Democracy and the Expanded Property Rights of NAFTA
An Analysis of the Potential Conflict
Paper presented at the Fourth Annual Kent State University Symposium on Democracy
On March 25, 1999,
Gray Davis ordered the phase out of MTBE (methyl tertiary butyl ether). The
gasoline additive had been polluting water supplies in
Methanex,
the maker of the additive, has since filed a lawsuit against the
Such cases seem shocking. It is not
difficult to see that such provisions have the potential to undermine a
nation’s sovereignty. In the case of the three nations participating in
the
North American Free Trade Agreement (NAFTA), the democratic process is
threatened.
In this paper I will consider the philosophical basis for the expanded property rights of the NAFTA agreement. It will begin with some arguments in favor of the expanded rights and conclude that some cases do warrant rectification on the very grounds that corporations like Methanex claim they do. It will then argue that there are at least two limitations to this sort of rectification. These two limitations severely restrict both the number of cases that will require rectification and the rectificatory amounts in these cases. While these limitations are significant, it is not clear that they are sufficient to guarantee a nation’s ability to protect its residents. The ability to pass legislation with regard to labor, in particular, remains vulnerable to prohibitive lawsuits.
Finally, I will argue that government regulation serves as a kind of insurance against corporations that ultimately cannot be held liable for the damage they might cause. Those who argue that government should not regulate at all really must explain how governments are to protect their residents without regulation, given the corporation’s limited ability to rectify the harm that it might cause.
I want to begin with a response to the following objection to cases like the one just mentioned. “How can a government owe rectification to a corporation when it has not even physically harmed the property in question?”
Let’s begin with a case in which rectification is clearly due. Suppose you crash your car into mine, causing minor damages. You might pay a mechanic to take the dents and scratches out of the car, and the harm might be fully rectified by this means. If you were to damage my car so severely that it was irreparable, you could rectify the harm by replacing the car with an adequate substitute or pay me its market value. The car is worth about $2,500, so pay me that, and we can consider the harm rectified.
There are more complicated cases. Sometimes the cost of repairing the property can exceed the value of the property. In these cases, the owner is only owed the value of the property undamaged; the market value serves as a limit to rectification. I could not demand $3,000 to repair the damage to my $2,500 car.
This suggests that rather than protecting property from harm without limitation, we protect the value of property from harm. I cannot recover damage when you crash into the garbage at the end of my driveway. It is valueless. These considerations make clear that we can only discuss property rights insofar as property means property with value. There are cases that might serve as counterexamples, mainly cases in which sentimental value is relevant, but I want to avoid that important topic here. Based on the foregoing, we might formulate the following general principle: If rectification is due, then wrongful harm to property value has occurred.
This formulation reflects the necessity of property value for rectification, and eliminates cases in which I might sue you for running over my garbage.2
Now, is wrongful harm to property
value a sufficient condition for rectification? There is some reason to think
that it is not. Consider the following: The state of
Also suppose that my house lies just north of the proposed highway, and so will not be physically expropriated. It is not difficult to imagine that the value of my house will go down, perhaps dramatically. The highway is unarguably a nuisance and probably a threat to the physical health and safety of the nearest homeowners, their families and visitors, me included. Those who make the decisions about highway projects are usually aware of the decrease in desirability and value that the highways cause. They also seem to suspect that they are to some extent responsible for the rectification of this harm. Such loss is often rectified in part by walls, sound barriers, trees, and so on. Yet the loss in value is almost never rectified entirely. This case, if typical, suggests that in addition to harm to property value, physical harm is also a necessary condition of rectification.
This intuition is mistaken. I have argued above that it is the value of property that is relevant in cases of rectification. Since we do not protect mere physical harm in the absence of harm to value, it is just this value that we do protect. One might object that harm to value alone does not satisfy the criterion of “wrongful” in principle 1. It is not clear, however, that there is a relevant difference between the physical expropriation on the one hand and the nonphysical expropriation of value on the other. Harm of the latter sort, therefore, is due rectification just as harm of the former sort is, so long as it is wrongful.3
If you do not like the highway example, consider some others. Phillip Montague suggests a case in which “x promises to repay a debt to y by a certain time, but fails to do so and has neither justification nor excuse for his failure; as a result, y cannot make his car payment and the car is repossessed.”4 Montague claims that X is obligated to compensate Y for any loss resulting from such an action, including the loss of equity in the car. X is then responsible for the harm done to the value of the car, even though he has done no harm to the car itself. The antitrust suit against Microsoft was essentially a claim of harm done to the value of other companies, although no physical harm was done. If I break a lease, I might owe the owner rectification, even if I have not physically damaged the place.
There are court cases that support
this conclusion, at least with regard to harm done to property value by the
government. In the 1946 case of the United
States v. Causby (328
These cases are of course more complicated than the cases of physical harm. They are more difficult to prove and adjudicate. But they are not simply dismissed because of the absence of physical harm. All of this provides justification for principle 2: If wrongful harm to property value has occurred, then rectification is due.
This principle formalizes the foregoing conclusion. Even in the absence of physical harm, harm to the value of the property is a sufficient condition for rectification. Together the two principles yield principle 3: Rectification is due if and only if wrongful harm to property value has occurred.
This final principle might seem tautologous. Its real purpose is to make explicit that it is harm to the value of property that we protect, and that an owner might be due rectification even in the absence of physical harm. The intuition that only physical harm can be wrongful, then, is mistaken, and there is a basis for claims of rectification based on lost property value alone. One’s right to rectification in the absence of physical harm rests on the same philosophical basis as rectification for direct expropriation. There is nothing about physical seizures or damages that is necessary in order for a harm to qualify as wrongful.
All of this is not as radical as it might sound. The word wrongful in principle 3 permits me to open a competing café in my small town and not owe rectification to the other café owner for her lost business. However, we should also be careful not to understand the word wrongful as synonymous with “illegal.” Much of what is right and wrong is legal and illegal, respectively. Yet, we should admit that the goal is to make what is wrong illegal and what is not wrong permissible, and that the present system, especially with regard to NAFTA, might be incorrect on this account. Much of the discussion here has to do with whether what is legal is in fact wrong. The discussion cannot be reduced to the question of what is legal.
There is nothing about principle 3 that limits rectification to individual persons. Anyone who accepts principle 3 for local homeowners should accept it for local businesses or corporations. Whether it is the value of my farm or restaurant, or some large corporation’s farm or restaurant that declines, it seems either or neither are due rectification.
This question (and apparent answer) of whether such cases require rectification returns us to the NAFTA cases. In chapter 11, subchapter A, article 1110: Expropriation and Compensation, the document states, “No party shall 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” unless certain conditions are met. One of these conditions is payment of compensation. Might not the governmental prohibition amount to an indirect expropriation of an investment that is tantamount to expropriation? Presumably the italicized words above make the question a reasonable one.
Consider another case. Metalclad is an American corporation that bought a closed
toxic dump in
While the conclusion in the Metalclad case follows from the more general conclusion, it does seem counterintuitive, since the company seemed to pose an environmental and health risk, and the community only sought to protect itself. Here the polluter, it seems, cannot be regulated without extravagant costs, perhaps prohibitive costs. I will deal with this apparently problematic implication in what follows. First, however, I want to put forth what I believe to be the only good argument for rectification of this sort.
The Methanex
suit against the
Suppose a city ordinance ceased all
new construction because of water scarcity (a scenario that
The answer should be obvious. I should be paid the loss in market value at the time of the highway project, and choose whether to keep the house I am in or move to, say, one of those nearly identical homes that were left unaffected by the highway a mile or two away, which retain their present value and are projected to go up in value as my home would have without the highway project. This follows from what was said regarding the limits of rectification at the outset. When my car was worth only $2,500, I could not claim $3,000 for its repair; I just had to find a substitute. If property can be replaced, it is ordinarily considered rectified. If we assume that I and everyone else who is interested act quickly, we might be able to accomplish this. Then we have an investment that is as promising as the original house was before the highway; we can await the dramatic rise in price. No damage done to the value of my investment.
Such substitutes, however, are not always available. It seems that if all other real estate in the entire country were increasing at 5 percent or less, and I was forced from my home, which promised to increase by 40 percent a year, into a home that appreciated more slowly, I might claim further rectification based on the loss of a unique investment opportunity. And it is just such a justification that favors rectification of loss in future profits for multinational corporations, especially in those cases where the company possesses a patent and therefore probably satisfies this criterion. In the case of Methanex and Metalclad, it is not that the companies must be able to find a California-sized population to sell its additive to, or a nearby dump site, respectively. It is that the companies must be able to find another investment opportunity for the money that had been invested in the now-defunct projects. So it does seem that some of the future profits of both companies should be considered. How much of this loss should be rectified is another question.
There is another limitation that emerges in the process of considering the following objection: It is abhorrent to pay a company that would otherwise have polluted vast water systems and contributed to the health problems and possible deaths of countless people so that they do not pollute and injure. This suggests that they had a right to pollute and injure in the first place, and they really did not.
Here, I think, is part of the
solution. We have already said that the calculation that yields the rectificatory amount must subtract the profit of
reinvestment. Additionally, we must subtract the damages that were precluded by
the regulation. So long as the accusations are true, Methanex
owes
If we consider all of these factors, rectification to corporations will be quite reasonable in most cases. There would be no rectification at all in those cases in which the regulation prevents extensive damage to public health or the environment—damages that would otherwise have outweighed profits. We would satisfy those concerns that the framers of NAFTA claim to have had in mind: frivolous regulation would be avoided. Governments could only afford to regulate when real danger is the alternative.
A number of objections arise immediately, and many more arise only on reflection, some of which I have dealt with in endnotes. I admit that the borderline cases are many, and that many of the details of what does and does not constitute harm remain to be sorted. Whenever monetary rewards depend on speculation about future profits, future harms, and so forth, there will be a good deal of room for disagreement. This does not mean the entire project should be abandoned.
I want to briefly consider what I
take to be the most serious of these objections. The city of
I am just not sure how to handle such cases. I take this objection to be a limit to the defense of NAFTA’s chapter 11 that I have advanced. Again, this is a matter of national sovereignty, and it seems clear that a government must retain its ability to protect its citizens, even when the harm is not imminent. I suspect that wages below the Santa Fe minimum wage might be linked rather easily to physical and mental harm. The life span of persons below the poverty line is of course lower on average than those above. I do not take this to be a satisfactory answer, though, and I invite any additions or alternatives to the thoughts I have advanced in this paper that deal with this problem.
If corporations could assure us that they would rectify all wrongful harm done to surrounding property values, we might not need regulation at all. If this were the case, it would simply be unaffordable to do something that caused a good deal of damage to the area. Industry that is heavily polluting, like the coal industry, would be forced into unpopulated areas. The nuclear power industry would be unable to afford the dumps it needs for its waste. But we do not have this assurance for a number of reasons. One reason is that corporations are able to declare bankruptcy. Corporations cannot assure us that they will rectify all of the wrongful harm for which they might be responsible, since they might cause more harm than they can rectify.
For this reason, government regulation serves as a kind of insurance. We might just allow Methanex to continue to pollute the water supplies, so long as it pays everyone involved for their trouble. But since governments cannot reasonably expect that corporations will rectify all wrongful harm in such drastic cases, it seems regulation is its only means of protecting its residents. This is a strong argument in favor of government regulation. Any opponent of regulation really must explain how a government might protect its residents otherwise. This capacity is a condition of sovereignty, and any attack on this capacity amounts to an attack on sovereignty. In the case of the NAFTA nations, this amounts to an assault on democracy itself.
Conclusion
When we hear about corporations suing governments that prohibit them from polluting or injuring, we often respond with outrage. There is nothing really wrong with this reaction, but some good might come from an analysis of the claims. I have argued that the claims should not be dismissed out of hand, since there are good reasons for accepting them under certain conditions. There are, however, strict limits on the rectificatory amounts that a corporation can rightly claim. So long as rectificatory judgments reflect these limits, the threat of the expanded property rights of NAFTA to democracy is considerably lessened. They may, in fact, be more consistent with intuitions with regard to justice than property rights more narrowly construed. However, the threat is not eliminated, and substantial issues remain over whether nations ought to enter trade agreements that compromise their sovereignty in the way that NAFTA might.
In the case of democratic nations, it seems clear that the voluntary compromise of national sovereignty is only legitimate when the populace consents. It does not seem controversial to suggest that on such complicated matters, a good deal of work ought to be done to educate the populace on the consequences of the compromise. Both of these criteria remain unsatisfied in the three North American nations with regard to NAFTA.
Notes
1. William Greider,
“The Right and
2. It is not the case that the garbage is not my property. When the wind blows my untied bags of garbage all over the neighborhood, there will be no doubt about whose property it is.
3. There are a number of objections that might be raised against my claim that a government or corporation must rectify harm done to surrounding property value in cases like the highway case. I want to consider two objections here.
The city or state seeks the common good. (This might not be an objection that would help the corporation that builds a highway.) It does not intend to cause harm, and so should not be held responsible. This is not, however, reason to dismiss the city’s obligation to the harmed individual. D. N. MacCormick gives the example of a professor who promises to take his children to the beach. As he is leaving, he meets a suicidal student, and justifiably chooses to break the promise with his children and attempt to convince the student not to commit suicide. In this case, the professor is still obligated to take the children to the beach on some other day, or provide some other sort of compensation. “He has an ‘obligation of reparation’ even though he did not do the wrong thing in failing to keep the promise.” “The Obligation of Reparation,” Proceedings of the Aristotelian Society 78 (1977–78): 175. Hence good will is no excuse for harm. It is the duty of the city or state to make travel more efficient. And it might be that the harm done to homeowners is justified. This does not eliminate the city’s obligation to compensate the homeowners, just as the professor is not released from his obligation to take his children to the beach.
The second objection is that, given this criterion for rectification, much fewer public projects would occur. Development always harms someone. The money allocated for public projects often does not even cover the project itself. My reply is that if we must choose between a government that rectifies all of the harm it commits, but accomplishes little, and a government that is extremely ambitious in its projects at the expense of an arbitrarily chosen population, the just decision is clearly the former.
4. Phillip Montague, “Rights and Duties of Compensation,” Philosophy and Public Affairs 13 (1984): 79–88.
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