Monterey Institute of International StudiesMaster of Arts in Commercial Diplomacy
 
 
Recommendations for the U.S. Trade Representative to 
Negotiate Trade Rules with Canada Governing Bulk Water Exports 

PURPOSE

This project was completed to fulfill the requirements for the Master of Arts in Commercial Diplomacy at the Monterey Institute of International Studies (MIIS).
  

SCENARIO

For the purpose of this project, I assume the role of a Deputy Commissioner for the Bureau of Reclamation, U.S. Department of the Interior.  My task is to advise the U.S. Trade Representative on negotiations with the Canadian Department of Foreign Affairs and International Trade (DFAIT) in order to establish rules within the North American Free Trade Agreement (NAFTA) that allow for the export of bulk, unprocessed water.   

In this project, I assume that a municipal water district on California ’s Central Coast , Monterey Peninsula Water Management District (MPWMD), wishes to import bulk water from a British Columbia company.

NOTE TO READER

Water exports take a variety of forms, and, for the purposes of this project, it is important to distinguish among them.  Water can be traded as either a raw (bulk) or value-added product.  Water traded as bottled or value-added water is covered by international trade rules as an economic good.  The focus of this project will be on the trade in bulk, unprocessed water across international borders for municipal use.

DEFINITIONS  

Bulk water exports - the removal and transfer of water out of its basin of origin by man-made diversions (e.g., canals), tanker ships or trucks, and pipelines.  

Crown land – the term used for 92% of the province that is publicly owned.  

Environment Canada – the name of Canada ’s federal environmental department.  

Groundwater – subsurface water usually found in an aquifer.  

Groundwater overdrafting – The process of taking more water out of an aquifer than naturally returns to it.  

Hydrologic Cycle – the process in which the flow of solar energy reaching the earth from the sun evaporates fresh water into the atmosphere from the oceans and land surfaces and redistributes it around the world.  

Overdraft – the process of taking water out of an aquifer at a rate higher than it takes to naturally replenish.  

Reclaimed Water – waste water that has been treated for municipal use.  

Royalties – the granting of a right by a sovereign to a corporation or individual to exploit specified resources.

Runoff – the difference between precipitation onto land surfaces and evaporation from those surfaces.

ISSUE

A California water district with a severe water shortage has received a proposal from a British Columbia company for the short-term delivery of fresh water in bulk quantities for residential use.  The company has a location in the province from where water could be shipped, i.e. at a deep sheltered harbor near an abundant source of water.  However, under British Columbia ’s Water Protection Act, the provincial government’s Water Management Branch[1] refuses to issue a license to the company if the water is to be exported outside the province beyond a 20-liter container threshold.  Thus, the British Columbia Water Protection Act precludes a beneficial transaction for the export of bulk, unprocessed water that could bring immediate relief to a California water district in need of additional supplies.  

California ’s water shortage has resulted in serious ecological damage that threatens the long-term security of the state’s population.  The situation will gradually become exasperated as water shortages are expected to increase in the face of California ’s growing population and climate change impacts. The damage occurs when water agencies, unable to meet demands until new alternative sources are allocated, temporarily increase pumping of surface and ground water at unsustainable rates.  Despite being temporary, this unsustainable practice can permanently ruin underground aquifers, contaminate drinking water, and place the local ecology in peril.  Water exported in bulk is suitable for such purposes as it can provide temporary relief during droughts and shortages before new sources, such as desalination, are developed.       

EXECUTIVE SUMMARY

MEMORANDUM

To:                   Ambassador Robert B. Zoellick
                        United States Trade Representative
From:               Keith Spain, Deputy Commissioner
                        Bureau of Reclamation , U.S. Department of the Interior
Subject:            Options to Reduce Water Shortages in California through Trade with Canada  
Date:                June 27, 2002

Issue

British Columbia ’s Water Protection Act prohibits the issuance of licenses to remove water from the province in containers larger than 20 liters. Consequently, this precludes a viable option for water district throughout California to immediately mitigate their water shortages.  British Columbia’s Water Protection Act and similar legislation in Canada’s other nine provinces exist because, the federal government of Canada is concerned that as soon as one of the provinces allows its water to be exported in bulk, the North American Free Trade Agreement (NAFTA) rules on trade and investment will apply to subsequent exports of bulk water.  As result of the NAFTA application on such exports, the government of Canada would be restricted in its jurisdiction to limit one of its natural resources.   

The mission of the Bureau of Reclamation is to manage water in the Western United States in an environmentally and economically sound manner.  To accomplish this mission, the Bureau of Reclamation urges the Office of the United States Trade Representative to engage in negotiations with Canada ’s Department of Foreign Affairs and International Trade in order to amend British Columbia ’s Water Protection Act so that water may be exported in bulk for the purpose of mitigating water shortages in California .   

California ’s chronic water shortages and prolonged droughts have caused the U.S. severe economic and environmental damage.  According to the National Oceanic & Atmospheric Administration, the cost from water loss after the 1987-1992 West Coast drought, including damages to agriculture and environment, totaled $39 billion.   Since the West Coast drought, conservation efforts throughout California have led to significant reductions in water use per capita.  Nevertheless, some hydrologic regions of California still lack a sufficient supply of fresh water despite successful implementation of conservation measures.  In many cases, water districts that have not acquired new permanent sources of water have allowed respective water agencies to strain existing, local sources just to meet the demands in their jurisdiction. This leads to unsustainable practices such as groundwater overdrafting and removing water from rivers at rates higher than it takes to naturally replenish.  Such actions can lead to irreversible damage to drinking water supplies, aquifers, and the ecology.  The magnitude of shortages and potential droughts demonstrates the urgency to take action.

Background

By 2020, California ’s water shortage[2] will increase by 50% during average years (1.6 million acre-feet or maf to 2.4 maf) [3] and 22% during drought years (5.1 maf to 6.2 maf).[4]  The greatest increase in demand will be from urban users.  Furthermore, as the state’s population expands, more water will be needed to preserve and restore California ’s ecosystems as well as maintain its natural resources.  Population growth in most of the state’s coastal counties, the likely importers of water from British Columbia due to geography, is expected to increase 40-60 % in the next twenty years.   

To successfully negotiate an amendment to the Water Protection Act, it is important to understand that the issue of water exports is very politicized in Canada .  Few Canadian politicians will publicly state that they support the export of water.  Canada ’s Environment Minister David Anderson and the British Columbia Premier Gordon Campbell, two key figures for this issue, both oppose exporting water in bulk.  Canada ’s most prominent environmental non-governmental organizations, civil society groups, and public sector employees oppose exporting water and have formed a coalition named ‘Water Watch’.  The majority of First Nation Bands are also opposed, namely those who live away from the coast or in drier regions and would not stand to benefit from the export of water.   

Opponents maintain that a ban is necessary in order to prevent bulk, unprocessed water from becoming a commodity and, consequently, subject to the North American Free Trade Agreement (NAFTA) rules.  They oppose exposing it to the NAFTA rules, because water is vital to human life and requires governmental regulation to protect it from becoming exhaustible.  At worst, they fear that once trade in bulk water has begun, Canada will be obliged by its trade commitments to export water to parched parts of the world at the expense of their people and environment.  From an economic standpoint, Canadians argue that exporting water in bulk, as opposed to added-value bottled water, provides only a one-time benefit to the economy with marginal investment in capital and local human labor.    

Americans and Canadians have a long history of friendly relations on water matters, as demonstrated by the success of the International Joint Commission (IJC), which has become a model for managing cross-border resources. Also, the Great Lakes Governors and Premiers have followed a set of principles to guide them in developing, maintaining, and strengthening the regional management regime for the Great Lakes ecosystem.

Recommendation

Due to the politically sensitive nature of exporting fresh water from its watershed in bulk quantities, the Bureau of Reclamation recommends that the USTR should not initiate negotiations with the Canadian DFAIT concerning action to amend the Water Protection Act or any of the other nine pieces of legislation banning bulk water exports.  The Bureau of Reclamation is confident that, given increasing water shortages as well as a growing population in the American Southwest and global warming, the price for new water in California will demand a premium high enough to induce Canadian entrepreneurs to challenge the respective provincial ban on bulk water exports.   

A successful challenge will encourage a provincial premier to seriously consider amending the respective bulk water export legislation, e.g. in 2001, the Newfoundland Premier Roger Grimes challenged that province’s bulk water export law following a local businessman’s proposal.  After one of the provincial premiers publicly announces his intention of amending or overturning the said legislation, the USTR should seek an opportune moment to react and introduce a proposal to the Canadian Prime Minister and DFAIT that allows NAFTA members to export bulk water but also safeguards such exports from the NAFTA trade and investment rules.    

Due to the sensitivity of the issue, the Bureau of Reclamation advises that the USTR should not hold talks or negotiations with the Canadian Prime Minister or DFAIT solely on bulk water exports; rather, the proposal on bulk water exports should be attached to an agenda of other trade issues to be discussed between the USTR and DFAIT and/or the Canadian Prime Minister and U.S. President.  

The Bureau of Reclamation suggests that the proposal to the Canadian Department of Foreign Affairs and International Trade should include maintaining the current decision making standard (e.g. Environmental Impact Assessment in British Columbia ) that the provinces utilize for reviewing proposals to withdraw water for exports which are presently allowed, i.e. less than the respective threshold.  For example, British Columbia ’s current Environmental Impact Assessment already takes into account environmental concerns and offers input from all parties who have a stake in a proposal to withdraw water.   

However, to safeguard potential bulk water exports from the NAFTA rules on trade and investment, the USTR should include in its proposal to the Canadian DFAIT an ‘escape-clause’ which allows the possibility of interrupting trade flows in case of environmental problems.  Further, to ensure that water removed for the purpose of export in bulk quantities adheres to the principles of sustainable development, a cornerstone of Environment Canada’s mission, the USTR may include in its proposal the establishment of a fund for ecological preservation.  For example, a percentage from each export transaction will be donated to the fund for various ecological projects in the respective watershed from where the water was removed, i.e. wetlands preservation.  

The Bureau of Reclamation recommends that the USTR include in its proposal the following principles which would be applied to each and every bulk water export proposal in the future:  

• No significant adverse individual or cumulative impacts to the quantity or quality of the waters and water-dependent natural resources of the water basin;

• An improvement to the water and water-dependent natural resources (e.g. establishment of fund for wetlands preservation);

• Compliance with the applicable provincial, territorial, federal, and international laws and treaties;

• No adverse impact to the local drinking water supply, or water supply for agricultural and industrial use;

• Water that is exported is ‘surplus’ (additional water after all the water needs for the local constituents, industries, agriculture, and environment have been met);

• Applicant must demonstrate that there are no practical alternatives to the removal; and

• Conservation practices are in place in the region importing the water.

BACKGROUND  

Overview of California ’s Water Needs

The red numbers highlighted in yellow in Table 1 show the difference between California ’s forecasted supplies and demands.  California ’s increasing population is the driving force behind increasing water demands.  Urban water demand will increase by about 3.2 maf in average years, and, as the state’s population expands, more water will be needed to preserve and restore California ’s ecosystems as well as maintain its natural resources.  Increases in water use efficiency combined with reductions in irrigated acreage, resulting from urban encroachment, are expected to reduce average year agricultural water demand by about 2.3 maf by 2020.  

California ’s Department of Water Resources has recommended the state’s water agencies a number of supply augmentation and demand reduction options in order to reduce the shortage expected in 2020.   

However, even after the implementation of options to augment supply and reduce demand, parts of California will still experience water shortages.  The table below shows shortages in California ’s hydrologic regions by the year 2020 after the implementation of the recommended options.  

 A Case Study: Monterey , CA  

The Monterey Peninsula Water Management District (MPWMD) has a water shortage of 9,000 afy following a state order for the Peninsula ’s major water purveyor, Cal-Am, to reduce its pumping from the Carmel River by 75%.[3]  In 1995, the state declared that Cal-Am’s pumping from the Carmel River exceeded its water right and was damaging the river’s ecosystem.  To reduce and eventually eliminate the shortage, MPWMD advanced two proposals, Plan A and Plan B, for new water supplies. [4] As the District’s voters have already rejected Plan A, the MPWMD will proceed to implement Plan B.  

Plan A was a proposal from the MPWMD to build a dam on the Carmel River .  In November 1995, the District’s voters rejected funding for the dam.  The primary reasons for rejecting the proposal are: (1.) the dam would have contributed to additional population growth; (2.) it would permanently alter flow regimes in the Carmel River in ways that would harm its ecological balance; and (3.) the amounts charged for water would be too high (22-49% higher).  

The MPWMD will proceed to implement Plan B, as proposed by the California Public Utilities Commission (PUC): a collection of non-dam alternatives, all of which will be used to eliminate the shortage.  The table below illustrates how much each alternative will yield. (measured in acre-feet per year - afy).

As the table shows, after conservation measures and Plan B possibilities for new water have been employed, the region will have normal-year surpluses of roughly 1,600 afy.  These surpluses would be used to:

• increase Carmel River flows;

• lower desalination capacity;

• increase storage in the Seaside aquifer; and

• provide water for existing lots/

Although the MPWMD plans to proceed with Plan B, it has not yet put the plan of building a desalination plant to a public vote. In the meantime, Cal-Am has continued to divert water at unsustainable rates from the Carmel River , leading to increased ecological damage to the river basin.  

To reduce the stress on the river and allocate additional supplies until new sources of water have been developed, the MPWMD wishes to import water from a British Columbia firm.  The B.C. firm has a location from which water could be captured, that would otherwise be discharged into the Pacific Ocean [5], and transported to the Monterey Peninsula by marine vessel.[6]   

However, pursuant to British Columbia ’s Water Protection Act, the Water Management Branch refuses to issue a license to the B.C. company if it will export the water outside the province in containers larger than 20 liters.