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Trade Is Good, Using Trade to Weaken Foreign Investment Is Not

Free traders have long promoted an expansion of the rights of the citizens of one nation to buy and sell to one another. The old GATT (General Agreement on Tariffs and Trade) achieved much in reducing fees on imports and exports, but protectionists shifted to non-tariff barriers which have proven much harder to discipline. GATT developed rules that limited such protectionist efforts: the PPM (Processes and Production Methods) which specified that it was the item in trade—not the process or the production method used to make it—that could be restricted. Thus, we could limit a specific chemical or food but not the technology used to yield that product. Another was the SPS (Sanitary and Phytosanitary) rule which allowed restrictions on health grounds that could be scientifically validated.

The role of these rules was to create a barrier between the internal policies of a nation and the products it sought to export. Trade policies were not intended to control or interfere with the sovereign power of a state to regulate its internal affairs. Some state policies could restrict trade—production with slave labor, for example—but the tone of trade policy was that nations had different cultures, different values and existed at very different levels of economic development. To impose requirements on poorer countries that they could not afford was unconscionable.

But that was then; now “free” trade proposals routinely impose often very restrictive requirements on trading partners. The shift from the relatively weak GATT to the far more powerful World Trade Organization that could limit trade in more expansive ways when its provisions were violated, encouraged many non-trade related interest groups to view trade as a vehicle by which to advance their goals internationally.

Nations, especially poorer nations, need to trade and, thus, are susceptible to trade-related threats by such non-trade interested groups. That intrusion of non-trade features into trade agreements began with NAFTA, the North American Free Trade Agreement, which included as “side agreements” both labor and environmental provisions. These additions were included for domestic political reasons; they were thought necessary to gain acceptability for NAFTA in Congress.

CEI argued that trade was complicated enough without adding side-agreements, that these provisions might well limit trade and, more generally, third world economic development. We also noted that such economic development was a more powerful path to environmental and labor improvements. We argued that allowing interest groups in the U.S. and other major powers to force weaker nations to accept costly growth-inhibiting domestic regulations.

Yet, that trend has continued since NAFTA with each trade agreement being used to strengthen these non-trade related elements (no longer mere side-agreements). The most recent proposed 12-nation Trans-Pacific Partnership (TPP) trade agreement goes further, modifying another non-trade provision, the Investor-State Dispute Settlement (ISDS) procedure. That procedure was added into trade agreements around the time of NAFTA.

The ISDS procedure provides firms with the right to seek restitution from a nation in which it has elected to do business which, it believes, has harmed its investment. Note this provision strengthens the recourse of firms to avoid investments in nation states with a record of regulatory predation against foreign investors. It does so by allowing a firm in one political jurisdiction (which has agreed to that treaty) the right to challenge a specific policy of another country in which it invests (when that nation too is a party to that treaty). They can do so by arguing that the nation’s policies violate the legal protection owed it as an investor.

The TPP agreement modifies the rules of ISDS procedures that prevailed in prior trade agreements by including a provision which strips one industry—tobacco firms—of this right.

Among the grounds, the ISDS allows a firm to bring a dispute to an ISDS arbitration panel for reasons that include “discrimination, uncompensated expropriation of property, denial of justice in the adjudication procedure, right to transfer capital,” or “when the nation has breached its international obligations, whether by discriminating against a foreign investor, expropriating the investor’s property, or violating the investor’s ‘customary international law rights.’” That right is given to all investors of the Parties to the treaty.

Except, of course, now for tobacco firms.

But such “except for…” provisions have long been a successful strategy for strategic changing the intent of a law or regulation. The ISDS concept was created because so many nations had taken action against some foreign investors, counting on the firm capitulating, given its non-transferable investments in that nation. Business interests pushed for its inclusion in trade agreements, believing that would increase investment protection. Yet, protections that are obtained politically, can also be withdrawn politically, as tobacco firms now fear from the proposed TPP agreement.

Of course, tobacco has long been a demonized product; certainly, this stripping away of protections would never be applied to other firms? Past experience suggests that this is naïve; many products, technologies and industries are viewed by pro-regulation, anti-business NGOs as “like tobacco”—industries that should be restricted or even destroyed. Candidates include prepared food companies, GMO firms, fast food chains, soft drink manufacturers, and, of course, fossil fuel firms.

Indeed, exactly that approach of attacking first tobacco, then arguing that the social harms of other products are like (or even worse) than those of tobacco, and thus lobbying to extend the restrictions to other business sectors is common in the United States. A very real risk is that this TPP provision would open the door to efforts to strip other industries of their current international investor protection. 

ISDS agreements can serve valuable purposes, providing firms risking investment in other nations a degree of protection. Yet, they need not be tacked on to trade agreements; indeed, the U.S. is a party to 51 ISDS accords. And, as mentioned, this provision is included in NAFTA, which provides TransCanada the opportunity of challenging the Obama administration over its blocked investment in the Keystone XL pipeline. Once one pariah industry has lost this protection, it is all too likely that other NGOs will seek to strip it away from others. And since green NGOs have long argued that fossil fuels threaten vastly more people than cigarettes, global energy firms should be concerned.