TESTIMONY OF ANDREA DURBIN, POLICY ANALYST FRIENDS OF THE EARTH BEFORE THE HOUSE WAYS AND MEANS SUBCOMMITTEE ON TRADE SEPTEMBER 21, 1993 ON THE NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) AND THE ENVIRONMENTAL SIDE AGREEMENT Mr. Chairman and members of the Subcommittee: Good Morning. I am Andrea Durbin, Policy Analyst with Friends of the Earth. Friends of the Earth is a national, nonprofit environmental organization with 50,000 members and supporters. We have affiliated organizations in 51 countries and work on a wide range of national and international environmental issues. We appreciate this opportunity to share our views on the North American Free Trade Agreement (NAFTA). After long and careful review of the text of the NAFTA, as well as the text of the Side Agreement on Environment, we have concluded that the NAFTA, as currently written, is not in the environmental interest of the three countries that are parties to the agreement. We believe that it is possible to structure a trade agreement that will directly link economic growth and the improved social and environmental conditions of the three countries, but this agreement does not achieve these ends. We urge the members of the Subcommittee to vote against this agreement and put your full energies behind its renegotiation. Since we last spoke before the full Committee, the Administration has concluded a side agreement on the environment. We want to acknowledge the Administration's efforts in this undertaking and recognize the advancements of environmental issues in the trade arena over the last few years. Trade and the environment will be intricately linked from now on. However, the environmental side agreement does little to address the fundamental environmental questions raised by NAFTA. Friends of the Earth believes that NAFTA's potential to create environmental problems and its lack of regard to existing problems is serious enough that it should be rejected, in spite of what was negotiated in the side agreement. We agree with the Federal District Court which ruled that "NAFTA, by its very terms, sets forth criteria that may form a basis for challenging various domestic health and environmental laws"... and that "a state law that conflicts with the NAFTA is preempted". We believe that rejection of this agreement, and commitments to negotiate another, is better than approving this agreement in its flawed form, particularly since the NAFTA will serve as a model for future integration with the rest of Latin America. We do not subscribe to the idea that increasing economic growth will automatically lead to improved environmental protection. We believe that economic growth enables a country to better protect the environment, but it will not necessarily follow without some guarantees and explicit commitments within the agreement. In our testimony today we will: 1) summarize some of the issues that have not been addressed in the environmental side agreement; 2) analyze the contents of the side agreement; 3) explore how the side agreement would address existing situations. I. ANALYSIS OF THE ENVIRONMENTAL SIDE AGREEMENT Many crucial environmental issues are not addressed at all in the side agreement. For example, the agreement: 1. does not ensure that NAFTA will not be used by our trading partners to weaken federal or state environmental, health and safety laws that may impact trade. 2. does not make the basic dispute resolution process of NAFTA more open or democratic by allowing for public participation or requiring a more representative process. 3. does not create a comprehensive border clean-up plan, based on the polluter-pays principle. 4. does not deter companies from relocating to countries with weaker or non- enforced environmental standards. 5. does not address the serious impacts of NAFTA on the conservation of natural resources -- mining, timber and agricultural impacts. 6. does not safeguard laws which protect us against products produced in an environmentally destructive manner. 7. does nothing to solve the ongoing problem of U.S. owned companies failing to return toxic wastes to the U.S. for proper treatment. A Tri-National Commission: A Lot of Talk, But No Real Teeth The side agreement is limited and weak, consisting only of (1) the establishment a tri-national Commission for Environmental Cooperation (CEC), (2) an exhaustive mechanism to bring disputes between countries regarding lax enforcement of domestic environmental laws and (3) an announcement that the United States and Mexico will continue discussion about a proposed border institution to leverage bonds that would build infrastructure along the border region. Because of the limited authority of this commission, we have to conclude that this new institution will have little power to protect the environment from the impacts of NAFTA. In fact, it could be negative for the environment because it will redirect resources that could otherwise be used for border clean-up and building community infrastructure. A major function of the Commission is to gather information in response to complaints. However, the Commission cannot conduct its own investigations, but must rely on information provided by the governments, not companies. It cannot investigate a workplace or company directly. If a government finds an information request excessive or unduly burdensome, the government may deny the request for information. The Commission can draw attention to environmental problems and it can make recommendations. Beyond that it can go no further. In short it is little more than a forum for discussion. A Long and Exhaustive Process for Enforcement The centerpiece of the Commission is its ability to review whether or not each Party is enforcing its own domestic environmental laws. Unfortunately, this power is so circumscribed that it is effectively meaningless. First, the definition of environmental law in the agreement is narrow and explicitly excludes laws regulating the exploitation of natural resources from the enforcement provisions. The Commission can only consider laws related to the prevention or control of pollutants, hazardous substances, and the protection of wild flora and fauna, including endangered species. By narrowly defining environmental laws in this way, laws such as food safety regulations or public health measures are excluded. In addition, only the repeated failure to enforce an existing law is reviewable by the Commission. Environmental problems that are caused because of a lack of regulation are not subject to review because there is no law to review. This kind of backward criteria leads to a downward pressure against establishing an environmental regulatory structure. For those narrow laws that are covered by the agreement, there are other criteria that must be met to determine whether or not a government can be penalized for not enforcing its environmental laws. The agreement allows for a Party to not enforce its environmental laws if it "reflects a reasonable exercise of the agency's or the official's discretion" or if it "results from a bona fide decision to allocate enforcement resources to violations determined to have higher priorities" (annex II), creating a gigantic loophole for governments to argue their way out of a complaint. Finally, in order to be reviewable, there must be a "persistent pattern of nonenforcement", which is defined as "a sustained or recurring course of action or inaction" (annex IV). This definition is extremely vague as to the length of time such a behavior must be sustained before a complaint can be brought. Without a more specific definition, the determination of persistent pattern of non-enforcement is left subjective and undetermined: it could be one year or five years of nonenforcement. Enforcement: Punishing Governments, Not Polluters The Administration has argued that the "real teeth" in this agreement is the ability to penalize a government for nonenforcement through sanctions. The compromise struck between the three countries would allow sanctions to be levied against the United States and Mexico, and fines against Canada, enforced through the Canadian courts. Much of the debate has focused on Mexico's record of enforcing environmental laws, rather than on the behavior of industries and whether or not they are complying with the law. We continue to believe that the industries themselves must be held responsible and accountable for their own behavior. But this agreement punishes governments for not enforcing, not industries for not complying. If, after a long and exhaustive process, the Commission decides that sanctions or fines can be levied, the agreement limits the amount of the penalty to no more than $20 million the first year, and .007% of the three-way trade between countries thereafter (which is roughly $20 million this year). Although $20 million appears to be a significant amount, when it is a fine against governments, it is relatively insignificant. Despite what the Administration has argued, it is unlikely that the government will pass on that cost to the offending industry. Structuring the agreement this way puts the burden on governments, rather than encouraging companies to comply with the law. Resolving Disputes in the Commission Like the NAFTA itself, the side agreement establishes a dispute resolution process to allow Parties to bring complaints about non-enforcement. Only nonenforcement cases will be resolved by this mechanism. All other environmental cases will be heard in NAFTA's dispute resolution mechanism, which still remains closed to the public, and unrepresentative of environmental interests. To see the disparity between the side agreement and the NAFTA, one only needs to look at the dispute resolution process. In order for a Party to establish a panel in the Commission, it must gain the support of two-thirds of the Parties. Compare that requirement to the NAFTA dispute resolution which requires that only one Party needs to approve in order to form a panel. The criteria in the environmental side agreement are consistently more difficult to meet than in the NAFTA. Only governments, not citizens, can request a panel. Although citizens can bring a complaint to the Commission, citizen complaints do not lead to the formation of a panel. If a citizen meets the regimented criteria that the Commission requires to be a legitimate consideration, the most the Commission can do in response to that complaint is issue a report, which requires the approval of two-thirds of the Parties. Still the governments can refuse to answer a citizen's request, or scale back the request. The negotiators have made progress in the dispute process of the Commission, when compared to NAFTA's dispute resolution. It will set up a roster of panelists that include panelists that have environmental expertise. However, this does not extend to NAFTA's dispute panel where environmental experts are not mentioned or required. This difference is crucial because any challenges to U.S. environmental, health or safety laws will be resolved in the NAFTA dispute process. II. CARBON II: A HYPOTHETICAL CASE In recent weeks there have been a number of press reports about the Carbon II coal fired power plant facility under construction in Mexico near the U.S. border town of Eagle Pass, Texas, 140 miles southeast of Big Bend National Park. The coal fired plants may be exporting energy to the United States. Carbon II will lack scrubbers and pollution control devices for sulfur dioxide that would be standard equipment on a newly constructed power plant in the U.S. Environmentalists are concerned that its emissions will cause air pollution problems on the U.S. side of the border and impact Big Bend National Park. Attached to our testimony is a recent Wall Street Journal article about the plant. We would like to imagine how this situation would be addressed by the environmental side agreement. First, let's assume that a citizen's group like Friends of the Earth wishes to take action to try to stop transboundary pollution. It could lodge a complaint with the Commission, which can be denied. If it is accepted, the Commission could undertake a report. It could not conduct its own independent analyses of air quality or subpoena plant managers or directors. It could only ask the Mexican and US governments to provide existing information. The governments can then simply refuse, saying the demand is burdensome. If the governments provide information, the Commission can write a report and make recommendations. If two of the three countries agree, the report can be made public, otherwise it remains confidential. It would be impossible for an individual or an organization like Friends of the Earth to initiate the process which might eventually lead to formal sanctions. Such actions can only come at the request of governments, and with the support of two-third's of the parties. If the U.S. Government decided to bring a formal complaint about Carbon II it would have to prove that the pollution is being caused by Mexico's lax enforcement of an existing law, not for the failure to set regulatory standards. According to the Wall Street Journal, the Mexican embassy has already said that the plant "meets or exceeds all applicable national and international pollution standards". If that is true, the Commission can do nothing. Second, the U.S. would have to prove that the violation is part of a 'persistent pattern' of non-enforcement. While the meaning of this term is unclear and will likely be resolved through precedent, the U.S. will have to wait until the plant is operating and will have to show that the violations of environmental laws have been persistent. It may also need to prove not just that this plant is in violation but that the whole Mexican power sector is in violation. If these difficult points were proven, Mexico could then simply claim that enforcing pollution control on coal-fired plants is not a priority and the lack of attention "results from a bona fide decision to allocate enforcement resources to violations determined to have higher priorities" such as air pollution in Mexico city. If the U.S. were able to surmount these difficulties and succeed in levying sanctions, the most it could collect is $20 million dollars. According to the U.S. EPA the costs of installing scrubbers to meet U.S. air emission standards would be around $300 million simply to control sulfur dioxide, not to mention nitrogen oxide. Given such costs, at the end of the day, paying the fine would be a bargain for Mexico. III. CASE STUDY OF RE-EXPORTING HAZARDOUS WASTES Annex III of the 1983 La Paz Agreement and the 1988 Mexican Law of General Equilibrium require Maquiladora industries to export their hazardous waste to the country of origin for treatment and disposal. The thinking behind this agreement is that Mexico lacks facilities to treat these wastes in a manner equivalent to the treatment they would receive in the U.S. The U.S.-owned Maquiladoras widely flaunt this law. The Environmental Protection Agency estimates that only about one-third of the hazardous waste generated in the Maquiladoras is returned to the U.S., leaving somewhere around 20,000 tons in Mexico. This situation is not in the Mexican or the U.S. interest. The improperly dumped toxic wastes can lead to public health problems and huge long-term clean-up costs for Mexico. Industries may relocate to Mexico to take advantage of the situation and avoid the costs of proper disposal in the U.S. The problem is not isolated to Mexico, since the toxics can cross back into the U.S. through the air, water, or groundwater. This whole topic is not addressed in the NAFTA, despite being one of the clearest, current, trade and environment problems between the U.S. and Mexico. We had hoped that the side agreements would address the problem, but, as with Carbon II, we see them doing little more than providing an opportunity to discuss the issue. In fact the agreement could provide political cover to allow this problem to persist into the next century. If this issue were brought before the Commission, the politics would be somewhat different from Carbon II, since in the case of the failure to re-export hazardous wastes both the U.S. and the Mexican Governments are failing to meet treaty obligations. Since the approval of two NAFTA country governments is required to initiate a formal enforcement proceedings, it is unlikely this situation would ever be considered. Furthermore, if the issue were considered, the U.S. and Mexico could quickly announce that they had reached an agreement on the issue -- whether or not any real action would ultimately take place. We therefore believe that the Side Agreements will deflect action on this crucial area for the immediate future. Furthermore, since NAFTA gradually phases out the Maquiladora program as it phases out tariffs, the effect is to provide cover for these corporate violations until the NAFTA itself steps in and makes the dumping of hazardous wastes legal. In short, desperately needed control and prevention of industrial toxics will not take place. IV. CONCLUSION The environmental side agreement did not serve to resolve some key conflicts between increased trade and environmental protection. Instead, it creates yet another international institution that, given its weak powers, will be ineffective, and given the requirements for sanctions to be invoked, it is unlikely that they will be applied. We still believe that a framework for integration is necessary within North America, but that framework needs to be dramatically recast to incorporate the goals of sustainable development, democratic participation and responsible corporate behavior.