Pac Rim Cayman V. Republic of El Salvador: Confronting Free Trade's Chilling Effect on Environmental Progress in Latin America

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Because of the disparity of environmental regulation between the United States and its southern neighbors, multinational corporations have long viewed the resource-rich countries of Central America as attractive locations for factories and extractive industry. (1) However, as liberal democracy has gradually penetrated the region in the post-Cold War period, Central American states like Costa Rica have become more environmentally friendly and more democratically responsible to voters. (2) This change has also come with the advent of a huge free trade zone spanning much of the Western Hemisphere. (3) This zone consists of two primary agreements: the North American Free Trade Agreement (NAFTA) among the United States, Mexico, and Canada (4) and the Dominican Republic-Central American Free Trade Agreement (CAFTA-DR) among the United States, the Dominican Republic, and several Central American states. (5) The long-term effects of these free trade agreements (FTAs) remain to be seen, but their immediate benefits, particularly as they relate to the environment, are already hotly debated.

In a 2005 opinion piece, then-Senator Barack Obama wrote that he opposed the CAFTA-DR because it did "little to address enforcement of basic environmental standards in the Central American countries and the Dominican Republic." (6) The senator's concern about environmental degradation in the free trade zone was a direct response to the effects of NAFTA in Mexico. (7) In the 2000 NAFTA arbitration, Metalclad Corp. v. United Mexican States, the California-based waste disposal company, Metalclad, obtained a $16.7 million award against the state of Mexico after the arbitration panel found that the Mexican state of San Luis Potosi had indirectly expropriated Metalclad's investment in a pre-existing landfill when the state designated the area surrounding the land as an ecological preserve. (8) The Metalclad award set a precedent whereby an arbitral tribunal could hold a NAFTA party government liable in an investor suit for indirect expropriation following the enactment of a legitimate domestic environmental policy. (9)

During the expedited CAFTA-DR negotiations, (10) environmentalists and legal scholars heatedly discussed whether the Central American agreement could or should improve upon NAFTA's weak environmental protections, particularly the Chapter 11 investor-state dispute resolution mechanism that had allowed Metalclad's judgment against Mexico. (11) A report by the Economic Policy Institute noted the dangers of adopting another NAFTA-style FTA: "NAFTA tilted the economic playing field in favor of investors and against workers and the environment, causing a hemispheric 'race to the bottom' in wages and environmental quality." (12) But in his final review of the CAFTA-DR document, the U.S. Trade Representative wrote that it would result in major environmental benefits in the region: "[A]s wealth grows and poverty decreases, more resources become available for environmental protection, particularly as [developing countries] develop constituencies in favor of environmental protection." (13) He also asserted that, along with investment and international trade, CAFTA-DR would provide the technology necessary to foster environmentally friendly policies in the region. (14) Despite continuing concerns over the FTA's environmental impact in the underdeveloped states of Central America, CAFTA-DR was signed by Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States in 2004, (15) and became law in the United States in 2005 after a narrow Senate majority vote. (16)

The resulting treaty is largely a word-for-word duplicate of NAFTA, including its investor suit provision. (17) Although CAFTA-DR pays lip service to the goals of "implement[ing] this Agreement in a manner consistent with environmental protection," "protect[ing] and preserv[ing] the environment," and "preserv[ing] [the Parties'] flexibility to safeguard the public welfare," (18) the treaty as a whole poses many of the same environmental and regulatory dangers that NAFTA was shown to threaten in the Metalclad suit. …