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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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Courts and intellectual property rights

Caught from the Washington Post…and also interesting knowing theTrans Pacific agreements allowing multinational CEOs and firms to sue in domestic courts:

Apple patents were violated by Samsung, jury rules
Apple won a sweeping victory in its landmark patent dispute against Samsung when a Silicon Valley jury ruled Friday that a series of popular smartphone and tablet features — from the rounded rectangle shape to the way screens slide and bounce to the touch — are proprietary Apple innovations.

Tokyo court finds no Samsung infringement on Apple patent in latest in global battle
A Japanese court on Friday dismissed Apple’s patent infringement claim against Samsung, a significant legal bounceback for the South Korean tech giant as the rivals wage a global battle over intellectual property. A Tokyo District Court ruled in a preliminary session that Samsung didn’t violate patents with its technology for synchronizing music and video between computers and smartphones or tablets. The ruling, the latest in a series of lawsuits and counter-lawsuits spanning at least nine countries and four continents, comes one week after a U.S. court dealt Samsung a costly defeat that could lead to an injunction against some of its devices. Samsung shares rose after the Friday verdict, helping the company recover from sharp losses earlier in the week, reports Chico Harlan:

Chinese firms put intellectual property lawsuits to work
U.S. companies have long accused the Chinese of stealing their intellectual property. But now some in China are pointing the finger back. In recent months, Apple has been slapped with lawsuits in China alleging that the most valuable company in U.S. history is infringing on patents and trademarks with a range of its products, from the iPhone voice assistant Siri to the Snow Leopard operating system. Many U.S. firms are used to accusing the Chinese of mimicking their products. But the lawsuits being filed in Chinese courts are evidence of a growing awareness in this country that intellectual property can be a valuable tool — for protecting your ideas and for squeezing money out of other companies, too, reports Jia Lynn Yang:

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U.S. Trade Deficit Largely Due to "Intra-Firm" Trade

by Kenneth Thomas

U.S. Trade Deficit Largely Due to “Intra-Firm” Trade

The vast majority of the U.S. $727 billion trade deficit in goods for 2011 is due to “intra-firm” or “related party” trade, that is, trade between two units of the same corporation, according to the U.S. Census Bureau. This is significant because such trade is the most open to companies manipulating the prices between subsidiaries to minimize tax liabilities, usually known as abusive transfer pricing. Moreover, as Stuart Holland argued in 1987, intra-firm trade is also less responsive to changes in exchange rates than is trade between independent businesses, since within an individual multinational corporation each subsidiary will have a specific role to play in its supply chain, which won’t be quickly changed.

U.S. goods trade and related party trade (billions of dollars), world and selected countries, 2011:
Country        Exports from US Imports to US Balance
World            $1480.4     $2707.8          – $727.4
World (RP)     $ 365.0      $1056.2          – $691.2
Canada          $ 280.9      $ 315.3            -$  34.5
Canada (RP)   $ 98.1        $ 162.0           – $ 64.1
Ireland           $ 7.6          $ 39.4             – $ 31.7
Ireland (RP)    $ 1.5          $ 34.6             – $ 33.1
Mexico           $ 196.4      $ 262.9            – $ 64.5
Mexico (RP)    $ 60.5        $ 155.7            – $ 95.2

Sources: Total trade, U.S. Census, Trade in Good with World, Not Seasonally Adjusted; Related party (RP) trade, U.S. Census, NAICS Related-Party, select all NAICS2, 2011, all countries, variables “imports related trade” and “exports related trade” and layout by country. Canada, Ireland, and Mexico as linked.

As we can see, related party trade (which can mean trade within either a U.S. or foreign multinational corporation) is 27.6% of goods trade, but it represents a whopping 95.0% of the trade deficit. Moreover, in

countries where the U.S. has heavy foreign direct investment, such as Canada, Ireland, and Mexico, the trade deficit for intra-firm trade actually exceeds the country’s overall trade deficit.
In fact, virtually all U.S. imports from Ireland take the form of intra-firm trade. This is no doubt due to Ireland’s status as a tax haven and low corporate income tax rate of 12.5%.

These data suggest that much of the U.S. trade deficit is due to U.S. corporations offshoring production and exporting the products back home. As the related-party data does not distinguish between U.S. and foreign multinationals, there is no way to know exactly how big the share of U.S. multinationals is in intra-firm, but is surely much more than half. Moreover, not counted in the data are imports that come from subcontractors (Wal-Mart’s many suppliers, Foxconn producing Apple products, etc.).

The bottom line is that we need to reverse the incentives in the tax code that encourage the offshoring of jobs. (Why does Apple have $64 billion in cash abroad?) However, to emphasize the point I made last time about what Americans want out of tax reform and the “reform” that has actually happened, it’s worth pointing out that Robert Gilpin of Princeton University, author of the seminal U.S. Power and the Multinational Corporation (1975), made the same policy recommendation almost 40 years ago, and it hasn’t happened yet. We’ve got our work cut out for us.

UPDATE: Following the Mitt George Romney rule (“one year might be a fluke”), I went back and collected the data for all years back to 2002 (the earliest for which the related party trade info was available). While 2009-11 were all 95%, previous years were generally between 70% and 80%. I’m not sure yet what to make of that.

cross posted with 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


The New York Times

Other links appreciated in comments.

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