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NAFTA, CAFTA-DR, and the Role of the Environment

NAFTA, CAFTA-DR, and the Role of the Environment
Revisiting NAFTA, with CAFTA-DR in Mind


In the fall of 2005, countries throughout Central America and the Caribbean were brought to their knees by an onslaught of deadly tropical storms which cut a swath of devastation across the region. Some of the destruction was avoidable: for years, environmentalists have argued that the massive deforestation brought on by increased agriculture and ranching—a trend which has been prevalent throughout Central America in recent decades—was at least partially responsible for exacerbating the damage caused by these raw acts of nature. Simultaneously, a different genre of tempest was brewing across Latin America, as protests, triggered by the Bush administration’s unabated promotion of its Free Trade Area of the Americas (FTAA), have inflamed anti-globalization emotions throughout the region. There is an indisputable link between the catastrophic storms, and the rage against the supremacy of the marketplace and a leadership which is indifferent to environmental factors.

Since the advent of the North American Free Trade Agreement (NAFTA) in 1994, hard pressed trade negotiators have been called upon to incorporate clauses addressing environmental concerns such as deforestation, in various bilateral and regional trade pacts. Yet, as a success story, NAFTA’s history – economically, socially and environmentally – is spotty. As the Bush administration pursues an increasing number of trade agreements throughout the region, including the signing of a Central American free trade agreement last summer (CAFTA-DR), NAFTA’s mixed environmental record warrants examination for its possible teachings, as well as warnings.

NAFTA’s Small Advancements
When NAFTA was ratified in 1994, it went farther than any other free trade agreement of its day in addressing issues of environmental protection and regulation associated with trade liberalization. While the main body of the agreement contained very few operational environmental provisions, the bulk of such considerations were included in a side accord called the North American Agreement on Environmental Cooperation. The NAAEC, as it is commonly known, contained provisions that called for the creation of the Commission for Environmental Cooperation (CEC), the Border Environmental Cooperation Commission (BECC), and the North American Development Bank (NADB). At the time these institutions were endowed with what seemed to be mammoth symbolic importance, and their very inclusion in the agreement certainly has to be seen as a step in the right direction. With over a decade under NAFTA’s belt, it is evident that the effectiveness has been marginal at best, and it has fallen well short of the mark on driving home environmental protections.

From its inception, the NAEEC had a range of mandates loosely assigned to it, including strengthening the enforcement of existing environmental laws, fostering greater conservation and pollution measures, and encouraging the maximum public participation. This sweeping, yet somewhat vague tasking, was a harbinger of struggles to come. It must be noted that the most significant achievement of the environmental clauses was the fact that they existed at all, given the hostility that trade negotiators usually felt towards green factors. At this point, the degree of successes and failures of these debating sessions are questionable. Early on, the NAEEC actually made meaningful progress, particularly in the fields of increased cooperation among the NAFTA governments, as well as some advances in the creation of complaint and settlement mechanisms in response to a member country’s “persistent, systemic failure to enforce its laws” involving any trade-related failures. That body has entertained a series of complaints concerning possible violations of environmental standards by one of the NAFTA partners or business concerns housed there.

While only NAFTA countries can directly invoke the dispute settlement process in the Council—none of which have done so as of yet—the accord also allows for any citizen or non-governmental organization to submit complaints to the Secretariat, not the Council, regarding a party’s persistent failure to enforce their environmental laws affecting them. At this point, NAEEC’s Secretariat can request the accused party to respond, after which the Secretariat can produce a factual record for the Council (where the dispute settlements are processed) to consider. A 2004 CRS Report to Congress reported that since 1995, 43 citizen submissions had been filed, and in nine of these cases, factual records had been finalized and made public. Nonetheless, even this success is marginal, as critics rightly point to the fact that relatively few complaints have been filed, given the actual magnitude of environmental offenses, and the maximum relief the NAEEC has offered to date, is the issuance of a factual report to the public, though it is endowed with the power to impose limited monetary fines and sanctions.

Built to Fail
After over ten years, it is now evident that in many ways NAFTA’s environmental initiatives were flawed from the outset, sundered by decisive weaknesses within its institutional frameworks and intentionally imprecise mandates. These only compounded the problems of insufficient funding and support for environmental efforts. Several specific shortcomings are particularly noteworthy. First off, in relative terms, NAFTA’s environmental institutions are painfully under funded: the CEC’s original $9 million budget has remained unchanged. Furthermore, the language of the agreement framing the institutions was made intentionally murky. The use of non-binding, toothless phrases like “fostering protection,” underscores the NAEEC’s fundamental lack of regulatory authority. What few rules do exist regarding monetary fines or sanctions are practically dormant, and serve more as a symbolic gesture than as a means of enforcement.

NAFTA’s environmental goals are also severely hampered by inconsistencies between differing domestic policies and regulations among member nations, and the agreement’s lack of organic links to international environmental accords. While the accord means to promote harmonization of governmental environmental regulations, each country is allowed to maintain individual standards. What's more, none of the NAFTA nations are required to sign on to any international environmental agreements such as the Kyoto protocol, leading some critics to charge that NAFTA’s standards are little better than “gutless.”

NAFTA was, at heart, a trade agreement, and as such environmental issues were consciously and deliberately made to defer to economic interests. The most egregious flaw in NAFTA’s environmental legacy is found in a Chapter 11 clause dealing with investor-state relations, a component that undermines the very foundations of the NAEEC. Under its terms, investors are enabled to challenge environmental regulations that are considered “tantamount to expropriation.” Environmental regulations in all three NAFTA countries—on federal, state, and local levels—have been challenged under this escape hatch. In 2005, Public Citizen issued an extensive report detailing the 42 cases and claims thus far where investors demanded compensation from NAFTA nations. It reported that while relatively few cases have been settled, over $35 million has already been awarded to foreign investors by NAFTA tribunals responding to complaints by member governments. In one example, the Mexican government was forced to pay $15 million to the U.S. company, Metalclad, after being sued for denying it permission to build a toxic waste dump in an environmentally sensitive area. The ramifications are obvious, as the all-powerful business forces are likely to routinely defeat governmental attempts to defend environmental concerns and regulate commercial endeavors whose activities could threaten them.

Repercussions of NAFTA’s Environmental Failure
NAECC’s questionable legacy inevitably leads one to an examination of the environmental problems that have arisen from the NAFTA agreement. One example is the increased air pollution as a result of greater freight transport involving the member countries. According to the CEC, there has been a significant increase in air pollution concentrations at U.S.-Mexico border points due to greater road freight transport, which has been magnified by poor infrastructure and planning. Relaxed trade barriers have led to increased marine transport as well, causing the creation of new pathways for the invasion of alien species.

The environmental consequences of NAFTA are perhaps the most palpable in the agricultural sector where policies springing from the agreement have catalyzed growth of large scale, capital-intensive food processing agro-industries, which in turn have marginalized small-scale family farms, especially in Mexico. One element in this agricultural transition is the increased reliance on modified plant forms, which may pose a serious threat to the sustainability of crop production, perhaps opening their genetic line to the infection or destruction by calamitous pests or disease infestations. Such market expansion has crushed a number of Mexico’s agricultural sectors, as heavily subsidized U.S. imports, including corn, are flooding south, and bringing on massive unemployment. While there were some initial hopes that the movement towards the modernizing of Mexico’s export-oriented agricultural sector would reduce deforestation and tillage, instead many rural farmers have been pushed to compensate for lost income by clearing and farming more marginal land, further devastating biologically fragile forests in southern Mexico.

CAFTA-DR: Just more of the same?
While NAFTA’s actual environmental accomplishments were limited in scope, what they did achieve was to put environmental concerns on the map when it came to the negotiation of trade agreements. It was no surprise, therefore, that the Central America Free Trade Agreement (CAFTA-DR) negotiations included specific environmental provisions within the core of the agreement. Yet sadly, it appears as though little was learned from NAFTA and that some of the same inherent flaws that diseased the 2004 accord will also infect the CAFTA-DR accord.

In fact, CAFTA-DR’s environmental provisions are for the most part merely replications of NAFTA’s environmental side accord, except this time the language was directly included within the fabric of the agreement. As in the case of NAFTA, the CAFTA-DR chapter contains considerable pro-environment rhetoric, but it is similarly burdened by unenforceable provisions and loose, often nonbinding, language. Like NAFTA, it includes clauses enabling each member country to establish their own domestic environmental standards and regulations without any requirement to sign on to international accords. Though the document encourages countries to strengthen environmental regulation at all levels—and expressly requests that they not be weakened—the agreement offers no clear incentive or requirement to do so. The chapter also contains a provision asserting that a country “shall not fail to effectively enforce its environmental laws,” but even this measure won’t punish first-time offenders since it is only applicable when there have been “sustained or reoccurring” instances of non-enforcement. And even if a country is found guilty after what would undoubtedly be a long and contentious process, the document does not establish an explicit punishment mechanism for offenders. A major complaint argued by environmental groups is that the CAFTA-DR nations have such weak environmental legislation to begin with, that the agreement, if anything, only diminishes their capacity to enforce any punitive measures.

Furthermore, the ominous legacy of NAFTA’s Chapter 11 also is found in CAFTA-DR’s Chapter 10. The Public Citizen report on NAFTA’s Chapter 11 warned that “NAFTA’s model of extensive foreign investor privilege and enforcement outside of the domestic court system should not be replicated in future agreements,” adding that, sadly, the problems raised in Chapter 11 “were not remedied in CAFTA’s investment chapter (Chapter 10).” Again, under CAFTA-DR, investors are given the right to sue governments for cash compensation if their profits have been compromised by environmental considerations. Business interests are also permitted to sue for an infinite figure, while fines for failure to enforce environmental laws have a ceiling of $15 million irrespective of how catastrophic their infractions may have been.

With the recent passage of CAFTA-DR, the agreement will soon be imposed on a region that already faces extraordinary environmental challenges, making the need for strong as well as balanced regulations all the more crucial. Central America boasts one of the most ecologically critical landscapes in the world. Although constituting only one percent of the world’s landmass, it can claim 8% the planet’s biodiversity. Even before CAFTA-DR was signed, this priceless ecological treasure was disappearing at an alarming rate. Between 1950 and 1990, for example, the region lost more than 70% of its forest cover, and this ravenous destruction continues to grow apace, fueled primarily by road construction, agriculture, ranching, mining, and logging. As the once abundant forests have disappeared, the result has been unchecked soil erosion, watershed degradation and a loss of biodiversity. While deforestation is one of the region’s most overwhelming environmental problems, there is also a rash of to-be-expected endemic urban problems, ranging from poor sewage treatment and water contamination to massive air pollution. It should go without saying that the region’s sensitive environment demands special attention and protection, yet the CAFTA-DR agreement follows NAFTA’s failed path and seems certain to only foment enhanced degradation.

FTAA: The future of free trade and the environment
After November’s Summit of the Americas ended in disagreement over the FTAA, its future appears more uncertain than ever. Though local opposition threatens the future enacting of a region-wide U.S.-backed free trade agreement in Latin America, environmental provisions found in the EU and China are not noticeably different from those experienced in NAFTA and CAFTA-DR. While the simple inclusion of environmental guidelines in NAFTA’s side agreement, as well as in CAFTA-DR’s, is a welcomed development, they have not gone far enough to make the environment a top trade priority, nor has its presence signified anything like a transformative role. In the wake of devastating natural disasters, wide spread oil crises, and growing evidence of global warming, it should be evident that the environment requires more than patronizing and unenforced regulations in side agreements containing only a few scant sentences, but instead must be a fundamental consideration in the development of any free trade agreement. In the CEC’s 2002 report, the body, self-consciously aware of its own role as a possible model for the formulation of future agreements, echoed this sentiment with the statement that “as long as environmental considerations remain outside of, or external to, economic priorities— serving as little more than a policy appendage or after-thought to core economic decisions— then the world will find itself lurching from one ecological problem to the next.”

If the FTAA is to be revived, its modus operandi regarding environmental policy will undoubtedly have to be more than an extension of the NAFTA and CAFTA-DR frameworks, or else it will not be allowed to strike roots. Given the mixed record of NAFTA’s ecologically associated initiatives, and the uncertain future of CAFTA’s environmental protection capacities, it is imperative that if the FTAA is ever realized in anything remotely resembling the original agreement, its environmental components must go a great distance to integrate sound pro-green policies with trade goals in order to avoid the eventual social and economic collapse that is likely to occur as a result of unchecked environmental downgrading and the latter’s effect on the region.

This analysis was prepared by COHA Research Associate Katie Harr

January 23, 2006

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