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March 02, 2011

Cola Wars Beat Drug Wars

The award in agribusiness giant Cargill's NAFTA investor-state attack on Mexico's jobs program was published last week.

The short version: a tribunal of three unelected judges determined that Mexico's efforts to save or create jobs for campesinos in the sugar sector were a violation of NAFTA. Mexico's taxpayers were ordered to cough up over $77 million plus interest, all the judges' and court fees, and to even pay Cargill $2 million for Cargill's own lawyers' costs.

Here's the longer version:

For years, large agribusiness groups have been pushing the use of high fructose corn syrup in soda drinks, despite concerns about the environmental and public health impact. Not only is HFCS opposed on health grounds, it's also opposed by some foodies on taste grounds: witness the growing demand for Mexican Coca Cola, much of which is made with sugar and is said to therefore taste better.

By the late 1990s, Mexico had a whole lot of excess sugar in its market that it hoped to be able to export to the U.S.This pile-up was driving down prices and hurting Mexico's farmers, who were generally getting battered by NAFTA-style rules and in turn driving displacement into drug trafficking or immigration, as President Obama himself noted during the campaign.

The Mexican government thought that it had a deal with the United States under NAFTA to allow more sugar exports if there was excess production within Mexico. But the Clinton and Bush administrations disputed the deal, and from 1997 onwards refused to address Mexico's concerns or even respond meaningfully to their phone calls and emails.

At the same time as Mexico's sugar farmers were getting hit from excess supply and low prices, they were also getting hit by another phenomenon: an increase in HFCS corn exports from the United States. Cargill was one of the leading companies involved in this trade, and focused on selling to soda companies in Mexico. The company apparently considered, but ultimately rejected, processing the HFCS in Mexico - which would have at least created jobs. Instead, they decided to simply ship it fully processed from the U.S. In other words, Mexico was seeing job losses due to the sugar sector problems and HFCS imports, and wasn't even seeing much job creation from the HFCS.

So, in 2001, Mexico did what any country facing a job crisis and diplomatic stonewalling would do: it imposed a 20 percent tax on soft drinks and other beverages that contained sweeteners other than sugar.

Of course, Cargill was unhappy with this, and tried to get the Mexican government to reboot the HFCS trade. In 2004, Cargill launched a challenge under NAFTA to get cash compensation from Mexico's taxpayers. So, Mexicans got a triple whammy from NAFTA: widespread campesino displacement due to agribusiness exports, a refusal to allow an outlet for excess sugar, and then they had to pay a giant U.S. corporation for the privilege of trying to construct a lifeboat for some of their farmers.

Folks that are interested in the full NAFTA award can peruse it here. Some of the lowlights, for the real trade wonks:

  • Cargill claimed that Mexico's tax measure was an expropriation. One of the supposed procedural safeguards in NAFTA allows the government of the host and home country to weigh in on this type of claim before it is allowed to go forward. The U.S. Treasury Department did a big favor for Cargill by choosing to not block this aspect of the claim.
  • Despite the obvious health, environmental and employment differentials between sugar and HFCS, the NAFTA tribunal considered that the two products were "like" for the purposes of NAFTA, and had to therefore be treated at least as well as each other.
  • This panel, like the panel in the Grands Rivers v. U.S. case we discussed last week, failed to resolve the question of whether there a governmental measure which diminishes the value of but does not compeltely destroy an investment could be considered an "indirect expropriation." (Thankfully, the panel did not find that Cargill was expropriated, although it left the door open to a finding of "indirect expropriation" if the damage to Cargill's Mexican distribution company had been more severe.)
  • The panel, like the panel in Grand River, failed to resolve the question of whether there exists a circumstance under which a mere change in regulation could rise to a violation of NAFTA, i.e. whether an investor has a compensable NAFTA right to expect stability and consistency in how democracies choose to regulate them.
  • As my colleague Matt Porterfield has discussed elsewhere, corporations are increasingly arguing that investor-state tribunals can expand the scope of so-called "customary international law" to include a right to not be disappointed in your expectations. He's argued that, at a minimum, we shouldn't be alleging that customary international law has evolved in this way unless we can show that there is a consistent and long-term and nearly universal practice of states conferring such a right. The Cargill v. Mexico tribunal, however, wrote that "surveys of State practice are difficult to undertake..." (paragraph 274)
  • I'm sorry, but if investor-state tribunals are going to continue to consider such outlandish corporate claims for hundreds of millions of dollars in taxpayer money, the least we can expect them to do is actually undertake the work that we would expect of a liberal arts college student. (The tribunal found that Mexico did violate Cargill's right under these provisions to "fair and equitable treatment," although for different reasons that the "reasonable expectations" arguments that I'm discussing here.)
  • The tribunal ruled that the tax was a NAFTA-prohibited "performance requirement." In other words, countries can't use their own tax policy if it constitutes an industrial policy to promote jobs in-country.
  • Finally, in what could have some relevance for the ongoing NAFTA trucks dispute, the tribunal ruled that Mexico should not have erected barriers to HFCS "in an attempt to persuade another nation to alter its trade practices." (paragraph 299). It seems like Mexico had a record of instituting trade restrictions when it is unsuccessful at negotiating with the United States government, as is the case with both the HFCS and trucking disputes. But this investor-state panel argued that the U.S. companies that suffer from these retaliatory measures should not be the victims of a separate trade fight. Wonder if we'll see any of the U.S. ag producers hurt by those tariffs Mexico instituted following the trucking dispute launch an investor-state case?

In sum, the Cargill v. Mexico panel did not adopt the most extreme and ideological interpretations of the "indirect expropriation" and "fair and equitable treatment" concepts. But this will be little consolation to the taxpayers that now have to pay the company for the privilege of enacting a jobs program at a moment when diplomacy had failed and the country was spiralling towards the abyss of narco-trafficking and failed statehood. Under NAFTA, the politically available option to a pressing problem may get you stuck with hundreds of millions of dollars in corporate claims.

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