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Binding Clauses and the Hidden Cost of Free Trade

Karim

In continuation of our series on trade reform, this article analyzes how the international trading system exploits the Canadian economy through the various binding clauses found within the free trade deals.

The deals covered in this article are the Canada US Free Trade Agreement (FTA) signed in 1988 and the North American Free Trade Agreement (NAFTA) signed in 1994.

The FTA deal deregulated trade between Canada and the US in order to allow goods and services to pass through more quickly and more efficiently.

The North American Free Trade Agreement (NAFTA) further expanded upon the principles espoused by the FTA, when it was signed by Prime Minister Brian Mulroney.

Essentially, these “free trade” deals have continued to weaken Canada’s economic sovereignty over its federal, provincial and local legislations.

Two notable effects of the FTA and the NAFTA trade deals are that they have forced Canada into;

  • Selling off its natural resources at low costs to the U.S.
  • Buying back natural resources at higher costs to sustain its own provinces

The following clauses found within the FTA and the NAFTA trade deals are prime examples of restraining Canada’s economic sovereignty.

  1. Proportional Sharing Clause
  2. Chapter 11 Clause
  3. National Treatment Clause

 

Proportional Sharing Clause

The Proportional Sharing Clause is found in Chapter 6, Article 605 of the NAFTA trade agreement. The following is an excerpt of the clause:

Article 605: Other Export Measures

Subject to Annex 605, a Party may adopt or maintain a restriction otherwise justified under Articles XI:2(a) or XX(g), (i) or (j) of the GATT with respect to the export of an energy or basic petrochemical good to the territory of another Party, only if:

a) the restriction does not reduce the proportion of the total export shipments of the specific energy or basic petrochemical good made available to that other Party relative to the total supply of that good of the Party maintaining the restriction as compared to the proportion prevailing in the most recent 36month period for which data are available prior to the imposition of the measure, or in such other representative period on which the Parties may agree;

b) the Party [Canada, US] does not impose a higher price for exports of an energy or basic petrochemical good to that other Party than the price charged for such good when consumed domestically, by means of any measure such as licenses, fees, taxation and minimum price requirements. The foregoing provision does not apply to a higher price that may result from a measure taken pursuant to subparagraph (a) that only restricts the volume of exports;

This clause guarantees a proportional share of Canadian energy supplies to the US in perpetuity or until they withdraw from the deal.

This clause also presents numerous implications for Canada since it;

  1. Compromises Energy Security
  2. Disruptions in Governmental Regulation

 

1. Energy Security

One implication of the Chapter 6 – Proportional Sharing clause is that Canada cannot reduce its exports on energy or petrochemical goods to the US. In fact, Canada must continue to export these goods at the same rate as it has done  in the past 3 years.

This is true regardless of Canada’s energy needs. If a terrible natural disaster were to devastate the country, Canada would still be forced to export energy resources to the U.S. even though it may need those resources for its own energy security.

The Council of Canadians have even published a paper titled Why its time to renegotiate NAFTA Energy and trade agreements, where they outline the energy security issues of the proportionality clause.

In their paper they reveal,

Canadian’s energy security could become compromised if, for example, energy imports are reduced, or if we are faced with the reality of an energy crisis. We could not prioritize the use of Canadian supplies if this required reducing the proportion of our supplies that get exported to the U.S. Complicating this scenario is the reality of diminishing energy resources, the lack of a Canadian strategic petroleum reserve, and west-east Canadian energy sharing strategy. The proportional sharing clause could also frustrate measures that set strict targets for reducing greenhouse gas emissions. This is particularly significant in the case of Alberta’s tar sands, which is Canada’s fastest growing source of greenhouse gas emissions. A high proportion of tar sands oil heads south to the U.S.

 

2. Disruptions in Government Regulations

Other implications of the Chapter 6 clause, are that it disallows Canada to levy export taxes or charge higher prices for their exports to the U.S. and Mexico.

In effect this clause undermines government trade regulation and legislation, serving to weaken Canada’s control over its natural resources.

A perfect example of how the  clause is undermines Canada’s economic sovereignty is found in the degradation of Alberta’s regulation on their natural gas reserves beginning in 1989.


Regulatory Demise

In 1951, the Albertan government passed the Alberta Gas Resources Preservation Act mandating that Alberta must have 30 years supply of natural gas before any could be exported to the rest of Canada, and that none could be exported out of the country until all of Canada’s natural gas needs were met.

When the FTA trade deal was signed in 1989, the Albertan reserves of natural gas were reduced by 15 years. Currently, Alberta is operating on only 8 years of natural gas reserves. This is in contradiction in its previous efforts on provincial legislation.

The Albertan case has led to increased scrutiny on the true effects of NAFTA and its detrimental effects on Canadian sovereignty.

The Director of the Parkland Institute, Gordon Laxer, notes that the FTA and NAFTA trade deals have led the Albertan government to violate its own legislation much to the chagrin of the Albertan people.

Laxer outlines his arguments in his paper titled Bitten by the deal that once fed us, where he writes

Canada has only 9.3 years left of proven supplies of natural gas at current rates of production. Yet Canada must make 60 per cent of it available for export by NAFTA’s proportionality clause. Albertans are in for a shock. Despite faith in the province’s endless resource reserves, Alberta has only 8.1 years left of remaining established supplies of natural gas. Yet, Alberta recklessly exports half its natural gas, and uses an increasing amount to produce tar-sands oil. Three quarters is exported to the United States. The Alberta Gas Resources Preservation Act, first enacted in 1949, is supposed to provide security of supply for Albertans of 15 years before natural-gas removals are permitted from the province. It keeps narrowing its definition of which Albertans it will protect. Alberta doesn’t enforce its own laws.

As noted by Laxer,  there are a variety of implications that the proportional sharing clause poses to Canada.

Another clause that is responsible for weakening Canada’s economic sovereignty is the Chapter 11 Clause.

 

Chapter 11 Clause

Under this clause, private investors and corporations are allowed to sue the Canadian government if any public policy or government legislation denies them the ability to seek investment or profit-making opportunities.

The Chapter 11 clause is composed of several articles found in the NAFTA trade deal. These articles include the following:

National Treatment (Article 1102) – Each NAFTA Party must treat investors and investments from other NAFTA Parties no less favourably that it treats its own investors and investments, in like circumstances, with respect to such matters as the establishment, acquisition, operation and sale of investments.

Most-Favoured Nation Treatment (Article 1103)
– A NAFTA Party may not treat an investor or investment from a non-NAFTA country more favourably than an investor or investment from a NAFTA country with respect to such matters as the establishment, acquisition, operation and sale of investments.

Performance Requirements (Article 1106)
– This Article prohibits a NAFTA Party from imposing or enforcing certain performance requirements, such as export requirements and domestic content rules, in connection with the establishment, acquisition, expansion, management, conduct or operation of investments. It also prohibits using the specified performance requirements as conditions attached to advantages such as subsidies, including tax incentives.

Expropriation (Article 1110)
– A NAFTA Party cannot directly or indirectly nationalize or expropriate an investment of an investor of another NAFTA Party except: (i) for a public purpose; (ii) on a non-discriminatory basis; (iii) in accordance with due process of law; and (iv) on payment of compensation equivalent to fair market value.

 

There have been numerous cases where foreign investors have sued Canada on the grounds of the Chapter 11 clause.

One case involves a $100 million dollar lawsuit filed by U.S. oil corporation Exxon Mobil Investments.

The basis of the charge is that the Newfoundland government introduced legislation demanding that the R&D budget of these companies be spent in the province.

Newfoundland Premier Kathy Dunderdale states that the oil development project (a.k.a. Hebron Project) should be built within Newfoundland and benefit its people.

Dunderdale outlines her statement in her speech to the Newfoundland and Labrador Oil and Gas Industries Association (NOIA), where she said,

With Hebron, as with every development project, I make no apologies for fighting hard to secure maximum benefits for Newfoundland and Labrador, leaving no stone unturned to ensure we are as fully engaged as possible in all the work associated with this project. In recent weeks we have heard from Exxon [Mobil] that it is considering building the Hebron Drilling Equipment module outside the province. Exxon has suggested that a constraint exists in regard to yard capacity. We disagree with this assessment and our opinion has been confirmed by an expert advisor. We expect Exxon to live up to the terms of the Hebron Benefits Agreement and we will pursue the available avenues under the agreement should Exxon not reconsider its present direction. The importance of living up to commitments like this one is paramount.

Dunderdale argues that there is no compelling reason for Mobil to create its oil development project outside of Newfoundland where the Newfoundland people will not gain any of its benefits.

Another case involving the Chapter 11 clause is the $2 million dollar lawsuit filed by U.S. chemical giant Dow AgroSciences on the grounds that Quebec’s cosmetic pesticide law bans chemicals (chemical 2,4-D) that the the industry receives its profits from.

This case has attracted much scrutiny on the nature of government legislation and its potential implications.

NDP senator Peter Julian observed the various implications of the Dow AgroScience legal suits in the 2nd Session of the House of Commons Debate in 2009, where he said,

The Government of Quebec decided that it had to protect children by prohibiting the use of 2,4-D. Quebec is not the only jurisdiction in the world to prohibit 2,4-D. Several other jurisdictions are doing so, including Ontario. Even though Ontario is behind Quebec on this issue, it is heading in the same direction as Quebec. So Dow AgroSciences could choose to attack the Government of Ontario for its decisions, just as it has attacked the Government of Quebec’s decisions. However, countries like Norway, Denmark and Sweden have also decided to prohibit the use of 2,4-D.  These countries are not governed by the chapter 11 provisions. So companies do not have the same grounds for attacking decisions made in the public interest by democratically elected governments. That is the problem, and that is why there is a motion to concur in this report today. This affects municipalities, Quebec, Ontario and other provinces that want to bring in legislation to prohibit products like 2,4-D. That is the fundamental problem. Essentially, there are chapter 11 provisions that can be used by any company to attack any democratic decision that is taken by a democratic government in the interests of the people it represents.

Here, Julian argues that the fundamental problem with the Chapter 11 clause is that it grants foreign investors free access to challenge Canadian regulation on matters concerning the health of the public.

Ultimately, the case was dropped by Dow AgroSciences in May 2011, representing a victory for the Quebec government.

Newfoundland and Quebec are not the only provinces being affected by these Chapter 11 cases.

The Canadian Centre for Policy Alternatives has compiled a comprehensive list of claims launched against the Canadian provinces in a report titled: NAFTA Chapter 11 Investor-State Disputes.

In their report they have found that, over half of the provinces in Canada have been blaned in Chapter 11 lawsuits including Ontario, British Columbia, Alberta, Newfoundland and Labrador, Quebec, and the Northwest Territories.

The Council for Canadians has also published a report where they outline how the Chapter 11 clause threatens Canada’s environmental and public policy.

The following is a brief section of their report titled, NAFTA’s Chapter 11:  A Threat to Environmental and Public Policy.

While there are many aspects of NAFTA that threaten social and environmental priorities, the investor-state dispute process found in Chapter 11 puts public policies aimed at protecting people and the environment at the most risk. Chapter 11 gives corporations the right to sue the Canadian government, often for tens of millions of dollars, if any public policy or government action denies them investment or profit opportunities.

The cases presented above clearly demonstrate how the clauses in the trade deals have undermined the federal as well as the individual provincial government’s abilities to act on their own matters.

 

National Treatment Clause

NAFTA’s National Treatment clause allows foreign investors to have the same privileges and access to goods as Canadian citizens.

The following is an excerpt of the National treatment clause, directly from Chapter 11 of the NAFTA trade agreement:

Article 1102: National Treatment

1. Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.

2. Each Party shall accord to investments of investors of another Party treatment no less favorable than that it accords, in like circumstances, to investments of its own investors with respect  to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.

 

The implication of this clause is that U.S. and Mexican investors have been granted the same rights and privileges as Canadian citizens in that they have no investment restrictions or limitations.

This means that Canada has lost control over what foreign investments to allow into the country, since the clause allows investors to invest in projects that may have either positive or negative effects for Canadians.

The National Treatment clause is also found in Chapter 3 of the NAFTA trade as well, where it deals with the treatment of goods:

Article 301: National Treatment

1. Each Party shall accord national treatment to the goods of another Party in accordance with
Article III of the General Agreement on Tariffs and Trade (GATT), including its interpretative notes, and to this end Article III of the GATT and its interpretative notes, or any equivalent provision of a successor agreement to which all Parties are party, are incorporated into and made part of this Agreement.

2. The provisions of paragraph 1 regarding national treatment shall mean, with respect to a state or province, treatment no less favorable than the most favorable treatment accorded by such state or province to any like, directly competitive or substitutable goods, as the case may be, of the Party of which it forms a part.

 

The National Treatment Clause presents an additional problem for Canada in the form of bulk water exports.

Another implication of this clause is explained by U.S. Trade representative Mickey Kantor in 1993 when he said,

The current U.S. – Canada Free Trade Agreement (CFTA) and the NAFTA are silent on the issue of Interbasin transfers of water. Interbasin transfers of water in which water is not traded as a good are not governed by either trade agreement. However under the CFTA and the NAFTA, when water is traded as a good, all provisions of the agreements governing trade in goods apply, including National Treatment provisions (Article 301).


Here, Kantor argues that if Canada trades water as a good then it will be subject to FTA and NAFTA trade regulations and provisions.

The National Treatment clause only applies on a province by province basis.

Thus if one province were to commit to bulk water exports then it would not imply that the bulk water in all of Canada would be subjected to FTA and NAFTA trade regulations.

Rather, only the province in question would face such regulation.

The problem with the National Treatment clause is that if a Canadian province were to begin the sale of bulk water export to the U.S., then it would not be possible to reverse their decision under NAFTA’s proportionality clause described earlier.

In the event a province were to restrict water exports, it would be liable for damages under the Chapter 11 clause.

An example where a province faced a penalty was in 1991, when British Columbia entered a contract to supply bulk water to the Sun Belt Water Corporation but then later reversed its policy on water exports.

This led to a $10.5 billion arbitration claim filed against Canada under the Chapter 11 and the National Treatment clauses.

 

Conclusion

The above mentioned issues of the FTA and the NAFTA trade deals clearly illustrate that Canada is losing economic sovereignty over its own regulations, and natural resources.

On the other hand, the U.S. has gained more from the free trade agreements since they have received a stable and inexpensive supply of Canada’s natural resources.

Ironically, the U.S. also seems to favor protectionist policies as well.

The U.S. seems to exhibit signs of a double standard since they also supports elements of protectionism in order to protect their own domestic industries from Canadian competition.

Part 4 discusses the double standard of the U.S. and how it employs elements of protectionism in order to safeguard their own domestic industries.

Contents:

 How Free Trade Costs Canada its Sovereignty – Pt 1

Fundamentals of the International Trading System – Pt 2

Canada US Debate over Trade Disputes on Free Trade Agreements – Pt 4

The Social Cost of Free Trade Agreements – Pt 5

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