http://truth-out.org/news/item/29595-trade-agreements-rigged-to-protect-capital-from-democracy
Trade Agreements Rigged to Protect Capital From Democracy
Thursday, 12 March 2015 00:00 By Park MacDougald, Truthout | News Analysis
Barack Obama, like his Democratic predecessor in the White House, has
gone all in for free trade. On January 20, the president used his sixth
State of the Union address to ask Congress to pass a legal procedure
(trade promotion authority) that would enable him to "protect American
workers with strong new trade deals," a reference to two mammoth
agreements currently in negotiation: the Trans-Pacific Partnership
(TPP), with 11 partners in the Pacific Rim; and the Transatlantic Trade
and Investment Partnership (TTIP), with the European Union. The deals
would, two decades after the North American Free Trade Agreement
(NAFTA), create the largest and second-largest free trade zones in the
world.
Opposition to the trade deals is refreshingly widespread. In addition to
criticism from the left, bolstered by the perennial trade-related
concerns about wages and bargaining, the TPP and TTIP have provoked much
suspicion, even among those who might normally be amenable to trade.
They are secretive - most of our information comes from WikiLeaks - and,
predictably, written in close collaboration with well-heeled corporate
lobbyists. What we do know features, among other things, draconian
rent-seeking from US copyright holders, threats to public health
courtesy of US pharma giants, backdoor efforts to undermine Europe's
fledgling efforts at data protection and significant problems for the
environment. However, in recent months, as Obama's trade agenda has come
increasingly to the fore, the headline-grabber of the trade agreements
has been clause in the prospective treaties that was until recently an
obscure bit of trade law: ISDS, or investor-state dispute settlement,
which has dominated discussion, earning high-profile criticism from
Elizabeth Warren and coverage in the mainstream media.
In the byzantine, technocratic and often boring world of international
trade rules, its rare that a bit of legal machinery can inspire even
passing attention from nonspecialists. Yet, ISDS - a legal instrument
for settling disputes between investors and states - is something of a
rock star. Nominally intended to provide a neutral arbitration forum to
protect foreign investors from capricious state action, ISDS has been
christened "corporate sovereignty" by opponents because of how it allows
international investors to use trade tribunals to circumvent domestic
legal systems - leading Greg Grandin to compare it unfavorably with
another modish four-letter acronym.
In essence, ISDS provisions in treaties - traditionally, bilateral
investment treaties (BITs), but more recently, expansive multilateral
trade deals such as NAFTA or the upcoming TPP and TTIP - allow foreign
investors who feel that their "investments" have been "expropriated"
(both terms are rather vague and contentious concepts in trade law,
hence the scare quotes) to bring the case before an independent
tribunal, usually made up of three trade lawyers and administered by the
World Bank-affiliated International Centre for Settlement of Investment
Disputes (ICSID).
If ISDS sounds troubling in the abstract, it gets worse in detail.
Capitalist baddies straight from central casting, from Big Tobacco to
Big Oil, have used investment arbitration to sue over - among other
things - plain packaging laws, environmental regulation and minimum wage
legislation. Vague wording in the treaties has meant that interpretation
of what, exactly, they cover is left to the discretion of the
arbitrators themselves, who are generally high-end corporate lawyers
from the United States and Western Europe. For example, according to a
2011 report from Corporate Europe Observatory, a group of 15 arbitrators
(13 men), including such luminaries as Francisco Orrego Vicuña, Augusto
Pinochet's former ambassador to Margaret Thatcher's Britain, sit as
arbitrators on about 64 percent of disputes of at least $100 million,
and 75 percent of those of at least $4 billion (these percentages may
have changed in the intervening four years).
Conflicts of interest are rampant, as arbitrators can sit as "neutral"
judges for cases involving parties for whom they have recently worked.
The largest investor-state payout in history was the 2012 decision in
Occidental Petroleum v. Ecuador, in which Rafael Correa's government was
forced to pay the US oil giant a total of $2.3 billion (including
interest) in response to Ecuador's decision to cancel a contract for oil
exploration in the Amazon. The award was equivalent to about 2.62
percent of Ecuador's 2012 GDP; Ecuador's military spending that year was
around 3 percent of its GDP. One of the arbitrators in the Occidental
case, L. Yves Fortier, is a former board member of Rio Tinto mining
company. While not a directly interested party in the case, Rio Tinto
certainly has an interest in cowing governments of the global South into
submission to resource extraction multinationals (Rio Tinto is perhaps
most famous for being the object of Norway's "ethical divestment" due to
environmental damage at its Grasberg mine in West Papua, an operation
that also involved shady collaboration with Suharto's secret police).
Supporters of the inclusion of ISDS in the agreements - concentrated
heavily in the business and policy elite on both sides of the Atlantic -
counter that investor-state arbitration is necessary to promote
investment and economic growth (a dubious assertion, to be charitable -
given FDI giants Brazil and China's refusal to participate in the
arbitration regime). More convincingly, they argue that ISDS has long
been a feature of the international trading system and that there has
been no qualitative shift that could explain the sudden surge of
opposition (Presumably, current troubles represent elites' failure to
explain the benefits to the uncomprehending mob). This latter argument
represents a half-truth. Rather than hypocrisy, however, newfound
opposition to ISDS is rooted in the changing nature of capitalism and
its relationship to the state.
History of Investor-State Arbitration
The contemporary investment regime has its prehistory in what are called
friendship, commerce and navigation treaties, or FCNs. FCNs initially
had little to do with investment per se - the first one was signed in
1778 between the newly independent United States and France, and
provisions ranged from most-favored nation status (i.e., that the best
terms offered to any nation also be offered to the signee) to the
restoration of property stolen by pirates. In the early 20th century,
and especially after World War II as the United States shifted from a
capital-importing to a capital-exporting economy, investment came to
occupy a central position in the American FCNs.
The bilateral investment treaty, or BIT, was originally the European
alternative to FCN treaties, and had from the beginning more explicitly
colonial overtones. The development of the BIT was spurred by the West
German state, which, having had its imperial pretensions decisively
crushed in two wars, nevertheless needed a means by which to protect and
promote the interests of German capital abroad. The world's first BIT
was signed by West Germany and Pakistan in 1959, and, with innovation of
investor-state arbitration added during the 1960s, these agreements
became the standard way for European states to govern relations with
their capital-starved former colonies.
FCNs and BITs, while similar, were not identical. FCNs, which included
provisions about everything from currency convertability to humanitarian
issues, had a number of disadvantages vis-à-vis BITs from the
perspective of capital. For one, they were more difficult to negotiate,
as they touched on more sensitive areas of policy that many states were
unwilling to trade away, and provisions were often directly enforceable
by national courts, making both negotiating partners more hesitant. FCNs
were also sometimes negotiated between highly developed countries,
meaning that legal equality for the negotiating partners was more than
an academic question.
In contrast, BITs were generally concluded between highly developed
European economies and capital-poor, lesser-developed countries, and
were characterized by a formal equality in wording masking a total
asymmetry of power. The United States, negotiating an FCN with a
capital-rich country like the Netherlands, may have hesitated to
sacrifice sovereignty to the whims of foreign investors; no such
scruples would have existed for France in negotiating with Senegal,
given assumptions about the unidirectional flow of investment. In
essence, however, both treaty types were attempts to "depoliticize"
investment after direct Western rule had come to an end with postwar
decolonization. The "Hull rule," formulated in 1938 by US Secretary of
State Cordell Hull in response to Mexico's nationalization of assets
belonging to US citizens, stated that "no government is entitled to
expropriate private property, for whatever purpose without provision for
prompt, adequate, and effective payment." In 1961, this became the
developed-world standard when it was incorporated into the Organization
for Economic Cooperation and Development's (OECD) binding "Code of
Liberalization of Capital Movements." (1)
The United States belatedly moved to adopt the BIT in the 1970s at the
urging of an increasingly militant US business community which, squeezed
at home by high wages and taxation, had come to view the unwieldy FCN
system as a competitive disadvantage vis-à-vis European capital, and had
grown hostile to the Carter administration's stated policy of neutrality
on investment (i.e., indifference toward inward and outward investment
flows). The last US FCN, with Thailand, was ratified in 1967, and a
decade of failed attempts at new agreements followed before the first US
BIT, with Hosni Mubarak's Egypt, was signed into law by Ronald Reagan in
1982. The new US BIT, however, had a number of significant modifications
appropriate to its neoliberal origins.
For one, while the neoliberals in the Reagan administration accepted the
European practice of negotiating narrow agreements with weak,
under-developed partners, the United States saw an additional
opportunity to use its BITs a tool to rewrite international rules on
investment. Conservative legal scholars had, by the late 1970s, revived
expansive interpretation of what constituted "regulatory takings," or
expropriation via regulation, which incorporated the Hull rule and added
that "compensation had to reflect the 'fair market value ...' and be
paid in a form that was 'effectively realizable [and] fully transferable
at the prevailing market rate of exchange on the date of expropriation.'"
As Leo Panitch and Sam Gindin note, this expansive interpretation was
extremely particular to US jurisprudence at the time (and not even fully
accepted within the United States), and yet, through its incorporation
into US BITs and eventually NAFTA, (2) ultimately became the
international standard. Supporters at the time even argued that a major
indirect benefit of BITs was to "lend weight in the international legal
community to the United States' position on various points of
international law and practice"; though what these "various points" were
remained unspecified. BITs proliferated rapidly in the following two
decades (accelerated especially by the lifting of the Iron Curtain),
with the number of active treaties quintupling from 385 at the end of
the 1980s to 1,857 at the end of the 1990s.
The Rise of ISDS
The explosion of treaties brought the massive expansion of
investor-state cases, and the numerous problems sketched above. Active
investor-state cases expanded from a total of 38 in 1996 to over 568 by
the end of 2013. Duplicative and vaguely worded treaties have (by
design) left the door open to various forms of chicanery by clever
corporate lawyers, including the use of shell corporations and liberal
application of most-favored nation clauses to "treaty shop" - i.e., to
bring identical cases simultaneously under a variety of different
treaties in order to increase the chances of a result favorable to the
investor, a practice which leads, inevitably, to directly contradictory
rulings on the same case. Many cases have followed traditional practice
by seeking punitive damages from periphery countries with the nerve to
place citizens' welfare over the interests of investors in the
capitalist core.
This article, a collaboration between The Nation and Foreign Policy in
Focus, lists a litany of abusive lawsuits that multinationals - mostly
North American mining and resource extraction companies - have filed
against Central American countries in response to environmental, health
and safety regulations, including a $300 million lawsuit by the Pacific
Rim mining company against El Salvador for the denial of a mining permit
and a $21 million suit by TECO against Guatemala in response to that
country's attempts to keep down electricity rates. A French company,
Veolia, is currently suing Egypt for a variety of costs incurred during
the revolution, most notably an increased wage bill as a result of
minimum wage hikes.
These core-periphery cases remain a crucial feature of the international
landscape. However, the rise of new multilateral treaties with
investment chapters, such as NAFTA and the Energy Charter Treaty (ECT)
as well as the proposed TPP and TTIP, has meant that Western states are
increasingly being forced to cede sovereignty to a restrictive
international legal regime. UNCTAD, the UN agency that monitors
investor-state arbitration, reported that in 2013 almost half of the
total cases were filed against developed states, mostly in Europe. Many
of the highly publicized cases involve Western respondents being taken
to court for "common-sense" regulation. Among those most often cited are
Philip Morris Asia v. Australia, in which the tobacco giant argued that
Australia's plain packaging laws constituted an indirect form of
expropriation (prompting the Labor government of Julia Gillard to
renounce ISDS); Lone Pine Resources Inc.'s $250 million NAFTA lawsuit
against Canada in response to Quebec's decision to institute a
moratorium on oil and gas exploration under the St. Lawrence River; and
Swedish energy giant Vattenfall's twin suits against Germany over
environmental regulations and the planned phaseout of nuclear energy.
Despite the increasing number of highly developed states named as
respondents, however, it would be a mistake to think that these
encroachments upon sovereignty are somehow an aberration, or symptoms of
a system gone out of control. Regarding the TTIP, transatlantic elites
in business and government have been in lockstep over the necessity of
including strong investor protections in the agreement, despite the fact
that the nominal rationale for these protections in the first place was
to protect investors from biased or underdeveloped legal systems - a
condition obviously lacking in either negotiating partner.
In Europe, opposition has forced some belated concessions to
transparency and brave words from Social Democrat ministers (later to be
walked back, of course), but the principals - Merkel and Malmstöm - have
shown little willingness to substantively engage on ISDS. In the United
States, where TPP is currently the focus of more attention than its
transatlantic sister, the response of Obama and his trade ambassador
Michael Froman - himself a former executive at Citigroup, classmate of
Obama's at Harvard Law, and walking metonym for the identity of
interests of American state and capital - has been refreshingly simple:
complete secrecy when possible, lying through the teeth when not.
This eagerness to trade away sovereign prerogatives like regulation
comes from the fact that elites on both sides of these agreements
recognize that the purpose of the international trade and investment
regime - ISDS included - is precisely this capacity to protect capital
from the threat of democracy. The American state and the European Union
do not exist to protect and expand the regulatory authority of their
respective state institutions per se, but to construct and reproduce an
international legal order conducive to capital accumulation. As Stepan
Wood and Stephen Clarkson argue of NAFTA's investment chapter, but in an
analysis that can and should be readily extended to TPP, TTIP, and a
host of other bilateral and multilateral agreements, this represents an
attempt to create a global supraconstitution - one that "constrains the
area of public authority" and is, once in place, exceedingly difficult
to change. This is an obvious and transparent attack on democracy
understood in anything other than an empty juridical sense.
Christopher Caldwell, a conservative journalist writing for the Weekly
Standard, notes in a perceptive comment that while Cold War capitalism
justified itself in the language of democracy, its most recent iteration
is "most interested in a set of international rules that make countries
more transparent to investors - by making those countries less
answerable to voters." Those of us on the left will counter that Western
piety about rights and democracy - perhaps true intermittently and
incompletely at the core - has long acted as a mystification of the
brute repression and exploitation that has always obtained at the
periphery. What has changed today in the Western world is not capital's
relation to democracy but to the Western state.
The United States' position as the anchor of global capitalism in the
postwar era has always meant, in the words of Perry Anderson, that the
"US state ... [must] act, not primarily as a projection of the concerns
of US capital, but as a guardian of the general interest of all
capitals." For a long time, this meant indulging our capitalist
competitors - Japan and Germany, most especially - in various economic
policies that hurt US capital, but maintained the health of the system
as a whole. While important, this function was largely invisible to much
of the US population, and did little to directly affect or restrict
domestic politics.
Today, as the fortunes of the international investor class are becoming
increasingly detached from national performance, and Cold War pieties
about democracy fade into the background, the United States is again
attempting to safeguard the system for accumulation - by protecting
(often rentier) profits from the threat of democratic action by
populations in the Western world. As the growth of the United States'
terrifying global security apparatus shows, this does not necessarily
mean the disappearance of the state - there will still be computers
attempting to predict when and where trouble may pop up, and a drone
waiting for when it does - but it does mean, if unchecked, the slow
dismantling of those aspects of bourgeois society that let us once tell
ourselves, even if mistakenly, that we lived in a democracy. The only
dignified option is to resist.
Footnotes:
1. Leo Panitch and Sam Gindin. The Making of Global Capitalism (Verso:
New York 2013), 116.
2. Ibid., 277-231.
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