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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.

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 by Daniel Becker at Angry Bear, 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.

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Comment Preferences

  •  simply not true. (3+ / 0-)
    Recommended by:
    raincrow, FG, VClib
    regulatory actions that may reduce the value of the investment, even if they are non-discriminatory among firms and taken in the public interest
    that's just not true.  countries certainly can engage in regulation.  they cant do so if its disguised protectionism, though, as was the case with Metalclad.
    •  Obviously countries can engage in regulation (0+ / 0-)

      But some provisions in investment treaties can be interpreted by a particular trade panel to be a creeping expropriation because they aren't constrained to following domestic judicial precedent. Was banning MMT disguised protectionism by Canada?

      The Metalclad case was necessarily aimed at an individual decision on a permit application, so it is not a case of regulation that is non-discriminatory among firms. I would be interested to hear why you think it was disguised protectionism in any event.


      •  Metalclad (0+ / 0-)

        Metalclad was more about NIMBYism than protectionism.  The local government in Mexico didn't want a hazardous waste disposal facility in their backyard, even though it would have meant Mexicans could have had the means to properly dispose of hazardous waste safely rather than dump it in the lakes and rivers like they do now.  Metalclad got screwed over in the process.

        Nevertheless, Johnny's right, investor protections are there to make sure investors don't get taken to the cleaners by governments trying to take their investment or hand it off to one of their cronies.  The intention isn't to prevent regulation in the public interest.  Hopefully the TPP will make that clear.

        Cynicism is what passes for insight among the mediocre.

        by Sky Net on Wed Apr 03, 2013 at 10:57:37 PM PDT

        [ Parent ]

  •  The fundamental flaw with trade agreements (0+ / 0-)

    as currently modeled is that they mobilize capital.  The whole basis of free trade theory is Comparative Advantage (CA), but CA only concerns trade of goods (i.e., output): Mobilized capital moots the entire framework of the model by turning every party to an agreement into a single market rather than two trading markets, and thus reduces all advantage into Absolute Advantage (i.e., a race to the bottom).  CA becomes undefinable.  

    To justify trade agreements, there have to be measures keeping capital within the borders of each party state so that it can shift to industries with the lowest opportunity cost.  With mobilized capital, that doesn't happen: All capital just flows to the member state with the lowest absolute costs, completely destroying other economies.  The people behind agreements like this know that, and that's their purpose: It's basically a way to liquidate the economies of entire nations and steal the money.

    Going faster miles an hour, with the radio on.

    by Troubadour on Wed Apr 03, 2013 at 05:33:06 PM PDT

    •  Well, not really (1+ / 0-)
      Recommended by:

      Capital also flows to countries that don't have free trade agreements with us, and the U.S. is, I think, still the top recipient of foreign direct investment.  I haven't seen a study looking at how FTAs affect the inflows and outflows of capital, but it would seem to be only one of many factors that would lead someone to invest overseas, or in the U.S. for that matter.

      I know you're going for a bit of hyperbole here, but you can't really say that any economies in the world have been destroyed or liquidated.  Foreign investment has helped lots of countries to develop and has pulled hundreds of millions of people out of poverty around the world.  The people behind these agreements tend to be from government departments and economic think tanks.  They have zero interest in harming other economies and personally benefit very little from them, other than having good jobs with great travel opportunities.

      Cynicism is what passes for insight among the mediocre.

      by Sky Net on Wed Apr 03, 2013 at 05:49:26 PM PDT

      [ Parent ]

      •  That's a hard claim to sustain given (0+ / 0-)

        the extreme trade deficits we always seem to run in perpetuity following agreements that mobilize capital.  A trade deficit is not an abstraction - it's net money flowing from one economy to another.  We've been hemorrhaging money to China ever since free trade was opened up with them, precisely because only Absolute Advantage matters under such a regime, not Comparative Advantage.  

        Our manufacturing sector was liquidated and the money went into establishing China's manufacturing sector, which was of course owned by the same people but without having to share any of the money with American workers.  But under free trade theory, that money should have gone into setting up an alternative industry in the US that would have had a lower opportunity cost.  That didn't happen.  We've simply lost the money that was once held by US manufacturing.

        Going faster miles an hour, with the radio on.

        by Troubadour on Wed Apr 03, 2013 at 05:59:27 PM PDT

        [ Parent ]

        •  trade deficits (1+ / 0-)
          Recommended by:

          Actually if you look at the numbers (I use USITC's Dataweb), you'll see that we have trade surpluses with 13 of our 20 FTA partners, including some of our biggest trade surpluses.  In many cases, like with Peru and Chile, we went from trade deficit to trade surplus, or from small surplus to large surplus, soon after the FTA went into force.  No surprise, as in many of these agreements it's the other country that lowers trade barriers far further since ours are already pretty low.  Obviously we have some pretty big trade deficits with Mexico and Canada, but you can easily make a case that would have happened without NAFTA.

          We don't really have free trade with China, other than both of us being members of the WTO.  We have pretty open trade with the rest of the world, though our remaining trade barriers are directed against the products of poor developing countries like apparel and agricultural products.

          Yes, manufacturing's taken a hit in the U.S., at least the employment side of it.  Part of that is due to trade, but part also to the more widespread use of machines instead of human labor.  A lot of that switch would have happened anyway had we stuck with higher trade barriers.  Nevertheless, we're still a manufacturing power, manufacturing more than we ever have before, just using fewer employees to do it.  Kind of like our agricultural sector.

          I'm sure you've heard the stories as well of companies "reshoring" manufacturing back in the U.S., partly due to the shale gas revolution, though that seems to be overplayed.  Don't count manufacturing out yet.

          Cynicism is what passes for insight among the mediocre.

          by Sky Net on Wed Apr 03, 2013 at 06:29:54 PM PDT

          [ Parent ]

          •  Under free trade theory (0+ / 0-)

            there shouldn't be any large-scale net movement of capital across borders, but not only has such movement been significant, it's been devastating.  The money in industries that fail to compete is supposed to be reinvested in new domestic industries with lower opportunity costs, but that didn't happen - both the jobs and the money that funded them went overseas, most of them permanently.  

            This is not even "trade", but a zero-sum redistribution of wealth from one country to another and from the worker base of one country to its capitalist class.

            Going faster miles an hour, with the radio on.

            by Troubadour on Wed Apr 03, 2013 at 06:42:04 PM PDT

            [ Parent ]

          •  I made this very point in a post linked above (1+ / 0-)
            Recommended by:

            Most FTAs have seen us improve our trade balance, but most are small potatoes.

            Using machines instead of human labor can also be substantially about trade, too - i.e., it's the only way to compete against low-cost labor. That was Adrian Wood's argument back in 1994.

            We need to see more systematic evidence about the wages paid in reshoring. Jeff Faux reported in The Servant Economy that GE used to pay $22/hour in Louisville, but that it reshored jobs there at $13/hour. If that's the norm (and I don't know if it is; that's why I say we need more evidence), then reshoring is not that great a development.

            •  Surpluses (0+ / 0-)

              Most of our trade surpluses are relatively small, but most people don't know that we have surpluses with more countries than we have deficits with.  However, the trend is clear.  Trade agreements tend to lead toward stronger US exports and resulting smaller trade deficits and even trade surpluses.  Mexico's the obvious exception.

              Regardless, I don't judge FTAs by surpluses or deficits.  That's not the right scorecard.  More goods and services exports is the goal, but more imports are good, too.  The TPP is a chance to make trade work better in the region.

              Cynicism is what passes for insight among the mediocre.

              by Sky Net on Wed Apr 03, 2013 at 10:51:35 PM PDT

              [ Parent ]

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