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El Salvador on Edge

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National Sovereignty of Tiny El Salvador at Stake as it Considers El Dorado Mining Project

March 28th 2011

Latin American Topics - El salvador mine protest

President Obama arrived in El Salvador on March 22 in order to hold up that country as an example of what Latin American states can achieve through cooperation with the United States. Given the Central American country’s acquiescence in the militarization of Washington’s regional War on Drugs, and its enactment of the Central American Free Trade Agreement (CAFTA) after a bruising domestic struggle, Obama observed, “There are few better examples of both the opportunities and challenges facing the Americas today than here in El Salvador.” Obama and his counterpart, Salvadoran President Mauricio Funes, discussed a number of issues, including the advancement of military and civilian counter-drug initiatives, an additional $200 million in U.S. funds for Salvadoran legal institutions, and immigration reform affecting the nearly two million Salvadoran citizens in the United States. Discussion of reforming CAFTA however, which is a primary demand of civil society organizations in El Salvador, was conspicuously absent from the agenda. Such a renegotiation could profoundly affect not only El Salvador, but also the other signatories of the agreement: Costa Rica, Guatemala, Honduras, Nicaragua, and the Dominican Republic.

Local activist groups and a broader coalition of international civil society organizations used the arrival of the U.S. president to stage a popular protest under the banner of autodeterminación, or self-determination. In addition to calling for a renegotiation of CAFTA, their demands included an end to the U.S. embargo against Cuba, a withdrawal of the U.S. military from El Salvador, and a cessation of U.S. support for the tainted Porfirio Lobos regime in neighboring Honduras. CAFTA was a particularly contentious item at the protests because Obama’s trip coincided with an arbitration hearing at the World Bank (originally scheduled for March 23 but presently postponed) that will determine El Salvador’s responsibilities to American investors under the terms of the free trade agreement.

Pacific Rim Mining Corp. v. El Salvador

Under CAFTA, international investors may file suits directly against states when they feel the latter are in violation of relevant clauses of the agreement. The Vancouver-based Pacific Rim Mining Corporation has brought such a suit against the state of El Salvador before the International Center for Settlement of Investment Disputes (ICSID), an organization created in 1965 under the aegis of the World Bank. Pacific Rim’s claim is that El Salvador is selectively discriminating against the corporation by refusing to grant mining permits for its El Dorado gold mining site, located 40 miles east of San Salvador in the rural department of Las Cabañas. According to the filing, two Pacific Rim owned subsidiaries, Pacific Rim El Salvador and Dorado Exploraciones, invested $77 million into the project between 2002 and 2008.

In March 2008, the Salvadoran government, led by President Elías Antonio Saca González of the right-wing Alianza Republicana Nacionalista (ARENA), announced that it wanted to carry out further studies of the environmental impact regarding the proposed mines before granting any of the required exploitation permits. In doing this, Saca surprisingly aligned himself with the left-leaning opposition Farabundo Martí National Liberation Front (FMLN), as well as community assemblies in Las Cabañas, international environmental advocates, and the Catholic Church, all of whom opposed the development of the El Dorado project. The National Reconciliation Party, another right-wing party, was at that time drawing up new mining legislation that would have granted permits to Pacific Rim for its El Dorado project and would also have authorized 23 other mining efforts.

Saca’s Minister of the Environment, Carlos Guerrero, raised concerns over the project, saying, “Neighboring countries have serious problems with the management of the metal mining industry, and I think, with those problems, that we should be very careful.” By March 2009, Saca was firmly in the anti-mining camp, saying, “If we discover along the way that there’s something that could damage the health of the people, then we have to come out in favor of the health of Salvadorans.”

Environmental Disaster in the Offing?

The myriad potential environmental and public health problems associated with the mining industry could be devastating to both local communities as well as the general population. In an interview with the Inter Press Service, Florian Erzinger, an environmental chemist at Switzerland’s Federal Institute of Technology, pointed out that the El Dorado mine would consume between 75 and 110 liters of water per second from the nearby San Francisco River in order to flush out gold particles. That means that the mining process uses twice as much water in a single second as the average Salvadoran uses in a day. And 1.5 million people in the country (more than a quarter of the population) lack access to clean water altogether. The excessive consumption by mining operations of what little clean water Salvadorans currently possess could be a massive threat to their future if the government grants permits for El Dorado and other proposed mines.

In addition to rapidly lowering the water table, as Erzinger warned, the mining process could pollute the entire local water cycle with mercury, cyanide, arsenic, zinc and aluminum. With the growth of the Salvadoran mining industry, these toxic substances could potentially be spread throughout the entirety of Central America through evaporation and rainfall, thus poisoning people, water supplies, and crops along the way. Erzinger’s study of the topic concluded that the environmental damage of Pacific Rim’s El Dorado project and the 23 other pending mines might affect more than 4 million people.

A Question of Jurisdiction

Pacific Rim was quick to reject these concerns, arguing that their gold-mining techniques would be cleaner than any existing alternatives. Given the horrible environmental record of gold mining in general, this claim does not amount to much. Despite this, Pacific Rim began the arbitration process on April 20, 2009, citing articles 10.4, 10.5, and 10.7 of CAFTA, as well as Article 23 of El Salvador’s Ley de Mineria (Mining Law). According to the interpretation of Pacific Rim, any company that has begun the exploration phase of a mining project is automatically entitled to eventually initiate the exploitation phase, given that it has made a significant investment. In addition to the remuneration of its $77 million investment, Pacific Rim is seeking $23 million in “lost profits” and other costs.

During Obama’s visit, the demonstrators in San Salvador demanded an end to these investor-protection clauses of CAFTA, which Pacific Rim is using to file their claim. The demonstrators also called on the U.S. State Department to file a brief with the ICSID pushing for the dismissal of the case.

The Salvadoran government responded to the company’s accusations by submitting a set of preliminary objectives to the ICSID tribunal, arguing that the beginning of the mining exploration process does not guarantee a concession to initiate extraction, but rather that it “triggers an administrative decision process that may result in the denial of the application at different stages.” On August 2, 2010, the ICSID tribunal held a hearing and rejected these objections, saying that the details of the law were to be disputed in the arbitration itself. Immediately after, the government of El Salvador filed another set of objections arguing that because Pacific Rim Mining Corp. is a Canadian company, it could not file suit under CAFTA, of which Canada is not a member. The government makes the claim that Pacific Rim Mining Corp. resorted to subterfuge by transferring its subsidiary, Pacific Rim Cayman—the actual holding company for the El Dorado project—to Nevada in order to file the suit, essentially using that entity as a shell so that the claim falls under the jurisdiction of CAFTA.

The disputes at the heart of this objection are about what caused the Pacific Rim Cayman subsidiary to move to the United States, and about whether it was done before or after the conflict with the Salvadoran government had emerged in full force. If the company was transferred to Nevada for the sole purpose of filing a claim under CAFTA provisions, after its contention with the government began, then the arbitration would be a priori illegitimate.

The government of El Salvador argues that its initial dis-accord with the corporation began during the period between 2004 and 2006, when it denied several environmental permits that Pacific Rim had requested. Salvadoran officials believe that the move of the Pacific Rim Cayman holding company was made in anticipation of litigating the swelling dispute. The company’s CEO, Tom Shrake, disputed this claim in his testimony submitted to the ICSID: “It was only after President Saca’s announcement of a de facto mining ban in March 2008 that we began to believe that a dispute with the government was a real possibility.” In other words, he insists that the 2007 move of Pacific Rim Cayman to Nevada had nothing to do with entering CAFTA’s jurisdiction.

But Shrake’s claim is belied by the company’s 2007 Annual Report, which acknowledges the contingency of the operations on the passage of a new mining law. It says, “Pacific Rim’s Exploitation Concession application for the El Dorado project remains in process, however, it is unlikely that a mining permit will be granted prior to the expected reformation of the El Salvadoran mining law.” This indicates that Pacific Rim had a hunch in 2007 that the Salvadoran government might deny it an exploitation permit, and thus likely considered the possibility that becoming a U.S. entity would entitle it to use CAFTA’s investment-protection arbitration.

Contacted about the objections filed by representatives of the Salvadoran government, Barbara Henderson, Vice President of Investor Relations and Corporate Secretary at Pacific Rim, said that she could not comment on the objections filed by the Salvadoran government in the ongoing case.

The End of Central American Sovereignty?

Beyond the jurisdictional and the environmental debates, the case of Pacific Rim and El Salvador illustrates a point that anti-globalization activists have been trying to make for some time: free-trade agreements allow aggrieved transnational corporations to lay siege on sovereign democratic entities, with the deck usually stacked in favor of the former.

In 2007, before the arbitration request was filed, Vivian H.W. Wang wrote an article in the Columbia Journal of Environmental Law detailing the possibility of a conflict between international investors and the political power of local and even national governments in Central America. She argued that the investor protection provisions of CAFTA created an unequal balance of power that favors the profits of outside investors against the environmental interests of local residents. Wang said that such a trend was reflective of the “asymmetrical scale politics of neoliberalism, [where] local institutions and actors [are] being given responsibility without power, while international institutions and actors [are] gaining power without responsibility.” In this case, El Salvador is being made responsible for the loss of Pacific Rim’s potential profits, and the corporation is trying to skirt its environmental responsibilities regarding the El Dorado project.

The Center for International Environmental Law poses this argument in its amicus curae brief filed in support of the government on behalf of the Mesa Nacional Frente a la Minería Metalica. This association is “a coalition of community organizations, research institutes, and environmental, human rights, and faith-based nonprofit organizations who collectively aim to improve public policy dialog concerning mining metals in El Salvador.” Their claim is that a ruling against the government of El Salvador would violate the fundamental democratic right of that country to choose its own direction and priorities.

The democratic debate on mining, according to the brief, only arose late in the process of Pacific Rim’s gold explorations. Faced with the possible adverse environmental and social consequences of the El Dorado project, local groups from Las Cabañas, as well as national public opinion, have staunchly opposed the gold-mining initiative. Indeed, it was for this reason that Saca was persuaded to take the line that he did during the 2008 election; the environmental assessments and community response to the project proved very negative, and citizenry had begun to take notice.

Throughout President Obama’s visit, the Salvadoran protesters called on him to push for a dismissal of Pacific Rim’s arbitration claim, and to strike the investor-protection provisions of CAFTA as well as any future free trade agreements, as he promised to do during the 2008 U.S. presidential campaign. “With regards to provisions in several FTAs that give foreign investors the right to sue governments directly in foreign tribunals,” said Obama in 2008, “I will ensure that foreign investor rights are strictly limited and will fully exempt any law or regulation written to protect public safety or promote the public interest.” El Salvador’s environmental precautions should, in this understanding, be exempt, and the vague language of CAFTA should be altered to reflect this.

Leah Wilson, a volunteer in San Salvador with the Washington-based Committee in Solidarity with the People of El Salvador (CISPES) put President Obama’s choice on the matter in stark terms: “Does the government and the people of a country have the right to decide what kind of policies they want to protect their own population? Or can a transnational company blackmail them against their will?” Perhaps President Obama believes that he can ignore his promise to limit investor rights, since the issue lies outside the purview of most U.S. citizens. To the citizens of El Salvador and other CAFTA nations however, the issue could not be more consequential. For them, national sovereignty itself is at stake.

Robert Cavooris is a research associate at the Council for Hemispheric Affairs.


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