The Office of the U.S. Trade Representative under the Bush administration struck a secret deal with the European Union that could open up a door for foreign ownership of liquefied natural gas terminals and other dangerous chemical and energy facilities. The agreement could also create conditions in which federal, state and local regulations affecting those facilities could be challenged as barriers to international trade.

Details of the negotiations came to light after a Freedom of Information Act request by Michigan Messenger was denied by the Bush administration on grounds that the deal was “classified in the interest of national security pursuant to Executive Order 12958.”

Michigan Messenger’s inquiry has lasted more than a year and involved a federal lawsuit seeking disclosure of the agreement. As a federal judge was considering the merits of the case, USTR declassified the document the week before last November’s elections. Trade law experts from Global Trade Watch, a division of the government watchdog group Public Citizen, assisted Michigan Messenger in the analysis of the agreement and in the federal lawsuit.

“It was important to get this document because it shows that the Bush administration was using the [World Trade Organization] process to sell out U.S. public safety and give foreign firms new rights and privileges here even as state authorities were trying to regulate these dangerous LNG facilities,” said Lori Wallach, a trade attorney and director of Global Trade Watch. “Now the public and state officials have the information to stop this proposal from becoming a new binding U.S. WTO commitment.”

While the United States trade representative, who serves as a member of the president’s Cabinet, has the authority to negotiate such settlements, Congress still has a role to play. Wallach notes: “Congress does not have to [take action] per USTR, but Congress should. The bottom line is that someone has to demand a vote in Congress.”

Wallach said she has spoken to many congressional Democrats who have not yet demanded that because they want to give the Obama administration an opportunity to review the agreement and take appropriate action. Former Dallas Mayor Ron Kirk was sworn in as Obama’s trade representative last month. Through the course of Michigan Messenger’s investigation, the office has refused comment.

From Online Gambling to Liquefied Natural Gas

The controversial agreement has its origins in an international dispute over Internet gambling.

Over the last few years, the U.S. government’s attempts to restrict access to online gambling have prompted a series of disputes under the World Trade Organization treaty. Because the government has attempted to stop many forms of online gambling by offshore companies while allowing other forms of domestic online gambling, like state lotteries and horse racing, several nations, led by Antigua, have filed complaints that such laws violate U.S. commitments under the General Agreement on Trade in Services treaty. Those disputes led to the White House announcement in May 2007 that the United States would withdraw gambling services from its GATS commitments. Such a withdrawal allows other nations that lose business as a result in one sector to make other trade demands on the offending nation as compensation.

In December 2007, USTR announced that it had reached a settlement with the European Union in one such dispute, but it would not reveal the substance of that agreement. That prompted Michigan Messenger’s Freedom of Information Act request and the subsequent federal lawsuit to force the U.S. government to disclose the details.

According to an analysis conducted by Global Trade Watch, the agreement opens up four markets to foreign companies that were previously closed under the U.S. government’s GATS “schedule of commitments.”

During the lawsuit, Wallach filed a declaration with the court indicating that two of the market sectors being opened by the settlement — warehousing and storage and research and development — could pose serious problems for the nation if the settlement becomes part of the GATS treaty. Although agreed upon by the United States and the European Union, it cannot be formally adopted as part of the GATS agreement until other nations that asked for compensation reach similar agreements.

It is the warehousing and storage sector that includes mention of the storage of oil, gas and chemicals. As Wallach said in her court declaration: “Not only are hazardous ‘tank farms’ for gas, oil, and chemicals covered by this commitment, but controversial liquid natural gas (LNG) facilities are also covered.”

LNG facilities are controversial because of their high explosive power. A Lloyd’s of London executive in 2004 noted that an explosion in an LNG tanker “would have the force of a small nuclear explosion.”

The first commercial LNG tank farm in the United States, in Cleveland, exploded in 1944. Although that was a fairly small facility, the fire engulfed 20 blocks of the city. There are currently only eight LNG terminals in the United States, but the new commitment resulting from this settlement could lead to more. According to the Federal Energy Regulatory Agency, many LNG facilities have been approved and proposed while more still are being eyed for potential development.

Important Regulations Potentially Voided

The agreement not only permits foreign firms to own storage facilities of this type, it also allows certain federal, state and local laws governing these facilities to be challenged as barriers to trade. Wallach’s court declaration spells this out in some detail:

The GATS rule regarding Market Access dictates that WTO countries may not limit the size or location of a foreign-owned operation in a committed service sector. In addition, foreign service providers in committed sectors cannot be banned from operating the covered services, even if domestic operations are forbidden. Other types of safety or environmental protections imposed by federal or state law in the United States could also potentially be implicated as violating GATS requirements. Thus, the new storage and warehousing commitment undertaken by the United States could significantly expand foreign firms’ operations of LNG facilities and hazardous “tank farms” for gas, oil, and chemicals in the United States and restrict the ability of U.S. governments (federal, state, or local) to regulate these facilities to promote the public health and safety and to protect the environment.

The provisions Wallach refers to are in Article XVI, Section 2 of the agreement. And while there is a provision in Article XIV of GATS that provides an exception for laws that are “necessary to protect human, animal or plant life or health,” Mary Bottari, a senior analyst with Global Trade Watch, said in an e-mail that it’s unlikely that the U.S. government would win a dispute if such regulations were challenged under GATS rules.

“The short list of exceptions in Article XIV can only be used in defense of a challenged measure,” Bottari explained. “In deciding the GATS-legality of the measure, it would have to be found by a WTO tribunal to be both necessary and least trade restrictive, a very difficult thing to do in front of a tribunal whose only job is to promote the interest of trade above all others.

“So, for example, if a nation decided to ban LNG storage to 50 miles from cities, [and] if other countries had less trade restrictive measures, such as no rule or a 1-mile rule, the 50 mile rule would be hard to justify. … Very few measures have ever been successfully defended as necessary and least trade restrictive in the WTO, and very few public interest laws have ever been upheld by the WTO in general. The plaintiff almost always wins.”

U.S. Trade Officials Ignored State and Local Concerns Over Agreement

The inclusion of such facilities in the GATS agreement has long been a subject of great concern for state and local regulatory bodies that oversee facilities that store oil, gas and chemicals.

In 2006 a working group chaired by the National Conference of State Legislatures issued a report saying that the inclusion of LNG terminals in GATS would increase the likelihood of trade disputes because state and local regulations of such facilities could conflict with proposed GATS rules. The working group asked U.S. trade officials to carve out LNG services from any GATS commitment and to consult with state regulators before negotiating any commitment. A second state-level working group, the Intergovernmental Policy Advisory Committee, which advises USTR on trade negotiations, agreed.

But USTR under the Bush administration did not consult with the roughly 20 federal, state and local authorities that regulate LNG facilities before entering into the secret EU agreement and didn’t inform them of the change after the agreement was reached nearly a year and a half ago.

Robert Stumberg of the Georgetown University Law Center, who acted as counsel to the working group that issued the 2006 report, told Michigan Messenger that the current trade dispute arose precisely because the federal government did not consult with state governments when it included gambling services in the original GATS talks. And the settlement to the current dispute, he said, makes the same mistake again:

“USTR aims to settle one GATS dispute (gambling services) by committing to another sector (storage of fuels) that is predictably contentious,” he wrote in an e-mail. “Back in 1994, with gambling, they simply made a mistake. This time, with LNG terminals, the states learned that they should do their homework and offer to consult. Unfortunately, USTR did not learn the same lesson.”

The Utah state legislature, in fact, passed a resolution condemning USTR for making this agreement without consulting with regulatory authorities and for continuing to keep the results of that settlement secret. In that resolution the legislature “expresses its concern that the terms of the agreement … have not been made available to members of Congress, to the Intergovernmental Policy Advisory Committee, or to state oversight commissions on international trade, and calls upon the USTR to make public the agreement terms.”

In California, state Sen. Joe Simitian, a Democrat from Palo Alto, has introduced legislation that would mandate that all proposed LNG facilities would need permission from state and local officials to move forward, require consultation with all relevant regulatory bodies, pass environmental review and prove that the facility is necessary to meet energy needs that cannot be met through alternative energy sources.

The restrictions and regulations Simitian is proposing could be challenged and found to be illegal trade barriers under the GATS agreement if those terminals are added to the set of U.S. commitments under the trade pact.

“There are important public safety, environmental protection and national security issues at stake here. To simply cast those aside is in my view irresponsible. I think that’s the case whether you’re an advocate or opponent of LNG, to simply dismiss the public safety, environmental and national security implications is irresponsible,” Simitian said in an interview on Wednesday.

The lawmaker also said that USTR officials were irresponsible to sideline congressional and state officials as the details were being hammered out in secret: “There’s a critical role here for the states and for the U.S. Congress. To simply leave the states and the Congress out of the conversation is hard to fathom. These decisions are being made on a relatively ad hoc basis without any thoughtful and deliberative process. This is a significant step backward in terms of the development of meaningful policy on either a state or national basis with respect to the siting of LNG facilities.”

Michigan Messenger attempted numerous times to get comment from Office of the U.S. Trade Represenative in regard to all of these issues. Detailed questions were sent to Christine Bliss, assistant U.S. trade representative for services and investment, who negotiated the settlement under dispute. As of press time, those questions went unanswered.