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Will the US keep winning indefinitely? ISDS, that is

Now that Congress has given the President fast-track Trade Promotion Authority, the first agreement to be considered under these rules (no amendments allowed, up or down vote in 90 days) will be the Trans-Pacific Partnership (TPP). As you know from previous columns, one of the most worrying aspects of the TPP is its expansion of investor-state dispute settlement (ISDS), wherein private firms can bring their disputes with governments not to courts, but to international arbitration (usually through units of the World Bank or the United Nations), where legal precedent doesn’t matter and appeal is all but non-existent. Moreover, as the Consumers Union has long argued (recent example here), arbitration has a well-known pro-business bias. That’s why so many of your agreements with cable TV providers, financial services companies, and many more have fine print requiring mandatory arbitration, keeping you from getting your day in court if something goes wrong.

The response from the U.S. Trade Representative’s (USTR) office has been, “Not to worry! The United States has never lost an ISDS case.” The linked document goes on to claim that worldwide, only 1/4 of corporate plaintiffs have won cases against governments. But a new analysis by the International Institute for Sustainable Development (IISD),* using the same data source the USTR cites, comes to a very different conclusion based on its most recent update, the 2015 World Investment Report from the United Nations Conference on Trade and Development (UNCTAD). Moreover, we can see that countries with even more trustworthy court systems than that in the U.S. have lost ISDS cases. The Rule of Law Project, an initiative of the American Bar Association, has ranked 102 countries on the administration of justice and freedom from corruption, and puts the United States at #19 with a score of 0.73. Yet #14 Canada (0.78) has already lost ISDS cases, and both Canada and #10 Australia (0.80) are currently on the hook for major new cases (Eli Lilly and Philip Morris, respectively), that would overrule decisions by the countries’ respective Supreme Courts. So, even if governments have only lost 25% of ISDS cases, it’s unlikely U.S. luck will hold out indefinitely, if countries with better court systems are losing.

But it’s worse than that. UNCTAD’s database of known ISDS cases and their outcomes shows that in all cases decided through the end of 2014, the investor won 27% of the cases compared to 36% won by the state (see Figure III.10, p. 116). But another 26% of the cases are listed as “settled,” which often (but not always) means the respondent agrees to make some payment to the plaintiff to keep the case from going to arbitration. Public Citizen has a list of ISDS cases under prior U.S. trade agreements with examples of settlements that do and do not contain payments (see, for instance, NAFTA cases against Canada).

Moreover, as IISD attorney Howard Mann argues, if we separate out cases between jurisdictional determinations and determinations on the merits of the case, things look even worse for states. While only 71 of 255 cases (this excludes the “settled” cases) were concluded by a decision of the tribunal having no jurisdiction, Mann points out that all 255 cases effectively had decisions on jurisdiction, i.e., cases with final decisions had to have rulings that the arbitrators had jurisdiction. In that case, Mann says, “Investors, therefore, have won 72 per cent [184/255] of jurisdictional determinations.” And of the decisions on the merits of the cases, investors won 111, or 60%, of the remaining 184 cases. This calculation suggests that states are losing ISDS disputes at a much higher rate than normally portrayed. As if that’s not bad enough, the new World Investment Report finds that in 2014, of the 15 ISDS cases decided on their merits, states lost 10 (2/3) of them. In 2013, it was even worse for states, with investors winning 7 of the 8 cases decided that year (p. 126). If these higher proportions continue, obviously the proportion of investor victories will increase beyond the current 60% total.

Bottom line: The threat to regulation, democracy, and the rule of law posed by investor-state dispute settlement is very real. The U.S. Trade Rep’s  reassurances that the U.S. has never lost in ISDS don’t even make it likely that will continue into the future. We need to pressure Congress to vote down the TPP when negotiations conclude.

* Important disclosure: I have consulted for IISD several times since 2007 on investment incentive issues.

Cross-posted from Middle Class Political Economist.

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Fast Track just passed the House (Updated with money facts)

Just want to let everyone know that the Fast Track bill just passed the house.  The vote was 218 to 208 with 28 Dem’s voting for it.  Imagine that.  no provision for workers harmed by this and it passes.

From the article here is Ryan’s take:

“It gives America credibility,” Ryan said of TPA. “And boy, do we need credibility right now.”

Who is he concerned about looking creditable too?

On to the senate.  Maybe all the talk about it being unconstitutional lately someone with money that gives more than lip service to being a patriot will step up.

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The Strongest Deal Possible?

“The president should listen to and work with his allies in Congress, starting with Nancy Pelosi, who have expressed their concerns about the impact that a weak [Trans-Pacific Partnership] agreement would have on our workers to make sure we get the best, strongest deal possible.  And if we don’t get it, there should be no deal.

— Hillary Clinton, speaking today in Des Moines, Iowa

I have to confess that I’ve been somewhat sympathetic to Clinton in her decision, until today, to avoid speaking about the TPP, mainly because she plays no role in the decisionmaking process.  Unlike Bernie Sanders and Elizabeth Warren, Clinton isn’t a member of Congress.  And she wasn’t likely to persuade any Democratic members of Congress one way or another simply by weighing in publicly on it.  And by the time the new president is sworn in in January 2017, Congress will have long earlier decided the issue.

Had she taken a public stand against it before last week’s vote, it would have been simply a gratuitously political act.

Now that that vote is over, it’s fine for her to discuss it.  But not tautologically.  Obama says the current deal is the strongest deal possible.  That is, he says that the counterparties would not agree to any of the changes and additions that the pact’s US critics (most prominently Warren, Sanders and Joseph Stiglitz) say are necessary to make the agreement a benefit rather than a detriment to the American workforce and others who would be effected (by the patent provisions that would pertain to pharmaceuticals, for example).

What does she mean when she says that Obama should listen to and work with his allies in Congress who have expressed their concerns about the impact that a weak agreement would have on our workers to make sure we get the best, strongest deal possible?  And that if we don’t get it, there should be no deal?  Does she mean that unless the pact’s terms are what Pelosi and the other congressional critics of it say is necessary, there should be no pact?

Presumably so.  The other alternative is that she means that Congress should approve the fast-track process once they’re convinced that the terms negotiated are the best possible ones that the other parties will accept, but she negates that possibility when she says, “And if we don’t get it, there should be no deal.” But then, why didn’t she just say it, outright?

She’s so consumed by her strategy of never saying anything actually specific about anything that her statements come off as some combination of a Rubik’s Cube and a Rorschach test for the listener.  I wish she’d start speaking in straightforward sentences and paragraphs—sentences and paragraphs that lead somewhere other than a cul-de-sac.

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Democratic Arithmetic vs Comparative Advantage: TAA, TPA, TPP

In reading around on reactions to the defeat of the TAA (Trade Adjustment Authority) component of the TAA/TPA (Trade Promotion Authority) Package needed to successfully pass TPP (Trans Pacific Partnership) I get the usual incomprehension as to why Democrats can possible oppose Free Trade given the proven mathematical reality of Ricardian Comparative Advantage. And the reason is simple, perhaps too simple for those educated in the higher maths of your typical Econ curriculum, Democrats are using democratic arithmetic.

Lets start with a schematic example. Suppose we have a Free Trade deal between two countries that we confidently predict will result in growth in national income in both over time. And maybe a lot of growth. For those that believe that GDP = Good this becomes a slam dunk, I mean who can argue against America getting richer? But what if the arithmetic goes somewhat as follows:

50% of the net gain flows to the top 1%, 20% to the 2-10%, 20% to the 11-30%, 10% to the 31-50%, 0 to the 51-70%, and -10% to the 71-100%.

Is this a good deal? Well even before you discuss possible offsets, it clearly is a great deal to the top 1% and a good deal to the top 10% but the benefits get pretty attenuated when spread over the top 50% while they range from zero to a net loss among the lowest 50%. And given this distribution this is true no matter how eye popping the top line GDP growth number gets. Which raises the question: why should small d democratic majorities vote for this?

Well the answer from the other side tends to fall into three types:
One. “A richer America is a stronger America. And a stronger America is a safer America.”
Which is a reasonable answer if you have a roof over your head, and sufficient food, and available health care. Because if not your world doesn’t seem that safe at all.

Two. “Well the distribution you suggest is actually impossible. Because of economic theory that shows indubitably:
a) Free Trade, b) PROFIT! c) Invisible Hand d) does something e) somehow, f) EVERYONE WINS!. Okay maybe not LAST time, or the time before THAT. But trust us, Free Trade cannot Fail. It can only be Failed.”
Which answer is reasonable enough if you still laugh when your weird uncle asks you to “Pull the other finger!”

Three. “Voters simply are not rational, they don’t understand the simplest most truistic arguments about Comparative Advantage and insist on nattering about redistribution (as if anyone cared about that) so lets take away their vote by reapplying a property qualification for voting”.
Which answer is reasonable enough in you are Bryan Caplan of GMU. The Myth of the Rational Voter: Why Democracies Choose Bad Policies

It just seems to me that Right economic and political theory seems to hold two contradictory ideas at one time:
One maximizing ones self interest is not only rational, it is virtuous.
Two democratic majorities looking to their own interests are simply selfish.

But you can’t square that circle with pure representative democracy. (Or with Ayn Rand’s The Virtue of Selfishness) Because why NOT a calculation of interest based on that of the majority?

Which given the general commitment in the West to some form of representative democracy leads to the impasse of the post title. Damn 50 + 1.

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It’s crunch time. Just a little reminder from Ross

Just a little reminder for everyone.  It’s not just his “giant sucking sound” comment.  It’s the time frame he noted, and the advantages to a business going to a foreign nation.  Well, tomorrow is the Fast Track vote and there are some dem’s who are not taking the threat of loosing their job seriously enough.

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Chocolate, the free market battle ground

I’m a chocoholic.  Can’t eat it as much as I used to.  So, this bit of news by way of C & L caught my eye.  I’ll let the article speak for it’s self.

As a result of a settlement with the Hershey’s Company, Let’s Buy British Imports, or L.B.B., agreed this week to stop importing all Cadbury’s chocolate made overseas. The company also agreed to halt imports on KitKat bars made in Britain; Toffee Crisps, which, because of their orange packaging, and yellow-lined brown script, too closely resemble Reese’s Peanut Butter Cups; Yorkie chocolate bars, which infringe on the York peppermint patty; and Ms. Perry’s beloved Maltesers.

Jeff Beckman, a representative for Hershey’s, said L.B.B. and others were importing products not intended for sale in the United States, infringing on its trademark and trade dress licensing. For example, Hershey’s has a licensing agreement to manufacture Cadbury’s chocolate in the United States with similar packaging used overseas, though with a different recipe.

“It is important for Hershey to protect its trademark rights and to prevent consumers from being confused or misled when they see a product name or product package that is confusingly similar to a Hershey name or trade dress,” Mr. Beckman said in an email.

It’s that different recipe that gets me regarding the “free market” and “competition”.

Chocolate in Britain has a higher fat content; the first ingredient listed on a British Cadbury’s Dairy Milk (plain milk chocolate) is milk. In an American-made Cadbury’s bar, the first ingredient is sugar.

American Cadbury bars also include PGPR and soy lecithin, both emulsifiers that reduce the viscosity of chocolate, giving it a longer shelf life. British Cadbury bars used vegetable fats and different emulsifiers.

Funny how this works now.  In the past Japan pushed our auto industry into building better cars.  You know, global economy, down with tariffs and all.   So what do we call it when licensing agreements end up acting like tariffs?  I wonder if Cadbury can file a claim in the world court for lost revenues?  Well, they have a “license agreement” so I guess not.  Though should we allow license agreements that basically act like a tariff or worse as in this case a complete shut out of the market?  Well, I guess Cadbury is not completely shut out.  We get to see their name on the wrapper.

What about the lose of money for the importer?  How is the World Bank’s Tribunal system suppose to resolve the contest between importers and local producers?  And, why would Cadbury sign such a thing?  Are they just a holding company now so it’s money without working?  Licensing fees, royalties and all that.

Where is my free choice in this?  Hell, were is my choice at all?  Is simply a name change and wrapping enough to suggest that I am actually buying a different product from Hersey?  Am I buying from Hersey or Cadbury regarding monopoly practices?

With all these international corporate agreements, is the consumer really getting a choice?  Remember when Sunbeam was sold?  It was a big deal on the news.  The purchaser said they only wanted the brand name.

Oh and TPP too.

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Trans Pacific Partnership Bad for the Middle Class, but How Bad? UPDATED

What you don’t know can hurt you. I think that’s a clear lesson of some so-called trade agreements the United States has signed over the last 20 years, and illustrated further by the few that have been defeated, most notably the Multilateral Agreement on Investment, negotiated by the Organization for Economic Cooperation and Development from1995 to 1998, but then abandoned in the face of ever growing protests.

Haven’t heard of the Trans Pacific Partnership? That’s no surprise: while the negotiations are not really being conducted in secret (the Office of the US Trade Representative provides periodic updates here), the level of disclosure from the USTR office rarely ventures beyond bland statements like this:

On November 12, 2011, the Leaders of the nine Trans-Pacific Partnership Countries – Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, and the United States – announced the achievement of the broad outlines of an ambitious, 21st-century Trans-Pacific Partnership (TPP) agreement that will enhance trade and investment among the TPP partner countries, promote innovation, economic growth, and development, and support the creation and retention of jobs.

The USTR website continues by claiming that the agreement will be “increasing American exports, supporting American jobs.” This is all too similar to the Clinton administration’s reporting on NAFTA, which would point out all the gains from increased exports while omitting any mention of increased imports (Journal of Commerce, Nov. 18, 1994, via Nexis, subscription required) which quickly turned a small trade surplus with Mexico into a huge trade deficit. Recent evidence suggests this may already be happening with Korea (thanks to Daniel Becker in private correspondence).

How do we evaluate the TPP? We have to see it as having at least three major elements: a trade agreement, an investment agreement, and an intellectual property agreement.

From the trade agreement alone, we can conclude that it is a bad deal for the middle class. As I explained last year, the Stolper-Samuelson Theorem in economics tells us that more trade is actually bad for labor in this country, because by global standards, the U.S. is labor-scarce (low population density), meaning that we expect trade to lead to more intense competition in labor-intensive goods, putting downward pressure on wages. Alas, that isn’t the end of it.

There is a lot of controversy about the investment side of the agreement. As discussed here by Daniel Becker, the investment chapter was leaked and published by the Citizens Trade Campaign. Before I discuss the TPP investment provisions, a little context on investment agreements first.

According to the United Nations Conference on Trade and Development (UNCTAD),at the end of 2011 there were 3190 international investment agreements, of which 2860 were between two countries, usually known as bilateral investment treaties or BITs. Investment agreements can also be part of larger agreements, such as the investment chapter of NAFTA, the WTO’s Agreement on Trade-Related Investment Measures (TRIMS), and various regional trade agreements. Since the TRIMS agreement, in force since 1995, applies to all WTO members, it is a global benchmark; thus, people will refer to agreements with stronger provisions as “TRIMS+.”

The purpose of investment agreements is to protect foreign investors, which are by definition multinational corporations (MNCs). At the same time, they place no corresponding duties on investors, only on the host government. Most significantly, these agreements remove dispute settlement from the host country’s court system to binding arbitration in an outside body, most commonly the World Bank’s International Center for the Settlement of Investment Disputes (ICSID). As with domestic arbitration clauses, this removal from the courts favors the business interests involved. So the investment agreement element of the TPP will tend to be bad for host governments (the U.S. is host to more foreign investment than any other potential TPP country) and by extension the middle class.

But “how bad” is the question. This depends on what restrictions the agreement puts on governments. Originally, MNCs wanted to be protected against having their property nationalized (“expropriated”) by the host, but more recent agreements such as NAFTA’s investment chapter (Chapter 11; text here) have opened the way to defining “expropriation” in ways that include regulatory actions that may reduce the value of the investment, even if they are non-discriminatory among firms and taken in the public interest. This is why I say above that investment agreements are bad for the middle class, because it normally benefits from public interest regulation.

For these reasons, there is in fact significant pushback regarding the content of investment agreements. Three good sources for this are UNCTAD, the Vale Columbia Center on Sustainable International Investment, and the International Institute for Sustainable Development.

So what’s in the TPP investment chapter? As far as I can tell, nothing that isn’t already in NAFTA, other U.S. free trade agreements, or a U.S. bilateral investment treaty. The problem is, that’s bad enough. Under NAFTA, for example, Metalclad won a dispute against Mexico over a local government’s refusal to grant it a permit to open a hazardous waste facility, and was awarded $16.7 million. Ethyl Corporation successfully challenged a Canadian ban on the import of gasoline additive MMT, leading Canada to withdraw the ban and pay the company $13 million in compensation. To have unelected bodies that (in the words of Citizens Trade Campaign) “would not meet standards of transparency, consistency or due process common to TPP countries’ domestic legal systems” overturning democratically adopted laws or regulations is profoundly undemocratic.

At the same time, I think Becker reads a little too much into some of the language. He quotes section 12-6bis (Becker’s emphasis):

Notwithstanding Article 12.9.5(b) (Non-Conforming Measures, subsidies and grants carveout), each Party shall accord to investors of another Party, and to covered investments, non-discriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife.

 He goes on to speculate that this could give rise to compensation claims due to interpreting protests against the Keystone pipeline, or even strikes, as “civil strife.” However, the exact same language is in NAFTA’s investment chapter, and there have been no such claims in its entire history. Moreover, this is what we would expect since the language only pertains to government behavior (“it adopts”), not private behavior.

So, that’s two strikes against the agreement. The third strike is intellectual property, something Matt Yglesias caught over a year ago. As I analyzed then, the TPP “would ban government health services from negotiating prices with pharmaceutical companies.” Given that many countries already do this and the U.S. ought to do it to help rein in health costs, if these provisions stay in the final agreement it will be a very bad development.

Hooray for baseball season, but that’s three strikes against the TPP. This is a bad deal that will put further downward pressure on real wages which have gone 40 years since reaching their peak, that will undermine governments’ ability to regulate, and will strengthen a small group of pharmaceutical, software, entertainment, and publishing companies at the expense of the rest of us.

Update: Citizens Trade Campaign reports that  the U.S. has listed numerous target policies among its TPP negotiating partners, including everything from health care policies in New Zealand to Malaysia’s ban on imports of pork and alcohol, both of which are forbidden to the Muslims who make up the majority of the population.

Original article cross-posted at Middle Class Political Economist.

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Trans Pacific Partnership

The US Trade Representative website posts:

The next negotiating round of the Trans-Pacific Partnership will take place in Leesburg, Virginia from September 6-15, 2012. As in the past, USTR will be hosting a Direct Stakeholder Engagement event to provide stakeholders the opportunity to speak directly and one-on-one with negotiators, raise questions, and share their views as well as a stakeholder briefing.

Other links talk about the lack of interim transparency and drafts of agreements to date, continuance of secret deliberations when making decisions on trade ‘infractions. and the enhanced ability of companies to sue domestic industries (a la WTO) in domestic courts:

The Trans-Pacific Partnership, Global Corporate Coup D’Etat
by Lori Wallach, The Nation

Citizens Trade

Firedoglake

The New York Times

Other links appreciated in comments.

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