have become more environmentally friendly and more democratically responsible to voters. (2) This change has also come with the advent of a huge free trade zone spanning much of the Western Hemisphere. (3) This zone consists of two primary agreements: the North American Free Trade Agreement (NAFTA) among the United States, Mexico, and Canada (4) and the Dominican Republic-Central American Free Trade Agreement (CAFTA-DR) among the United States, the Dominican Republic, and several Central American states. (5) The long-term effects of these free trade agreements (FTAs) remain to be seen, but their immediate benefits, particularly as they relate to the environment, are already hotly debated.

In a 2005 opinion piece, then-Senator Barack Obama wrote that he opposed the CAFTA-DR because it did "little to address enforcement of basic environmental standards in the Central American countries and the Dominican Republic." (6) The senator's concern about environmental degradation in the free trade zone was a direct response to the effects of NAFTA in Mexico. (7) In the 2000 NAFTA arbitration, Metalclad Corp. v. United Mexican States, the California-based waste disposal company, Metalclad, obtained a $16.7 million award against the state of Mexico after the arbitration panel found that the Mexican state of San Luis Potosi had indirectly expropriated Metalclad's investment in a pre-existing landfill when the state designated the area surrounding the land as an ecological preserve. (8) The Metalclad award set a precedent whereby an arbitral tribunal could hold a NAFTA party government liable in an investor suit for indirect expropriation following the enactment of a legitimate domestic environmental policy. (9)

During the expedited CAFTA-DR negotiations, (10) environmentalists and legal scholars heatedly discussed whether the Central American agreement could or should improve upon NAFTA's weak environmental protections, particularly the Chapter 11 investor-state dispute resolution mechanism that had allowed Metalclad's judgment against Mexico. (11) A report by the Economic Policy Institute noted the dangers of adopting another NAFTA-style FTA: "NAFTA tilted the economic playing field in favor of investors and against workers and the environment, causing a hemispheric 'race to the bottom' in wages and environmental quality." (12) But in his final review of the CAFTA-DR document, the U.S. Trade Representative wrote that it would result in major environmental benefits in the region: "[A]s wealth grows and poverty decreases, more resources become available for environmental protection, particularly as [developing countries] develop constituencies in favor of environmental protection." (13) He also asserted that, along with investment and international trade, CAFTA-DR would provide the technology necessary to foster environmentally friendly policies in the region. (14) Despite continuing concerns over the FTA's environmental impact in the underdeveloped states of Central America, CAFTA-DR was signed by Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States in 2004, (15) and became law in the United States in 2005 after a narrow Senate majority vote. (16)

The resulting treaty is largely a word-for-word duplicate of NAFTA, including its investor suit provision. (17) Although CAFTA-DR pays lip service to the goals of "implement[ing] this Agreement in a manner consistent with environmental protection," "protect[ing] and preserv[ing] the environment," and "preserv[ing] [the Parties'] flexibility to safeguard the public welfare," (18) the treaty as a whole poses many of the same environmental and regulatory dangers that NAFTA was shown to threaten in the Metalclad suit. (19) CAFTA-DR's investor suit provision, found in Chapter 10, is copied nearly directly from the language in NAFTA's Chapter 11. (20) CAFTA-DR's article 10.3 states that each party shall provide investors of another party "treatment no less favorable than that it accords, in like circumstances, to its own investors." (21) Article 10.7 also prohibits state parties from expropriating, either directly or indirectly, a covered investment, except when it does so for a public purpose, in a non-discriminatory manner, and pays prompt compensation equivalent to the fair market value of the expropriated investment. (22)

In the event that a state party or an investor of a state party breaches one of these provisions, traditional protocol under international law would require the investor to settle the dispute either through the host country's domestic judicial system or through a government-to-government process. (23) However, CAFTA-DR, like NAFTA before it and many other U.S. FTAs since, (24) contains a revolutionary provision allowing for direct dispute resolution between the investor and the host country in an international tribunal. (25) Article 10.16 provides an injured investor or state party the right to bring a claim directly against the offending party in an international arbitral tribunal. (26)

The Metalclad decision sent ripples through the legal and foreign investment worlds in 2001. (27) During the CAFTA-DR negotiations, Central American governments were careful to protect themselves against similarly large investor suit judgments. (28) To that end, they insisted on including various provisos to the Chapter 10 investor-state dispute resolution provision to assist a future tribunal in interpreting the meanings of "indirect expropriation" and other vague terms that had contributed to the rather surprising result in Metalclad. (29) For example, CAFTA-DR's chapter 10 Annex 10-C provides that "indirect expropriation" is to be interpreted according to the U.S. Supreme Court's analysis of Fifth Amendment takings in Penn. Central Transportation Co. v. City of New York. (30) Similarly, Article 10.11 admonishes that the investor-suit provision must not be interpreted to "prevent a Party from adopting, maintaining, or enforcing any measure ... that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns." (31)

Despite these precautionary measures, activists and legal scholars worried that the CAFTA-DR investor-suit provision would result in a "regulatory chill," wherein state parties to an FTA would refrain from enacting protective environmental and public health legislation for fear of a potentially crippling damages award for indirect expropriation. (32) During his 2008 campaign, President Obama spoke out passionately against the effects of investor suit provisions in U.S. FTAs, promising to "ensure that this right is strictly limited and will fully exempt any law or regulations written to protect public safety or promote the public interest." (33) Nevertheless, investor-state dispute resolution mechanisms persist in many of the most important U.S. FTAs--including NAFTA and...