We are going to debate free trade agreements, and their relationship with governments and democracy.

Methyl Tertiary-Butyl Ether (MTBE) is a substance that started being added to gasoline in 1997, after several studies showed its cost-effective capacity of reducing the pollution emissions of fossil fuel vehicles. However, MTBE is also the element of gasoline most likely to contaminate groundwater, due to its high degree of solubility, its tendency to move at the same or faster velocity than the water it contaminates, and its failure to biodegrade to the same degree as other gasoline components.

Even low levels of MTBE can make water supplies undrinkable, and people who ingest it frequently experience headaches, nausea, dizziness, and disorientation. Although its long-term human health effects are unclear, laboratory animal experiments suggest it can cause maternal and fetal defects, and the substance is classified as a possible human carcinogen according to the USA Environmental Protection Agency.

Worried about those negative environmental impacts, the state of California investigated the costs and benefits of adding MTBE to gasoline. The Health and Environmental Assessment of MTBE: Report to the Governor and Legislature of the State of California, published in 1999, revealed that MTBE had contaminated several of the state’s drinking water sources, and the treatment and monitoring costs were potentially in excess of $1 billion. Within months, the Governor issued an Executive Order forbidding the addition of MTBE to gasoline, and most California gasoline refiners agreed to cease using MTBE and produce ethanol-blended gasoline in its place. However, one of the major players in the Californian gasoline market was the Canadian company Methanex, that operated in the United States since the establishment of the North American Free Trade Agreement (NAFTA), in 1994, and they didn’t agree to the ban on MTBE.

Because California accounted for approximately forty percent of the U.S. reformulated gasoline market, and MTBE-blended gasoline was the dominant choice among California refiners, the ban had immediate and substantial effects on Methanex’s sales. Within ten days of the Executive Order, Methanex experienced market capitalized losses of $150 million. So, on July 2, 1999 Methanex notified the United States of its intention to initiate international arbitration for the recovery of damages pursuant to Chapter 11 of NAFTA. Methanex sought damages of $970 million for loss suffered by Methanex, its American subsidiaries, and its investors. If successful, these damages would be drawn from the U.S. treasury and would therefore hold all Americans accountable. Further, Methanex alleged its compensable losses included the depreciation of Methanex stock on international securities markets due to the Executive Order’s impact on the global price of methanol.

Particularly, Methanex alleged that the ban on MTBE constituted a breach of three obligations on the host state under NAFTA’s Chapter 11: (1) the national treatment obligation in Article 1102 of



NAFTA, which requires a NAFTA party to accord foreign investors “treatment no less favorable” than that it accords, “in like circumstances,” domestic investors in the host state; (2) the obligation to accord minimum international standards of treatment to protected investors, including fair and equitable treatment, as per Article 1105 of NAFTA; and (3) the obligation not to take measures tantamount to expropriation without paying compensation, in accordance with Article 1110 of NAFTA. The Tribunal rejected each of these arguments, finding in favor of the United States.

Since then, a number of similar cases were brought to court. Not all courts ruled in favor of the state, and private companies were able to appropriate money from taxpayers and/or forbid states to adopt environmental/health practices several times, due to legislation established in free trade agreements. This generated a heated debate about the marketization of governance: to what extant can private companies go over decisions made democratically (meaning by elected officials), and prevent legislation from being adopted? Why should taxpayers who voted for local environmental protection pay companies that lost their right to pollute? How can low-and-middle-income countries, that frequently do not have institutional nor financial capacity to compensate the losses of billionaire companies, prevent that risk and still engage in international trade? Engage in that debate, justifying your answers. Feel free to provide an opinion regarding the court decision on the Methanex vs. United States case as well.

– Your post should be at least 6 sentences long – You are expected to comment on at least one other student’s post.

In your communication with other students, please:

● Expand on or clarify an important point. ● Offer an additional argument to support a position taken in an answer. ● Suggest ways in which an idea could be more clearly expressed. ● Identify passages where you think the writer misunderstood a concept or

applied it incorrectly. ● Disagree or agree with a point or position made in an answer.