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Great Lakes Article:

BULK WATER REMOVAL AND INTERNATIONAL TRADE CONSIDERATIONS

Department of Foreign Affairs and International Trade
(Written February 2001)

International Trade Considerations

The issue of whether water is subject to international trade agreements, such as the North American Free Trade Agreement (NAFTA) and the World Trade Organization’s agreements (WTO), has been raised in some quarters.

This question raises three separate but related issues:

  • whether these trade agreements apply to water;
  • whether allowing the removal and export of some water creates a precedent, compelling Canada or any province to allow the removal and export of all water; and,
  • the relationship between bulk water removal and Chapter 11 of the NAFTA.

1. Water as a Natural Resource; Water as a Good

The NAFTA and the WTO generally prohibit restrictions on the exportation of goods, subject to certain exceptions, none of which are likely to be applicable for present purposes. Therefore, it is necessary to determine whether and when water would be considered a "good" and subject to these trade agreements.

In the absence of a definition of good in the NAFTA or the WTO, recourse may be had to the ordinary meaning of the word "good" as defined, for example, in dictionaries. Based on the ordinary meaning of the word good, that is, something that can be traded for value, or a saleable commodity, water in its natural state is not a good.

Some observers have suggested that, because Canada’s (and most other countries’) tariff schedule includes "natural waters" as a tariff heading, this means that all water must be considered to be a good. This is a mistaken view of the purpose of the tariff schedule. The tariff schedule does not define what is a good; it merely provides an organizational structure for the purposes of tariff negotiations and customs administration. In other words, it does not tell us if and when water is a good; it only tells us that when water is classified as a good, it falls under a particular tariff heading.

Water in its natural state can be equated with other natural resources, such as trees in the forest, fish in the sea, or minerals in the ground. While all of these things can be transformed into saleable commodities through harvesting or extraction, until that crucial step is taken they remain natural resources and outside the scope of the trade agreements.

The NAFTA countries reinforced this viewpoint in December 1993 when they issued a joint statement, in the context of the NAFTA coming into force, which indicated that "unless water, in any form, has entered into commerce and becomes a good or product, it is not covered by the provisions of any trade agreement, including the NAFTA...Water in its natural state in lakes, rivers, reservoirs, aquifers and the like is not a good or product...".

Furthermore, the International Joint Commission stated in its August 1999 interim report on bulk water removal from the Great Lakes that, "it would appear unlikely that water in its natural state (e.g., in a lake, river, or aquifer) is included within the scope of any of these trade agreements since it is not a product or good...".

Water does not become a good until it is removed from its natural state and enters into commerce as a saleable commodity, such as in bottles or in bulk containers. It would not include water provided by licence, or as a service by municipalities or a province for domestic, industrial and agricultural uses where the charge for such water reflects the cost of supplying it rather than a price for it as a commodity. Even if that water were considered a good, it would only be in respect of that particular water and not water remaining in its natural state. Likewise, the issuance of a licence to withdraw some water for a limited purpose, such as a temporary use, is not sufficient to transform that water into a good. In that situation, it is more accurate to speak of a right of use, rather than a right in goods.

Because water in its natural state is not a good and therefore outside the scope of the trade agreements, the proposed Accord on bulk water removal, and any federal or provincial measure regulating the extraction of water in its natural state, would not be subject to international obligations concerning trade in goods.

2. Exports of Water as a Precedent

A second issue is whether allowing some water to be extracted and put into commerce as a good, including for export, would create a precedent requiring that all other requests to extract water and transform it into a good for commercial purposes, including for export, be granted, anywhere in Canada.

There is nothing in international trade agreements which would require that future projects for the bulk extraction or removal of water, including for export, be approved just because previous bulk water removal projects have been approved. From the standpoint of trade obligations, the fact that a government has allowed the extraction and transformation of some water into a good, including for export, does not mean it (or another government within Canada) must allow the extraction and transformation of other water into a good in the future.

This point is readily illustrated by looking at the fishing industry for a parallel example of a natural resource that can be transformed into a good. In that context, governments have a discretionary power to decide not only whether to allow fishing as a general policy, but also where and when fishing may take place, and the total quantity of fish that may be caught. From the standpoint of trade agreements, that discretion is not affected by previous decisions that allowed some fishing to take place.

3. Bulk Water Removals and NAFTA Chapter 11

Chapter 11 only applies to measures adopted or maintained by a NAFTA country relating to investors, and investments of investors, of another NAFTA country in its territory. It also provides a mechanism for dealing with investor-state disputes relating to a NAFTA country’s alleged breach of its obligations under Chapter 11.

The principal obligations of Chapter 11 most often cited as relevant to bulk water removals are:

  • providing national treatment; and,
  • paying compensation in cases of expropriation.

National Treatment

The national treatment obligation requires that any measure adopted or maintained by Canada relating to an investor, or the investment of an investor, of another NAFTA country, must accord treatment no less favourable than that it accords, in like circumstances, to its own domestic investors and investments.

For example, a regulatory measure relating to an investor, or an investment of an investor, of another NAFTA country, would be consistent with the national treatment obligation if it prohibited the removal of bulk water from water basins in a manner that did not discriminate between investors, in like circumstances, on the basis of nationality. Canada’s proposed strategy with respect to the prohibition on bulk water removals from water basins is in keeping with this obligation.

Expropriation and Compensation

The NAFTA provides that the Parties may not nationalize or expropriate an investment of an investor of another Party, either directly or indirectly, or take measures tantamount to expropriation, unless it satisfies certain criteria, including the payment of compensation. A claim for compensation could only arise where there was an investment that had been expropriated. A regulatory measure designed to conserve and manage water resources, if properly implemented, should not constitute an expropriation. Any claim for compensation would have to be examined in light of the details of the individual case.

4. Conclusion

In so far as trade in goods is concerned, the NAFTA and the WTO do not impose disciplines on the ability of governments to regulate the extraction of water from its natural state, nor do they create obligations that would compel Canada or any province to allow the extraction of bulk water, including for export, without any limits. Because the proposed Accord relates to water in its natural state, it would not be subject to the provisions of these trade agreements with respect to trade in goods.

Furthermore, as long as regulations governing the extraction of water from its natural state do not discriminate among NAFTA investors, or investments of investors, in like circumstances, on the basis of nationality, such regulations will be consistent with the national treatment obligation of Chapter 11 of the NAFTA. Also, such measures, if properly implemented, should not constitute an expropriation under the NAFTA.

 

This information is posted for nonprofit educational purposes, in accordance with U.S. Code Title 17, Chapter 1,Sec. 107 copyright laws.

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