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The Progressive Economics Forum

Free Traders Panic Over German Challenge to Investor-State Dispute-Settlement

In my many years documenting and critiquing the overblown claims of free trade proponents about the supposedly self-regulating efficiency-promoting mutually-benefiting effects of globalization, I’ve encountered some real doozies.  (My Ph.D. dissertation consisted of a critique of the theoretical and empirical basis of neoclassical CGE trade models, and the construction of quantitative models based on alternative theoretical foundations; I’ve never been able to lock up that nerdy side of my personality ever since!)  The more troubled the global economy becomes, despite (or because of) decades of free trade medicine, the more rose-coloured are the predictions of the gains expected from the next free trade deal.  The promised gains from trade are always just around the corner, to be unlocked by new twists in trade negotiations (and proselytized with the help of new twists in quantitative economic modeling).

For example, free-traders’ analysis of the proposed Canada-EU CETA reflects this unending and innovative optimism.  The CGE model cited by official documents to predict mutual gains (including an oft-cited but other-worldly claim of a $12 billion boost to Canada’s GDP) doesn’t just rely on the normal predicted gains from mutual specialization (which in turn are all dependent on standard Walrasian assumptions of full employment, competitive pricing, representative household, and so on).  Those comparative-static gains are small, and don’t grab many headlines.  So this model adds additional levels of hyperbole, based on even more far-fetched assumptions — including large gains from the elimination of non-tariff trade barriers that the authors cannot identify but are assumed to be both significant and removeable, the reinvestment by consumers of their higher incomes in order to drive faster capital accumulation and hence growth, and penetration by Canadian service exporters into European markets as thoroughly as European service providers already serve European markets.  This latter assumption is equivalent to assuming the disappearance of the Atlantic Ocean — which puts a new twist on that old economists’ joke (the one about assuming the existence of a bridge in order to get across a wide canyon … in this case, why not just assume the disappearance of the canyon!).  See my critique of the CETA CGE model and its results in this Canadian Centre for Policy Alternatives report for more of the laughable details.

But even I was taken aback by the lofty language of John Ibbitson’s commentary in the Globe and Mail yesterday on the absolute historical necessity of implementing CETA.  If there’s a gold medal for indominatable faith in the virtues of free trade, he’s got a lock on it, for quite explicitly linking passage of CETA to the very future of free civilization:

“Dark forces are trying to drag the world back into its violent, protectionist past…. War and famine still stalk too many lands…. Against this shadow stands globalization, a universal movement to bring the world closer together by promoting the free flow of goods, people and ideas…. Without CETA, everything is put at risk…. With CETA, everything becomes possible. It’s as simple as that.”

Never mind the ridiculous equation of free trade agreements with the abolition of war and hunger.  (It hasn’t worked out quite that well, so far.)  A more interesring question is why did Ibbitson raise the stakes so dramatically?  His column (and others in recent days) reflects the sudden panic among Canadian free traders over news from Europe that the German government may be unwilling to sign the CETA in its current form because of concerns over its NAFTA-style investor-state dispute settlement (ISDS) mechanism.  ISDS is a parallel quasi-judicial arbitration system which allows foreign companies to sue national governments for measures which are deemed to unfairly undermine the profitability of their investments in that host country.

Canadians are well familiar with this corporate kangaroo court because, unfortunately, we helped to invent it.  Its inclusion as a key feature of regional trade agreements dates back to Chapter 11 of the 1994 NAFTA (which extended arbitration features originally contained in the 1989 FTA between Canada and the U.S.).  Similar ISDS systems are now contained in many regional FTAs, and also in bilateral investment agreements (such as the one the Harper government wants to implement with China — with its unique and anti-democratic minimum 31-year term, thus locking future Canadian governments into its nefarious commitments for decades).

As Scott Sinclair has demonstrated through his detailed, careful research for the CCPA, Canada has been sued far more under NAFTA’s Chapter 11 than its North American neighbours: some 35 times in total, with claims totalling many billions of dollars.  Enough of those claims have been successful (either through awarded judgments or through out-of-court negotiated settlements) to make any politician think twice before passing a measure which could spark this corporate counter-attack.  Indeed, Canada may be the nation most targeted by ISDS actions.  The docket of cases against Canada under Chapter 11 constitutes an offensive grab-bag of corporations’ willingness to put their own profits ahead of the public interest.  On topics as diverse as regulations on harmful gasoline additives, to generic drugs, to handling of toxic substances, to Quebec’s recent ban on gas fracking — in every case, the ISDS system is another potent club with which business can intimindate governments into accepting their economic and political dominance — and punish those which do not.

Only foreign companies have access to this unique redress; there is no appeal system or judicial oversight; the definition of “effective expropriation” that arbirators are willing to consider in awarding damages is wide and getting wider all the time; the governance of the arbitration courts themselves is a growing concern (they are populated exclusively by appointments from a tiny, unaccountable community of professional trade lawyers).  Scott Sinclair’s outstanding and comprehensive submission to the EU inquiry on ISDS paints a very worrisome portrait indeed; I suspect that Scott’s work has been very important in the growing European opposition to this grotesque feature of modern globalization.

The standard orthodox argument is that these things really only affect tin-pot Third World countries (where foreign investors naturally worry about arbitrary or unfair treatment, given undeveloped or corrupt legal systems).  This argument is utterly discredited by real world experience.  Foreign companies do not use these panels because normal legal redress in unavailable.  Rather, they use the ISDS system as another route to restrain government and win redress (a kind of “double jeopardy” for defending governments), in addition to any standard legal appeals they may also file.  If ISDS is only needed in countries where the rule of law is incomplete and unreliable, why are right-wing governments (backed by business) so keen to include them even in free trade agreements among highly developed and supposedly democratic countries?

Canadian alter-globalization activists have been raising the alarm for years on the danger of this parallel, exclusive, and anti-democratic feature of modern free trade.  Others are finally catching on.  In Europe there has been a punchy, grasroots movement against ISDS provisions (including mass mobilizations in Germany and the U.K.), sparked by the legitimate fear that the proposed blockbuster deal with the U.S. (TransAtlantic Trade and Investment Partnership, or TTIP) will include new ISDS powers.  Including ISDS in CETA would be a dangerous precedent in that regard.  Germany’s limited experience with ISDS (it was recently sued by a Swedish company for billions in lost profits resulting from its phase-out of nuclear power) has heightened these concerns.  Until the election of a new hard-right government, Australia refused to sign any trade agreements that contained ISDS measures (but lamentably, the new Abbott government has just signed an FTA with Korea containing ISDS).  Indonesia has said it will reject ISDS in future deals, India is reviewing the practice, and other emerging economies (led by Brazil) are also hostile to the idea (with good reason).

The Harper government is already embarassed and vulnerable because of long delays in reaching final agreement on the CETA text (it’s now 9 months and counting since the elaborate but premature “signing ceremony” last October).  They still hope CETA can help turn the channel on continuing political scandals (with Mike Duffy’s case going to court) and Canada’s flagging economic performance (pretty well no full time jobs have been created in Canada in the last year, and we’ve now fallen well behind the U.S. and other recovering economies).  Ottawa’s political desperation to finalize the CETA will be cranked up a notch in light of the German revelations.  Expect much more hyperbole in coming months that the end of the world is nigh, unless we seal a final deal.  Similar dark predictions were made when Canadians were debating the original Canada-U.S. FTA in 1988 and the outcome was in doubt.  But this time it’s European politicians (warily watching the growing anti-ISDS activism among their own constituents), not Canadian voters, who hold the cards.  And the more desperate the Canadians seem, the more the Europeans will know that they can demand anything they want to seal this deal.

Many free traders (including Ibbitson) are now urging the Canadian government to remove ISDS from the CETA, thus hopefully enticing the Europeans to finally sign off on it.  But this will be harder than it looks.  First, in the years of bargaining that has already gone on, every piece of agreed language reflects a tricky trade-off of competing demands.  Suddenly removing one major clause will likely have unpredictable ramifications for other issues still in play — and possibly some that even been signed off.  Second, trade negotiators everywhere will be looking at the implications of removing ISDS on trade talks in other, more important venues (like the TTIP or the Trans Pacific Partnership).  If the Harper government agrees to remove ISDS from a deal with Europe, how can it possibly justify keeping it in place with a place like China?  It would represent a major retreat on an issue with major ideological importance for free traders (namely, the idea that private sector investment is efficient and neutral and must be priveleged with unique freedoms and powers).  This government will not want to go there.  On the other hand, it has staked so much on signing a CETA as a sign of its supposed economic “leadership”, that the Conservatives will be desperate to solve this problem — and quickly, given the approaching October 2015 election.  (Of course, even implementing a CETA would have no positive impact on Canadian employment by the election, and any eventual effect is more likely to be negative.  The deal’s value to the Conservatives is about optics, not economics.)

A CETA without ISDS is certainly better than one with it.  And the blow to the credibility and legitimacy of this very negative feature of globalization is welcome and helpful.  There are other provisions of CETA that are still dangerous and damaging, like the extension of drug patents (the cost of which would single-handedly wipe out all gains to Canadian consumers from lower tariffs on European imports), and big restrictions on domestic content rules (which are increasingly important to our sluggish job market).  So ISDS is not the only controversy regarding CETA, but it is certainly stimulating some needed and important reconsideration.

I hope this latest development emboldens Canada’s opposition parties to demand the exclusion of ISDS from any proposed CETA — and to question why Canada tolerates it in other agreements (like the NAFTA or the Canada-China investment deal).  And I hope that the growing worldwide concern with the profoundly anti-democratic nature of this practice forces negotiators to abandon it altogether.  That way, trade negotiators could get back to talking about trade, and less about corporate rights.

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Comments

Comment from Andrew Dettmer
Time: July 30, 2014, 5:53 pm

Very incisive. This brief history of ISDS provisions, and their abuse, as well as the pathetic claims of their proponents, lays bare the nonsense which surrounds FTAs wherever they rear their ugly heads.

Comment from Thomas
Time: July 31, 2014, 8:09 am

Unfortunately, this post advances a lot of common misconceptions about the ISDS system.

What Jim and other ISDS critics continually fail to mention is the important role that arbitral tribunals play in global governance. In an increasingly globalized and interconnected world, public policy decisions have implications that reach well beyond national borders. It is thus important that a diverse range of voices can have an impact on shaping the contours of public policy. Arbitral tribunals constituted pursuant to investment and trade agreements are one of these voices that help to set the norms and expectations of public policy.

The mythology propagated by ISDS critics is that tribunals are “kangaroo courts” set up for and by big business. This, of course, is hardly the case. If arbitrators are so biased toward business litigants, then why do well over half of ISDS cases end in decisions in favour of the respondents? Furthermore, critics also forget that the ISDS system is a creature of the states that are part to the treaties that underpin the system. Democratically elected governments can and have laid out how arbitrators should interpret the treaties that legislatures enacted. Witness, for example, the NAFTA Commission’s decision to ensure access to third-party groups such as NGOs to arbitration proceedings through the submission of amicus curiae briefs.

The final myth critics advance is that ISDS is little more than a neo-colonial tool by which rich capital-exporting countries can dictate the public policy agendas of poorer capital-importing states. But Jim’s post here itself contradicts this myth, as we see that advanced countries like Canada have frequently been respondents in ISDS cases.

Ever since the first foreign merchant stepped foot in an alien land and had a dispute with the local authority the question has lingered as to how best to resolve disputes between foreign investors and the governments that host their investments. The contemporary ISDS system is reflective of the ad hoc nature of contemporary global governance and is a creative way in which we can ensure that international public policy is shaped through due process.

Comment from Lesley Durham-McPhee
Time: August 11, 2014, 9:34 am

FTA’s are omnibus bills on steroids. The point is to include something that sounds good for everyone in order to ram through a lot of things that are only good for a very few.

Comment from Paul Pugh
Time: August 17, 2014, 7:25 am

Thomas’ last paragraph sums it up: “Ever since the first foreign merchant. . .” Quite true, and the armies, mercenaries and invasions have followed. All in the interest of the “foreign merchant”. We need defenses against, not more incentives for transnational vampires. Sorry Thomas.

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