Canada: NAFTA Panel Rejects WTO Approach to Anti-Discrimination Rules

Article by Ken Purchase, ©2005, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on International Trade - November 2005

The Methanex decision creates an interpretive chasm between similarly worded provisions in NAFTA and WTO agreements while arguably opening the door for protectionist legislation.

The ability of NAFTA Chapter 11’s anti-discrimination rules to discipline discriminatory legislation has been called into question in the decision dismissing the challenge by Methanex of California’s ban on fuel additive MTBE. While many aspects of the decision are noteworthy, its treatment of Chapter 11’s anti-discrimination provisions is remarkable in rejecting the longstanding approach to these issues under the GATT and WTO Agreements.

Methanex, a Canadian company, manufactures methanol, a key component of MTBE, a gasoline additive that increases oxygen content and reduces tailpipe emissions through the more complete burning of the fuel. Such additives are known as oxygenates.

California announced its intention to ban MTBE in 1999, citing concerns that MTBE was contaminating drinking water due to gasoline releases into the environment. Methanex challenged that order claiming, among other arguments, that it violated Chapter 11 of the NAFTA by discriminating against a Canadian investor and its U.S. investment. The ban on MTBE was, according to Methanex, actually intended to help U.S. producers of ethanol, another oxygenate sometimes added to gasoline.

Like GATT and other WTO Agreements, NAFTA contains anti-discrimination rules prohibiting a country from treating its own people, goods or businesses better than their foreign counterparts. In the context of Chapter 11, NAFTA prohibits treating domestic investors or investments better than it treats those of other NAFTA Parties in like circumstances. A critical question in any allegation of discrimination is what constitutes "like circumstances".

WTO and GATT Panels have traditionally taken a broad view of "likeness" to ensure that discrimination cannot be disguised as regulation simply by drawing arbitrary distinctions. Industries in competing countries will often produce somewhat different products which nevertheless compete for the same market. In such cases, protectionist governments may aid their domestic industry by drafting laws drawing distinctions that, while neutral on their face, ultimately favour their own industry at the expense of foreign competition.

In one WTO dispute, France enacted labelling regulations permitting only specified species of scallops to be labelled as "Coque St Jacques" while all other scallops must be labelled as the less desirable "petoncles". It just so happened that the scallops found in French waters were species entitled to the "Coque St Jacques" designation while all Canadian scallops were, according to the regulation, "petoncles".

Whether or not the law was discriminatory depends on how broad a view of likeness one employs. If all scallops were "like", then the law would seem to discriminate against Canadian scallop producers by preventing them from using the sought after "Coque St Jacques" label but, if a scallop is only like other scallops of the same species, there would be no discrimination because the law did not distinguish between producers from different countries. GATT and WTO Panels have taken a broad view of "likeness", generally relying on such factors as whether the goods or businesses in question compete with one another. In the scallop case, France agreed to change its regulations before a final determination was made on the challenge.

NAFTA anti-discrimination provisions have not been tested as often as those of GATT and other WTO Agreements, but most NAFTA scholars expected them to be similarly interpreted. That has not always been the case and the Methanex decision represents a complete break with GATT/WTO jurisprudence on this point.

Methanex argued that the issue, in the context of its discrimination claim, was California’s regulation of oxygenates. The law, by banning MTBE, gave the entire oxygenate market, which had previously been dominated by this Canadian producer, to ethanol producers, and to one U.S. producer in particular.

The Methanex Panel, however, took a very restrictive view of "like circumstances": MTBE is like MTBE, ethanol is like ethanol and never the twain shall meet. The Panel considered it irrelevant that these products compete with one another in the oxygenate market and evaluated the discrimination claim simply on the basis of whether Methanex was treated less favourably than U.S. methanol producers. Because the ban treated U.S. producers the same as Canadian producers, there could be no discrimination. End of story.

The Methanex decision could have significant implications for future anti-discrimination cases under NAFTA Chapter 11 and for the ability of NAFTA governments to pass facially neutral but substantively discriminatory legislation.

The decision is puzzling because the Panel’s novel interpretation of NAFTA’s anti-discrimination rules was not necessary to defeat the Methanex claim. Methanex could have been found not to be in like circumstances to oxygenate producers because it does not actually produce MTBE. Methanex produces methanol, a component of MTBE. While such a distinction may also be artificial, it would be less egregious than saying MTBE producers are not in like circumstances to other oxygenate producers. Moreover, even if methanol producers were in like circumstances to ethanol producers, the ban would not have been automatically discriminatory. The Panel found the ban to be based on valid science and enacted in furtherance of legitimate health and safety concerns. The formalistic and narrow view of "like circumstances" adopted seems unnecessary to dismiss the Methanex claim.

The Methanex decision creates an interpretive chasm between similarly worded provisions in NAFTA and WTO agreements while arguably opening the door for protectionist legislation. That door may not, however, open very much as the Methanex approach to anti-discrimination flies in the face of WTO treatment of the issue. While NAFTA may now permit such protectionist distinctions, the WTO clearly does not. Finally, the Methanex decision is not binding on subsequent NAFTA Panels, offering hope that it is simply a misstep on the path of trade discipline jurisprudence that will be corrected in due course.

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