2. Constraints of NAFTA on Water Policy regulations :

This section reveals the extent to which the provisions of NAFTA might impact bulk water policy regulations in order to better understand the extent to which they impact environmental regulation in general in Canada.

NAFTA was mainly designed to constrain government behavior in certain areas, where such constraints are understood to uphold the common good of parties to the agreement . Under NAFTA, Canada is prevented from regulating any trade through the use of tariffs or taxes because these represent barriers to trade. In fact, any such action would be interpreted as pushing towards protectionism.

In the case of bulk water exports, the three most probable sources of conflict lie in NAFTA's chapters 3, 11 and 12. In this section, evaluations of the impact of these chapters on bulk water export policy will be given.
 
 

a. NAFTA Chapter 3: Trade in Goods and National Treatment:

i. Tariff elimination & import/export Restrictions:

Under this provision, Canada has abandoned the option of regulating bulk water exports by imposing taxes or tariffs under Articles 302: Tariff Elimination, 309.2: Import and Export Restrictions and Article 314: Export Taxes. If Canada allows the export of water in bulk, under the provisions of this chapter, it would not be allowed to regulate the quantities of water traded.
 

ii. Water is a tradable good in all of its forms:

NAFTA Article 301 classifies water in all of its forms as a tradable good. Hence, under NAFTA, "natural or artificial waters,... snow and ice, and ordinary natural water of all kinds other than sea water" are considered as commodities that can be traded on the international market.
 

iii. GATT Article XX: General exceptions:

NAFTA and the General Agreement on Tariffs and Trade share the same basic architecture. A fundamental difference between the two however is that GATT provides special exceptions to the prohibition of trade regulations. These exceptions are defined in Article XX of GATT which states that:

...nothing in this Agreement (GATT) shall be construed to prevent the adoption or enforcement by any Member of measures:
…(b) necessary to protect human, animal or plant life or health;
... (g) relating to the conservation of exhaustible natural resources if the such measures are made effective in conjunction with restrictions on domestic production and consumption;


It is significant, when assessing the impact of NAFTA on bulk water export policy, to know that GATT Article XX exceptions do not apply to the provisions of NAFTA.
 

iv. Article 301: National Treatment of Exports

Article 301 provides that:

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 [emphasis added]. Under this clause, Canada would have to treat export markets the same way it would for water bound for domestic consumption which implies no taxes, tariffs other types of regulation.
 

v. Proportional sharing :

Another unique feature of NAFTA is the proportional sharing provision described by article 315:

    1. the restriction does not reduce the proportion of the total export shipments of the specific 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 36-month 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;
    2. the Party does not impose a higher price for exports of a good to that other Party than the price charged for such good when consumed domestically, buy means of any measure, such as licenses, fees, taxation and minimum price requirements. [emphasis added]
In other words, Canada would be prevented by these provisions from ever reducing the "proportion of total exports shipments of the specific good (in this case water) made available to that party relative to total supply." Another way of stating this is to say that the US is entitled to a proportional share of Canadian water resources once exports are allowed, and, in case of a water shortage, Canada would not be able to halt the exports.
 
 

b. NAFTA Chapter 11: Investment

Chapter 11 of NAFTA was designed to protect foreign direct investment (FDI) as it plays a key role in promoting economic development. Indeed, for free trade agreements like GATT which encompasses a great host of countries, FDI plays a critical role in achieving sustainable development in developing countries. As a source of capital, it represents between one-third and one-half of all private investment in developing countries, and is helping to relieve their dependence on foreign development assistance. However, as this section will show, foreign investment under NAFTA can also pose grave risks to sustainable development.

Chapter 11 establishes the most extensive array of investor rights ever provided to foreign investors. Chapter 11, Section B also establishes its own enforcement regime that involves recourse to binding international dispute resolution. It provides the right of foreign investors to initiate direct action against the host government and is unprecedented because it deeply affects public foreign policy making.

The five main provisions upon which claims can be and have been made against Canada concerning water export control measures and that this paper will evaluate are:

- the right to National Treatment (Article 1102)

- the most favored nation treatment (Article 1103)

- a Minimum Standard of Treatment (Article 1105).

- the prohibition against certain Performance Requirements (Article 1106)

- Compensation in case of Expropriation (Article 1110).
 
 

i. Article 1102: National Treatment for Investors and Investments and Article 1103: Most favoured nation:

Each Party shall accord to investors of another party treatment no less favourable than 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. [emphasis added] (Article 1102) In simple terms, Canada is required to treat investors of other NAFTA parties the same way it would treat its own domestic investors. It is also not allowed to discriminate against an investor on the basis of labor, human rights or environmental practices. The combination of the two articles form the backbone of Chapter 11 as they encourage non-discriminatory government behaviour towards FDI. In the context of our case study, the two articles are important for they require water policy regulators to consider both domestic and foreign investors in the design and implementation of any export law. Under articles 1102 and 1103, the scope of bulk water export regulation has broadened to also include the investors of other countries and as a result, pressure will be put on Canada to reduce its regulations.
 

ii. Article 1105: Minimum Standard of Treatment:

This ensures that the signatories to NAFTA ensure "fair, equitable treatment and full protection and security" for both domestic and foreign investors operating within the boundaries of their country. There have now already been at least four cases which have used this article to sue host governments, among which is the Sun Belt Water case.
 

iii. NAFTA Article 1110: Expropriation and Compensation:

Another potential ground for an investor claim under Chapter 11 can be found in the provisions of Article 1110:

No party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take any measure tantamount to nationalization or expropriation of such an investment except:

    1. for a public purpose,
    2. on a non-discriminatory,
    3. in accordance with due process of law and Article 1105 and
(d) on payment of ....prompt, adequate and effective compensation. [emphasis added] Under this provision, environmental regulations represent an expropriation of investment rights. This article forces the government to compensate the investor for loss of profit for any regulation affecting his investment, even if these regulations were intended to protect human health or the environment. This Article has also given rise to any claims for compensation by investors such as the McCurdy Group.

Hence, it can be seen that what received little attention during the implementation of NAFTA was the scope and interpretation of the investment protection provisions contained in NAFTA's Chapter 11, and how they related to environmental protection by the host state. The past few years' experience demonstrates that this is critical. The investor protections provided in NAFTA's Chapter 11 have been used repeatedly to challenge environmental laws and administrative decisions that have negative economic impacts for foreign investors. As a consequence, the provisions designed to ensure security and predictability for the investors have now created uncertainty and unpredictability for environmental regulators (in this case bulk water export regulators).
 
 

c. Chapter 12: Services:

Chapter 12 of NAFTA sets out an extensive regime to govern trade and investment in the services sectors. As for the scope of Chapter 12, Article 1201.1 provides:

This Chapter applies to measures adopted or maintained by a Party relating to cross-border trade in service providers of another Party, including measures respecting:
  1. the production, distribution, marketing, sale and delivery of a service;
  2. the purchase or use of, or payment for, a service;
  3. the access to and use of distribution and transportation systems in connection with the provision of a service;
  4. the presence of a bond or other form of financial security as a condition for the provision of a service.
Article 1201.1 indicates that the Chapter applies to any foreign company supplying cross border services to the host country. Water is not a listed exception and we are aware of no other provision that would exempt water service providers from rights established by this Chapter. Therefore a company operating in these circumstances would be entitled to National Treatment under Article 1202 and the Standard of Treatment set out in Article 1204.
 
 

d. Summary:

Canada already lacks a clear national water policy and legislation that would prohibit bulk water exports of freshwater, and under NAFTA, it could lose complete control over its freshwater once it becomes a tradable commodity. Indeed, NAFTA rules concerning both investment and services would extend to water, whether water is classified as a good or not. In reaction to this, the Canadian federal government has conceded the following point:

Chapter 11 does not prevent NAFTA Parties from prohibiting the removal of water from its natural state. But foreign investors seeking to establish investment, or with established investments, for the removal of water from its natural state would have to be treated in the accordance with the obligations of the Chapters of NAFTA, In other words, this would mean that investors would have to be compensated for loss of profit if the proposed ban for bulk water exports is put into effect. Thus, because Chapter 11 provisions apply to Canadian water resources even though they represent an exhaustible resource, the considerable exposure that water export regulations would have to investor claims becomes evident.

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