Within the United States, free trade works to the benefit of all. Goods and services pass easily between Pennsylvania and Maryland, between California and Nevada, between Georgia and Florida. One reason internal US trade works is that the rule of law exists. If a fraudulent transaction takes place in one state, there is a reasonable chance that someone in another state can achieve effective recourse in the courts. In addition, although states can enact legislation locally, the federal government retains the exclusive right to regulate interstate commerce. Indeed, it was the impediments to free trade between states under the Articles of Confederation that motivated the writers of the Constitution to prohibit the states from regulating interstate commerce.
The presence of barriers to international commerce had been an impediment to prosperity in Europe. The rise of the European Union represents a recognition of this. Europe is on a rapid track to full economic integration, now that these countries largely share a common currency.
The North American Free Trade Agreement (NAFTA) is an attempt to largely achieve the benefits of free trade between the United States, Canada, and Mexico. The increase in trade and prosperity following the enactment of the agreement is a testimony to the benefits of free trade. There was not the great ``sucking sound'' of jobs being vacuumed out of the United States predicted by some.
Nonetheless, Bill Moyers in the PBS program Now: Trading Democracy focuses on what may turn out to be an important if not fatal flaw in the agreement. Whereas most corporations would like to avoid Chapter 11 when it refers to bankruptcy, some that invest in foreign countries are trying exploit Chapter 11 of NAFTA. The offending section Chapter reads:
``No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment ("expropriation"), except: (a) for a public purpose; (b) on a nondiscriminatory basis; (c) in accordance with due process of law and Article 1105(1); and (d) on payment of compensation....''
Actually, the provision seems to make sense. If one wants to encourage investment, the investors must be confident that their investments will not be arbitrarily seized. The penalty for the expropriation is payment of fair market compensation.
The problem that Moyers focuses on in his special is potential overly broad interpretation of the ``tantamount to expropriation'' clause. Apparently, California passed an environmental regulation limiting the chemical additive MTBE in gasoline. The chemical had found its way into ground water and there are serious questions about the long-term health consequences of human exposure to MTBE. The Canadian company, Methanex is a major manufacturor of MTBE. It is now suing California under Chapter 11 of NAFTA. Methanex is submitting to an arbitration tribunal set up as part of NAFTA a request for nearly $1 billion in compensation for an act that is ``tantamount to nationalization or expropriation.''
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