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An unprecedented dispute has been running for more than two years between two South American neighbours. A new paper mill in the Uruguayan town of Fray Bentos, which is overseen by the Finnish company Botnia, is causing considerable ill feeling.

On one

side of the River Uruguay, the small republic of Uruguay, home to just over three million people, has welcomed the project--as well as another paper mill proposed by Spanish company Ence--as a boost to its agriculture-based economy. The mills would have had a combined production of 1.5 billion tonnes and created 8,000 jobs.

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On the other side of the river, Argentina, ten times larger in area, with a population of 40 million and an economy roughly 15 times the size of Uruguay's, opposed the plants. It had demanded a halt to the projects and had even approached the International Court of Justice (ICJ) in 2006, but the case was rejected.

Argentina claimed that Uruguay didn't consult it before the projects began, violating the terms of the Uruguay River Treaty, which requires both countries to inform each other of any project that could have an effect on the river. Buenos Aires also contended that environmental and economic consequences hadn't been properly considered.

Paper mills require large volumes of water, and the chemicals used in their processes have been linked to water contamination. Environmental groups such as Friends of the Earth Uruguay and the World Rainforest Movement also campaigned against the projects and put pressure on external funding parties to withdraw.

Residents of the Argentine town of Gualeguaychu, which is opposite Fray Bentos, have staged their own protests. And representatives of an Argentine NGO, the Center for Human Rights, have approached the Inter-American Commission on Human Rights and complained to the World Bank about the latter's support.

In September 2006, Ence abandoned its plant and relocated it further south to the Colonia region, citing a lack of infrastructure around Fray Bentos to support both plants. But in November that year, the International Finance Corporation, the private-investment arm of the World Bank, approved funding of US$170million for the Botnia plant after studies found that it would have a limited environmental impact.

Subsequently, Uruguay signed a Trade and Investment Framework Agreement with the USA in a move that critics believed was an attempt by the Tabare Vasquez administration in Montevideo to secure Washington's support for the project, risking further alienation of neighbours such as Argentina. And despite a last-ditch presidential summit in Santiago, Chile, to resolve the row, the Botnia plant began production in November last year, sparking further Argentine protests.

The dispute is something of a milestone because it's the first time that Latin American countries have approached the ICJ about environmental matters as opposed to territorial disputes. It's also a salutary reminder that shared boundaries, especially with regards to rivers and water basins, often provoke controversies. And finally, it highlights a growing European practice of locating paper mills in the Southern Hemisphere as European legislation governing paper production becomes more stringent.

* Klaus Dodds is professor of geopolitics at Royal Holloway, University of London