NAFTA and the Mexican environment: An evaluation of article 1110 and its application
Daniel Belanger
The first part of this paper evaluates the environmental risks brought by NAFTA's article 1110. The provisions of this article grant foreign investors protection against arbitrary or unjustified expropriation measures. If interpreted broadly, it could allow foreign investors to claim compensation when a new environmental regulation negatively affects their investment. Some environmental groups claim this broad rule of interpretation already prevails, based on the Ethyl and Metalclad disputes. I don't believe this is true. If it did prevail, however, the environmental consequences of this interpretation would be: an increase in the costs of environmental regulation, a regulatory chill, and the abandonment of the 'polluter pays' principle.
This paper then evaluates the potential impacts of article 1110 on environmental regulation in Mexico. The Mexican situation is analyzed through the perspectives of both liberalized trade advocates and opponents. Many critics of expropriation rules believe they will be particularly detrimental to Mexico, a country with large amounts of foreign investment and a critical need for stronger environmental protection. On the other hand, liberalized trade advocates argue foreign investment will benefit the Mexican environment. They claim it will increase national wealth - which in turn brings a demand for a cleaner environment - and provide the country with cleaner technology and management schemes. By protecting foreign investors from expropriation, article 1110 would maximize these potential benefits.
I conclude that Ethyl and Metalclad disputes do not provide a clear rule of interpretation for 1110. Furthermore, it does not appear that Mexico's environmental record worsened after almost a decade under NAFTA rules. It would be necessary, however, to issue a clarification statement on the application of 1110. It must be reassessed that an environmental regulation, when applied in a non-discriminatory manner, does not require compensation; that the general environmental exception of 1114 consistently apply to article 1110. As well, Mexico should push for the establishment of an environmental fund under NAFTA. The fund could be used to compensate foreign investors when it is required. Finally, Mexico can improve its environmental protection by promoting voluntary compliance to environmental standards in the private industry (i.e. ISO, etc.). By promoting environmental protection outside of the regulatory approach, the country would benefit from foreign investment without being exposed to a claim under 1110.