Environment: Toxic Trade?

In Santa Monica, a beach town known for its movie stars, the sun shines almost every day, palm trees sway on the boulevards--and the groundwater is poisoned. All over town, ugly drilling rigs mounted on trucks are boring 300-foot holes to trace the plumes of a pollutant that has leaked from the underground tanks of gasoline stations. The culprit: methyl tertiary butyl ether (MTBE), an additive that makes gasoline burn cleaner but one the U.S. Environmental Protection Agency has classified as a potential carcinogen. Half of Santa Monica's water supply is undrinkable--MTBE makes water taste like turpentine--and the city (pop. 85,000) faces a $300 million cleanup that could take as long as 30 years. As lawsuits against 18 oil companies drag on, California has ordered a phaseout of the chemical, and a dozen other states have followed suit.

If this were an ordinary tale of one more controversial pollutant, it could be resolved in U.S. courts. But the MTBE conflict has exploded into an international fistfight, a test case for globalization and a key issue in President Bush's effort to win new trade-negotiating powers from Congress next month. That's because METHANEX, the Canadian company that makes a key ingredient of MTBE, is challenging California's ban under the 1993 North American Free Trade Agreement. The case has raised doubts about whether a state can protect its drinking water as it sees fit. Do such health regulations amount to a trade barrier?

Methanex wants U.S. taxpayers to compensate it for $970 million in profits it would lose as a result of a California MTBE phaseout. CEO Pierre Choquette asserts, "We believe the ban of MTBE was politically motivated" to favor the U.S.-made gasoline additive ethanol "and has no scientific merit." The company's director of investor relations, Brad Boyd, says, "California should make sure its underground gas tanks don't leak. That's what would protect the public."

The issue will be decided, under terms of international treaties, by a panel of arbitrators, chosen in this case by the U.S. State Department and Methanex, meeting behind closed doors. A U.S. loss could be challenged in federal court--but only on narrow procedural grounds. Critics fear that a Methanex win would upend the principle that "the polluter pays." Instead, the polluter would be paid. A California senate committee questioned whether hundreds of state and local laws--from fishing-fleet fees to truck-inspection rules to a preference for recycled paper--could be challenged by foreign investors. Says state senator Sheila Kuehl: "A secret tribunal is going to decide whether a private company can trump laws passed by a democratically elected government."