When free trade isn’t enough: A corporate grab for policy power

US workers protest against 'Fast Track', or the Trade Promotion Authority. Photo from AFL-CIO.

US workers protest against ‘Fast Track’, or the Trade Promotion Authority. Photo from AFL-CIO.

The new generation of free trade agreements such as the Trans-Pacific Partnership and Trans-Atlantic Trade and Investment Partnership are less about reducing already-low tariffs, and more about providing multi-national corporations with the power to determine public policy. This is the first part in a two-part article on the politics and likely impact of this new generation of trade deals.

As the US Congress resumes sitting after the Easter break, the Obama administration’s number one priority is to convince sceptical House Democrats to approve his Trade Promotion Authority (TPA), or so-called ‘Fast-Track’ legislation. The TPA would allow for the Trans-Pacific Partnership (TPP) free trade agreement currently under negotiation to be signed and entered into by the President without Congressional approval. Implementation legislation would then be fast-tracked through Congress without amendments in a filibuster-free yes-or-no vote within 90 days.

Political commentators estimate that Obama still needs to convince between 40 and 50 members of his Democratic party to support Fast-Track in the Republican-controlled 435-seat House of Representatives. The TPA is already supported by the vast majority of House Republicans, with the exception of a group of Tea-Party types who appear to be opposing it for the sheer joy of blocking any further delegation of power to Obama.

If agreement is not reached and a TPA bill tabled before Congress goes into recess in August, it is all but certain that the US will not be able to seal the deal on TPP before 2017 – after the presidential election primaries, and the election itself in 2016. It’s also highly unlikely that TPP could get through Congress without Fast-Track.

It’s a sorry spectacle: Obama trying to drum up support from his base to implement the agenda of the massive corporations that did their utmost to prevent his election and re-election – an agenda that, if successful, will unpick his key achievements in progressive domestic policy reforms, from affordable healthcare to increased regulation of the financial sector.

Environmental groups and progressive economists and academics are backing the Congressional opposition to Fast-Track led by Massachusetts Senator Elizabeth Warren. The AFL-CIO is campaigning for Democrats to maintain their stance against TPA, and it is continuing to withhold contributions to Democratic congressional campaigns to maximise the pressure. A letter to all House representatives and Senators asking them to oppose Fast-Track was jointly signed by the leaders of every union in the country in March, representing more than 20 million workers.

The total undermining of congressional oversight in Fast-Track, though alarming, is not the chief concern of those who oppose it. It’s the content of the trans-Pacific trade deal that the TPA would fast-track that is fuelling the opposition, and with good cause.

The TPP is part of a ‘new generation’ of free trade agreements that move far beyond the lowering of tariffs and aim primarily to remove ‘non-tariff barriers to trade’ by reaching regulatory coherence or harmonisation between parties. Without a doubt, this will result in a trans-Pacific race to the bottom on labour standards and environmental protections, as well as the offshoring of jobs from industrialised countries; the prising open of access to the state-owned enterprises of poor nations for multi-national corporations; and the imposition of stricter intellectual property demands on these nations. If signed, TPP will cover 800 million people and 40 per cent of the global economy. Next on the agenda is the Trans-Atlantic Trade and Investment Partnership (TTIP) under negotiation between the US and EU.

Negotiations for the TPP began in 2010 and it now includes 12 Pacific rim countries – the US, Canada, Japan, Australia, New Zealand, Singapore, Malaysia, Vietnam, Brunei, Mexico, Chile and Peru. It is to be a ‘living agreement’ – which means other countries can join further down the track, and that the content of the TPP can be altered with agreement from the parties. The text of the proposed agreement and the negotiations have been kept secret, but key chapters have leaked.

The negotiations are reportedly nearing conclusion, with the remaining sticking points being a dispute between the US and Japan over tariffs in the US agriculture sector and in Japan’s car industry. The chief negotiators for the 12 countries met for a week in Hawaii in March and will meet again at the APEC summit in the Philippines in May. Negotiators for several countries have made it clear they are not willing to sign up to an agreement unless Obama secures Fast-Track.

The secrecy that has shrouded the talks has contributed to the hostility to the TPP among the public in the US and other countries. Then US Trade Representative Ron Kirk said in an interview with Reuters in May 2012: “There’s a practical reason, for our ability both to preserve negotiating strength and to encourage our partners to be willing to put issues on the table they may not otherwise, that we have to preserve some measure of discretion and confidentiality.”

Reuters went on to say that Kirk noted during the interview “that about a decade ago negotiators released the draft text of the proposed Free Trade Area of the Americas and were subsequently unable to reach a final agreement”. When the Bush administration released the draft text of the FTAA in 2001, an expansion of the North American Free Trade Agreement (NAFTA), the resulting public outcry across the Americas was the beginning of the end for the proposed deal.

The US has existing free trade agreements with 20 states. The bitter experience of previous agreements, particularly NAFTA, signed in 1994, has made the US labour movement deeply wary of TPP, which would cover 40 per cent of the world’s GDP. During the NAFTA negotiations between the US, Canada and Mexico, then US President Bill Clinton promised the agreement would create 20 million new export-based jobs in the US. It didn’t – instead, it led to a net loss of almost one million US jobs, according to the Economic Policy Institute. Industrial investment was off-shored to to Mexico resulting in job losses and a steady downward pressure on US wages.

The impact of NAFTA on Mexico was, of course, much harsher. More than two million small farmers and rural labourers were ruined and dislocated. The minimum wage in Mexico in 2013 was 24 per cent lower in real terms than in 1993. Growth has slowed to less than one per cent annually since 1994 and the poverty rate in 2012 was 52 percent of the population.

According to US NGO Public Citizen, of the 29 chapters of the the draft TPP agreement, only five are actually related to trade issues – the rest focus on the so-called non-tariff barriers. In November 2013, Wikileaks released the draft chapter on Intellectual Property Rights, followed by the draft Environment chapter in January 2014. Observers have gleaned further information from the few public statements made by negotiators regarding the content of the agreement.

Opponents of TPP expect many aspects of the NAFTA experience to be replicated in the trans-Pacific region. One of the most objectionable elements of TPP to the US labour movement is the chapter on government procurement, which will outlaw the ‘Buy American’ laws (some in place since 1934) that favour domestic producers in government contracts as being discriminatory to foreign firms. The major discrepancy in labour conditions and wages across the 12 TPP countries will mean further offshoring of jobs – for example, to Vietnam, where the average monthly wage is US$145.

The large proportion of services delivered in Vietnam by significant state-owned enterprises are also in the sights of the US corporations backing the trade deal, with the US Trade Representative’s office claiming that “levelling the playing field” between private firms and state-owned enterprises is a central goal of the pact.

Among the most vicious proposals in TPP is the plan pushed by major pharmaceutical companies to force impoverished Pacific countries to sign up to the US model of intellectual property rights, which go beyond the World Trade Organisation (WTO)-administered agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) made in 1994.

A map of TPP countries. Image from New York Times.

A map of TPP countries. Image from New York Times.

The leaked intellectual property chapter of TPP confirmed that the warnings of public health experts and the World Health Organisation were well-founded – that the US is pushing for stricter rules in TPP countries on medicine patents, which will restrict the availability of affordable medicines. Flexibilities within the TRIPS agreement exempt ‘least developed countries’ from having to grant pharmaceutical patents up until 2016. But so-called TRIPS-plus provisions in TPP will uniformly delay the production of generic drugs for cancer and other life-threatening illnesses, by including an “automatic monopoly period” of up to 12 years for patented drugs before generic versions can be manufactured – putting treatment out of reach for potentially millions of patients across the Pacific for a decade or more.

A May 2012 briefing paper on the impact of free trade agreements on public health by the UN Development Programme and UNAIDS said: “TRIPS flexibilities were implemented and endorsed by the global community as methods to mitigate the impact of WTO Agreements on access to affordable, quality pharmaceuticals.” The report cites a study on the impact of the US-Colombia Trade Promotion Agreement that estimates an increase of almost $1 billion being spent on medicines in Colombia by 2020, or alternatively a 40 per cent decrease in medicine consumption.

The UN paper adds that in order to keep the benefits of the TRIPS flexibilities, “countries, at minimum should avoid entering into FTAs that contain TRIPS-plus obligations that can impact on pharmaceuticals price or availability”. Economist Joeseph Stiglitz has written: “In the poorest countries, this is not just about moving money into corporate coffers: thousands would die unnecessarily.”

The intellectual property chapter has also alarmed internet freedom activists, who believe the proponents of the failed US Stop Online Piracy Act (SOPA) and the Senate’s Protect IP Act (PIPA), which were scuttled due to public opposition in 2012, are aiming to implement a similar regime under the cover of the TPP. SOPA and PIPA proposed empowering the government to block internet service providers of infringing websites and to penalise individuals who accessed copyrighted content with jail terms. The leaked chapter includes text that would expand copyright periods significantly beyond TRIPS.

Digital rights group the Electronic Frontier Foundation says the leaked proposals restrict innovation and freedom of expression online, and that provisions on trade secrets mean countries will be able to “enact harsh criminal punishments against anyone who reveals or even accesses information through a ‘computer system’ that is allegedly confidential”.

And internet privacy advocates are equally concerned by the leaked detail on data flow provisions that they believe will allow privacy protections to be challenged on the basis that they act as an unfair barrier to trade. The text includes prohibitions on countries deciding where private data is stored – ie, in onshore or offshore data centres.

The protection of investors’ rights is the most controversial of all aspects of the TPP, and it is this aspect of the pact that environmentalists are most concerned about. Regardless of domestic policies that may exist or be introduced to combat climate change and reduce carbon emissions, investment in the fossil fuel industry, including in shale, will be locked in and unassailable. The leaked Environment chapter of TPP contains soft and aspirational language in comparison to the other leaked chapters. University  of Auckland Professor Jane Kelsey, who provides an analysis of the leaked text, writes of the Environment chapter: “The obligations are weak and compliance with them is unenforceable.”

Corporate justice and socialised risk

The TPP proposes to ease restrictions on investment and boost protection for investors. The centrepiece of this protection is the ISDS or investor-to-state dispute settlement mechanism. The ISDS mechanism will allow private companies to sue national governments for compensation for loss of “expected future profits” in response to government actions that impact on the company’s activities in private offshore tribunals that comprise three lawyers with the power to award damages.

The critical Investment chapter of the TPP leaked and surfaced on Wikileaks on March 25, and was dated January 20, 2015. Activists universally responded to the leak by describing the ISDS provisions as even worse than feared. Footnote 29 of the leaked chapter states that Australia is exempt from the ISDS provisions but adds: “deletion of footnote is subject to certain conditions”.

Coordinator of the Australian Fair Trade and Investment Network Dr Patricia Ranald said that the Australian government “is using ISDS as a bargaining chip in the hope of improved access to US agricultural markets” and appears to be “about to agree to ISDS” under certain conditions. Australia has existing agreements with 28 countries that include ISDS provisions.

The former Labor government in Australia banned the inclusion of ISDS mechanisms in future trade deals. But this policy has been overturned by the conservative Abbott government, which says it will assess each trade deal on a case-by-case basis. It has already signed up to a major free trade agreement with South Korea, released in February 2014, which includes an ISDS provision.

The action by tobacco giant Philip Morris against the Australian government over its introduction of plain packaging for cigarettes in 2010 has become the most infamous and emblematic example of ISDS in action. There are three main reasons why the case, which was launched in 2011 and is ongoing, has generated a deep suspicion towards ISDS among the public internationally.

First and foremost is the fact that a major corporation peddling a deadly project is entitled to sue a national government for implementing an important and effective public health measure. Secondly, there is the fact that Philip Morris exhausted its legal avenues in Australia’s national courts, having its claim rejected in the High Court before it decided to invoke ISDS – when Australian citizens and companies are not entitled to any further recourse beyond the High Court.

Finally, there is the blatant cynicism in Philip Morris’s manoeuvring, known as ‘treaty shopping’, that allowed it to launch the ISDS action over the supposed appropriation of its trademark by the Australian government. In February 2011 Philip Morris Australia, which was then owned entirely by a Swiss company, was bought by Hong Kong-based Philip Morris Asia. Australia did not have an ISDS trade agreement with Switzerland, but it did have a 1993 trade deal with Hong Kong that included ISDS provisions.

Most commentators believe Philip Morris will lose the case, but that hasn’t prevented it from threatening other countries that have expressed their intention to introduce cigarette plain packaging legislation. It had already brought a case against Uruguay in 2010 for introducing health warnings on packaging.

In March this year, Ireland became the second state in the world to introduce plain packaging. Comedian John Oliver covered the story on his Last Week Tonight programme, quoting from a June 2013 letter to the Irish government from a subsidiary of Philip Morris International threatening legal action that included the line, “As a dance is only meaningful when danced, so a trademark is only meaningful when used”. “And you know you have a pretty weak legal argument,” Oliver commented, “if it sounds like a rejected fucking Jewel lyric”.

The investor-state dispute settlement mechanism was first introduced into trade agreements and treaties in the 1950s, ostensibly to protect investors from outright government expropriation of their land or factories in countries that lacked a robust legal system. It was rarely used until the 1990s when the US-led surge in free trade agreements made it a more readily accessible option for multi-national corporations. According to the UN Conference on Trade and Development (UNCTAD), there has been a ten-fold rise in reported cases 2000.

Obama at TPP meeting in Hawaii 2011

US president Barack Obama at the TPP Leaders meeting at the APEC summit in 2011. Photo: Reuters

An ISDS mechanism is now included in more than 3,000 trade agreements around the world, around 2,700 of which are bilateral investment agreements and the remainder of which are trade treaties. According to UNCTAD, by the end of 2014 there have been a total of 608 known ISDS cases brought against more than 100 national governments that have resulted in the payout to multi-nationals of an unknown amount that totals billions of dollars.

In 2014 alone, 42 ISDS decisions were handed down, and the awards in just three of these totalled an unprecedented $50 billion. Corporations from the US and the European Union combined have initiated 64 per cent of claims that are publicly known. But because ISDS arbitration can be kept totally private, there may be many other cases the public is unaware of.

Canada, which entered into an ISDS agreement with the US through NAFTA, expected that its investors would be enabled to sue the Mexican government but was unprepared for the series of cases brought against it by US corporations, which have led it to pay out at least $158 million in compensation or settlements. Outstanding cases against Canada include damages claims of $6 billion. The US government has never yet lost an ISDS case. Just wait until it enters an ISDS agreement with Japan under TPP, observers warn.

The mechanism has repeatedly been used to directly challenge legislation by democratic governments made in the public interest. After NAFTA, the Canadian government banned a fuel additive, MMT, due to it having been found to be a risk to human health and the environment. It was sued by US MMT manufacturer Ethyl for a loss of expected future profits and settled the case for $13 million. The settlement included not only a payout but an obligation on the Canadian government to rescind the ban and publicly declare that MMT was safe.

Argentina was sued by more than 40 corporations after it took action to devalue its currency and freeze energy and water bills in the wake of its 2001 financial crisis. Compensation orders against Argentina for these actions reached $1.15 billion by 2008. In Ecuador, after the government cancelled Occidental Petroleum contracts for illegally breaching contractual terms, the US oil company was awarded $1.77 billion. Ecuador, Bolivia and Venezuela have now withdrawn from the World Bank’s investor dispute mechanism and withdrawn from many bilateral investment treaties that contain an ISDS mechanism.

In response to the Arab Spring in 2011, the then Egyptian government conceded an increase in the minimum monthly wage from $56 to $99 – only to be sued in June 2012 for almost $100 million by French corporation Veolia, which objected to having to pay its Alexandria bus station workers more.

In an intellectual property case, US drug corporation Eli Lilly is suing Canada under NAFTA over its laws that require the patentability of a medicine to be proved before a patent is granted – a law with the public policy goal of ensuring accessibility to affordable medicines.

In another case under NAFTA, Canada is being sued by US company Lone Pine Resources for $230 million for the declaration by the Quebec government of a moratorium on oil and gas exploration in 2011. The moratorium resulted in the revocation of Lone Pine’s permit to frack gas from underneath the St Lawrence River, which was an essential source of drinking water in Quebec.

In 2011, Swedish energy corporation Vattenfall claimed €1.4 billion in damages from Germany for placing environmental restrictions on a coal-fired power plant the company was building in Hamburg. The government settled – lifting the restrictions. After the Fukishima nuclear disaster, the German government made a decision to phase out nuclear energy. The same Swedish company, Vattenfall, sued under ISDS again in 2012 – this time for €3.7 billion for the loss of profits in its two nuclear power plants.

The examples go on.

If successful, the US-led drive to include ISDS provisions in TPP and TTIP – which combined, cover more than 60 per cent of global GDP – will result in an exponential rise in ISDS claims, where taxpayers are forced to shoulder the cost of the risks associated with foreign direct investment.

In response to the Europe-wide outcry against the proposed inclusion of ISDS in TTIP, the European Commission issued a ‘fact-sheet’ on October 13, 2013 that claims US investors may not want to bring an action against an EU member state in that state’s national courts, “because it might think they are biased or lack independence”.

An Australian ISDS lawyer, Sam Luttrell, offered a similarly lame justification for why investors would be reluctant to sign trade deals with Australia without an ISDS mechanism on ABC radio in September 2014 – arguing that foreign investors would be wary because Australia has a legal system based on case law, because it’s a federation, and because there’s a “perception” that investors will be discriminated against in Australian courts on the grounds of their nationality. But Australia’s Productivity Commission, hardly a beacon of protectionism, found in a 2010 report that there is no evidence that ISDS has any significant impact on foreign direct investment into a country.

Regulatory ‘chill’

As objectionable as the socialisation of risk taken by powerful multinational corporations is, the direct power these corporations are seizing over public policy is far more disturbing.

The European Commission’s fact-sheet declares: “Including an ISDS mechanism in an investment agreement will not make it more difficult for the EU or its Member States to pass laws or regulations.” It said the EU is working to ensure that “genuine regulations and laws are consistent with investment agreements”, a statement that begs the question – what exactly is a genuine regulation or law? Does the European Commission get to decide on behalf of member states which laws passed by democratic governments can be maintained and which can be discarded in the interests of multinational investors?

In an attempt to convince EU citizens that member states will retain the right to regulate under TTIP, the fact sheet continues: “A country cannot be compelled to repeal a measure: it always has the option of paying compensation instead.”

Well – that’s reassuring.

Discussing the impact of NAFTA, a former Canadian government official was quoted in The Nation as saying: “I’ve seen the letters from the New York and DC law firms coming up to the Canadian government on virtually every new environmental regulation and proposition in the last five years.” These included pharmaceuticals, chemicals, patents and pesticides. “Virtually all of the new initiatives were targeted and most of them never saw the light of day.”

World-leading ISDS lawyer and Essex Court Chambers barrister Toby Landau QC said that this so-called regulatory chill exists “without doubt”, adding that in his role as counsel, “on a number of occasions now I’ve actually been instructed by governments to advise on possible adverse implications or consequences of a particular policy in terms of investor-state cases”.

As to achieving ‘regulatory coherence’ in the new generation of free trade agreements, business associations believe it would save everyone time if they were allowed to just write regulations for governments. In the lead-up to the opening of TTIP negotiations in 2013, the US Chamber of Commerce and BusinessEurope demanded a seat at the table with regulators “to essentially co-write regulation” in an October 2012 joint statement.

The ISDS provisions that offer the highest success rate for multinationals are the “fair and equitable treatment” commitment and the “minimum standard treatment” guarantee. According to Public Citizen, in 74 per cent of cases where US investors were successful, the fair and equitable treatment provision was used. Both provisions would be extended in TPP according to the Investment chapter that Wikileaks released in March. The chapter shows that under the minimum standard of treatment provisions, a case could be taken against government action that consists of a higher degree of regulation or scrutiny than an investor expected based on its dealing with a previous government.

UNCTAD has calculated that of all known investor-state disputes, 42 per cent were won by the state, 31 per cent were won by the investor, and 27 per cent were settled – typically regarded as a win by the investor in terms of a financial or legislative reward. There is no limit on the amount that can be awarded to a corporation, and the average cost of running a case is $8 million.

So how do these tribunals actually work?

They are ad-hoc tribunals convened by the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) or the United Nations Commission on International Trade Law (UNCITRAL) dispute mechanism. Three private lawyers are selected from a roster to arbitrate – one appointed by the investor, one by the state, and one that is agreed by both parties.

They meet in hotels or conference centres for a few days or a week, according to leading US ISDS lawyer – and fierce critic of the system – George Kahale. The proceedings are often kept secret and there are no public disclosure requirements.

Many lawyers alternate between representing major corporations in cases against governments and being ‘judges’ in ISDS tribunals. They do not earn a flat salary, as judges do in most countries, but rather earn more money the more tribunals they sit on. Incredibly, there is no requirement to follow precedent – the findings and the sum awarded are entirely at the discretion of the panel of corporate lawyers.

In its analysis of the leaked Investment chapter of TPP, Public Citizen outlines this extreme conflict of interest: “Since only foreign investors can launch cases and also select one of the three tribunalists, ISDS tribunalists have a structural incentive to concoct fanciful interpretations of foreign investors’ rights and order that they be compensated for breaches of obligations to which signatory governments never agreed.” An investor-friendly tribunalist clearly has a higher chance of being selected by corporations to sit on future tribunals.

Despite the wave of opposition to an ISDS being included in TTIP in Europe, demonstrated in the 150,000 responses received by the public consultation the European Commission was forced to undertake in 2014, the Commission appears determined to include it in the final agreement – with token added “safeguards”, no doubt.

The “safeguards” that were included in the Central America Free Trade Agreement in 2005 have been replicated in the TPP Investment chapter – but these safeguards have been ignored in practice by the tribunals, which have no appeal mechanism.

Regarded as the economic arm of his administration’s ‘Pivot to Asia’ aimed at containing the power of China, signing off on TPP is an urgent priority for Obama in the coming months, but it won’t happen unless Fast Track is approved by Congress. Enormous pressure by multinational corporations is being exerted on Democrats to delegate this authority to the President.

The Trans-Pacific Partnership will be followed by TTIP and the US-led Trade in Services Agreement. TISA is an even more secretive agreement aimed at the deregulation and ‘regulatory coherence’ of financial and other services that has been under negotiation between more than 50 countries since 2013.

The three agreements collectively, if signed, will result in a historic and unprecedented transfer of political and policy-making power to multinational corporations. This makes the stakes dizzyingly high for the fate of Fast Track, not only for the populations of TPP countries but for the vast majority of the world’s population that will be affected by this new generation of corporate trade deals.

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