Pacific Rim v. El Salvador and the Perils of Free Trade in the Americas

In 2005, then-Senator Barack Obama published an opinion piece in the Chicago Tribune entitled “Why I oppose CAFTA.” In his article, released on the same date as the Senate vote on the Dominican Republic-Central American Free Trade Agreement (“DR-CAFTA”), Obama explained that he would not vote for the bill and voiced his opinion that DR-CAFTA “…does little to address enforcement of basic environmental standards in the Central American countries and the Dominican Republic.” Despite well-founded fears about the consequences of DR-CAFTA among its critics, President George W. Bush and his administration lobbied heavily for the passage of the bill, which was signed into law on August 2, 2005. El Salvador became the first of the Central American nations to implement DR-CAFTA after the treaty took effect in the country on March 1, 2006.

Like the North American Free Trade Agreement (“NAFTA”), the treaty that DR-CAFTA is based upon, DR-CAFTA’s Chapter 10 includes extensive investor rights provisions. These clauses, ostensibly designed to encourage foreign investment, in fact allow multinational corporations to avoid negotiations with individual governments and instead to settle investor disputes with an international tribunal. The first of such cases adjudicated under DR-CAFTA began when Pacific Rim Mining Corporation (“Pacific Rim”*), a Vancouver-based gold exploration company, filed a petition calling for arbitration proceedings against the government of El Salvador for allegedly failing to grant exploitation permits in accordance with the mining laws of El Salvador. The corporation hopes to receive a compensatory payment totaling at least US $77 million, the amount of money it claims to have lost while waiting for its mining permit to be issued. The case will have alarming implications in the event that the international tribunal rules in favor of Pacific Rim against the government of El Salvador: in addition to the staggering cost that would be imposed on the country, the case could set a precedent for other private companies looking to settle cases in international venues that they presume would be more sympathetic to their cause.

Weighing the Pros and Cons: Mining and the Environment

The subject of the Pacific Rim case is the El Dorado mine, located in the Cabañas department of El Salvador. As El Dorado is Pacific Rim’s “flagship” mining operation, the company has a huge stake in commencing the process of gold extraction. However, El Salvador’s Ministry of the Environment denied Pacific Rim an exploitation permit for the El Dorado mine after finding the Environmental Impact Assessment (“EIA”) unsatisfactory. An outside report, conducted by independent hydrologist Robert Moran, confirms El Salvador’s analysis. Moran writes that “[the] EIA would not be acceptable to regulatory agencies in most developed countries.” He notes that, while Pacific Rim claims to have conformed to World Bank Group’s mining safety guidelines, “these guidelines are, in many respects, much weaker than those that would be required to operate a mine in Canada or the U.S.A.”

Operations in Cabañas began in 1993, when Mirage Resources and Dayton Mining began exploration in the region; they found high-grade gold veins during the exploratory drilling phase. Pacific Rim had acquired the mine in 2002 through its merger with Dayton Mining. According to Cameron Herrington, an organizer with the Committee in Solidarity with the People of El Salvador (“CISPES”), the community in Cabañas became concerned with the possibly harmful environmental impact of the gold mine during the early phases of exploration. Although the company only had carried out the exploratory drilling activities at that stage, villagers had noticed that their wells were going dry. Access to water is a matter of grave concern in El Salvador, one of the countries with the least access to clean water in the hemisphere. According to Herrington:

When the people in Cabañas started to notice environmental changes taking place because of the gold exploration, they did their research: they looked to places like Guatemala and Honduras, where mining has taken a huge toll. They learned about communities that had been devastated by water contamination from mining.

Cabañas is located on the Rio Lempa, a major river in El Salvador and the country’s main source of fresh water. Gold processing requires a large input of cyanide, which Pacific Rim planned to detoxify through a decontamination process. However, Moran discovered that “[i]f [the EIA is] read closely, one will note that no actual remediation measures are discussed for a spill of cyanide into a river or lake – because all of the options have significant environmental impacts.” Already, 1.5 million people—nearly a quarter of the country’s population—lack access to clean water. If gold processing chemicals contaminate the Rio Lempa, thousands of Salvadorans will be directly affected. Water supply contamination would be especially devastating for the people of Cabañas, who rely on the Rio Lempa for all of their fresh water.

Even without a serious spill, the mine itself could jeopardize the available water supply in the region. Pacific Rim’s environmental impact assessment indicates that the plant would require 10.4 liters of water per second – over 3.2 million liters of water per year. Herrington put this number into context, citing Salvadoran activists’ analysis of Pacific Rim’s own studies, which found that “the amount of water the El Dorado mine would use per day to extract gold is what a single Salvadoran family living near the mine would use for household needs in twenty years.” In a region where the majority of the population relies on agriculture and fishing for survival, the El Dorado mine could cause a host of environmental problems. Furthermore, contamination of the Rio Lempa could destroy the community’s ability to support itself by farming and fishing, leading to economic ruin.

Long Term Damage, Short Term Gain

Another issue that the government of El Salvador and the citizens of Cabañas must consider is the relative value of the gold mine over time. While water pollution and environmental contamination could threaten Cabañas and the Rio Lempa for years, Keith Slack, a Senior Policy Advisor and Extractive Industries Campaign Manager at OxFam America, notes that:

The economic benefit of the mine to El Salvador would likely be small, given that modern mining generates relatively few jobs… It would provide income to the government, but past experience shows that very little of those economic benefits would “trickle down” to the mining-impacted areas.

While mining traditionally has played a role in the economies of Honduras and Guatemala, El Salvador has not historically had a large mining presence. As a result, mineral extraction has not been a major component of the country’s economy: in 2006, mining represented only 0.4% of El Salvador’s GDP. Furthermore, the El Dorado mine has a projected life of only 6.2 years, meaning that the anticipated economic gains would be relatively short-lived. The CEO of Pacific Rim, Tom Shrake, estimates that the mine will produce 2,000 jobs and generate income for the government, which would receive 2-3% of the mine’s gross sales. In reality, the number of jobs generated is likely to be significantly less, and they would most likely be lost when the El Dorado mine is closed.

In order to carry out mining in El Salvador, companies must first have approval to initiate exploration. After the exploration period, the company must apply for a mining permit by submitting an environmental assessment survey and feasibility study. Pacific Rim acquired exploration permits when it merged with Dayton Mining in 2002. However, the government did not automatically approve the company’s second application to begin actual exploitation of the mine, citing Pacific Rim’s failure to provide an adequate feasibility study—something that Pacific Rim denies.

Commentators have criticized El Salvador for failing to grant the mining permit to Pacific Rim, suggesting that “gold, as an engine of growth, has the potential to transform the country’s economy.” However, Keith Slack, who has studied the history of resource exploitation in Central America, predicts that the actual economic transformation would be far less monumental. He cites the San Martin mine that operated in Honduras from 2000-2007 and has been the basis of international criticism due to the health problems it has spawned: “the local community experienced very little long-term economic development benefit from the mine. Yet many community members allege that contamination from the mine has contributed to serious water pollution and community health problems.” Without careful environmental protections in place, Cabañas could face the same dismal fate.

Getting Political

The initial exploration permit was granted to Mirage Resources in 1996, during the administration of President Armando Calderón Sol. Calderón, of the right-wing Alianza Republicana Nacionalista (“ARENA”) party, won the presidency in 1994 in the first presidential elections held after the end of the Salvadoran Civil War. Calderón promoted neo-liberal economic programs during his presidency, hoping to stimulate investment—especially from newly resurgent foreign companies—after the country’s Civil War devastated its economy. Pacific Rim inherited the mining permits when it merged with Dayton mining; however, when it came time for Pacific Rim to reapply for exploitation permits in 2006, then-President Antonio Saca, also of the ARENA party, was sufficiently wary of the mining company and refused to issue the permits. While Saca’s actions earned him criticism among more conservative circles, his administration’s decision to stop the El Dorado mining project was wildly popular amongst those who would be directly affected by the project—the citizens of El Salvador, particularly those living in Cabañas.

Unfortunately, the mining issue had become dangerously political and increasingly violent approaching the 2009 Salvadoran presidential election. As Pacific Rim threatened to file international arbitration proceedings using Chapter 10 of DR-CAFTA, a member of the ARENA party proposed a new mining law with new regulatory standards. If approved, this effort may have led to the granting of new permits for the El Dorado mine. These maneuverings put pressure on President Saca to privately settle the case with Pacific Rim so as to avoid voter backlash; interests supporting the Salvadoran mining project portrayed President Saca’s position as one that created a hostile environment for international investment. Ultimately, President Saca did not cave in to the political pressure, and Pacific Rim officially filed suit against the government on April 30, 2009. In the historic elections that took place in El Salvador on March 15, 2009, the Frente Farabundo Martí para la Liberación Nacional (“FMLN”) party candidate Mauricio Funes won with 51.3% of the vote. He has continued President Saca’s mining policies, refusing to grant Pacific Rim a license to begin exploitation of the El Dorado mine.

In addition to the political pressure exerted by the mining company, the issue of gold exploitation has also caused mounting instability and increased violence in the Cabañas region. To date, three prominent anti-mining activists have been killed in Cabañas: the tortured body of activist Marcelo Rivera was found in a community well in June 2009, and Ramiro Rivera Gomez and Dora “Alicia” Recinos Sorto—both outspoken critics of the gold mine—were murdered in December. According to Herrington, “there is no evidence to link these murders back to the mining company. However, the wave of violence in Cabañas is clearly a result of Pacific Rim’s presence in the region. The tortured body of a prominent anti-mining activist found in the bottom of a well is obviously trying to send a political message.” Despite community and government opposition to the mining project, Pacific Rim remains a presence in Cabañas, exerting political pressure while outbreaks of violence continue to take place.

The El Dorado mine has never been operational—and therefore has not been profitable—since President Saca refused to stand down on his mining position and did not issue the company the necessary exploitation permits. In 2008, Pacific Rim made serious cutbacks to the El Dorado project, and “does not intend to resume significant exploration work at the El Dorado project until such time as the environmental permit is received and the exploitation concession is granted.” But, in reality, Pacific Rim now hopes to circumvent the Salvadoran government’s decision altogether by following a strategy of appealing directly to an international tribunal using the extensive investor rights provisions of DR-CAFTA.

DR-CAFTA’s Troublesome Record

DR-CAFTA’s potential to cause, rather than to solve, environmental and labor problems was already feared at the time the treaty was being negotiated. NAFTA, the precursor to DR-CAFTA, had been shown to create a “race to the bottom” in regard to wages and regulatory standards, causing major job loss in the United States as well as dangerous working conditions in Mexico. Despite these concerns, President George W. Bush made passing the Central American free trade agreement a matter of the highest priority during his presidency, much like President Clinton before him had done with NAFTA. Congress voted to grant President Bush “fast-track” trade promotion authority with the Trade Act of 2002, which gave the president substantial power to negotiate trade legislation with limited Congressional oversight. According to the Council on Foreign Relations, “[trade promotion authority] is seen as a critical tool for facilitating trade liberalization by streamlining the complicated process of drawing up trade legislation.” When the president has fast-track authority, neither body of Congress can modify the bill, but can only vote for or against the measure. Trade Promotion Authority has been used by a number of presidents in the past, including President Clinton when he negotiated the Uruguay Round Agreement in 1994.

DR-CAFTA was signed into law in the United States on August 2, 2005, only a few years after the initial negotiations had begun. This represents a very short period of time to negotiate an international trade treaty. One reason the discussions were so brief is the fact that DR-CAFTA borrows much of its language from the text of NAFTA. Critics contend that the shared language replicates NAFTA’s lack of environmental and labor protections. Both neo-liberal trade agreements have the potential to transfer decision-making power away from national governments to multinational corporations.

Before DR-CAFTA was approved, The Economic Policy Institute published a report warning of the dangers of adopting another NAFTA-style free trade agreement. In their piece, authors David Ratner and Robert E. Scott write:

NAFTA is a free trade and investment agreement that provided investors with a unique set of guarantees designed to stimulate foreign direct investment and the movement of factories within the hemisphere, especially from the United States to Canada and Mexico. No protections were contained in the core of the agreement to maintain labor or environmental standards. As a result, NAFTA tilted the economic playing field in favor of investors and against workers and the environment, causing a hemispheric “race to the bottom” in wages and environmental quality.

These same investor rights protections are repeated in DR-CAFTA’s Chapter 10, provisions that may have been amended if Congress and members of civil society had ample time to voice their opinions on DR-CAFTA before it became law.

International Interests with A Powerful Voice in Cabañas

Pacific Rim Mining Corp. operates the El Dorado mine through their wholly-owned subsidiary Pac Rim Cayman, LLC (“Pac Rim”), based in Nevada. The El Dorado project, located about an hour outside of San Salvador, is Pacific Rim’s “flagship exploration asset and has received the bulk of the Company’s exploration efforts over the past 7 years,” according to the company’s website.

Canada is not a signatory of DR-CAFTA, and thus Vancouver-based Pacific Rim is filing the suit through its Nevada subsidiary, Pac Rim. Until 2007, the Pac Rim subsidiary was located in the Cayman Islands; the company has come under criticism for moving the branch with the sole intention of being eligible to file suit under DR-CAFTA. Under the treaty, investment disputes must be settled in an international tribunal. The International Centre for Settlement of Investment Disputes (ICSID), an institution of the World Bank Group located in Washington, DC, is often the final destination for international resource cases.

The Pacific Rim case is not the first international resource dispute to be resolved in the ICSID. The number of cases filed has gone up dramatically over the past ten years. According to a report by the Institute for Policy Studies (IPS), there are currently 32 pending cases related to oil, mining, and gas in the ICSID, whereas “ten years ago, there were only three pending ICSID cases” of the same nature. Countries in Latin America are disproportionally involved in cases involving oil, mining, and gas: IPS estimates that 66% of the cases filed globally are lodged against countries in Latin America.

The basis of Pacific Rim’s case involves DR-CAFTA’s investor rights provision, which stipulates that “each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors.” Pacific Rim alleges that the government of El Salvador has failed to uphold its own laws by not granting the second round of mining concessions. The ICSID must decide if El Salvador violated Chapter 10 of DR-CAFTA by treating Pacific Rim differently than it would treat a Salvadoran mining company.

Dangerous Precedent

The international tribunal’s decision on the Pacific Rim v. El Salvador case is likely to have reverberations around the world. Should the tribunal rule in favor of Pacific Rim, it will signal to other international corporations that they, too, will find a sympathetic ear in Washington. It will also set a precedent for the numerous lawsuits that already have been filed with ICSID pertaining to resource exploitation in Latin America. The Pacific Rim case has the potential to replicate itself, as Canadian mining companies overwhelmingly choose Latin America as the site of their mining investments. Within Canada, there is very little regulation of mining companies’ impact abroad. If DR-CAFTA is interpreted to favor foreign mining interests over sovereign governments, there will be little recourse to prevent continued environmental exploitation by foreign mining companies operating in Latin America.

*For clarity, I refer to the mining company as “Pacific Rim” throughout my analysis. Legally, the El Salvador mine is operated by the Nevada-based subsidiary “Pac Rim.”

References for this memorandum may be found here.