Tag / Free Trade

A protester waves the tricolour at a protest against the Troika bailout of Ireland in 2010
by Admin

Some euros are more equal than others: trade imbalances and debt crises

WHY WERE leaders of European Union countries so determined to establish a monetary union among member states despite the setbacks and shocks experienced in the first decades of such an attempt at creating a common currency? In part it was a response to the collapse of Bretton Woods, and in part it was viewed by committed European federalists as a way to push the pace of political integration. There was a widespread belief stretching back to the Gold Exchange Standard that a common currency would ensure price stability and predictability, eliminate the risk of changes in exchange rates and therefore boost trade. For the European deficit states, the susceptibility of their currencies to repeated devaluations against the Deutschmark was viewed as an economic and political vulnerability, which caused inflation that reduced the purchasing power of both rich and poor. Meanwhile, from the mid-1980s the expanding US deficit had allowed both Germany and the EEC as a whole to generate a trade surplus. For the technocrats that had already set up shop in the limited European community administrative bodies, the creation of the euro would speed up the process of political integration and movement towards a European federation.

A shared currency with different motivations

Successive French governments had repeated the call for a European monetary union since Giscard d’Estaing first proposed it in 1964, with a view to reining in German power – and to make it easier to impose wage restraint on French workers, by comparing their wages with those of German workers. French national expertise in constructing political institutions would also be able to shine in a European administration. Germany had dragged its heels on such a union for decades, largely because of a fear that a fixed exchange rate between the franc and the Deutschmark would require the Bundesbank to print more money to prop up the franc, causing inflation that had been regarded with profound dread by Germans since their experience of the hyper-inflation of the 1920s, a dread that continues to define German monetary policy today.

The typical explanation regarding the creation of the Economic and Monetary Union (EMU) found in history books is that Germany finally agreed to the long-standing French call for a monetary union after the fall of the Berlin Wall in exchange for French acceptance of Germany’s reunification. But it was also created to accommodate Germany’s export-led economic strategy. The Deutschmark’s sky-high value in the wake of the collapse of Bretton Woods was a reminder to Germany that if the Deutschmark’s exchange rate was to float freely its value could rise indefinitely, making its exports too expensive and destroying its trade surplus strategy. Competitive currency devaluations were successfully reducing Germany’s trade surpluses with the countries that used them during the 1980s. Germany needed some way of locking its exchange rate to other currencies after the demise of the dollar zone. The ERM was viewed as a partial solution to these problems by German political leaders and the Bundesbank. But the speculative attacks on the currency fluctuations possible within the ERM that caused its collapse in 1992 led Germany to finally accept the creation of a common currency – on the condition that the deflationary debt and deficit rules of the Maastricht convergence criteria were accepted by its neighbours, of course.

Germany’s biggest export – stagnation

The question of how to deal with chronic, persistent trade imbalances within a common currency area was resolved to a large degree under the Bretton Woods system by the American commitment to spend its surplus internationally – its direct injection of capital into the economies of its capitalist allies during the duration of the system through aid and then investment. In this way, the US exported its goods but it also exported demand. The German model, on the contrary, aims to export its goods and import demand from other countries. In this way, the biggest German export can said to be stagnation. Instead of playing a role of recycling surplus profits, generating growth and stabilising the international economic system, the persistent German surplus plays a destabilising and deflationary role in the monetary union.

China has faced much criticism internationally in recent years for consistently running a large trade (or current account) surplus, but Germany’s trade surpluses have been almost twice as high as China’s in recent years as a percentage of GDP. China has made a conscious effort to reduce its economic dependence on exports, while Germany recorded a record surplus in the first half of 2017. Large and persistent trade surpluses are a problem because the sum of all surpluses has to equal the sum of all deficits. As discussed above, in stable economic periods, the banks in surplus countries can lend to borrowers in deficit countries, maintaining a semblance of balance, but in a crisis this surplus recycling measure comes to a sudden stop. But chronic surpluses also cause an overall decline in demand. The surplus countries are exporting goods but they are spending less than they are making in income.

Keynes called this the paradox of thrift – the phenomenon where when a country’s population saves their money during a downturn this actually causes a fall in aggregate demand, while total savings are not actually increased. Savings must equal investment, so if the level of investment remains the same, the level of savings must also remain the same. People might save a higher proportion of their income, but the only way the level of savings can change is if there is a reduction in the level of income. Stiglitz argues that the global economy today “is in this precise position, with a deficiency of aggregate demand leading to slow growth and 200 million unemployed. This deficiency of demand is the cause of what many call global secular stagnation” (secular meaning long-term stagnation as opposed to cyclical stagnation).

Trade imbalances cause debt crises

Trade imbalances do not only contribute to stagnation. Countries who run deficits must borrow the gap between what they export and what they import, meaning they have to take on more debt and become exposed to the risk of a debt crisis. If the country’s exchange rate can be devalued, then the external imbalance can be gradually reduced as the deficit country’s exports become more competitive on the global market. But inside a currency union, the option of exchange rate adjustment disappears. The main alternative way for a deficit country inside a currency union to regain trade balance is by an ‘internal devaluation’. This is when the nominal exchange rate remains fixed, but the real exchange rate falls as local prices in the deficit country drop, which makes its exports more competitive. (The nominal exchange rate sets the amount of foreign currency that can exchanged for a unit of the domestic currency, while the real exchange rate takes into account local prices and indicates how much goods in the domestic economy can be exchanged for goods in a foreign country.)

In a currency peg system, participating countries are not only prone to experiencing high or long-term unemployment, as they lack the ability to change their exchange rates and interest rates after a shock; they are also very susceptible to debt crises. In the absence of successful internal devaluation, deficit countries with a misaligned exchange rate seeking to finance the gap between their imports and exports rely on capital inflows. If foreign direct investment is not forthcoming then the only option is debt. But if the misalignment in the exchange rate is persistent, then the debt mountain grows until creditors fear it will not be repaid, usually resulting in a sudden stop of credit.

The Irish economy, Spain, Greece and others received huge capital flows after the creation of the euro in 1999, as a result of the elimination of exchange-rate risk. These countries were able to run deficits but also maintain employment and experience growth as a result of the low interest rates they were allowed to borrow at, and the small risk premium on government bonds (the extra amount that was added to the government bonds to compensate for the perceived extra risk associated with lending to that country). Both Ireland and Spain experienced massive housing bubbles based on speculative inflows of capital throughout the 2000s, while neither country imposed any effective measures to cool the heat.

Economist and writer Martin Wolf comments in his book on the financial crisis, The Shifts and the Shocks, that the belief among the Eurozone’s founders was that the problem of trade imbalances would no longer matter in a currency union, “as exchange-rate risks would vanish and payment disequilibria within the area would be smoothly offset by private capital flows”. But “these expectations proved delusional; the sovereign debt crisis in the Eurozone in 2010-12 started as a fully-fledged balance-of-payments crisis… prompted by the accumulation of large payment imbalances between its members and reflecting persistent underlying divergences in prices and costs”. These countries that were running trade deficits based on private and government debt due to the misalignment of their exchange rates then experienced the sudden stop of credit brought about by the global financial crisis, causing creditors to doubt their debts would be repaid. The common currency meant that these countries were forced to turn to the so-called Troika of the European Commission, the ECB and the IMF to be bailed out.

The euro, in this way, is somehow both a domestic and a foreign currency for its members. It is less risky for people, firms and governments to borrow in local currency markets than to borrow in foreign currency. To prevent a debt crisis developing, the government can print more of the local currency to repay creditors. But for Eurozone members, they were borrowing in a supposedly “local” currency that they could not then control. The nature of the Eurozone changed as soon as some members of the monetary union owed other members, Stiglitz argues. “Rather than a partnership of equals striving to adopt policies that benefit each other, the ECB and Eurozone authorities have become credit collection agencies for the lender nations, with Germany particularly influential”. The deficit countries dependent on creditor countries and the ECB are then vulnerable to any and all political and economic demands made by the creditors.

In their study of financial crises over eight centuries, Carmen Reinhart and Kenneth Rogoff identify several key features as having strong correlations with banking crises, all of which applied in the Eurozone. They note that in an analysis of banking crises after 1970, in 18 out of 26 of those studied the financial sector had been liberalised within the previous five years. They also identify a major correlation between removing restrictions on capital mobility and the incidence of banking crises over centuries. “Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically”.

A further common feature they identify is that in the lead-up to banking crises there is often what they call a “capital flow bonanza” – a surge of capital inflows of roughly a few per cent of GDP on a multiyear basis, and the tendency to run a large current account deficit. While the liberalisation of the financial sector is by no means limited to the Eurozone, the free movement of capital and persistent trade imbalance problems inherent in the Eurozone, due to its design, make the common currency area prone to crises.

Capital defies gravity

After the signing of the Maastricht Treaty in 1992, the interest rates across the euro area converged towards the low level predominant in Germany. At the same time, in taking steps to lower inflation to the 3 per cent limit required for entry into the common currency, governments implemented deflationary measures that compressed wages. These low interest rates, lower real wages and the removal of all restrictions on capital flows as well as financial deregulation in the euro area combined to cause massive influxes of capital into the peripheral economies, and a massive expansion of both private and government debt in these countries. These trends reached new heights in the years leading up to the crisis, causing worsening trade imbalances and divergence.

From 2003 to 2007, net capital outflows from Germany were on average 45 per cent of its GDP. By comparison, the net capital inflows into Greece over the same period was 37.5 per cent of GDP; in Portugal the net inflow was 36.6 per cent of GDP and in Spain it was 29.1 per cent. A large majority of these inflows came in the form of credit. In the Irish state, house prices doubled in real terms between 1995 and 2005, and then continued to rise. From 2003 until 2007 lending to households in the Irish state expanded at one of the highest rates in the Eurozone, with the exposure by German banks reaching more than US$200 billion.

The once-popular view outlined by Wolf above and expounded by free-market fundamentalists – that trade imbalances would be offset and rectified by private capital flows – proved to be completely false. Instead of playing a balancing and stabilising role in the Eurozone economy, the completely free movement of capital generated massive speculative bubbles, and the abrupt reversal of capital flows from 2008 shows that these capital flows have operated in a pro-cyclical instead of counter-cyclical way. (Pro-cyclical policies exacerbate economic and financial fluctuations, while counter-cyclical policies aim to decrease fluctuations.) If the free movement of capital operated in a counter-cyclical way, as was claimed, then it would flow to weak countries when they were in trouble, instead of doing precisely the opposite.

While there is a single interest rate across the Eurozone, set by the ECB, the risk premium on government bonds and bank debt in different countries means the actual interest rate differs significantly across the common currency area. The perceived risk in lending to a weaker country is reflected in the spread of interest rates. Where economies are viewed as strong (and governments viewed as being capable of bailing out their banks), their banks will benefit from lower interest rates. Weaker countries and their companies have to pay a higher interest rate. During a crisis, capital flees to the ‘safe’ countries’ banks. Since 2008 capital has flowed dramatically from the poorer countries to the rich – not only in the Eurozone but across the global economy – with a large proportion of global capital fleeing to the US as a result of the US government’s perceived ability (and political commitment) to bail out the banks. Inside the Eurozone, the trend has been for capital flight from banks in the periphery to the core, particularly Germany. Stiglitz notes: “Standard economics is based on the gravity principle: money moves from capital-rich countries with low returns to countries with capital shortage. But in Europe under the Euro, capital and labor defy gravity. Money flowed upward”.

The proposed European Deposit Insurance Scheme, the so-called third pillar of the EU’s Banking Union following a single rulebook and single supervision, was dreamt up as a way to reduce this tendency. It is one of the few proposals emanating from the Commission and the leaders of the EU that would could actually effectively reduce divergence in the Eurozone, and reduce the incentive for capital flight from the weak to the strong countries. It could work as a form of institutionalised surplus recycling during a downturn or a period of crisis for the periphery – and for that reason it is being resisted by Germany and has been put on the legislative back-burner. The lack of a common deposit insurance scheme makes the Eurozone “structurally vulnerable” to bank runs according to Wolf.

Betting on default

The so-called sovereign debt crisis saw the global financial crisis shift to inside the euro area, where it still remains, due to the structural flaws in the architecture of the Eurozone. The ‘foreign currency’ nature of the euro – the fact that countries couldn’t create the money they were borrowing in – meant that the belief by investors in the years following the creation of the common currency that all Eurozone government bonds were equal was short-lived. From 2007-2009 the spreads between government bonds in Greece and government bonds in Germany (‘bunds’) increased tenfold up to 2.8 percentage points, with the market giving its ‘verdict’ on the creditworthiness of the Eurozone’s deficit countries. This increased again to a differential of almost 4 percentage points by April 2010, when the Greek government found itself unable to keep funding itself from international money markets. After the Greek default, the markets turned to train their sights on Ireland.

Former Greek Finance Minister Yanis Varoufakis describes this ‘market verdict’ of risk strikingly: “Suddenly [in 2009-2010] hedge funds and banks alike had an epiphany. Why not use some of the public money they had been given [in the mass bank bailouts] to bet that, sooner or later, the strain on public finances (caused by the recession on one hand, which depressed the governments’ tax take, and the huge increase in public debt on the other, for which the banks were themselves responsible) would cause one or more of the Eurozone’s states to default?” The most common way to place these bets was through credit default swaps, which are basically insurance policies that pay out in the case of a default by a third party. As the CDS casino on sovereign debt in the Eurozone grew – instead of this capital being directed towards productive investment or economic recovery – the rising value of CDSs in Greece, Ireland and the other peripheral economies caused the interest rates these countries were forced to pay to rise, pushing them towards the cliff.

Ireland defaulted in December 2010, followed by Portugal and Cyprus. Portugal hadn’t gone through a bubble bursting like Ireland but had experienced a long period of stagnation as a consequence of joining the euro at a very uncompetitive exchange rate that it was then locked into. Cyprus imposed capital controls on euros leaving the country between 2013 and 2015 in fear its partial ‘bail-in’ of deposits would prompt massive capital flight. Iceland had done the same in 2008 but this was the first time capital controls had ever been used in the Eurozone. The Treaty on the Functioning of the EU states that capital controls can only be “justified on grounds of public policy or public security” and that such measures should “not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments” (Articles 63 and 65), prompting threats of legal action.

The existential crisis of the Eurozone began in 2011 when the CDS bets on Spain and Italy defaulting caused the spreads in the government bonds of these two countries to diverge from bunds by between three and six percentage points, yield rates that had pushed Greece, Ireland and Portugal over the edge. Spain received a recapitalisation package for its banks but it was not a fully-fledged bailout. Italy’s public debt was around four times the amount of the Eurozone rescue fund.

The European Financial Stability Fund (EFSF) was created in 2010 as a temporary vehicle to finance bailouts, and was made permanent in 2013, becoming the European Financial Stability Mechanism (EFSM). The EFSF and EFSM were created to bail out banks, not states. Varoufakis likens the Eurobonds issued by the EFSF to the toxic collateralised debt obligations (CDOs) peddled by Wall Street in the lead-up to the crisis. CDOs were instruments that included ‘slices’ of different bank loans, each with a different level of risk and a different interest rate. The rationale behind CDOs was that by pooling together risky loans with less risky assets, the overall risk profile would be lowered – the CDO would be able to gain a higher credit rating – and they would be more profitable for investors. The “mix was toxic because if one slice within a CDO went bad, that increased the risk of a default by the next slice”. Unbelievably, the same structure and rationale that underpinned the disastrous CDO was used by the EFSF when issuing Eurobonds for lending to the Irish state, and later other countries subject to Troika intervention. Each Eurozone state was required to make a guarantee according to the size of their GDP, and these guarantee from states with wildly diverse credit ratings were then bundled together as bonds. Weaker countries were charged higher interest rates, increasing the pressure on the next weakest state to fall. The EFSM is now a permanent body called the European Stability Mechanism (ESM).

This is an excerpt from the economic discussion document launched by MEP Matt Carthy on October 27, entitled The Future of the Eurozone. Download the full document for a referenced version of Chapter Three, above.

by Admin

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.