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Tuesday, March 1, 2005 - Page updated at 01:51 p.m

Correction: This story incorrectly reported that a North American Free Trade Agreement arbitration ruling overturned a damages award by a Mississippi jury. In fact, the case sought to undermine the verdict by seeking compensation for the award, arguing that the jury had been unfair. The claim was denied by a NAFTA tribunal on technical grounds.

Canadians want U.S. to pay for beef ban

Seattle Times business reporter

Call it the stampede from up north.

Under an obscure provision of the North American Free Trade Agreement (NAFTA), Canadian cattlemen are asking the U.S. government to pay hundreds of millions of dollars to cover losses they incurred when the border was closed to Canadian beef after mad-cow disease turned up in Alberta.

With the ban set to be lifted early next month, the case spotlights NAFTA's little-known Chapter 11, which allows companies to claim damages from governments if their laws or actions damage trading partners.

About 500 cattlemen, mostly from the province of Alberta, have filed 121 claims under NAFTA seeking at least $325 million in compensation from U.S. taxpayers for the May 2003 decision to halt imports of Canadian beef and cattle, their lawyer said.

NAFTA critics say the mad-cow case shows how the rules increasingly are being used to let foreign companies override national or state laws. Big awards, they say, could frighten lawmakers into watering down or avoiding safeguards. In one case in Mississippi, a NAFTA panel used the rules to overturn a jury verdict.

"Foreign investors are empowered under Chapter 11 to sue us for cash compensation over laws that affect their profits, when in fact our own corporations wouldn't have that right," said Rep. Maralyn Chase, D-Edmonds. "That bothers me a lot — especially if we pass laws protecting health or the environment."

31 cases pending

While noting that trade agreements are essential to opening export markets for U.S. products, Chase said she's concerned about Chapter 11 provisions in other trade deals, including the Central America Free Trade Agreement, which awaits congressional ratification. A group of ambassadors will visit Seattle tomorrow to promote CAFTA.

So far, business interests have won $35 million from Canada and Mexico in five of 11 cases concluded since NAFTA, a trade agreement among the U.S., Canada and Mexico, went into effect in 1994.

An additional 31 cases are pending, seeking $28 billion in claims, according to a tally by Public Citizen's Global Trade Watch, a Washington, D.C.-based policy group founded by Ralph Nader, which released a study on Chapter 11 yesterday in Olympia.

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Some of these cases, including one $10 billion claim, have not moved beyond the initial filing stage.

The U.S. has won all three cases against it that have concluded so far. Five pending cases include a $970 million claim by Methanex, a Canadian maker of an ingredient in a gasoline additive, that claims it was harmed when California banned the additive.

The U.S. closed its border to Canadian beef and cattle after a case of bovine spongiform encephalopathy was diagnosed in Alberta in May 2003. Since then, three more infected cattle have been found, including a case in Mabton, Yakima County, that was traced to Canada.

Last month, the Department of Agriculture said it would allow Canada to export beef and cattle less than 30 months old to the U.S. starting March 7.

While opening the border to Canadian beef would limit future claims, it would do nothing to diminish the losses cattlemen say they've suffered so far.

"The damages we're seeking are for what the border closing has already done to us," said Todd Weiler, an attorney representing the cattlemen.

Weiler said he expects to formally initiate arbitration next month, which starts the process of setting up a three-member panel of trade lawyers to hear and decide the case.

The damages specified in the cattlemen's filings are minimums that the panel could increase, he said. "It could be much more."

"Protectionist politics"?

NAFTA's Chapter 11 is intended to protect companies from having factories or land seized by foreign governments, or from laws that unfairly favor a nation's own businesses.

The cattlemen's claims are based on a clause that says companies from other NAFTA countries are entitled to the most favorable treatment that U.S. companies would receive in similar circumstances. The provision is designed to prevent countries from arbitrarily tossing impediments in front of foreign competitors, and to encourage businesses to invest and compete across borders.

The Canadian cattlemen say they invested in feedlots, cattle, feed and equipment to supply the U.S. market. The flow of cattle and processed beef across the border has been common for so many years, they contend, that the U.S. and Canada constitute one, integrated market.

For such an integrated market, closing the border had no meaningful public-health effect, the Canadians claim. To really protect U.S. citizens and render the border closing meaningful, the U.S. should have killed all of the Canadian cattle already in the U.S., Weiler contends. However, that would have hurt U.S. ranchers and feedlot operators who owned those cattle.

Instead, the border closure boosted the price of U.S. cattle, while creating a glut of cattle in Canada that pushed down prices there. The move was based on "protectionist politics rather than science," Weiler said.

Several Chapter 11 cases challenge state law or even jury verdicts. In the Methanex case, critics fear a $970 million award to the Canadian company could prompt California to remove its ban on MTBE, the gasoline additive that was found in drinking water. In a case in Mississippi involving the Loewen funeral-home chain, the rules even overturned a $500 million antitrust verdict awarded by a jury.

U.S. companies also have sued Canada. Pope & Talbot, an Oregon timber company, won $461,000 in 2002 after a panel decided Canada had treated it unfairly in a dispute over lumber imports. Shipping giant UPS has filed a case alleging Canada's postal monopoly unfairly subsidizes its national courier service, which competes with UPS.

"The rules give corporations a platform to argue that any government measure that negatively impacts their profitability is a violation of NAFTA," said Mary Bottari, co-author of Public Citizen's Chapter 11 study.

"The U.S. government should be able to open and close borders because of health concerns without this expensive litigation. Even if the U.S. wins, the case will cost millions of dollars to defend."

Ian Laird, an attorney at Davis & Co. in Toronto, said concern about the number of NAFTA cases is overblown. Only a few are filed every year against the U.S., and many languish after an initial filing.

"One or two a year does not a growth industry make," Laird said.

However, he and others say there has been rapid growth in similar types of cases worldwide where companies file claims against governments under what are known as bilateral investment treaties. There are about 2,000 such treaties among 200 countries.

"It has created a renaissance in investment-treaty arbitration," Weiler said. Among bilateral agreements, "we've seen an exponential increase in cases."

Beyond CAFTA, Chapter 11 protections are part of the proposed 32-nation Free Trade Area of the Americas, which includes all the countries of North, Central and South America and the Caribbean.

Similar protections also have been proposed at the World Trade Organization, though they have not made much progress.

Chase said she expected state legislators to become more vocal about the issue as Congress considers CAFTA, which she fears could hamper the state's lawmaking powers. She questioned why an agreement appears to put corporate profitability ahead of public health.

"I don't want to put those Canadian cattlemen out of business by any means," she said. "But under NAFTA, they can demand that [the border] be opened or we have to pay. I think we're building a democracy deficit."

Alwyn Scott: 206-464-3329 or ascott@seattletimes.com

Copyright © 2005 The Seattle Times Company

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