Free Trade Supporter Cato Institute Says Drop Corporate Sovereignty Provisions In Trade Agreements

from the so-that's-everyone,-then dept

Even though the formal negotiations for TAFTA/TTIP have begun only recently -- earlier meetings were largely exploratory -- it is already clear what the most contentious chapter will be: that dealing with corporate sovereignty, or "investor-state dispute settlement" (ISDS) as it's more formally known. Indeed, even back in January, ISDS was generating so much negativity that the European Commissioner responsible for TTIP, Karel De Gucht, decided to pull the corporate sovereignty chapter from the negotiations for a three-month EU consultation in an attempt to draw the sting from the criticisms.

It hasn't worked. As the Financial Times noted this week (subscription or registration required):

Faced with an increasingly vocal opposition to a landmark EU-US trade agreement, a growing number of backers of the deal are starting to ask a simple question: might the future of transatlantic trade be better served if one of its most controversial provisions was simply dropped?

Almost nine months after negotiations opened with great hope and fanfare, opponents of the mooted Transatlantic Trade and Investment Partnership, or TTIP, are rallying against a plan that would allow private investors to use the pact to sue governments if they felt local laws threatened their investment.
One fan of free trade agreements is Daniel Ikenson, director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute. He's written a great post on the Cato Institute Web site with the title: "A Compromise to Advance the Trade Agenda: Purge Negotiations of Investor-State Dispute Settlement." As he points out with reference to the faltering TPP negotiations (but it applies equally to TAFTA/TTIP):
Characterizations of the TPP as a scheme to boost the fortunes of tobacco, oil and gas, banking, and pharmaceutical companies at the expense of worker protections, the environment, public health, and food and product safety have gone viral. And without so much as a single public repudiation of these claims by the president those perceptions are sticking.

As is true of most populist causes, buried beneath the enabling mythology and hyperbole are some kernels of truth. One such truth, which this paper seeks to distill from the vacuous, anti-capitalist hyperventilation surrounding the trade agenda, is that the so-called Investor-State Dispute Settlement (ISDS) mechanism, which enables foreign investors to sue host governments in third-party arbitration tribunals for treatment that allegedly fails to meet certain standards and that results in a loss of asset values, is an unnecessary, unreasonable, and unwise provision to include in trade agreements. Although detractors may not know it by name, ISDS is a significant reason why trade agreements engender so much antipathy. Yet, ISDS is not even essential to the task of freeing trade. So why burden the effort by carrying needless baggage?

Purging both the TPP and the TTIP of ISDS makes sense economically and politically, would assuage legitimate concerns about those negotiations, splinter the opposition to liberalization, and pave the way for freer trade..
After filling in the historical background to corporate sovereignty provisions in free trade agreements, Ikenson then goes to offer what he calls "Eight Good Reasons to Drop ISDS from TPP and TTIP":
First, ISDS is overkill. Governments are competing to attract productive investment to keep their citizens employed and their economies growing. Accordingly, it is imperative to maintain smart, transparent, predictable policies that are administered fairly and nondiscriminatorily. Asset expropriation or other forms of shabby treatment of foreign companies is not likely to be rewarded by new investment.
We don't need corporate sovereignty provisions to protect investors in foreign markets because those same companies will soon shun any country where investments are seized or investors discriminated against. It's true that such investments can be risky, but Ikenson points out that multinational companies (MNCs) are actually rather good at managing that risk. And if they're really worried, they can always take out private insurance.
Second, ISDS socializes the risk of foreign direct investment. When other governments oppose, but ultimately concede to, U.S. demands for ISDS provisions, they may be less willing to agree to other reforms, such as greater market access, that would benefit other U.S. interests. That is an externality or a cost borne by those who don't benefit from that cost being incurred. In this regard, ISDS is a subsidy for MNCs and a tax on everyone else.
It is not just other companies that are subsidizing MNCs, but also the public, which must bear most of the burden of corporate sovereignty's costs. That's because awards to foreign investors that sue and win against national governments are paid out of taxes. But the benefits of ISDS only accrue to those companies actually investing abroad.
Third, ISDS encourages "discretionary" outsourcing.
This is an interesting point. Corporate sovereignty is designed to make investing overseas less risky and more attractive. But the ironic effect of this is to make the US less attractive as an investment. As Ikenson says:
Access to ISDS could be the decisive factor in a company's decision to invest in a research center in Brazil, instead of the United States. Why should U.S. policy reflect greater concern for the operations of U.S. companies abroad than for the operations of U.S. and foreign companies in the United States? Why should ISDS effectively subsidize outsourcing, and not insourcing?
His next point has been made by a number of commentators:
Fourth, ISDS exceeds "national treatment" obligations, extending special privileges to foreign corporations.
Corporate sovereignty has the effect of giving foreign corporations more privileges than domestic ones -- hardly a policy aim for either the US or EU here.
Fifth, U.S. laws and regulations will be exposed to ISDS challenges with increasing frequency.
This is hugely important, because it exposes the fact that the current push for corporate sovereignty is based on a naïve extrapolation from current corporate sovereignty experiences. Hitherto, ISDS has been a weapon for Western countries to deploy against developing nations -- something that has few downsides. But if corporate sovereignty is included in TTIP, say, we will see US companies routinely challenging EU laws and regulations -- and EU companies challenging US laws and regulations. Suddenly, Western nations will be the victims, as well as the bullies.
Sixth, ISDS is ripe for exploitation by creative lawyers.
This will come as no surprise to Techdirt readers, who have seen post after post about the abuse of the patent system by trolls and their lawyers. Introducing a supranational legal system with ill-defined rules will produce a new class of more aggressive and better-funded trolls attracted by the even higher stakes involved when the defendant is not just a company, but an entire country.
Seventh, ISDS reinforces the myth that trade primarily benefits large corporations.
Some might argue that's no myth, but Ikenson is right: the revolt against corporate sovereignty and the power that it might give transnational companies is now such that the entire TAFTA/TTIP agreement is in doubt -- recently, the influential German news magazine Der Spiegel wrote: "The battle for TTIP seems as good as lost" (German original.)
Eighth, dropping ISDS would improve U.S. trade negotiating objectives, as well as prospects for attaining them.
The idea here is to divide the opposition to TAFTA/TTIP by sacrificing ISDS. The hope is that enough organizations and people will then support the agreement, isolating those that still do not. Yes, it's cynical, but it's also a sensible approach for those in favor of such trade agreements. Ikenson concludes:
For practical, economic, legal, and political reasons, ISDS subverts prospects for U.S. trade liberalization. Yet it is tangential, at best, to the task of freeing trade. Any benefits to availing MNCs to third-party adjudication are all but totally overwhelmed by the additional costs. In the proverbial airplane that is down one engine and losing altitude, throwing ISDS out of the cargo hold to reduce unnecessary weight is the best solution.
It's a great piece, cogently argued, that is particularly important given the affiliations of the author. Quite apart from the specific reasons it lays out as to why corporate sovereignty should go, its mere existence is proof that ISDS now lacks support across the entire political spectrum. Time to drop it.

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Reader Comments (rss)

(Flattened / Threaded)

  • identicon
    Anonymous Coward, Mar 18th, 2014 @ 12:13am

    Protip: these aren't trade liberalisation agreements; these are trade restriction agreement.

    reply to this | link to this | view in chronology ]

  • identicon
    David, Mar 18th, 2014 @ 1:26am

    We cannot drop bad ideas

    since that would be a victory for those who are against bad ideas.

    That's the reasoning with which no felonies, perjuries, attacks on the constitution, misappropriations and other misdeeds uncovered by Snowden have led to any prosecutions or even dismissals of the perpetrators: since it would mean that Snowden has "won".

    The same argument holds for opposition against the anti-democratic and anti-freedom bloopers in secret trade negotiations. Fixing the problems would hand a "victory" to the leakers who considered the interests of the public more important for a decision affecting the public than the interests of their corporate overlords.

    It's the good old: "we were planning to screw you over secretly. If we cannot have the secret part, we certainly are not going to give up the screwing part as well" play.

    Compromise is called for, like with the just father approached by his two sons, one son stating "Mother gave us a cake to share. I want to have it all.", the other "we should each get half of the cake."

    And the father says "that calls for compromise. Let's meet halfways. Tim gets 75% of the cake, and Fred gets 25%".

    Now, of course, one has to weigh this according to controlled funding (the public provides the majority of funding for the shenanigans of politics but don't have control over the pursestrings, so they are less interesting to listen to than those with the smaller purse they can actually open at will). So it will end up more like a 90/10 division of the cake with Tim getting to pick his 90% and afterwards pissing on the 10% piece.

    Which is pretty much how the balance of copyright and public domain combined with DRM has worked out for the general public. So there is no reason not to embrace the same approaches regarding international trade.

    reply to this | link to this | view in chronology ]

    • icon
      That One Guy (profile), Mar 18th, 2014 @ 2:26am

      Re: We cannot drop bad ideas

      Personally I'm hoping the US negotiators stick to their guns on this one, and the other countries have the guts to stand up to them, scuttling the entire 'agreements' as a result.

      No 'trade agreement', supposedly something aimed at helping the people, rather than just select companies/industries, should ever be negotiated in such complete secrecy from the people, and it needs to be made very clear that any 'trade agreement' that is deserves to be shot down entirely, and treated as something detrimental to the public, something their supporters most certainly know they are.

      reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, Mar 18th, 2014 @ 7:35am

    the whole idea of this part of the 'agreements' is to try to get other countries to fund USA companies for money that THEY think they are entitled to, but have lost because of little things like 'Health and Safety' laws, ones designed to try to keep the masses, including those in the particular company from harm and to give them a redress if needed. you can bet anything that it would be used mostly by US companies who are prevented from introducing something because of safety fears, just because they say it's ok. any 'arbitration' would result in the company winning every time, as long as it was an American company, and all others losing every time because of not being American. if ever there was a stitch up requirement to ensure that companies could get millions from a country, in effect, bankrupting the country who would suddenly be 'bailed out' by the USA in return from something else that stitched the people of the country up as payment (probably some spin-off of the entertainment industries and massive increases in prices and penalties), and the presence of US troops everywhere, ready to pounce when told to put in force some sort of curfew until the local government signed the country over to the USA's total control! in other words, the USA would be expanding by swallowing up other countries to become the world police that is put about already because of the way it always has to stick it's snout in!!

    reply to this | link to this | view in chronology ]

  • identicon
    Bradley Johnston, Mar 18th, 2014 @ 9:14am

    I think Darrin Bell's editorial Cartoon from 2/18/14 sums this up nicey...

    reply to this | link to this | view in chronology ]

  • icon
    John Fenderson (profile), Mar 18th, 2014 @ 10:15am

    Wow, is that consistency I see?

    I have to hand it to Daniel Ikenson. At the very least, he's managed a rare instance of consistency in his point of view. This is a crowd that frequently trumpets the magical power of the "free market" to sort out inequities, and yet has viewed ISDS favorably despite the fact that the "free market" should handle cases of inequity all on its own (because companies will avoid doing business with nations that treat them unfairly). It's refreshing to see one of that crowd making this exact point.

    reply to this | link to this | view in chronology ]

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