freshwater, law, and game theory ......ii freshwater, law, and game theory: strategies for...
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FRESHWATER, LAW, AND GAME THEORY: STRATEGIES FOR NAVIGATING THE TROUBLED WATERS OF A CANADA / U.S. BULK WATER EXPORT
CONFLICT
By
Allison Leigh Kindle
A thesis submitted in conformity with the requirements for the degree of Master of Laws
Graduate Department of Law University of Toronto
© Copyright by Allison Leigh Kindle (2009)
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FRESHWATER, LAW, AND GAME THEORY: STRATEGIES FOR NAVIGATING THE TROUBLED WATERS OF A CANADA / U.S. BULK WATER EXPORT
CONFLICT
by
Allison Leigh Kindle
Master of Laws 2009
Graduate Department of the Faculty of Law, University of Toronto
ABSTRACT
The U.S. is facing a serious decline in its water supply and is likely to turn to Canada as its next
major source of water. Under NAFTA, Canada may become legally obligated to allow
American companies to begin selling Canadian water. If one province trades its water, Canada
can do little to stop water exports nationally. Consequently, it is crucial that Canada takes steps
now to legally ensure its water is protected.
This paper portrays the Canada / U.S. bulk water export issue as a conflict, and proposes
strategies that Canada could take to protect its freshwater. It applies a game theory perspective
to the conflict, and illustrates the moves that each country might make to “win” the game and
secure Canada’s water supply. The purpose of this application is to better predict future
strategies and their consequences when two political allies legally battle over the world’s most
precious natural resource.
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ACKNOWLEDGMENTS
I would like to thank my supervisor Mr. Andrew Green, Associate Professor of Law, Faculty of Law and School of Public Policy & Governance, for his invaluable comments and support.
I would also like to thank my family for their love and encouragement which allowed me to pursue my career goals this year, including the completion of this paper.
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TABLE OF CONTENTS
ABSTRACT ................................................................................................................................. ii
ACKNOWLEDGMENTS.......................................................................................................... iii
I. INTRODUCTION................................................................................................................... 1
II. HISTORY OF CANADA / U.S. RELATIONS OVER WATER and ENVIRONMENTAL CONSEQUENCES OF BULK WATER REMOVAL................. 4
A. Water Crisis in the United States ..................................................................................... 4
B. U.S. Attempts at Accessing Canada’s Water ................................................................... 8
1. Past – NAWAPA and GRAND......................................................................................... 8
2. Present – SPP and Canadian Water to Feed U.S. Energy Needs ................................ 10
C. Environmental Impacts of Bulk Water Export............................................................. 12
III. LEGAL ATTEMPTS TO PROTECT WATER AND THE NAFTA HURDLE .......... 15
A. Efforts to Prevent the Export of Water.......................................................................... 15
B. Legal Analysis of NAFTA Provisions and Their Significance to the Bulk Water Export Conflict ................................................................................................................. 19
IV. THE STRATEGY OF CONFLICT, GAME THEORY, AND THE PRICE OF DEFECTION FROM NAFTA .......................................................................................... 26
A. Setting the Stage for Game Theory Analysis................................................................. 26
B. International Water Conflicts, Strategies and Threats ................................................ 28
C. Games of Cooperation and Deterrence .......................................................................... 31
1. Prisoner’s Dilemma........................................................................................................ 31
2. Chicken ........................................................................................................................... 35
V. STRATEGIES TO PROTECT CANADA’S WATER..................................................... 46
1. Violation of NAFTA Trade Rules ................................................................................... 47
2. Justify Water Export Restriction on the Basis of Environmental Protection ............ 48
3. Renegotiate NAFTA as a whole ...................................................................................... 50
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4. Withdraw from NAFTA .................................................................................................. 50
5. Negotiate a Water Market Treaty .................................................................................. 50
VI. CONCLUSION................................................................................................................... 51
BIBLIOGRAPHY...................................................................................................................... 54
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I. INTRODUCTION
Wars will not be fought over who wants power or which country has the best ideology, but over human survival and the need for fresh water...exploitation of natural resources produces amenities marking the difference between poverty and wealth; but water is the lifeblood of existence.1
Canadians can no longer take their freshwater supply for granted. As the threat of global
water shortage looms amidst worries of global warming and climate change, Canada is poised to
become the unwilling centre of attention. It stands at the forefront of the world’s stage,
notorious for being the land of plenty where open spaces and a low population give way to
bountiful lakes, rivers and streams. It is no longer far-fetched to suggest that its reputation for
being blessed with an abundance of water makes it vulnerable. World leaders are increasingly
faced with water shortages, and are searching for new sources of water to ensure the survival of
their people and economies alike. When the situation becomes so dire, and experts predict that
it will, countries may be forced to take extraordinary measures to gain access to life-giving and
industry sustaining water. Armed conflicts between states over water resources have been and
are currently taking place all over the globe.
The United States, as Canada’s closest neighbour, ally, and trading partner, has
approximately one-tenth as much water as Canada, and over nine times its population.2 Canada
does not export water to the United States, and pursuant to the Governor General’s Throne
Speech in November 2008, is planning to implement federal legislation banning the bulk export
of water.3 But when the world’s strongest superpower runs short of water, there is little doubt
that it will come knocking on Canada’s door. Canada’s economic relationship with and military
weakness relative to the United States puts its economic and possibly its national security at risk
1 Cynthia Baumann, “Water Wars: Canada’s Upstream Battle to Ban Bulk Water Export” (2001) 10 Minn. J. Global Trade 109 at 132, online: Hein Online<http://heinonline.org.myaccess.library.utoronto.ca>. 2 Ibid. 3 Right Honourable Michaelle Jean, “Speech from the Throne 2008: Protecting Canada’s Future” (19 November 2008) Government of Canada, online: Google<http://www.sft-ddt.gc.ca/eng/media.asp?id=1383>.
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if the United States becomes desperate for water. In this paper, the issue of the bulk water
conflict is portrayed as a game played between Canada and the United States, in the hopes of
understanding the strategies both countries consider as they negotiate the tumultuous waters of
trade law and politics.4 It will be argued that Canada’s potential future North American Free
Trade Agreement5 (hereinafter “NAFTA”) violation and refusal to open its tap to the United
States could end friendly relations between the two countries, and that Canada must strategize to
avoid harsh U.S. retaliation which would be disastrous for both. That theory will be explored
through an analysis of various legal and policy issues relevant to the water conflict, and from the
perspective of game theory.
It is vital to such an examination to lay the groundwork for the Canadian / U.S. conflict.
This paper’s second section begins with a historical framework of Canada / U.S. relations over
Canada’s freshwater, and uses the increasing U.S. water shortage as a backdrop to explain the
push to acquire Canada’s water. It reveals the roots of the U.S. water shortage, past U.S.
attempts to access Canada’s freshwater through large scale diversions, and the necessity for U.S.
energy industries to access vast freshwater supplies to facilitate profitable production. It shows
that the remaining U.S. water supply is insufficient to support its current and future agricultural
usages, industries, and conceivably, its own human population. This discussion is used to
support the conclusion that the U.S. needs more water; further, high level talks between the two
countries with respect to sharing freshwater are both historical and relatively current, and are
likely to become more frequent in the future as the urgency of industrial and agricultural
demands for water increases. This section ends with an illustration of the dire environmental
4 Kenneth W. Abbott, “Modern International Relations Theory: A Prospectus for International Lawyers” (1989) 14 Yale J. of Int’l L. 354 at 354. Abbott defines “game” in this context as “a model of a situation in which two or more rational actors must choose among alternate courses of action”, and says that “games reveal how the conduct of each player in a situation of interdependence affects itself and others.” 5 North American Free Trade Agreement, Dec. 17, 1992, Can.-Mex.-U.S., 32 I.L.M. 605.
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impact of past proposed water diversions, and a forecast of how future bulk water exports would
affect Canada’s delicate ecosystems. The purpose of this discussion is to provide a justification
for a legal argument found later in this paper, which proposes that Canada devise legislation
banning bulk water exports which is based on environmental conservation. Such a purpose is
permitted in international trade law.
The third section of the paper discusses the legalities of the bulk water issue. It begins
by exploring existing laws created to protect Canada’s freshwater and then reveals the trade and
other agreements that threaten it. Predominantly, it focuses on NAFTA’s provisions as they
could affect the management of Canada’s water in a variety of ways. It was important in this
section to present and analyze the provisions which could threaten Canada’s ability to legally
prevent foreign businesses from acquiring the rights to sell Canada’s water, and to examine
whether the applicable trade law provided any options for Canada to circumvent NAFTA’s
water threatening provisions. This section will present a possible solution to Canada’s legal
woes with respect to NAFTA and water which involves legislating in the name of environmental
conservation.
The fourth section presents the water conflict from a game theory perspective in the
hopes of being better able to predict and understand the considerations and strategies both
countries may face when deciding how to manoeuvre the relevant NAFTA requirements and
important political relationships. It will illustrate the consequences of a Canadian move to
defect from NAFTA on any issue in general, and in particular the consequences of Canada’s
failure to share its water with the U.S. after a NAFTA Arbitration Panel (hereinafter “NAP”)
decides that it cannot restrict water exports. Using a point system to grade different political
moves in different scenarios, the two countries’ strategies can be better predicted based on their
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considerations of the estimated payoffs of each move. Other factors such as reputation and
different levels of threats to achieve deterrence are added to the basic games.
The final section addresses possible solutions to a future crisis between friendly nations.
It presents various strategies that Canada could take to protect its water including: developing
water export bans to preserve Canada’s sovereignty over its water, implementing a water export
restriction based on a water conservation strategy, negotiating new NAFTA terms with
signatory countries which exclude water from the export provisions, abandoning NAFTA
altogether to avoid its pitfalls, or engaging in the water trade and attempting to maintain some
export controls over water. Overall, the strategies and their consequences are then evaluated
from economic, environmental and political perspectives, and lead to a conclusion which tries to
balance all considerations and avoid pitting Canada and the U.S. against each other on a
collision course where there is no victor. Justifying a water export restriction based on
environmental conservation could be the key to Canada’s freshwater security at a time when
environmental protection is a significant global priority.
II. HISTORY OF CANADA / U.S. RELATIONS OVER WATER and ENVIRONMENTAL CONSEQUENCES OF BULK WATER REMOVAL
A. Water Crisis in the United States
This paper addresses the controversy surrounding trade in Canada’s inland territorial,
non-navigable, freshwater resources, and excludes transboundary or shared freshwater (i.e. the
Great Lakes) from that discussion. The estimates of just how much water Canada has vary, with
some sources citing “between nine and twenty percent of the global share,”6 or “about 6.5
percent of the world’s renewable water – water that falls from the sky and passes through lakes 6 Scott Gordon, “Canada’s Fresh Water and NAFTA: Clearing the Muddied Waters” (2006) 15 Dalhousie J. Legal Stud. 73, online: Hein Online<http://heinonline.org.myaccess.library.utoronto.ca>.
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and rivers as it heads to the sea”7; or simply “20% of the world’s fresh water supply”.8 In
comparison, the United States has one tenth of Canada’s water supply, yet its population is
nearly ten times larger.9 As a result, the diversion, transfer, sale, and/or trade of Canada’s water
have become the subject of negotiations in Canada / U.S. relations.10 The reality of the
American water shortage is a crucial aspect of the bulk water export issue, as it sets the stage for
U.S. demands for Canadian water if and when it runs out.
In the United States, 36 out of 47 state water managers predict extreme water shortages
by 2017 under “average climate conditions.”11 Nikiforuk writes,
Half of all streams in the United States are contaminated with pesticides and fertilizers. Due to droughts and over consumption, Texas, South Dakota, Wisconsin and Tennessee are scrambling to balance available supplies with demand. In 2002 the Texas Water Development Board, for example, predicted that it could only meet 60 percent of the state’s needs by 2050 without building new reservoirs, draining wetlands or approving controversial inter basin water transfers at a cost of nearly $100 billion. Nearly half the population of the United States (140 million people) depends on groundwater for their domestic water supply...The Ogallala aquifer, which underlies portions of eight states and provides water for 27 percent of U.S. irrigated land, has dropped by up to 100 feet (it has actually lost a volume of water equal to the annual flow of 18 Colorado Rivers).12
The American southwest has had a history of grand diversion projects and irrigation practices,
with irrigation being the largest water use.13 It has thrived economically upon a steady, thrifty,
and easily accessible water supply,14 and the process of agricultural and economic development
7 Maude Barlow, Blue Covenant, The Global Water Crisis And The Coming Battle For The Right To Water (Toronto: McClelland & Stewart, 2007) at 178. 8 Brian D. Anderson, “Selling Great Lakes Water To a Thirsty World: Legal, Policy, & Trade Considerations” (1998-99) 6 Buff. Envtl. L. J. 215, online: Hein Online< http://heinonline.org.myaccess.library.utoronto.ca>. 9 Supra note 6 at 73. 10 Andrew Nikiforuk, “On the Table: Water, Energy, and North American Integration” (Oct. 16, 2007) Program on Water Issues for the Munk Centre for International Studies, University of Toronto, at 1, online: Google<http://www.powi.ca/pdfs/waterdiversion/waterdiversion_onthetable_new.pdf>. 11 Ibid. at 9. 12 Ibid. at 10. 13 Andrew A. Dzurik, Water Resources Planning, (Oxford: Rowman and Littlefield Publishers, Inc., 2003) at 158. 14 Supra note 6.
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“has been nothing short of incredible.”15 Agriculture continues to consume more than 80% of
water supplies,16 and its overall water resources are “dwindling at an alarming rate.”17 In Texas,
the Water Development Board and the Texas Natural Resource Conservation Commission
advised in 1996 that the state was no longer able to extract water by regular extraction methods
in an amount able to meet its needs.18 Further, a new government subsidy leading to growing
corn for ethanol for gasoline instead of cotton has increased the need for irrigation by an amount
“equivalent to a large lake.”19
According to Maude Barlow, Chair of the Council of Canadians, “Florida is in
trouble.”20 Barlow has conducted extensive research into the issue of bulk water exports and
water management in Canada and now sits as Senior Advisor on Water to the President of the
United Nations.21 She demonstrates through her research that the state is almost entirely
dependent upon groundwater; further, in an effort to maintain its numerous supply of lawns and
green golf courses, it has “suck[ed] up groundwater at such a rate that it has created thousands
of sinkholes that devour anything.”22 She asserts that California and New Mexico have 20 and
10 year water supplies left, respectively, and that Arizona, now out of water, must import all of
it.23
15 Scott Philip Little, “Canada’s Capacity To Control The Flow: Water Export And The North American Free Trade Agreement” (1996) 8 Pace Int’l L. Rev. 127 at 128, online: Hein Online< http://heinonline.org.myaccess.library.utoronto.ca>. 16 Frank Quinn, “Water Diversion, Export and Canada-US Relations: A Brief History” (August 2007) Program on Water Issues, paper for the Munk Centre for International Studies, University of Toronto at 4, online: Hein Online<http://www.powi.ca/pdfs/waterdiversion/waterdiversion_briefhistory.pdf>. 17 Jamie W. Boyd, “Canada’s Position Regarding an Emerging International Fresh Water Market With Respect to the North American Free Trade Agreement” (Spring 1999) NAFTA: Law and Business Review of the Americas 325 at 327, online: Hein Online< http://heinonline.org.myaccess.library.utoronto.ca>. 18 Farah El Ayoubi and James McNiven, “Political, Environmental and Business Aspects of Bulk Water Exports: A Canadian Perspective” (2006) 23 Canadian Journal of Administrative Sciences 1 at 8, online: Hein Online<http://heinonline.org>. 19 Supra note 16. 20 Supra note 7 at 4. 21 Maude Barlow, “Our Water Commons, Towards a Freshwater Narrative, About the Author” The Council of Canadians, online: Google< http://www.canadians.org/water/publications/water%20commons/index.html>. 22 Supra note 7 at 4. 23 Ibid.
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Due to irrigation for California and Arizona, the Colorado River “has been reduced to a
mere trickle” as it joins the Gulf of California.24 In the San Joaquin Valley, the ground has
compacted thirty feet lower than it was fifty years ago due to over-pumping of groundwater.25
In Arizona, 5,000 square kilometres of crops have been successfully irrigated where a desert
used to lie by extracting shrinking groundwater resources “in an unsustainable manner.”26
California’s fruits and vegetables grow in what used to be arid desert land.27
Demand for the use of water for irrigation is unlikely to wane despite the vast exhaustion
of the water supply, and it is predicted that there will be stiff competition for the use of available
ground and surface waters.28 It is not only agriculture which demands water for its
sustainability: protection and enhancement of ecosystems is a rapidly growing public interest,
as the public becomes aware that California has lost more than 90 percent of its original
wetlands.29 Arizona, New Mexico, Colorado and Texas have also lost approximately one-third
to one-half of their original wetlands.30 There is also, of course, the demand for water from
industries, as they use water for the cooling of “energy-generation equipment, for cleaning
purposes, as inputs to production, and for consumption by employees.”31
When choosing a production site, industries choose the location based on the certainty of
decades-long sufficient and available water supply.32 With respect to California, “If current
patterns of demand and use continue in California, with its existing facilities, by 2020 the state
could fall short of meeting its water needs by 2.4 million acre feet in normal years and by 6.2
24Supra note 13 at 159. 25 Supra note 15 at 129. 26 Ibid. 27 Ibid. at 128. 28 Supra note 13 at 159. 29 Brent M. Haddad, Rivers of Gold: Designing Markets to Allocate Water in California (Washington: Island Press, 2000) at 9. 30 Ibid. 31 Ibid. at 4. 32 Ibid.
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million acre feet in drought years.”33 Economic development in the southern U.S. is so tied to
fresh inexpensive water that for the past 20 years, the U.S. has examined the possibility of water
export from Canada.34 Discussions surrounding the issue will only become more frequent and
pressing as U.S. water shortages continue to worsen.
B. U.S. Attempts at Accessing Canada’s Water
1. Past – NAWAPA and GRAND The issue of water diversion and export from Canada to the U.S. is not new. Anderson
writes, “It is not paranoia. The Canadian fear of Americans coming to pillage Canadian waters
has a long and colourful history.”35 In the early 1960’s, the Ralph M. Parsons company
developed and proposed the North American Water and Power Alliance (hereinafter
“NAWAPA”), a project deemed the “most environmentally threatening of...engineering
proposals.”36 It was a plan that would divert an annual 160 million acre-feet of water “from
Alaska, northwestern Canada, and watersheds surrounding Hudson Bay and James Bay to arid
areas in the Midwestern and western United States, the prairie provinces of Canada, and
northern Mexico.”37 Specifically, by constructing large dams, the northerly flow of the Yukon,
Peace, Liard and other rivers would be reversed and forced into the Rocky Mountain Trench –
trapped in a large basin reaching 800 kilometres in length.38 The water would then flow through
a newly constructed canal into Washington State to ultimately supply 35 states with
freshwater.39 The total drainage area of the project encompassed “about 1.3 million square
33 Ibid. at 5. 34 Supra note 15 at 129. 35 Supra note 8 at 218. 36 Supra note 15 at 130. 37 Gary Fritz and Matthew J. McKinney, “Exporting Water: Toward a Policy Framework” in J.E. Windsor, ed., Water Export: Should Canada’s Water Be For Sale? (Cambridge, Ontario: The Canadian Water Resources Association, 1992) 57 at 58. 38 Tony Clarke, “Turning on Canada’s Tap? Why we need a Pan-Canadian Policy and Strategy Now on Bulk Water Exports to the U.S.” (April 2008) Report of the Polaris Institute, at 14. 39 Ibid.
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miles, with runoff of 800 to 1,000 million acre-feet.”40 The project was estimated to divert an
annual volume of water “equivalent to the average total yearly discharge of the entire St.
Lawrence River system in Canada,”41 and was likely to cost $300 billion in 1990 dollars.42
Another plan was the Grand Recycling and Northern Development Canal, (hereinafter
“GRAND”) which proposed the construction of a dyke between Hudson Bay and the saltwater
James Bay in the 1950s.43 It proposed to convert James Bay into a freshwater lake.44 The
process was said to involve impounding the rivers that emptied into the Bay, such that “water
that would otherwise be lost through salinization would be recycled. The flows of the rivers
would be reversed and canals, dams, power plants, and locks would be built to deliver this
“new” water into the Great Lakes. The Great Lakes, in turn, would become a reservoir for fresh
water waiting to be transferred to other destinations in North America.”45 The budget for the
project in 1989 was an estimated $100 billion.46
According to Barlow, while then Prime Minister Brian Mulroney was “a big fan of water
exports,” the Canadian public was “outraged at such talk, and these and other water diversion
schemes were shelved in the face of strong public opposition.”47 A Canadian community’s
attachment to water has been referred to as an attachment to “historic architecture, art or other
cultural iconography,” and the notion of water referred to as a “heritage resource” by an
academic water law expert.48 Further, Bill Blaikie, former Member of Parliament of Manitoba,
40 Supra note 37 at 58. 41 Supra note 38 at 14. 42 Supra note 37 at 58. 43 Ibid. 44 Ibid. 45 Ibid. 46 Ibid. 47 Supra note 7 at 186. 48 Supra note 8 at 216. Anderson refers to Professor Joseph L. Sax’s article, “Understanding Transfers: Community Rights and the Privatization of Water” (1994) 1 West-Northwest at 13, 14.
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suggested, “Water is as Canadian as hockey, as the Mounties, as the beaver.”49 Public opinion
managed to influence provincial politicians, as they abandoned plans to sell and transport water
in bulk from Ontario, Newfoundland and British Columbia.50
Specifically, in 1999 the Ontario Conservative government granted a five year permit to
export water via supertanker from Lake Superior to Asia.51 The government of Newfoundland
also attempted to sell water to the dry Middle East.52 Similarly, throughout the 1990s the
government of British Columbia entertained more than a dozen proposals to export water. The
Sun Belt Water of Santa Monica company (hereinafter “Sun Belt”) obtained a contract which
would supply Goleta, California, with Canadian water via tanker export from British
Columbia.53 Sun Belt and the Snowcap Waters of Fanny Bay companies agreed to ship water
from the province by tanker to Goleta.54 After staunch public opposition to all of the proposals,
they were shelved,55 and the province of British Columbia declared a “three year moratorium for
marine tanker water export.”56 Government willingness to engage in the idea of bulk water
export did not, however, end there.
2. Present – SPP and Canadian Water to Feed U.S. Energy Needs
In 2005, the Canadian government agreed to partner with the United States and Mexico
in the Security and Prosperity Partnership (hereinafter “SPP”), a move that would open up the
discussion of bulk water export once again. The SPP was a Washington think tank initiative,
49 Ibid. 50 Adele M. Hurley, “Water in North America, Rising Tensions” Remarks to the Royal Society of Canada Symposium on Water in Canada and the World (November 17, 2006) Munk Centre for International Studies, online: Google<http://.powi.ca/pdfs/watersecurity/rising_tensions.pdf>. 51Ibid. 52 Ibid. 53 Supra note 8 at 219. 54 Ibid. 55 Supra note 50. 56 Saule Bakenova, “Making a Policy Problem of Water Export in Canada: 1960-2002” (2008) 36:2 Policy Studies Journal 279 at 291, online: Hein Online <http://heinonline.org>.
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and was legitimized absent public awareness or discussion.57 Upon a superficial examination of
the agreement, its stated intentions include strengthening North American unity with respect to
economics and security. Some see it, however, as an “ideal framework for negotiating away the
rights to Canada’s water.”58 This argument becomes more plausible after one takes a closer
look at U.S. energy use, as energy production and fresh water are intertwined.
The U.S. consumes 25% of global energy, putting it atop global energy consumption.59 It
is Canada, however, that supplies the U.S. with the majority of its energy needs, specifically,
“Canada supplies around 18 percent of the U.S. oil imports and about 90 percent of its imported
natural gas, and it is the biggest seller of electricity to the U.S. northeast. In total, about one-
fourth of the energy used in the United States comes from Canada, and the proportion is going
up.”60 Further, “Since 1999, Canada has been the number-one supplier of crude oil and
petroleum products to the United States.”61
In Alberta, oil production requires on average a substantial three barrels of freshwater to
one barrel of oil; unfortunately, the Athabasca River is being drained at an unsustainable rate in
order to service the oil industry.62 Unlimited oil sands development “is slowly being recognized
as a threat to Canadian water security.”63 Nikiforuk explains,
The SPP has established a continental agenda for political integration that is slowly changing the lives of every Canadian. The SPP, largely driven by the interests and needs of its dominant player, the United States, has already embarked on an ambitious agenda to integrate the continent’s customs, transportation and security
57 Supra note 7 at 193. 58 Andrew Nikiforuk, Adele Hurley and Ralph Pentland, “Water Exports to U.S. Remain on Table Until We Take Them Off; Ottawa Must Take Clear Stand Against Growing Pressure” Edmonton Journal (11 Sept. 2007) A18, online: Google<http://webapp.mcis.utoronto.ca>. 59 Supra note 10 at 13. 60 Martin J. Pasqualetti, “The Alberta Oil Sands from Both Sides of the Border” (April 2009) 99:2 Geographical Review 248 at 254, online: Gage Online<http:gageonline.org>. 61 Mark J. Kasoff, “East Meets West in the Canadian Oil Sands” (2007) 37:2 American Review of Canadian Studies 177 at 178, online: Gale<http://mygalegroup.com>. 62 Supra note 10 at 14. 63 Ibid. at 15.
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networks. In the absence of domestic Canadian policy the SPP has also accelerated energy integration and undermined national action on climate change, for the benefit of the dominant trade partner. To date successive Canadian governments have actively sacrificed water resources in the name of rapid oil sands development and North American energy integration. Many SPP documents assume that a continental water policy is just as desirable as a continental energy policy, which is now a fait accompli. This explicit assumption raises two questions: Has the move towards a continental energy policy jeopardized our energy security? Can continental water policy, including bulk water exports, be far behind?64
Former Liberal Leader Stephane Dion even admitted to knowledge of “secret talks” between
Canadian and U.S. leaders pertaining to selling Canadian water.65 Obviously the U.S. is poised
to make a move towards accessing Canadian water. The question is when will it happen?
C. Environmental Impacts of Bulk Water Export
Not surprisingly, damming and/or exporting water from a river or coastal estuary could
have severe environmental consequences.66 This discussion becomes important because if
Canada is to try to protect its water from export without violating NAFTA, there may be an
argument that it can do so in the name of environmental protection.67 (See sections III and V for
a discussion on this NAFTA export restriction.) If B.C. Hydro was permitted to dam the Liard
River in British Columbia today (as was part of the NAWAPA plan more than a decade ago), it
is suggested that breakup on the MacKenzie River would be delayed easily by three or more
weeks, which would catastrophically result in a shorter arctic summer.68 The consequences
would trickle down to influence fish production from Hudson Bay to the coast of Labrador and
64 Ibid. at 24. 65 Martin Mittelstaedt, “Canada’s Water ‘On The Negotiating Table,’ report says; Vague Wording in NAFTA Doesn’t Protect Country Against Bulk Shipments and Other Forms of Sale To The United States” The Globe and Mail (10 Sept. 2007) A6, online: Google<http://webapp.mcis.utoronto.ca>. 66 Richard C. Bocking, “The Real Cost of Dams, Diversions, and Water Exports” in J.E. Windsor, ed., Water Export: Should Canada’s Water Be For Sale? (Cambridge, Ontario: The Canadian Water Resources Association, 1992) 277 at 283. 67See General Agreement on Tariffs and Trade, Oct. 30, 1947, 58 U.N.T.S. 187, Can. T.S. 1947 No. 27 (entered into force 1 January 1948) at Articles XX(b) and (g). 68 Supra note 66 at 281.
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Newfoundland’s Grand Banks.69 There is sufficient evidence that local ecosystems are
damaged through the drainage of large quantities of water; specifically, there is a reduction in
biodiversity and a dehydration of aquifers and underground water systems.70 Mammals would
then accumulate mercury from the flood waters of diversions, thereby damaging the food
chain.71
The Canadian Environmental Law Association’s 1993 report on the issue of water
exports revealed the growing body of evidence that has accrued on the environmental effects of
large scale diversions:
A diverse set of changes occurs when one river system is dammed and its flow is diverted to another...A variety of biophysical changes are predictable. Moderate earthquakes and climate change are to be expected in the vicinity of large impoundments. Erosion and turbidity decrease primary biological productivity in some existing lakes and rivers. Forests, agricultural lands, and wildlife habitat may be lost in perpetuity and existing fisheries habitats destroyed. Mercury is released into the water column and bioaccumulates in fish to levels which makes them unsuitable for human consumption; this condition persists for 20 to 30 years at a minimum and longer in areas where erosion or organic-rich soil continues.72
It also details the environmental impacts of the GRAND scheme: It could increase ice
formation in Hudson Bay as water layering develops earlier in the spring and deepens by the
summertime, causing a delay of ice breakage due to the lack of warm water from the James Bay
outflow in the spring.73 Further, there would most likely be an alteration of the nutrient content
of freshwater circulation out of Hudson Bay which could affect productivity on the Labrador
Shelf, and fish and marine life would be negatively affected by such changes to the ice pack in
Hudson Bay.74 Perhaps the most devastating assertion from the report is that, “Changes to
69 Ibid. 70 Supra note 38 at 15. 71 Ibid. 72 Jamie Linton, “Water Export” in NAFTA and Water Exports (Toronto: Canadian Environmental Law Association, 1993) 28 at 29. 73 Ibid. at 31. 74 Ibid.
14
coastal staging areas in both bays would most likely destroy a major portion of the North
American migratory bird population.”75
Human communities living near the watersheds may also be affected by taking water for
export, as its removal could result in a shortage of drinking water and negatively impact
irrigation.76 Water quality is affected through large scale water removal, as the level of
pollution increases as the water level goes down.77 River water that flows into the ocean “is not
‘wasted,’ as proclaimed by potential buyers who want to fill tankers. It creates estuaries –
among the most productive habitats on earth. There are shocking examples from around the
world where estuarial wetland communities have crashed when river flows disappeared into
upstream irrigation.”78 The issue of exporting water from estuaries by supertankers raises many
concerns. The 250,000 tonne tankers would weave through delicate waterways home to pods of
killer whales, beautiful reefs and oyster fisheries.79 Their fuel tanks carry bunker C fuel, which
is “the worst possible grade of oil in environmental terms”; the risk level of a spill from
transporting water by tanker in B.C. is “very high” and one accident would be “catastrophic.”80
The long-term effects of bulk export are not scientifically certain, but it could be dangerous for
Canada to start the flow, and be unable to stop once those devastating results are realized.81
75 Ibid. 76 Supra note 18 at 4. 77 Ibid. 78 John B. Sprague, “Myth of Abundance: The Common Claim that Canada Boasts the World’s Largest Supply of Fresh Water is False” (Spring 2003) 29:2 Alternatives Journal 28, online: Gage Cengage Learning<http://find.galegroup.com>. 79 Supra note 72. 80 Ibid. 81 Supra note 1 at 119.
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III. LEGAL ATTEMPTS TO PROTECT WATER AND THE NAFTA HURDLE
A. Efforts to Prevent the Export of Water
No Canadian law prohibits bulk water exports.82 Federal and provincial governments
contend that they have no intention of trading freshwater, but as indicated above, some past
provincial actions revealed otherwise. It can be argued that the federal government lacks
effective water policy leadership, as the research and laws on water have not been revamped or
updated for more than a decade, and some provincial laws regulating water exports have
worrisome loopholes as explained below.83
The Mulroney government created the Federal Water Policy in 1987 in response to
public outcries against bulk water exports.84 Its objective was to gain federal control over bulk
water exports, “through a national ban on large-scale water diversions, effectively banning the
export of Canadian water to the United States, and national regulation of small-scale diversions
through cooperation with the provinces on developing a uniform system of measurement.”85
Shortly thereafter in 1988 the federal government introduced the Canada Water Preservation
Act,86 also known as Bill C-156.87 It was drafted to prohibit any export or diversion, “into
boundary waters for the purpose of export of water above the average daily rate of one cubic
metre per second or annual volume of 20,000 cubic decametres...The bill permitted the Minister
to consider licensing exports below this level, after undertaking environmental impact
82 Ralph Pentland and Jim Bruce, “How Much Longer Can We Go Without Leadership On Water?” The Toronto Star (11 Sept. 2008) AA8. 83 Ibid. 84 Supra note 7 at 187. 85 Ibid. 86 Bill C-156, Canada Water Preservation Act, 2d. Sess., 33rd Parl., (1st reading 25 August 1988). 87 Supra note 16 at 10.
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assessments and setting terms and conditions.”88 Bad timing sealed the fate of the bill, as an
election was called prior to its consideration by a Parliamentary committee.89 Ultimately, it died
on the order paper.90
Another blow to the protection of Canada’s water from export arose in 1993 when the
Chretien government embraced NAFTA and, “like the Conservatives before them, declined to
negotiate an exemption for freshwater in the text of the trade agreement, even though
exemptions had already been negotiated for raw logs and unprocessed fish.”91 An attempt was
made to appease the public’s concerns over what effect NAFTA would have on Canada’s rights
to control the flow of its water: a joint Canadian, American and Mexican statement was made
on December 2, 1993 which “announced that the NAFTA creates no rights to natural water
resources of any Party to the Agreement. The parties agreed in this non-binding manner that
unless water actually becomes a traded commodity, it will not be regulated as such under
Chapter Three’s provisions.”92 Essentially there was an oral agreement that the NAFTA
provisions would not allow water “in its natural state” to become available for export.93 One
NAFTA commentator explains that “for critics, the statement resembled a nonbinding
gentleman’s agreement that would have to be supported by formal policy.”94 The agreement’s
enforceability is debatable as it was never signed, and no attempt was made to negotiate a
formal and binding NAFTA exemption for water.
In the late 1990s, the federal government created a strategy that was designed to forbid
the removal of water in bulk from Canadian watersheds – this prohibition included water for
88 Ibid. 89 Supra note 56 at 290. 90 Ibid. 91 Supra note 16 at 10. 92 Supra note 8 at 240. 93 Supra note 16 at 10. 94 Supra note 56 at 292.
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export.95 The strategy took the form of a voluntary agreement among participating Canadian
provinces and territories in which all would prohibit exporting water in bulk; it was known as
the Accord for the Prohibition of Bulk Water Removal from Drainage Basins (hereinafter “the
Accord”).96 According to MacNab, “The Accord is an attempt by the federal government to
create a comprehensive policy on bulk-water export while at the same time respecting
jurisdictional uncertainty under the Canadian constitution and uncertainty about Canada’s
obligations under GATT97 and NAFTA.”98
The Accord’s signatories include Nunavut, the Northwest Territories, the Yukon,
Ontario, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland.99 British
Columbia did not sign the Accord, but its Water Protection Act100 “is by far the most extensive
and prohibitive of the provincial policies.”101 It states that, “A person must not remove water
from British Columbia.”102 MacNab interviewed “key government policy makers” about why
B.C. did not sign the Accord and was advised that “the Accord was a weaker policy option than
B.C.’s existing Water Protection Act,” and there was a concern that “signing the Accord would
undermine B.C.’s independence within Canada to make its own resource decisions.”103
Alberta similarly did not sign the Accord, and it too has a bulk-water export policy.104
Its 1996 Water Act105 prohibits the issuance of a license to transfer water outside of Canada,
95 Joshua MacNab, Murray B. Rutherford and Thomas I. Gunton, “Evaluating Canada’s Accord for the Prohibition of Bulk-Water Removal from Drainage Basins” (Dec. 2006) 34:3 Environments, online: Gale Cengage Learning<http://find.galegroup.com>. 96 Ibid. 97 Supra note 67. (hereinafter “GATT”) 98 Supra note 95. 99 Ibid. 100 R.S.B.C. 1996, c. 484. 101 Supra note 95. 102 Ibid. 103 Ibid. 104 Ibid. 105 R.S.A. 2000, c. W-3.
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unless authorized by the Legislature.106 The Alberta government decided that there was no need
to sign the Accord as its own Water Act already prohibited bulk water removal.107
Saskatchewan did not sign the Accord and in 2001, it passed The Water Corporation
Amendment Act108 which prohibited removing water from watersheds.109 Manitoba opted not to
sign the Accord, and in 2000 passed the Water Resources Conservation Act110 wherein it
prohibited removing water from a water basin (defined as Manitoba’s part of the Hudson Bay
drainage basin).111 Quebec did not sign the Accord and implemented a temporary moratorium
on bulk-water exports from 1999 to 2001.112 It then enacted the Water Resources Preservation
Act113 in 2001 which prohibited bulk water removal in Quebec.114
MacNab asserts that the Accord was devised so as to avoid conflicts with GATT and
NAFTA, and examined whether each province’s bulk water export prohibition legislation
defined the prohibited areas of water export by watershed boundaries rather than political
boundaries. The distinction is important because the Accord specifically seeks to prevent
political boundary prohibitions which might open a province to challenge as instituting a
“disguised trade barrier[s] rather than [a] legitimate measure[s] to protect Canadian watersheds
and environments.”115 Further, he queried whether the provincial prohibitions were created to
protect ecological integrity.116 He writes, “Only Ontario, Nunavut, the Northwest Territories
and the Yukon fully satisfy both the ecological integrity and watershed definition specifications
of the Accord. The remaining jurisdictions have prohibitions that differentiate on the basis of
106 Ibid. at s. 46(2). 107 Supra note 95. 108 S.S. 2001, c. 47. 109 Supra note 95. 110 C.C.S.M. c. W72. 111 Supra note 95. 112 Ibid. 113 R.S.Q. chapter P-18.1. 114 Supra note 95. 115 Ibid. 116 Ibid.
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political boundaries and may be subject to NAFTA challenges.”117 As discussed in subsection
B below, while provincial actions are commendable, they are not solid enough to withstand a
NAFTA dispute with the U.S.; consequently, the federal government should draft and
implement strong and clear fresh water protection legislation to unify the country against bulk
water removals.
B. Legal Analysis of NAFTA Provisions and Their Significance to the Bulk Water Export Conflict
Canada, the United States and Mexico are tied together through NAFTA. The
agreement was designed to eradicate trade barriers and promote the movement of goods and
services across the three countries’ borders.118 Its goal was to promote economic growth, but
NAFTA’s text led to increasing fears that Canada’s control over its water resources would be
lost.119 Although there were discussions among the three NAFTA countries about excluding
water from NAFTA’s scope, they did not agree to adopt an exception.120
Article 201 of NAFTA defines “goods” as, “domestic products as these are understood
in the General Agreement on Tariffs and Trade or such goods as the parties may agree.”121 For
tariff purposes under the GATT, the Harmonized Commodity Description and Coding System
(the Harmonized System) describes products and includes various descriptions of water, such as
“natural or mineral water and aerated waters, not containing added sugar or other sweetening
matter nor flavoured...; ice and snow.”122 There is an explanatory note at heading 22.01 of the
Harmonized System that expands the definition of water in NAFTA by including, “ordinary
117 Supra note 95. 118 Supra note 15 at 134. 119 Ibid. 120 Supra note 17 at 332. 121 Supra note 5 at Art. 201, 32 I.L.M. 122 Peter H. Gleik, Gary Wolff, Elizabeth L. Chaleki and Rachel Reyes, “The New Economy of Water: The Risks and Benefits of Globalization and Privatization of Fresh Water” (2002) Report of the Pacific Institute for Studies in Development, Environment and Security, online: Google<http://pacinst.org/reports/new...water/new_economy_of_water.pdf>.
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water of all kinds (other than sea water).”123 Because the Harmonized System describes water,
“NAFTA commentators have concluded that once a WTO member begins to trade its natural
surface water, the water becomes a “good” on which a member might not be allowed to impose
export restrictions.”124 Water may be bought and sold as permitted by GATT, but in what form
is it to be considered a “good”? Perhaps the intention of its inclusion in the Harmonized System
was meant to capture trade in bottled water, but the latter definition left the door open for an
interpretation to include water of larger quantities. The Canadian government made a
submission to the International Joint Commission in 1999 on this specific issue:
...some observers have suggested that, because Canada’s (and most other countries’) tariff schedule includes “natural waters” as a tariff heading, this means that all water must be considered to be a good. This is a mistaken view of the purpose of a tariff schedule. The tariff schedule does not define what is a good; it merely provides an organizational structure for the purposes of tariff negotiations and customs administration. In other words, it does not tell us if and when water is a good; it only tells us that when water is classified as a good, it falls under a particular tariff heading.125
Little explains that “[c]ritics of the proposed agreement argued that this inclusion
restricted the legal means by which Canada could restrict large-scale exports of water,” and,
“argued that Canada had forfeited its rights to protect its water resources under Chapter Three of
NAFTA concerning National Treatment and Market Access for Goods.”126 For example,
Article 301 states that each NAFTA party shall, “accord national treatment to the goods of
another party in accordance with Article III of the General Agreement on Tariffs and Trade.”127
The term “national treatment” in this context is designed to ensure that no party can give less
123 Ibid. 124 Robert Girouard, “Water Export Restrictions: A Case Study of WTO Dispute Settlement Strategies and Outcomes” (2002-2003) 15 Geo. Int’l Envtl. L. Rev. 247 at 252, online: Hein Online<http://heinonline.org>. “WTO” refers to the World Trade Organization. 125Ibid. at 256. 126 Supra note 15 at 135. 127 Ibid.
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favourable treatment “to goods and services of other parties than the most favourable treatment
accorded to any similar, directly competitive or substitutable goods and services.”128
Boyd suggests that the implication of Article 301 is that Canada would be obligated to
handle water to be exported by both domestic water corporations and foreign owned companies
in the same manner.129 In order to make that argument, it would have to be established that the
business of exporting freshwater for profit constitutes a “service” as contemplated by Article
301, and that the national treatment provision could somehow be applied to exports. Shrybman
makes a similar argument, and asserts, “The National Treatment requirements of Article III of
GATT are restricted in their application to import measures only. Article 301 of NAFTA adopts
this provision by reference. However Annex 301.3: Exceptions to Articles 301 and 309,
specifically excepts export controls on such products as logs and fish. This suggests that unlike
the GATT, under NAFTA National Treatment applies to exports as well.”130
These are difficult arguments to make, as Article III does not apply to exports, and it
would seem to go against the definition of “national treatment” to apply it to goods and services
used anywhere else but in Canada. It is both curious and troubling, however, that while Annex
301.3 of NAFTA provides that export controls on logs and unprocessed fish would be excluded
from the national treatment obligation, the Canadian Government did not carve out that same
exception for water.131
128 Supra note 17 at 333. 129 Steven Shrybman, “A Legal Opinion Concerning Water Export Controls and Canadian Obligations Under NAFTA and the WTO” (September 1999) 25:1 Occasional Paper Series, West Coast Environmental Law Research Foundation, at 3, online: Google<http://www.wcel.org>. 130 Ibid. at 15. 131 Supra note 5 at Annex 301.3.
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It is suggested that “Canada’s most onerous trade obligations are found in NAFTA’s
investment chapter.”132 The “National Treatment” provision surfaces again in Chapter 11 on
Investment, and the obligations it imposes upon the parties could “translate into the greatest
threat to Canada’s water resources.”133 Chapter 11 of NAFTA allows private investors to
advance claims against NAFTA parties for a breach of obligations.134 The argument is that if
even just one company exported Canadian water, it would become a commodity subject to
international trade obligations.135 Article 1102 of NAFTA provides that Canada must, “...accord
to investors of another party treatment no less favourable than it accords, in like circumstances,
to its own investors.”136 Under Chapter 11, it does not matter whether water is considered a
good or not – these NAFTA investment rules extend to water,137 and Article 1102 does not
distinguish between imports and exports.138 In practice, the provision works as such: If both a
Canadian and American investor sought individual water diversion approvals or licences for
bulk water export, Article 1102 prevents the Canadian government from granting the Canadian
investor the license while rejecting the American investor’s application.139 Doing so would
violate the National Treatment provision. Consequently, the only way to prevent foreign
investors from selling Canada’s water is to deny domestic investors a license to export.140
Article XX of GATT is incorporated into NAFTA Article 2101 and provides states with
the opportunity to permit restrictions on exports if they are: “necessary for the protection of
human, animal or plant life or health” (Article XX(b)) or they relate “to the conservation of
132 Supra note 129 at 1. 133 Supra note 15 at 145. 134 Supra note 18 at 3. 135 Supra note 1 at 116. 136 Supra note 129 at 4, see also note 5 at Art. 1102. 137 Ibid. 138 Supra note 15 at 145. 139 John McDougall, “From Black Gold to Blue Gold: Lessons from the Petroleum Trade Regime for an Emerging Water Trade and Investment Regime” (2007) 26:1 Policy and Society 135 at 145, online: Hein Online<http://heinonline.org>. 140 Ibid.
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exhaustible natural resources” (Article XX(g)).141 Article XX(b) permits policies to protect
animal or plant life which are “embedded in a wider plan of national water management aimed
at averting national water scarcity.”142 Article XX(b) also requires that that the export
restriction be necessary for plant and animal protection, which ostensibly means that it has to be
considered to be the “least trade restrictive measure” to achieve plant and animal protection.143
Similar to Article XX(b), under Article XX(g), Canada could apply a restriction on water export
on the basis that it is instituting a national water conservation policy.144 The requirements of the
two articles differ in that there is no necessity test under Article XX(g) in order for an
environmental measure to be justified.145
In the recent United States – Import Prohibition of Certain Shrimp and Shrimp
Products146 (hereinafter “Shrimp-Turtle I”) and United States – Import Prohibition of Certain
Shrimp and Shrimp Products, Recourse To Article 21.5 of the DSU by Malaysia147 (hereinafter
“Shrimp-Turtle II”) decisions, the World Trade Organization (hereinafter “WTO”) dispute
settlement body decided that a U.S. import restriction designed to protect sea turtles was
justifiable under Articles XX(b) and (g) of GATT as sea turtles were found to be an “exhaustible
natural resource.”148 In Shrimp Turtle I, the Appellate Body disallowed the measure, as it found
the U.S. to have infringed the preamble or chapeau of Article XX which provides that a WTO
country may impose a restriction that would otherwise violate GATT as long as the measure is
“not applied in a manner which would constitute a means of arbitrary or unjustifiable
141 Supra note 67 at Arts. XX(b) and (g). 142 Esther J. de Haan, “Balancing Free Trade in Water and the Protection of Water Resources in GATT” in Edward H.P. Brans, ed., The Scarcity of Water (London: Kluwer Law International, 1997) at 255. 143 Ibid. at 255. 144 Ibid. at 256. 145 Ibid. at 256. 146 WTO Appellate Body Report on U.S. - Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R (October 12, 1998). 147 Report of the Appellate Body, U.S. - Import Prohibitions of Certain Shrimp & Shrimp Products; Recourse to Article 21.5 of the DSU by Malaysia, WT/DS58/AB/RW (Oct. 22, 2001). 148 Supra note 146 at paras. 131-42.
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discrimination between countries where the same conditions prevail, or a disguised restriction
on international trade...”149 Four years later in Shrimp Turtle II, the Appellate Body explained
how a country can administer trade sanctions under Article XX and still prevent a determination
under the chapeau that the measure constitutes “arbitrary or unjustifiable discrimination.”150 It
found that due process requirements must be fulfilled and there must be flexibility in creating
laws so that different countries can be accommodated.151 It also held that a country is required
to undertake good faith negotiations in the construction of agreements related to actions causing
import restrictions.152 Girouard writes that the Shrimp-Turtle rulings suggest that
if a WTO member uses an export restriction to conserve water resources, and if the restriction violates Article XI of the GATT, the measure will be provisionally allowable under Article XX(g) if it is “primarily aimed at” and “narrowly focused” on a conservation objective (protecting clean water), if it is not a “blanket prohibition” that is “disproportionately wide in scope and reach” in relation to its objective, and if it is accompanied by restrictions on domestic producers or consumers...153
Carving out an exemption from trade restrictions based on environmental conservation
would require Canada to successfully argue that its freshwater is an exhaustible natural resource.
It is suggested here that such an argument would not be unreasonable, considering that the
United States, once blessed with water, has severe shortages due to agricultural practices and
diversions. If the U.S. can run out of water, why would Canada be any different if its main
sources of freshwater began to be diverted and/or exported via tanker or pipeline to the United
States?
Further, if water export began and then an attempt to curtail it was made, Article 315 of
NAFTA, “Other Export Measures”, would pose a problem for the restriction effort. It states:
149 Supra note 67 at Art. XX. 150 Supra note 147 at paras. 122-23. 151 Ibid. at paras. 140-9. 152 Ibid. 153 Supra note 124 at 268-9.
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A party may adopt a restriction justified under Article XX(g) of the GATT with respect to the export of the good of the Party to the territory of another Party, only if the restriction does not reduce the proportion of the total export shipments of the specific good made available to that other Party relative to the total supply of that good of the Party maintaining the restriction as compared to the proportion prevailing in the most recent 36-month period...prior to the imposition of the measure.154
In essence, its wording applied to Canada would be that “once Canada begins to export water it
cannot restrict exports unless it initiates a proportionate domestic restriction.”155 A restriction
placed on a good (water) may not reduce proportional access to the total supplies of that good,
“that have been enjoyed by the importing party over the preceding three years.”156 This could
mean that once water export to the U.S. begins, the U.S. would be entitled to an unending
proportionate share of Canada’s water, regardless of attempts to “turn off the tap” for
environmental protection reasons.157
Obviously there are many NAFTA provisions so tied to the water issue that, if violated,
would harm Canada financially and politically. The federal government ought to realize that the
issue may come before an NAP in the future if it is perceived that any water protection
legislation Canada might implement is violating any part of the agreement. The procedures for
bringing such a dispute between Canada and the U.S. before a panel are found in NAFTA
Chapter 20, and only occur after a period of consultations, mediation and intervention by a
Commission in an attempt to resolve the dispute before it reaches a panel.158 Further, private
American investors would have their own means of dispute resolution under NAFTA Chapter
11.159 The federal government has been hesitant to legislate in this area and to test these
NAFTA provisions, possibly because it is hoping the bulk water export issue is going to go
154 Supra note 5 at Art. 315(1)(a). 155 Supra note 6 at 84. 156 Supra note 17 at 334. 157 Supra note 6 at 84. 158 Supra note 5 at Ch. 20, Arts. 2005-2008. 159 Ibid. at Ch. 11, Arts. 1115-1136.
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away. It also could not easily afford to walk away from NAFTA, as 87 percent of Canada’s
trade and 62 percent of Canada’s wealth is dependent on the United States.160
IV. THE STRATEGY OF CONFLICT, GAME THEORY, AND THE PRICE OF DEFECTION FROM NAFTA
A. Setting the Stage for Game Theory Analysis
While many may discard the notion that ‘Canada and the U.S. may come to blows over
water in the future’ as preposterous, under the right conditions the possibility exists. Few
predicted that a worldwide recession would strike in 2008 with a force not seen since the Great
Depression. Few predicted that Osama Bin Laden would successfully orchestrate the terrorist
attacks of September 11, 2001, which changed the face of international airline security forever.
Similarly, few predicted that Saddam Hussein would invade Kuwait, resulting in a U.S. military
intervention often portrayed by the media as a fight for Kuwait’s oil supply.
The world is constantly changing and society evolving, in sometimes unpredictable and
undesirable ways. What is different about the current and future worldwide water crises is that
scientists, governments, policy makers and environmentalists are aware that it is happening and
have the information to predict future water conflicts. The U.S. is in the throes of a water crisis,
which conceivably will only worsen. If the U.S. was willing to go to war to protect oil, a
money-making resource which human beings can survive without, what will it do to secure
water, the key to both its economy and human survival, when its supply runs out?
Such a doomsday scenario is not a foregone conclusion, but it is foreseeable. As was
revealed in the preceding sections of this paper, a Canada / U.S. conflict over water is
conceivable, and surely both sides know it may be coming. As the roots of the conflict have 160 Supra note 6 at 97.
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been explained, it will be analyzed from the perspective of two countries playing a game, also
known as “game theory”. The game involves calculated moves which result in payoffs or
losses, with access to Canada’s freshwater supply as the ultimate payoff for each game playing
country. When the stakes are so incredibly high, the consequences of a false move can be
disastrous, so the strategies behind the game must be well-crafted. Once the considerations
facing each side are determined, outcomes of the conflict can be theorized. Game theory is
concerned not with games of skill or chance, but with games of strategy.161 In these games,
each player’s best course of action is dependent on his expectation of the other players’
actions.162
Guzman has studied game theory and international relations in an effort to understand
state behaviour.163 He comments on the Canada / U.S. relationship:
Even in a world of selfish states, there will be times when states have common interests that make cooperation valuable and easy to achieve. Consider, for example, the relationship between Canada and the United States. For a variety of reasons, neither state stands to gain from a military confrontation. Canada would obviously like to avoid such a conflict because it could not hope to emerge victorious, while the United States, despite its military superiority, has no interest in using force against Canada. The ongoing relationship between the two states is worth more to the United States than what would emerge from the use of force. Canada and the United States could choose to sign an agreement explicitly reaffirming the legal obligation not to attack one another, but it is not clear what such a treaty would achieve. They are likely to behave in the same way with or without a treaty because of their shared interest in avoiding a military conflict.164
Guzman is correct in that neither country would desire to enter into a major political or military
conflict. But the stakes may change if Canada makes a move to violate a NAFTA provision that
may legally compel it to export bulk water to the U.S. Of course, as explained above, Canada is
161 Thomas C. Schelling, The Strategy of Conflict (Cambridge, Massachusetts: the President and Fellows of Harvard College, 1960) at 9. 162 Ibid. at 9-10. 163 Andrew T. Guzman, How International Law Works, Rational Choice Theory (New York: Oxford University Press, 2008) at 25. 164 Ibid. at 26.
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not required to export its water...yet. Further, the U.S. government has not formally made a
move to acquire Canadian water via a NAFTA legal challenge, but if the U.S. attempts to use
NAFTA to access Canadian water in the future, how will Canada respond? The following
illustrations proceed under the assumption (unless otherwise stated) that at a future date it has
been determined by the NAP, or conceded by the Canadian government, that Canada’s water
export tap was turned on and under NAFTA it cannot be turned off.
B. International Water Conflicts, Strategies and Threats
Water resources are a natural candidate for game theory applications: due to increases in
the human population and decreases in water supply, the likelihood of conflict over
management, removal and distribution of water also increases.165 As a result, individuals,
groups and territories are negatively affected, and their own strategies for survival become
paramount.166 Conflict involving access to vital water supplies is common: “India and Pakistan
nearly went to war when the waters of the shared Indus basin were diverted, following partition
of the Indian subcontinent in 1947. Similarly, conflicts over access to the Jordan River and its
associated ground water basins have triggered a string of military clashes in the Middle East
going back to at least 1951. They also helped to spark the 1967 Arab-Israeli War.”167 Barrett
asserts that even when states are in conflict over non-essential resources, friendly relationships
“can turn hostile.”168 He is referring to the fur seal conflict in the late 1800s, where Canada
(controlled by Great Britain at the time) and the United States squabbled over fur seals and “a
risk of the horrors of a war between two kindred peoples” was created.169
165 Ariel Dinar, Jose Albiac & Joaquin Sanchez-Soriano, eds., Game Theory and Policymaking in Natural Resources and the Environment (London: Routledge, 2008) at 2. 166 Ibid. 167 Scott Barrett, Environment and Statecraft (Oxford: University Press, 2003) at 51. 168 Ibid. 169 Ibid.
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In this paper, the Canadian freshwater referred to as the subject of potential export is not
a resource shared with the United States, as seen in the above examples, but as explained, the
U.S. might decide it has a legal entitlement to it under NAFTA. The legal quarrel ensuing may
result in an unfavourable NAP ruling for Canada. If Canada, upon receipt of an unfavourable
arbitration panel report, continued to violate the agreement or walk away from it entirely, it may
be faced with retaliation from the United States in the form of economic sanction, or in a worst-
case scenario, a future military invasion. Although the latter possibility is slim, history suggests
that even friendly relationships can turn hostile if the stakes are high enough.
When discussing such international conflicts, an understanding of the dynamics behind
leaders’ strategies is essential to comprehension of the strategy game. Thomas Schelling,
famous and widely cited for his discourse on international conflict strategy theory, writes,
“[strategy]...is not concerned with the efficient application of force but with the exploitation of
potential force. It is concerned not just with enemies who dislike each other but with partners
who distrust or disagree with each other.”170 Further, in conflict situations, players often make
threats against the opposing side in order to attempt to achieve deterrence.171 Of such threats,
Schelling states, “The distinctive character of a threat is that one asserts that he will do, in a
contingency, what he would manifestly prefer not to do if the contingency occurred, the
contingency being governed by the second party’s behaviour...if I threaten to blow us both to
bits unless you close the window, you know that I won’t unless I have somehow managed to
leave myself no choice in the matter.”172 A threat makes player A’s course of action conditional
upon what player B does, and while a commitment from player A determines A’s course of
170Supra note 161 at 5. 171 Ibid. at 6. 172 Supra note 161 at 123.
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action, the threat determines player B’s course of reaction in response.173 The first move
involves making a commitment in a game where that first move carries an advantage; the
second move involves the threat.174
Canada must analyze the consequences inherent in its possible defection from NAFTA
on the water issue. Such examination can be broken down into the study of two game models.
The first model, the “Prisoner’s Dilemma,” will be used to illustrate Canada and the U.S. in a
general NAFTA cooperation game. It will show the options and considerations faced by both
countries in deciding whether to cooperate with or defect from NAFTA on any given issue. The
introduction of a specific Canadian defection from NAFTA to protect its water from bulk export
(hereinafter “water conflict”) will be illustrated in the second model, the game of “Chicken.”
It is suggested here that the water conflict is a game of deterrence. Brams writes, “...by
threatening untoward action against an opponent who initiates conflict, even at great potential
cost to oneself, one seeks to deter the opponent from committing aggression in the first
place.”175 Applied to the water conflict, Canada’s “aggression” would be a refusal to engage in
trade in water even after a negative NAP ruling required it to do so. Such a refusal could
include the creation and implementation of legislation to prevent the export of water to the U.S.
Such legislation could also be enacted prior to the matter being referred to an arbitration panel.
This step - refusal to trade in water - would be a “commitment” or “first move” as characterized
by Schelling above. The “second move” would be the U.S. response to Canada’s intention to
defect. It may involve a threat to take Canada to an arbitration panel, or impose economic
sanction upon Canada in order to achieve deterrence. If those options ultimately failed, and the
173 Ibid. at 124. 174 Ibid. 175 Steven J. Brams, Superpower Games: Applying Game Theory to Superpower Conflict (New Haven: Yale University Press, 1985) at 1.
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U.S. was desperate enough for access to Canada’s freshwater, it may then invoke a state of
national emergency and threaten Canada with a military invasion.
C. Games of Cooperation and Deterrence
1. Prisoner’s Dilemma
The bilateral prisoner’s dilemma is a game in which “both parties can maximize their
total joint payoff through mutual cooperation but where each player does better by defecting.”176
It is described as the story of two prisoners, accused of a crime and separated in jail such that
they cannot speak to each other.177 The Crown needs a confession from at least one suspect in
order to convict both of them of the crime.178 The prisoners have three choices with different
consequences: (1) if one confesses and the other does not, the former goes free while the latter
gets a 10 year sentence; (2) both confess and get 5 year sentences; (3) both remain silent and get
1 year sentences.179 The best outcome would be if both remained silent, but the dominant
strategy is for both to confess; each prisoner does not know what the other is thinking and
cannot tell the other person to stay quiet, so each prisoner will likely confess because there is a
chance he will go free. He also knows that if he does not confess and his partner does, he will
face 10 years in prison.180
It could be argued that overall, Canada and the United States benefit more from mutual
cooperation with NAFTA rather than periodic defections, as the spirit of the agreement is to
176 Supra note 163 at 30. 177 Steven J. Brams, Rational Politics: Decisions, Games, and Strategy (Washington: Congressional Quarterly Inc., 1985) at 141. 178 Ibid. 179 Richard H. McAdams, “Beyond the Prisoner’s Dilemma: Coordination, Game Theory and the Law” (2009) 82 S. Cal. L. Rev. at 7, online: Google Scholar<http://ssrn.com/abstract=1287846>. 180 Ibid.
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promote the ease of the flow of goods across North American borders and the payoffs from
mutual compliance are generally high.181 Anderson writes,
...the importance of the NAFTA in facilitating the deepening of the trilateral economic relationship cannot be overstated. Canada and Mexico are now the U.S. numbers one and two trading partners...Canada / U.S. trade flows remain the world's largest (on a bilateral basis), with nearly one billion dollars a day in goods and services criss-crossing the Canada/US border. Mexican and Canadian exports to the United States now account for nearly 90 percent of each country's total trade. In 2002, Mexico and Canada accounted for over 30 percent of U.S. imports and over 35 percent of U.S. exports.182
There are circumstances, however, where the NAFTA signatories have deemed it in their
countries’ best interests to violate NAFTA – an example is the Canada / U.S. softwood lumber
dispute, where the WTO found that the United States had violated NAFTA by unfairly imposing
duties on imports of Canadian lumber.183 The Canadian government may find itself in a similar
position and decide that the protection of its freshwater buttresses adherence to trade provisions.
Figure 1 below uses the prisoner’s dilemma game to illustrate the choices facing Canada
and the U.S. with respect to cooperating with NAFTA generally. Both sides can choose to
comply with the agreement and continue with the status quo by both choosing C. This option
would award them the highest joint payoff and the second highest individual payoff. Mutual
cooperation in this scenario is a desirable option. The only better option for each individual
country would be to each choose D, but only when the other country chooses C. If Canada
chooses D and imposes a trade restriction to protect a domestic industry from import
competition while the U.S. continues to cooperate with NAFTA, Canada would achieve the
highest payoff in this game. The U.S. would be faced with the equivalent choice – choose D
and violate NAFTA on a certain issue to benefit itself economically where it sees fit, and hope
181 Supra note 15 at 134. 182 Greg Anderson, “The Canada-United States Softwood Lumber Dispute: Where Politics and Theory Meet” (2004) 38(4) J. World T. 661 at 661, online: Hein Online<http://heinonline.org>. 183 Chuck Stoody, “Softwood Lumber Dispute” CBC News Online (23 August 2006) online: Google News<http://cbc.ca/news/background/softwood_lumber/>.
33
that Canada does not challenge it or walk away from NAFTA altogether. Both countries could
choose to defect from NAFTA and each choose D, which would result in one or both countries
protecting some domestic industries from import competition, but negatively affecting each
country’s economy after the collapse of free trade. In this scenario, the countries’ joint payoffs
are the lowest, totalling 4, whereas the CC choice yields a joint payoff of 6.
Figure 1 Canada / U.S. Cooperation with NAFTA as a Prisoner’s Dilemma
CANADA NAFTA: Comply (C) NAFTA: Defect (D)
U.S.
NAFTA: Comply (C)
NAFTA: Defect (D)
Key: 4 = high payoff (victory); 3 = medium payoff (compromise); 2 = low payoff (some loss); 1 = no payoff (total loss)
Following Brams’ illustration of the Prisoner’s Dilemma model, Canada and the U.S. will
independently choose D as their dominant strategy, in the hopes of achieving the desired (4,1)
(3,3)
Compromise – Canada and U.S. abide by NAFTA terms and free trade continues
(1,4)
Canada victorious – Protects a domestic industry – economic damage to a U.S. industry
(4,1)
U.S. victorious – Protects a domestic industry – economic damage to a Canadian industry
(2,2)
Conflict – both countries abandoned NAFTA – protected some industries from trade but overall economic losses for both
34
result.184 But the choice of D by both leads to a pareto-inferior result, (2,2) which is worse for
both countries than the compromise of CC (3,3). The (2,2) outcome is also known as a Nash
equilibrium, meaning that each player does not want to deviate from it because doing so would
result in a loss, i.e. (1,4).185 Even when Canada and the United States do achieve a compromise
– i.e. free trade flows without barriers, duties or bans – the position is unstable because both are
tempted to deviate to D when faced with an import that could harm domestic industry. It would
seem that regarding rational players in the prisoner’s dilemma: “...mutual cooperation” is “hard
to sustain because each player would have an incentive to double-cross his opponent.”186
While this may be true of the model, other factors come into play when states make
decisions about whether and when to defect from a treaty or international agreement. These
factors have to do with a state’s perception of its anticipated payoffs, or benefits from pursuing a
course of action. A state’s reputation, for example, greatly affects future payoffs.187 Guzman
emphasizes the value of a state’s reputation and suggests that if violation of an agreement
creates future costs to its reputation, a state may decide to forgo defection and comply
instead.188 He states, “...when a state violates a commitment, other states take note and the
violating state’s reputation suffers. When the state enters into a treaty, it represents to the other
party that it prefers mutual cooperation to noncooperation.”189 Applied to the NAFTA example,
if Canada or the U.S. violates NAFTA, its ability to make credible promises in the future will be
reduced.190 A reputational loss is significant, “[p]otential partners will have less confidence that
the state will resist opportunities to violate the agreement and capture some immediate gain.”191
184 Supra note 175 at 8. Brams’ illustration of the Prisoner’s dilemma was helpful in this application to the NAFTA conflict. 185 Ibid. 186 Ibid. 187 Supra note 163 at 38. 188 Ibid. 189 Ibid. 190 Ibid. 191 Ibid.
35
Reputation is critical in promoting compliance, and a state’s defection from an agreement will
trigger reputation costs.192
If reputation is that important to the decision-making process, then Canada and the U.S.
likely refrain from regular NAFTA violations regularly - partly to avoid the hassle of being
brought before the NAP to settle the dispute, but partly in order to preserve future opportunities
for cooperation between themselves and with other countries. Factoring reputational losses into
the prisoner’s dilemma game as illustrated above, both countries may not achieve a benefit of 4
points for defection if they have already defected many times before as this would put the
defecting country at a disadvantage when trying to forge new future bilateral or multilateral
agreements with the same or different parties. Other countries would likely perceive it risky to
enter into an agreement with a country that has a pattern of deviation from the terms of a past
international agreement. Such a consideration of a reputational loss may change the payoff of
defection to 3 or 2 where the country that did not defect from NAFTA would still achieve a
payoff of 1.
2. Chicken
It could be argued that a different game, “chicken”, is more appropriate when analyzing
the specific Canada / U.S. water conflict. The game can be derived from the example of two
drivers approaching each other at dangerously high speeds on a collision course.193 Barrett
explains that “[i]f one player chickens out by slowing while the other continues to speed, the
player who slows loses self-esteem and the other gains. If both slow, their initial levels of self-
esteem remain unchanged. If neither slows, the consequences are unpleasant for both.”194 In
192 George W. Downs and Michael A. Jones, “Reputation, Compliance, and International Law” (January 2002) 31 Journal of Legal Studies S95 at S99. 193 Supra note 167 at 87-8. 194 Ibid. at 88.
36
the game theory literature, “chicken” is often used to analyze the Cuban Missile Crisis, where
both superpowers (the U.S. and Russia) would have “lost” the game if neither veered from their
collision course.195
The prisoner’s dilemma and chicken games are different. As McAdams explains,
“...legal scholars give excessive attention to the prisoner’s dilemma game.”196 They
“misdescribe and misapply the game” with an “attempt to shoehorn a non-prisoner’s dilemma
situation into the prisoner’s dilemma model they find so alluring.”197 Chicken is a coordination
game whereas the prisoner’s dilemma is a cooperation game.198 In a cooperation game, the
prisoner always does better by confessing (defect from agreement not to admit to the crime) and
best when he is the only one who confessed (defected).199 Unlike in the prisoner’s dilemma
game, in chicken neither player has a dominant strategy.200 In the prisoner’s dilemma, a double
defection means both players still go to jail, but for a lesser sentence. It is not the best result,
but it is not the worst result for either player. The worst result is for the player who doesn’t
confess (complies with the agreement between the two not to admit to the crime) when the other
player confesses (defects).
Comparatively, the worst result in a game of chicken is when both players defect. Each
player’s payoff in that scenario is worse than even the payoff it receives when one player
defects and the other complies. In chicken, each player’s better payoff (comply or defect)
depends on the strategy of the other player.201 Applied to the water conflict, such
195 Supra note 177 at 116. 196 Supra note 179 at 8. 197 Ibid. 198 Ibid. at 11. 199 Ibid. at 18. 200 Supra note 175 at 9. 201 Ibid.
37
interdependence gives the U.S. incentive to threaten to choose retaliation, hoping that Canada
will concede by complying with NAFTA.
As can be seen in Figure 2 below, the consequences of the most drastic retaliation by the
U.S. would be undesirable for both countries. The two players’ actions and outcomes are
ranked in terms of the chicken game. In this game, Canada’s goal is to protect its water from
export without a costly retaliation by the U.S., and the U.S.’s goal is to obtain access to
Canada’s water without having to utilize its most severe method of obtaining compliance -
military intervention.
1. C – If and when the U.S. makes a legal argument for Canada’s water under NAFTA, Canada can choose to comply with NAFTA and enter into negotiations with the United States about how to share and export its freshwater.
2. D- Canada can choose to violate NAFTA’s requirements, and refuse to export water to the U.S. by enacting legislation banning export.
3. NR – United States can make a legal argument to obtain Canada’s water under NAFTA, and if Canada refuses, it can allow Canada to keep its water while both countries continue trading other products under NAFTA.
4. MF – United States can threaten to take Canada’s water by military intervention and invasion.202
202 Supra note 177 at 116. Brams’ illustration of the Cuban Missile Crisis was helpful in demonstrating the Canada / U.S. water conflict example.
38
Figure 2 The Canada / U.S. Water Conflict as a Game of Chicken
CANADA NAFTA: Comply (C) NAFTA: Defect (D)
U.S.
Status Quo – No Retaliation (NR)
Threat of Military Force (MF)
Key: 3 = high payoff (victory); 2 = medium payoff (compromise); 1 = low payoff (loss); 0 = no payoff (disaster)
Although this illustration is helpful in understanding the moves each side could make, it does
not portray all of the possibilities or alternative courses of action open to each country. For
instance, this illustration assumes that in three out of the four scenarios (excluding MF) both
countries would view the water conflict as an isolated issue and continue to trade under
NAFTA. In reality, Canada may decide to abandon NAFTA altogether, as discussed below;
similarly, the U.S., faced with Canada’s defection on the water issue, might also retaliate by
abandoning it altogether.
Important alternative courses of action in both the NAFTA cooperation prisoner’s
dilemma issue and the game of chicken include U.S. retaliatory strategy. Consider what a state
will do when its partner in an international agreement decides to defect from one of its terms.
Ought that state to look the other way, or terminate the agreement altogether? Co-authors in
(2,2)
Compromise – possible water sharing/export agreement is established
(1,3)
Canada victorious – Protects its water – No export – Countries continue other NAFTA trade
(3,1)
U.S. victorious - U.S. threats deter Canada into agreement to export water
(0,0)
Military Conflict – end of Canada / U.S. friendly relations – U.S. takes Canada’s water by force
39
game theory literature analyze various retaliatory actions to state defection: (a) “tit-for-tat”, a
state responds to defection with a defection; (b) “grim trigger”, a state responds to a defection
by defecting forever; and (c) “penance” where a state will respond to a defection by defecting
until the defecting party decides to comply again, at which time there is reinstated mutual
compliance.203
Applied to the chicken game’s water conflict, the U.S. would be unlikely to respond with
a “tit-for-tat” strategy, as not only will Canada have defected from NAFTA, but defected on an
issue of the utmost importance to the U.S. A corresponding defection in another area of trade
followed by forgiveness for the water defection and renewed cooperation would result in a low
payoff for the United States. It would be able to keep NAFTA in place for the long-term, but it
would lose a huge prize in the process, and allow Canada to get away with a costly defection. If
significant enough, a corresponding U.S. defection would likely persuade Canada not to defect
again on a future issue, but would not solve the U.S.’s problem of needing access to freshwater.
Tit-for-tat would have limited success in achieving Canada’s compliance on the water issue, but
would likely have success with future issues of contention between the two countries.
While the “grim trigger” strategy is feasible and permitted by international law,
countries that opt for such severe punishment also harm themselves.204 NAFTA’s free trade
creates too high of an annual payoff in the form of profits to the U.S. for it to abandon the
agreement forever. The most likely scenario is “penance” where the U.S. has a variety of
options at its disposal. It may bring the dispute before an NAP in order to obtain a favourable
ruling against Canada for a NAFTA violation.205 Engaging in this course of action would be the
203 George Norman and Joel Trachtman, “Measuring the Shadow of the Future: An Introduction to the Game Theory of Customary International Law” (2008) U. Ill. L. Rev. 127 at 135-7, online: Hein Online<http://heinonline.org.myaccess.library.utoronto.ca>. 204 Supra note 167 at 277. 205 Supra note 5 at Ch. 20.
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least costly from a reputational standpoint, as the U.S. would be perceived by the international
community to be taking action within the parameters of NAFTA. Because of the low
reputational loss, the U.S. would be most likely to initiate this course of action before taking
more drastic steps. However, if Canada defies an unfavourable NAP ruling, the U.S. may then
decide to become more aggressive in its penance strategy and use intimidation, threats of
economic sanction, and military intervention to punish Canada into compliance. If penance
was successful and Canada agreed to trade its freshwater, conceivably the U.S. would attempt to
carry on with NAFTA cooperation to continue enjoying NAFTA’s benefits.
As can be seen below, in theory “penance” works. When applied to the delicate
diplomatic ties between two old friends, however, political conflict, harsh economic sanction,
and in the very worst case scenario, military intervention, might sever that relationship forever.
In defiance of an NAP ruling, (if that dispute settlement route was taken at all) it is most
realistic to suggest that the U.S. may threaten Canada with economic sanction or trade embargo
before it tried to obtain control of Canada’s water by force. If that was the case, Canada would
have to decide whether protecting its water would be worth being cut off from the U.S.
financially.
Figure 3 illustrates the chicken game with the added and more realistic scenarios of the
threats of both the NAP and of economic sanction (if the NAP remedy is not effective), as
intermediate steps before threatening military intervention. In this game, the original and less
realistic threat of military intervention is replaced by another more limited in scope, known as a
“strategy of flexible response”.206 When a threat is more serious, it is more costly for the
206 Jon Hovi, Games, Threats, & Treaties: Understanding Commitments in International Relations (London: Pinter, 1998) at 39.
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Figure 3 The Canada / U.S. Water Conflict as a Multiple Payoff Game of “Minimal Deterrence”
CANADA NAFTA: Comply (C) NAFTA: Defect (D)
U.S.
Status Quo – No Retaliation (NR)
Threat of NAFTA Arbitration Panel (NAP)
Threat of Economic Sanction Outside NAFTA dispute settlement provisions (ES)
Threat of Military Force (MF)
Key: 5= highest payoff (victory); 4 = second highest payoff (victory); 3 = medium payoff (compromise); 2 = low payoff (win with consequences or loss with small benefit); 1=no payoff; 0 = disaster
(3,3)
Compromise – possible water sharing/export agreement is established
(2,5)
Canada victorious – Protects its water – No export – Countries continue other NAFTA trade
(5,2)
U.S. victorious – maximum payoff for deterring Canada with legitimate NAFTA remedy – Canada loses but still gets some points for avoiding harsh economic sanction or worse
(2,4)
Canada victorious – it keeps its water while undergoing NAFTA’s dispute settlement process knowing it has a chance of a favourable panel ruling – U.S. loses but gets some points for following NAFTA process
(4,1)
U.S. victorious – Threats of economic sanction deter Canada from denying export – U.S. gets water
(1,2)
Canada victorious by slim margin – Protects its water but faces economic turmoil in face of sanction or embargo
(2,1)
U.S. victorious – Threats of military force deter Canada from denying export – U.S. gets water but relations strained
(0,0)
Military Conflict – end of Canada / U.S. friendly relations – U.S. takes Canada’s water by force
42
threatener to follow through; further it is preferable to commit to the ‘minimal deterrence’
principle that a party ought to apply the least serious threat which is capable of deterring an
adversary.207 Threats of the NAP and economic sanction constitute the “flexible response”
strategies and if undertaken, would fulfill the commitment to minimal deterrence.
This game of chicken is similar to the original game with four outcomes in that a
Canadian NAFTA defection met by U.S. military force, (above MF,D) would result in
disastrous consequences for both countries. The cost of the U.S.’s success in obtaining its water
would be so high, i.e. the ensuing irreversible damage to its relationship with Canada and to its
international reputation, that a military intervention would almost not be worth pursuing. Also
similar to the original game, both countries would benefit from compliance, (NR,C) and Canada
would be better off defecting only if the U.S. did not retaliate harshly.
By adding the additional strategies of the threats of an NAP and economic sanction to
this game, the U.S. is able to retaliate with the hope of achieving minimal deterrence. It would
be far more desirable for the U.S., faced with a Canadian defection from NAFTA on the water
issue, to initiate dispute settlement procedures under NAFTA and even trade sanctions well
before threatening Canada with military action for non-compliance. In this example, the U.S.
achieves the greatest payoff of 5 by using an NAP, and the second greatest payoff of 4 by using
an economic trade sanction. Both choices are preferred to the use of force to pressure Canada
into compliance. In this scenario, the U.S. is able to access Canada’s water while preserving its
international reputation and, hopefully, a Canada / U.S. relationship.
The U.S., while easily capable of invading Canadian territory, is expected to abide by
the rules of international law - one of the most fundamental being that “the use of force is
207 Ibid. at 40.
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prohibited, except in self-defence.”208 In the Persian Gulf War, the United States justified its
military intervention on the basis that Kuwait requested its help and it was a “U.S. led
intervention,” although its motive, it has been argued, was to secure access to valuable Kuwaiti
oil.209 A military invasion into Canada, however, would have to be justified another way. At
the very least it would seem that the U.S. would have to declare a “National State of
Emergency” as a result of a water shortage.210 It is questionable whether military force would
be justified even under this power as it is only supposed to be used in self-defence from attack
or to deal with disputes requiring military intervention within the U.S.211
Like Figures 1 and 2, Figure 3 uses examples of ordinal numbers to illustrate possible
payoff results, i.e. numbers where the exact value is not important. The concern with using
ordinal numbers is whether one payoff is greater than another, not the degree of difference
between numbers. Overall, Canada’s payoffs of both ‘compliance’ after threat of economic
sanction, or ‘attempting to withstand it,’ would be relatively low at 1 and 2, respectively. If
Canada is going to comply at all, it is a better option to do so when faced with an NAP (2
points) rather than waiting to see if the U.S. will resort to economic sanction or threat of military
intervention (1 point). Further, even if Canada attempts to withstand the economic sanction by
the U.S., it will only achieve a payoff of 2 points because of its dependence on it for economic
stability. When added to the water conflict in the chicken game, the intermediate and more
realistic retaliations of NAP and economic sanction create a far more desirable set of strategical
outcomes for both Canada and the U.S.; ones that they can both live with even if faced with the
least desirable of those options. According to Figure 3, Canada would be most likely to 208 Ibid. at 33. 209 Andrew Rosenthal, “No Quarter; America Could Face a Long and Costly Commitment in the Mideast” (12 August 1990) The New York Times 4:1, online: Google News< http://www.nytimes.com/1990/08/12/weekinreview/no-quarter-america-could-face-a-long-and-costly-commitment-in-the-mideast.html>. 210 Harold C. Relyea, “National Emergency Powers” (September 2001) Congressional Research Service, Report for Congress, The Library of Congress, online: Google<http://fpc.state.gov/documents/organization/6216.pdf>. 211 Ibid.
44
continue to defect and refuse to trade its water unless and until the U.S. threatened economic
sanction or military force. A defection in the face of an NAP threat would still yield Canada a
relatively high payoff.
If the United States could accomplish deterrence through an NAP ruling or economic
sanction instead of military intervention, it is likely that diplomatic relations between the two
countries could be salvaged. The rest of the world would also be less likely to get involved in
Canada’s defence. Although it is difficult to imagine a scenario where Canada could survive
economically without U.S. investment, Canada stands to become the world’s number one
producer of oil in the near future, as the other large oil producers face either peaking or
declining production.212 It is arguable that this reality gives Canada more power against the
U.S. As explained above, the U.S. imports the majority of its oil supply from Canada, and
would stand to lose from a conflict over water if its unintended effect would be to damage its
access to Canada’s oil.
Countries must understand that their threats need credibility in order to achieve
deterrence.213 In the aforementioned Canada / U.S. fur seal dispute from the 1800s, the U.S.
threatened to destroy the seal herd in order to affect a change in Canada’s behaviour.214 If the
U.S. had carried out the threat, it would have harmed itself in the process – a reality Canada
likely knew because it did not accede to the U.S. demand.215 The threat lacked credibility and
212 Henry Groppe, Presentation promoting Groppe Middlefield Energy Fund at the Fairmont Hotel in Winnipeg, May 22, 2009. Groppe is known as a “guru” of the oil industry, having been in the oil and natural gas business for 55 years, and being a Fellow of the American Institute of Chemical Engineers and Director of the United States Energy Association. 213 Supra note 167 at 67. 214 Ibid. 215 Ibid.
45
the bill never passed.216 In the water conflict, the U.S. must make Canada believe that its threat
of economic sanction is real. Such a threat is more believable than the threat of military action.
As Brams argues, “Ideally, to deter an opponent, a threat should be both effective and
credible. Its effectiveness increases the more damage it causes the player who ignores it; its
credibility increases the lower its cost to the threatener to carry it out.”217 Both economic and
military threats to Canada would be effective, in that it would be hard for Canada to withstand
either form of punishment, but attacking Canada would come at a high cost to the U.S. It
would be unlikely to do so unless and until completely desperate for water.
Unlike the “disaster” portrayed in the Cuban Missile Crisis game of chicken, where
mutually assured destruction may have occurred if the U.S.S.R. refused to remove its nuclear
weapons from Cuba sparking a forceful U.S. retaliation, U.S. military forces would not face
resistance or danger from Canadian forces. Canada’s military is too weak to defend it from a
U.S. attack. Other superpowers also facing water shortages, or in Canada’s defence, may
intervene commencing a multiparty conflict. Either way, the U.S.’s reputation would seriously
suffer – especially when it could have achieved a deterrent result from a NAFTA remedy or
trade sanctions. Therefore, the credibility of a U.S. military threat to Canada is low – not
because the U.S. is unable to carry it out without harm to itself from Canadian resistance – but
because the reputational costs are too high, and could potentially start a world war over water.
216 Ibid. 217 Supra note 175 at 13.
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V. STRATEGIES TO PROTECT CANADA’S WATER
The aforementioned discussion of game theory demonstrates the complexities and
consequences of the decision making tactics of Canada’s leaders. Perhaps the government has
been very slow to enact any legislation preventing the export of Canada’s water because the
issue is very complicated, and it is hoping the conflict never erupts into a political showdown
and an unfavourable NAP ruling. Barlow asserts, “Its attempt to cover its tracks in the wake of
its sell-out of Canada’s water heritage in NAFTA is best described as “Nobody moves and
nobody gets hurt.””218 Other explanations may be that the government wanted to keep the door
open to the possibility of trade in water, (although the 2008 Speech from the Throne would
indicate otherwise), or that it would rather not get into a conflict with the provinces which
already have, for the most part, some sort of water protection legislation. As has been explained
above, however, provincial legislation is inadequate to fully protect Canada’s water.
The Canadian government ought to realize that this issue is not likely to disappear, that
is unless desalinization plants, used to purify saltwater, become a much more cost-effective
option for the U.S. government. Currently, desalination of water as a solution to the world’s
water crisis has been called “an elusive dream”, as it is “very very expensive” and the plants
generate a lethal by-product which is pumped back into the sea in a quantity equal to the amount
of saltwater taken in for desalinization.219 As of 2007, all of the world’s desalinization plants
put together only had the capacity to provide for three-one thousandths of the world’s water
use;220 further, the desalinized water cannot be used for irrigation purposes due to its cost, its
218 Supra note 7 at 193. 219 Ibid. at 26-8. 220 Ibid. at 26.
47
distance from the interior agricultural lands, and the large amount of water needed for
irrigation.221
As the game theory analysis revealed, Canada cannot afford to achieve a total loss at a
game of chicken. If it violates NAFTA on the water issue, the U.S. is likely to retaliate in some
fashion. It may be able to withstand economic sanctions because of its vast oil supply and
world demand for oil, but it is argued that long-term Canada cannot survive economically if cut-
off from the U.S. That said, however, the U.S. would also suffer from sanctioning Canada, and
if that is the extent of the retaliation, the game may end at who gives in first. Retaliation which
would affect Canada’s security is not an option, as Canada would surely lose and the
relationship between the two countries would suffer permanent damage. Canada’s leaders need
to strategize the safest, most effective way to remove water from the trading picture – otherwise
Canada may face a very unpleasant battle later on. U.S. plans to access Canadian water have
been imminent for decades – one day its need for water may become so great as to force its
government to put its friendly relationship with Canada at risk. Canada has a few options, none
involving a military standoff for obvious reasons:
1. Violation of NAFTA Trade Rules
Canada could create federal legislation that openly and clearly bans bulk water exports.
Canada would be asserting its sovereignty and acting with the full support of the Canadian
public. Such an option should not be successfully opposed by the provinces as the federal
government is legally entitled to legislate on international trade matters. This move would be
the most brazen, as it would be a resounding message to the U.S. that Canada’s water belongs to
221 Frederic Lasserre, “Managing water diversion from Canada to the United States: An old idea born again?” (Winter 2006-2007) 62 Int’l J. 81 at 85, online: Hein Online<http://heinonline.org>.
48
Canada and is not for sale, regardless of NAFTA. The repercussions of doing so, as explained
in section IV, could be costly and dangerous, including a reputational loss if it was legally
determined that this federal legislation constituted a NAFTA violation.
2. Justify Water Export Restriction on the Basis of Environmental Protection
As in option #1, Canada could legislate a restriction on bulk export, but attempt to justify
the legislation on the grounds that it is undertaking a water conservation and environmental
protection policy. As explained in section III, GATT Articles XX(b) and (g) provide exceptions
to export restrictions on the basis of harm to plant and animal life. If it carved out an exception
on these grounds, and presented thorough and credible evidence on the environmental
destruction of mass water diversions and exports, it may be able to survive a NAFTA challenge.
It would, of course, have to ensure that the measures could not be construed as being arbitrary or
unreasonable, or done for the dominant purpose of restricting trade. The catch, as explained, is
that water conservation measures must be applied in Canada, so new legislation and regulations
affecting Canadians’ water usage would have to be created and implemented.
If Canada, in the process of carving out an export restriction based on conservation and
protection of plant and animal life, also required the U.S. and Mexico to adopt their own
conservation regulations, it would likely have to abide by the Shrimp-Turtle II recommendations
in order to fall within the parameters permitted by the chapeau. Girouard summed up the
Shrimp-Turtle II recommendations concisely:
First, before requiring its trading partners to adopt the conservation regulations, the exporter must make “serious, good faith” efforts to reach a negotiated multilateral solution...Second, the exporter cannot require its trade partners’ conservation regulations to be “identical” to its own but may require that they be “comparable in effectiveness”...Third, in deciding whether to apply a water export restriction against a trade partner who fails to adopt a “comparably effective” conservation regulation, an exporter must use an open, predictable, procedurally
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fair decision making process, must not apply the restriction inflexibly to trade partners who are subject to different local conditions, and must not apply the restriction inconsistently between trade partners who have identical regulatory policies and practices.222
This option would not likely permit Canada to prohibit water exports in every instance, as the
recommendations in the Shrimp-Turtle cases suggest that a restriction allowable under Article
XX(g) cannot be a “blanket prohibition” which is “disproportionately wide in scope”223.
Members of the Canadian public would have to accept that they can no longer treat Canada’s
water supply as endless, and that in order to protect its water from foreign interests, Canadian
consumers must abide by new, domestic water consumption restrictions. Also, pursuant to
NAFTA Article 2101, the exceptions do not apply to the Chapter 11 investment provisions, so
Canada could still be faced with private investor claims and damage awards.
The option should still be attractive for Canada in order to avoid a direct NAFTA
violation, despite the inapplicability to Chapter 11 and the reality that it will require a great deal
of time and effort to properly implement. Encouraging the U.S. and Mexico to implement
similar conservation measures would be beneficial for all NAFTA signatories, provided that the
discussions remained flexible and consistent between them. Canada would only be required to
engage in “good faith” negotiations in order to reach an agreement along these lines, and would
not likely be penalized if the U.S. and Mexico refused to implement reasonable conservation
measures. For the purposes of Shrimp-Turtle II, it is Canada’s reasonable negotiation efforts
that are most important. Overall, this measure would not only prevent mass bulk export, but
would protect a vital natural resource and the environment first.
222 Supra note 124 at 269. 223 Ibid. at 268. See also note 146 at para. 141.
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3. Renegotiate NAFTA as a whole
Canada could attempt to renegotiate an exception for water into NAFTA, and perhaps
negotiate a different concession favourable to the U.S. at the same time. The success of such an
agreement would depend on when it was initiated: if NAFTA signatories renegotiated the
agreement today, before the U.S. water crisis reaches the point of no return, they may be able to
come to an agreement; if Canada waits too long and the U.S. becomes desperate for water, there
is little hope for such negotiations.
4. Withdraw from NAFTA
Canada could also remove itself from NAFTA entirely, a move which is permitted under
Article 2205 with six months notice. This action would allow Canada to undertake any
protective measures it desires without violating NAFTA. It removes the hostility of a trade
battle, and leaves the U.S. to other creative devices to try to negotiate water diversions to and
from Canada. Realistically, (as explained in section III) that strategy would be detrimental to
Canada’s economy because of its interconnectedness to trade with the U.S. The Canadian
government must decide whether protecting freshwater is worth sacrificing a billion dollar trade
agreement. It is a big step, and so far none of Canada’s leaders have publicly stepped up to the
plate with such a proposal.
5. Negotiate a Water Market Treaty
Boyd suggests a very different solution to the water conflict. He argues for a “bilateral
treaty with all of the NAFTA signatory countries affording it sovereign and comprehensive
control over its fresh water resources” which would, “open it up to the possibility of being a
51
major market participant in an emerging and potentially extraordinarily lucrative international
marketplace.”224 In short, Boyd is advocating that Canada profits from its most precious
resource. Such an action, while likely “lucrative”, and would appease the U.S. with little to no
conflict and without a change in NAFTA, could lead to foreign control and extraction which
may be unstoppable. Entering into a water market may lead down a dangerous path, where
environmental concerns might get washed away in the wave of profits. The best course of
action under this option would be to enact some sort of trilateral treaty wherein Canada could
hope to retain some ability to regulate and limit the water flow.225
VI. CONCLUSION
The bulk water export issue has proven to be resilient in Canada, and will not cease to
spark emotion and controversy unless and until the Canadian government acts to protect
Canada’s water once and for all. Canada will continue to face ever increasing pressure to share
its water as the U.S.’s population and industry increase with a corresponding decline in its water
supply. As illustrated in this paper, a hasty decision to open Canada’s floodgates to the south
would be disastrous on an environmental level, causing irreversible damage to ecosystems and
Canadian communities. The Canadian public has made itself perfectly clear: Canadians do not
want to lose control over their water.
Unfortunately for Canadian legislators, NAFTA has been the challenging hurdle to
overcome in their efforts to protect Canada’s freshwater. Consequently, their approach has been
to push the issue aside, as the ramifications of making a false move could result in major
investor lawsuits under Chapter 11 or a direct conflict with U.S. lawmakers. The games
224 Supra note 17 at 348-9. 225 Ibid. at 348.
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discussed in this paper have proven that strategy is crucial in winning the prize of freshwater
security, and Canada ought not to wait for a credible U.S. threat before it makes the first move.
While the U.S. is transitioning into a new period of environmental protection, the stage
is set for Canada to rapidly advance a strategy to ensure that its water is legitimately protected
from bulk export. How should it proceed? The section V strategies above are all plausible and
workable in theory, but the federal government ought to take action that reflects today’s political
realities. For the first time in eight years, Canada has the opportunity to craft legislation aimed
at water conservation and environmental protection while next door to a thirsty, yet
environmentally progressive neighbour. The fact that President Obama is pushing for a greener
America through environmental protection and climate change policy initiatives may prove to
open the door for Canada to negotiate an Article XX(b) and (g) exception for water conservation
purposes. While such an exception would not prevent private investor claims as mentioned
above, no solution is perfect and Canada would be better off dealing with private investor suits
than with a country-to-country conflict.
If Canada waits years longer to act, any hopes for cooperation on environmental issues
and water conservation with the U.S. may be dashed depending on successive U.S. governments
and the state of the U.S. water supply. Judging from the outcomes of the chicken game,
Canada’s best hope for a “win” may only be achieved if it can act while the environmentally
progressive and forward-thinking Obama administration is in Office. It should be emphasized
that it is very unlikely that any U.S. president would agree to a policy that would put America’s
needs second to those of Canada’s environment, but negotiations for a bilateral water
conservation strategy may proceed more smoothly between Canada and a U.S. government that
is more open to environmental protection. If Canada could “win” the game by successfully
53
passing the Shrimp-Turtle II test and enacting a water conservation policy within GATT’s
Article XX(b) and (g)’s parameters, it would also avoid a reputational loss thereby making this
option more attractive.
While Canada’s future water protection actions could leave it vulnerable to U.S.
retaliation, whether legal, economic, or military, that risk is worth taking as the world braces for
an international water shortage. The harshest U.S. retaliation would be many negotiations in the
future, and potentially preventable if all NAFTA signatories implemented sound water
conservation policies. Canada’s options have been revealed, and delay is not one of them. The
iron is hot. The first step to a successful Canadian win depends on whether the federal
government takes the initiative to strike.
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BIBLIOGRAPHY
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57
Richard C. Bocking, “The Real Cost of Dams, Diversions, and Water Exports” in J.E. Windsor, ed., Water Export: Should Canada’s Water Be For Sale? (Cambridge, Ontario: The Canadian Water Resources Association, 1992).
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Reports/Discussion Papers
Adele M. Hurley, “Water in North America, Rising Tensions” Remarks to the Royal Society of Canada Symposium on Water in Canada and the World (November 17, 2006) Munk Centre for International Studies, online: Google<http://.powi.ca/pdfs/watersecurity/rising_tensions.pdf>.
Andrew Nikiforuk, “On the Table: Water, Energy, and North American Integration” (Oct. 16, 2007) Program on Water Issues for the Munk Centre for International Studies, University of Toronto 1-31, online: Google<http://www.powi.ca/pdfs/waterdiversion/waterdiversion_onthetable_new.pdf>.
Frank Quinn, “Water Diversion, Export and Canada-US Relations: A Brief History” (August 2007) Program on Water Issues, paper for the Munk Centre for International Studies, University of Toronto 1-14, online: Google <http://www.powi.ca/pdfs/waterdiversion/waterdiversion_briefhistory.pdf>.
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Steven Shrybman, “A Legal Opinion Concerning Water Export Controls and Canadian Obligations Under NAFTA and the WTO” (September 1999) 25:1 Occasional Paper Series, West Coast Environmental Law Research Foundation 1-15, online: Google<http://www.wcel.org>.
Tony Clarke, “Turning on Canada’s Tap? Why we need a Pan-Canadian Policy and Strategy Now on Bulk Water Exports to the U.S.” (April, 2008) Report of the Polaris Institute 1-25.
News Sources
Andrew Nikiforuk, Adele Hurley and Ralph Pentland, “Water Exports to U.S. Remain on Table Until We Take Them Off; Ottawa Must Take Clear Stand Against Growing Pressure” Edmonton Journal (11 Sept. 2007) A18, online: Google News<http://webapp.mcis.utoronto.ca>.
Andrew Rosenthal, “No Quarter; America Could Face a Long and Costly Commitment in the Mideast” The New York Times (12 August 1990) 4:1, online: Google News< http://www.nytimes.com/1990/08/12/weekinreview/no-quarter-america-could-face-a-long-and-costly-commitment-in-the-mideast.html>.
Chuck Stoody, “Softwood Lumber Dispute” CBC News Online (23 August 2006) online: GoogleNews<http://cbc.ca/news/background/softwood_lumber/>.
Martin Mittelstaedt, “Canada’s Water ‘On The Negotiating Table,’ report says; Vague Wording in NAFTA Doesn’t Protect Country Against Bulk Shipments and Other Forms of Sale To The United States” The Globe and Mail (10 Sept. 2007) A6, online: GoogleNews<http://webapp.mcis.utoronto.ca>.
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Websites
Honourable Michaelle Jean, “Speech from the Throne 2008: Protecting Canada’s Future” (19 November 2008) Government of Canada, online: Google<http://www.sft-ddt.gc.ca/eng/media.asp?id=1383>.
Maude Barlow, “Our Water Commons, Towards a Freshwater Narrative, About the Author” The Council of Canadians, online: Google<http://www.canadians.org/water/publications/water%20commons/index.html>.
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Presentations
Henry Groppe, Presentation promoting Groppe Middlefield Energy Fund at the Fairmont Hotel in Winnipeg, May 22, 2009.