Economic Issues Raised by Treatment of Takings Under NAFTA Chapter 11

Chapter 11 of the North American Free Trade Agreement (NAFTA) allows most foreign investors from any NAFTA country to seek monetary damages for properties that might be appropriated, or any measure that might be deemed "tantamount to an expropriation" by the governments of any of the other NAFTA parties (Canada, Mexico, and the United States); to obtain such damages, the investor must go through the dispute settlement process provided in chapter 11 part B. A number of investors have used these provisions to argue that diminished value of an investment due to environment regulation is indeed tantamount to an expropriation and hence subject to monetary damages. If this line of argumentation is generally upheld, it would amount to a requirement that governments compensate investors for losses resulting from requirements to implement environmental safeguards (or to cease from activities that cause environmental damage). This article uses the reasoning of Ronald Coase, which is extensively articulated for the benefit of readers not familiar with this reasoning, to argue that in fact that such a requirement can in fact lead to an optimal outcome in terms of tradeoff of cost/benefit of an environmental regulation. However, Coase argued also that a requirement that the "polluter pay" can also lead to an optimal outcome, and for reasons of perceived equity, this latter approach is most often implemented in environmental regulation. The article goes further to argue that for a number of reasons not considered by Coase, the latter approach might, in an imperfect world where conditions for optimality are violated, in fact come closer to achieving an optimal outcome than the former.