Vermont Commission on International Trade and State Sovereignty Overview of International Trade and Its Impact on Vermonts Environment Vermonts Environment Vermont Legislative Council November 13, 2007

2 The Commission on International Trade and State Sovereignty Shall: annually assess the legal and economic impacts of trade agreements on state and local laws, state sovereignty, and the business environment; annually assess the legal and economic impacts of trade agreements on state and local laws, state 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, governor, and congressional delegation that are designed to protect the states job and business environment and state sovereignty from any negative impacts of trade agreements; make recommendations to the general assembly, governor, and congressional delegation that are designed to protect the states job and business environment and state sovereignty from any negative impacts of trade agreements;

3 work with interested groups from other states to resolve the conflicting goals and tensions between international trade and state sovereignty; work with interested groups from other states to resolve the conflicting goals and tensions between international trade and state sovereignty; on request from the governor or the general assembly, develop recommendations regarding challenges and opportunities posed by a particular agreement; on request from the governor or the general assembly, develop recommendations regarding challenges and opportunities posed by a particular agreement; submit an annual report. submit an annual report.

4 The Commission on International Trade and State Sovereignty May: recommend legislation or preferred practices; recommend legislation or preferred practices; develop recommendations regarding challenges and opportunities posed by a particular agreement. develop recommendations regarding challenges and opportunities posed by a particular agreement.

5 What is International Trade and What are International Trade Agreements? International Trade is the exchange of goods and services across international boundaries or territories. International Trade is the exchange of goods and services across international boundaries or territories. International Trade traditionally was conducted according to agreements between two countries. Such agreements are referred to as bilateral agreements. International Trade traditionally was conducted according to agreements between two countries. Such agreements are referred to as bilateral agreements.

6 What is International Trade and What are International Trade Agreements? Beginning in 1944 at Bretton Woods, trade began to be considered in a global manner and global economic institutions were created to help regulate its conduct. Beginning in 1944 at Bretton Woods, trade began to be considered in a global manner and global economic institutions were created to help regulate its conduct. Some of these organizations include: Some of these organizations include: The World Bank The World Bank The International Monetary Fund (IMF) The International Monetary Fund (IMF) The Global Agreement on Tariffs and Trade (GATT) The Global Agreement on Tariffs and Trade (GATT)

7 Evolution of the International Trading System In the U.S. … 1974 Fast-track authority was established, streamlining congressional consideration of trade bills Fast-track authority was established, streamlining congressional consideration of trade bills Office of U.S. Trade Representative (USTR) was created by Executive Order. USTR is part of the Executive Office of President. It is not subject to Freedom Of Information Act (FOIA) requests Office of U.S. Trade Representative (USTR) was created by Executive Order. USTR is part of the Executive Office of President. It is not subject to Freedom Of Information Act (FOIA) requests. USTR consults states through the Inter-Governmental Policy Advisory Committee (IGPAC) and State Single Points of Contact (SPOCs). USTR consults states through the Inter-Governmental Policy Advisory Committee (IGPAC) and State Single Points of Contact (SPOCs).

8 Evolution of the International Trading System In 1994, the Uruguay Round global trade discussions were completed and the World Trade Organization (WTO) was created. In 1994, the Uruguay Round global trade discussions were completed and the World Trade Organization (WTO) was created. The WTO now has 149 members. The WTO now has 149 members.

9 Evolution of the International Trading System WTO agreements include: WTO agreements include: Goods Goods Services Services Government procurement Government procurement Agriculture Agriculture Intellectual property rights Intellectual property rights A binding dispute resolution system A binding dispute resolution system More than a dozen separate agreements More than a dozen separate agreements

10 Evolution of the International Trading System Since the Uruguay Round… North American Free Trade Agreement (NAFTA) North American Free Trade Agreement (NAFTA) U.S. – Singapore Free Trade Agreement U.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)

11 Land Use Under the General Agreement on Trade in Services (GATS), the states ability to regulate land use under Act 250 and the towns planning and zoning powers under Ch. 117 may be subject to attack regarding regulation of: the wholesale or retail sales sectors, or the wholesale or retail sales sectors, or the hotel and restaurant sectors. the hotel and restaurant sectors.

12 Land Use Grounds for attack may be that those 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 may employ. the number of natural persons that a business may employ.

13 Utility Regulation Under GATS, Vermonts ability to regulate electricity may be subject to attack: for not being objective, because the law requires a subjective finding that a project serves the public good; for not being objective, because the law requires a subjective finding that a project serves the public good; for requiring an economic needs test; for requiring an economic needs test; for setting contingent portfolio standards that require renewable resources but exclude large hydro; for setting contingent portfolio standards that require renewable resources but exclude large hydro; for limiting the number of service suppliers in a given service territory, e.g. where a municipality operates an electric system. for limiting the number of service suppliers in a given service territory, e.g. where a municipality operates an electric system.

14 Utility Regulation Services supplied in the exercise of government authority are exempt from GATS if supplied neither on a commercial basis, nor in competition with one or more service suppliers. Services supplied in the exercise of government authority are exempt from GATS if supplied neither on a commercial basis, nor in competition with one or more service suppliers. Thus, a municipal power system would not appear to be exempt. Thus, a municipal power system would not appear to be exempt.

15 Water Services The European Union has requested that the United States commit to including water services under GATS. The European Union has requested that the United States commit to including water services under GATS. Water services would include municipal drinking water services and supplies. Water services would include municipal drinking water services and supplies. If water services were included under GATS, traditional state and municipal regulation of water services and supply would likely be in conflict with market access rules. If water services were included under GATS, traditional state and municipal regulation of water services and supply would likely be in conflict with market access rules. Market access rules restrain governments from limiting the number of service suppliers, the number of outlets, or the degree of foreign ownership. Market access rules restrain governments from limiting the number of service suppliers, the number of outlets, or the degree of foreign ownership.

16 Water Services Most U.S. drinking water systems are in public hands and limit the ability of other water treatment plants or providers to sell into the same service area. These limitations would violate the market access rules. Most U.S. drinking water systems are in public hands and limit the ability of other water treatment plants or providers to sell into the same service area. These limitations would violate the market access rules. The USTR has stated that public water services are exempt from the definition of services because they are supplied in the exercise of government authority. The USTR has stated that public water services are exempt from the definition of services because they are supplied in the exercise of government authority. But the exemption requires services to be supplied neither on a commercial basis, nor in competition with one or more service suppliers. But the exemption requires services to be supplied neither on a commercial basis, nor in competition with one or more service suppliers. Presence of a private provider or assessment of fees would defeat the exemption. Presence of a private provider or assessment of fees would defeat the exemption.

17 Water Services If U.S. commits water services under GATS, state grants or loans that are funded by the E.P.A.s state revolving fund could violate the national treatment rules, if the grants are issued only to public providers. If U.S. commits water services under GATS, state grants or loans that are funded by the E.P.A.s state revolving fund could violate the national treatment rules, if the grants are issued only to public providers. National treatment rules require governments to treat foreign service providers at least as well as domestic providers. National treatment rules require governments to treat foreign service providers at least as well as domestic providers.

18 Investment Claims Investor-state provisions or Chapter 11 provisions allow foreign investors themselves to bring arbitration proceedings against Party countries, as opposed to the historical approach which only allowed a government to sue another country. Investor-state provisions or Chapter 11 provisions allow foreign investors themselves to bring arbitration proceedings against Party countries, as opposed to the historical approach which only allowed a government to sue another country. Many U.S. companies establish offices in Party countries, from which they may sue the U.S. under arbitration procedures, thereby possibly avoiding state law and gaining a competitive advantage over companies that obey state law. Many U.S. companies establish offices in Party countries, from which they may sue the U.S. under arbitration procedures, thereby possibly avoiding state law and gaining a competitive advantage over companies that obey state law.

19 Investment Claims For example, NAFTA Chapter 11 prohibits a country from directly or indirectly expropriating an investment of an investor of another country or taking measures tantamount to expropriation, except with just compensation. For example, NAFTA Chapter 11 prohibits a country from directly or indirectly expropriating an investment of an investor of another country or taking measures tantamount to expropriation, except with just compensation. But expropriation and tantamount to expropriation are not defined in the agreements. But expropriation and tantamount to expropriation are not defined in the agreements.

20 Investment Claims Although U.S. law urges that foreign investors should get no greater substantive rights than U.S. investors, arbitration opinions allow broader recovery than is possible under U.S. law. Although U.S. law urges that foreign investors should get no greater substantive rights than U.S. investors, arbitration opinions allow broader recovery than is possible under U.S. law. Investments are defined broadly, to include commitment of capital, expectation of gain or profit, and assumption of risk; Investments are defined broadly, to include commitment of capital, expectation of gain or profit, and assumption of risk; U.S. takings cases consider property rights as a whole. Under arbitration, each component of a property right – physical, functional, and temporal – may be considered individually, and each may be expropriated; and U.S. takings cases consider property rights as a whole. Under arbitration, each component of a property right – physical, functional, and temporal – may be considered individually, and each may be expropriated; and U.S. takings cases require a finding of significant economic impact. Arbitration panels noted that partial or temporary deprivations of rights can constitute expropriation. U.S. takings cases require a finding of significant economic impact. Arbitration panels noted that partial or temporary deprivations of rights can constitute expropriation.

21 Investor-State Disputes: Glamis Gold Ltd. v. U.S Glamis, a Canadian mining company, is a target of large protests over forest destruction and water contamination in Honduras. Glamis, a Canadian mining company, is a target of large protests over forest destruction and water contamination in Honduras. Glamis proposed massive open-pit cyanide heap-leach gold mining involving use of large amounts of water, in a California pristine area near tribal ancestral sites. Glamis proposed massive open-pit cyanide heap-leach gold mining involving use of large amounts of water, in a California pristine area near tribal ancestral sites. Clinton administration denied permit, Bush administration reversed. California passed law requiring backfilling of open pit mines near sacred sites. Clinton administration denied permit, Bush administration reversed. California passed law requiring backfilling of open pit mines near sacred sites. In 2003, Glamis filed a NAFTA claim for $50 million, claiming violation of minimum treatment and expropriation without compensation. The claim is still pending. In 2003, Glamis filed a NAFTA claim for $50 million, claiming violation of minimum treatment and expropriation without compensation. The claim is still pending.

22 Investor-State Disputes: Metalclad Corp. v. United Mexican States Permits were issued for a Mexican company to construct a hazardous waste facility … U.S.-based Metalclad bought the Mexican company. Permits were issued for a Mexican company to construct a hazardous waste facility … U.S.-based Metalclad bought the Mexican company. Mexican state and municipality objected to the facility, arguing that the site was on an important aquifer, and it never opened. Mexican state and municipality objected to the facility, arguing that the site was on an important aquifer, and it never opened. Metalclad filed a NAFTA claim against Mexico for $90 million, alleging violation of minimum treatment rules and expropriation without compensation … NAFTA panel agreed and awarded $16.7 million. Metalclad filed a NAFTA claim against Mexico for $90 million, alleging violation of minimum treatment rules and expropriation without compensation … NAFTA panel agreed and awarded $16.7 million.

23 Investor-State Disputes: Methanex Corp. v. U.S Canadian Methanex makes methanol, a key component of MTBE, a potential carcinogen … …in 1997, California ordered a phaseout of MTBE. Canadian Methanex makes methanol, a key component of MTBE, a potential carcinogen … …in 1997, California ordered a phaseout of MTBE. In 1999, Methanex filed a NAFTA claim for $900 million: violation of national treatment rules and minimum treatment rules (favoring ethanol) and uncompensated expropriation. In 1999, Methanex filed a NAFTA claim for $900 million: violation of national treatment rules and minimum treatment rules (favoring ethanol) and uncompensated expropriation. Minimum treatment rules for investors require treatment consistent with international law. Minimum treatment rules for investors require treatment consistent with international law.

24 Investor-State Disputes: Methanex Corp. v. U.S 2005, decision: Methanex failed to prove discriminatory intent … a non-discriminatory regulation for a public purpose, enacted with due process, is not expropriation unless specific commitments are given by the regulating government … also, one may not compare different products (MTBE and ethanol). 2005, decision: Methanex failed to prove discriminatory intent … a non-discriminatory regulation for a public purpose, enacted with due process, is not expropriation unless specific commitments are given by the regulating government … also, one may not compare different products (MTBE and ethanol). Remaining issues: What kind of commitment could lead to expropriation? What will other panels do? Remaining issues: What kind of commitment could lead to expropriation? What will other panels do?

25 Investor-State Disputes Thus, plaintiffs in international trade disputes have attacked legitimate traditional exercises of the police power for basic environmental protection purposes, in areas such as: Thus, plaintiffs in international trade disputes have attacked legitimate traditional exercises of the police power for basic environmental protection purposes, in areas such as: product bans designed to protect the groundwater from pollutants (Methanex); product bans designed to protect the groundwater from pollutants (Methanex); disposal site requirements designed to protect aquifers from contamination (Metalclad); disposal site requirements designed to protect aquifers from contamination (Metalclad); land reclamation requirements for open pit mining (Glamis Gold); and land reclamation requirements for open pit mining (Glamis Gold); and bans on certain extractive industries so as to preserve important cultural assets (Glamis Gold). bans on certain extractive industries so as to preserve important cultural assets (Glamis Gold).