A Stealth Attack on Democratic Governance

It takes quite a “trade” agreement to undermine financial regulation, increase drug prices, flood us with unsafe imported food and products, ban Buy America policies aimed at recovery and redevelopment, and empower corporations to attack our environmental and health safeguards before tribunals of corporate lawyers. Trade, in fact, is the least of the Trans-Pacific Partnership (TPP).

Backdoor deregulation and imposition of new corporate investor and patent rights via trade negotiation began in the 1990s with the World Trade Organization (WTO) and North American Free Trade Agreement (NAFTA). But the TPP now threatens a slow-motion stealth attack against a century of progressive domestic policy. At stake is nothing less than a democratic society’s ability to regulate a market economy in the broad public interest.

Under the framework now being negotiated, U.S. states and the federal government would be obliged to bring our existing and future policies into compliance with expansive norms set forth in 26 proposed TPP chapters. These include domestic policy on financial, health-care, energy, telecommunications, and other service-sector regulation; patents and copyrights; food and product standards; land use and natural resources; professional licensing and immigration; and government procurement.

The obligation that signatory countries “ensure conformity of their laws, regulations and administrative procedures” to these terms would be strongly enforced, including by our own government. Failure to do so would subject the U.S. to lawsuits before dispute-resolution tribunals empowered to authorize trade sanctions against the U.S. until our policies are changed. Attacks against our non-trade laws could also be launched by any “investor” that happens to be incorporated in one of these countries. The TPP is being designed so that other nations—China, Japan, you name it—could join in the future.

We know this much only thanks to a combination of text leaks and grilling of negotiators. As trade lawyer Gary Horlick, a former U.S. trade official with four decades in the game, recently noted at a conference on global business: “This is the least transparent trade negotiation I have ever seen.” In fact, a recent text leak revealed that the parties were required to sign a memorandum of understanding that forbids the release of negotiating documents for four years after a deal is done or abandoned.

Such an extreme proposal could only get this far under cover of unprecedented secrecy. Executive-branch trade officials and corporate allies are making important policy decisions that could affect us all in myriad ways, without public access to any documents or details or input from members of Congress serving on key committees whose jurisdiction is directly implicated. The involved governments have ignored a global “release the texts” campaign led by unions and civil-society groups. This is especially appalling for the Obama administration, given its stated priority of enhancing government transparency. The opaque process has contributed to a near-total absence of press coverage.

Meanwhile, more than 600 business representatives serving as official U.S. trade advisers have full access to an array of draft texts and an inside role in the process. The strategy is to squelch informed debate until a deal is signed and any alterations become difficult.

The implications for the principle and practice of democratic governance are dire. Not only would a vast array of decisions affecting our daily lives be made in venues where we have no role, but even if the U.S. wanted to make changes to the adopted pact it would require consent by all signatory countries. Thus, accompanying the imposition of specific retrograde policies would be an unprecedented shift of power toward locking in corporate rule insulated against the normal means of democratic accountability such as elections, advocacy, and public protest.

If this description of the proposed TPP sounds far-fetched, consider the consequences of trade pacts sold under the appealing brands of “trade expansion” and “free trade.” Canada is threatening key aspects of the Dodd-Frank financial—reregulation package as violating NAFTA. The European Commission staff contends that the proposed financial-transaction tax conflicts with European WTO commitments. Billions in U.S. stimulus money leaked offshore because of limits on Buy America procurement preferences already established in past trade pacts. Last year alone, the WTO struck down U.S. dolphin-safe tuna and country-of-origin meat labeling as well as the ban on candy-flavored cigarettes, which is aimed at curbing youth smoking, as violating U.S. trade obligations.

Now, the TPP threatens to combine the most damaging elements of past pacts and expand on them. With the later addition of Japan, China, Russia, Indonesia, and other Pacific Rim nations, it could encompass many of the world’s largest nations. This is precisely the vision that TPP former U.S. trade officials and corporate lobbyists presented to the Obama transition team in their ultimately successful push to get the new administration engaged in these talks.

 

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Not surprisingly, the idea for a Pacific region NAFTA-on-steroids originated in the alliance between the George W. Bush administration and U.S.–based multinationals eager to increase offshoring while rolling back domestic consumer—safety, financial, environmental, and other safeguards. After a pause (ostensibly premised on Obama’s establishing his own trade policy), the new administration renewed negotiations. The operating text, though, is the one drafted by Bush officials, which shouldn’t come as a surprise since so many of the career trade officials were involved with NAFTA and the original TPP negotiations. 

The fact that the TPP is not mainly about trade or the countries now at the negotiating table is also demonstrated by the fact that the U.S. already has bilateral free-trade agreements with four of the nations engaged in the process (Australia, Singapore, Chile, and Peru) making up about 80 percent of all TPP nations’ combined gross domestic product. These existing deals eliminate most traditional trade barriers, like tariffs. Given the limited opportunity for expanded U.S. exports, it is worth examining more closely who stands to benefit from the TPP.

Investor Rules to Facilitate Offshoring and Undermine Domestic Law

Past U.S.–sponsored agreements have included a set of extreme foreign-investor rights, and U.S. negotiators are looking to use TPP to expand these terms. This package includes many special protections that incentivize offshoring of U.S. jobs, by eliminating risks typically associated with relocating to developing countries with rock-bottom wages.

Under the U.S. investment model for free-trade agreements, relocating firms are guaranteed a “minimum standard of treatment” that extends beyond being treated the same as local firms. They also are granted new rights to obtain compensation from host governments for loss of “expected future profits” due to health, environmental, zoning, labor, or other policies. Compensation can be obtained for indirect or “regulatory” takings, a concept championed by conservatives but generally not recognized under the robust property rights provided by U.S. law.

The U.S. proposes that this chapter also forbid host countries from limiting capital transfers. This removes a prospective complication for U.S. firms considering relocation and poses a risk to global financial stability. In an era when even the International Monetary Fund has reversed its traditional opposition to capital controls, imposing such limits via a trade pact is both disingenuous and reckless policy.

The chapter also would establish new rights for foreign investors to acquire land, natural resources, factories, and more. All performance requirements, including domestic content rules, would be forbidden. This ban on signatory countries using this key industrial policy tool would be absolute, not just applied to investors from those nations.

These extraordinary rights would also be provided to foreign firms investing in the U.S., including subsidiaries of, say, Chinese firms incorporated in Vietnam. This raises concerns about our ability to determine what sorts of investment from what sorts of countries are best for the U.S., and to regulate foreign firms operating here so that they conduct business on equal terms with domestic firms.

Most stunningly, these new rights in a public treaty could be privately enforceable. The U.S. is pushing for inclusion of “investor state” enforcement. This little-known mechanism allows foreign firms to bypass domestic court systems and directly sue governments for cash damages (our tax dollars) over alleged violations of their new rights before U.N. and World Bank tribunals. These bodies would be staffed by private-sector attorneys who rotate between serving as “judges” and bringing cases for corporations.

 

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Conservative critics of the International Criminal Court’s jurisdiction in human-rights cases have been curiously silent about this more substantial assault on our sovereignty and judicial system. The scope of domestic policies that would be exposed to such attacks is vast, including government procurement decisions, regulatory permits, intellectual-property rights, and regulation of financial instruments such as derivatives.

Avoiding domestic courts not only eliminates major risks for firms seeking to relocate but inclusion of this regime in past pacts is establishing an alarming two-track system of justice. Chevron is now asking one of these corporate tribunals to invalidate 18 years of U.S. and Ecuadorian court judgments that resulted in the company being ordered to pay for the cleanup of horrific Amazonian toxic contamination. In other trade courts, Philip Morris International is attacking Australian and Uruguayan cigarette plain-packaging policy.

Under similar NAFTA provisions, more than $350 million has been paid to investors by governments in disputes over such issues as toxic-waste-dump permits, logging rules, and bans on toxic substances. Currently, there are more than $12 billion in pending corporate attacks on environmental, transportation, and public-health policy under existing U.S. free-trade agreements—and the proposed TPP would create vast new opportunities for litigation. Even when governments win, they waste scarce budgetary resources defending national policies against these corporate attacks.

Buy America Procurement Banned

The pact’s procurement chapter would require that all firms operating in any signatory country be provided equal access to U.S. government procurement contracts over a certain dollar threshold. These rules constrain how our national and state governments may use our tax dollars in local construction projects and purchase of goods. They also limit what specifications governments can require for goods and services and the qualifications for bidding companies. Requiring that electricity come from renewable sources or that uniforms meet sweat-free standards could be forbidden. Rules excluding firms that refuse to meet prevailing wage requirements or that are based in countries with terrible human- or labor-rights records could be challenged.

Effectively, these rules eliminate important policy tools for job creation, development of green-economy capacity, and the building of demand for preferred business practices. Even in strictly commercial terms, this is lunacy. The U.S. procurement market in 2010 was more than seven times that of all the TPP countries combined. Thus, in exchange for opportunities for some large U.S. firms to bid on a smaller pool of foreign contracts, we would be trading away the ability to ensure that billions in U.S. government expenditures are channeled back into our economy to create jobs and foster our own cutting-edge industries.

Backdoor Financial Deregulation

U.S. trade officials engaged in the TPP are seeking to extend older trade deals’ ban on capital controls, even as Massachusetts Representative Barney Frank, the ranking Democrat on the Financial Services Committee, has demanded a review of whether the past pacts require changes. U.S. negotiators are also pushing for additional limits on domestic financial regulation. These constraints would undermine policies being implemented by many countries to get banks, insurance, and securities firms under control.

This includes a prohibition on bans of risky services and financial products. The provision would enable litigants to challenge purely domestic policies that set limits on financial firms’ size, the types of services a firm may offer, and the legal entity through which a service or product may be provided. This would, for instance, foreclose many policy tools aimed at dealing with “too big to fail” banks and shadow banks, limiting risk via firewalls or requiring derivatives only be sold on exchanges. These would be absolute bans on certain forms of regulation that countries would be forbidden to “adopt or maintain,” not requirements to treat domestic and foreign firms the same.

Higher Medicine Prices

The notion that any free-trade agreement would expand monopoly rights for “rent seeking” (excess profits) would induce Adam Smith and David Ricardo to rotate in their graves.

But that’s exactly what our current trade policy does, and the TPP is poised to go further. According to a study conducted by the University of Minnesota, U.S. drug prices increased $6 billion when WTO patent rules required the U.S. to change its patent term from 17 to 20 years. The TPP would be even more of a gift to drug companies at the expense of consumers and taxpayers.

Leaked negotiating texts show that the TPP would extend monopoly controls over drug-safety testing data, which could cut off millions of people from access to life-saving drugs. (Even when a patent monopoly ends, lower-cost generics cannot be marketed because the safety data is withheld.) A majority of target TPP countries are developing nations with significant HIV/AIDS rates, so this is a particularly depraved proposal. Thanks to a leak, we know that U.S. negotiators are proposing to roll back even the modest trade-pact access to medicine reforms obtained during the George W. Bush administration.

The U.S. proposal could also undermine the drug formularies of Australia, New Zealand, and other countries that have successfully controlled drug costs. This could also boomerang home. State officials participating in the development of formulary rules for Medicare and Medicaid have reacted with alarm about how this proposal could undermine hard-won gains in the epic health-care reform battle.

And There’s More …

Even given the lack of access to actual negotiating texts, we know that the scope of domestic-policy space that could be foreclosed by this deal is immense.

The pact’s coverage of the service sector would include basically anything you can’t drop on your foot, from an education to health care. The rules would not be limited to trade in services but would limit how we can regulate foreign-owned service firms operating here, including critical sectors like health, energy, education, water, and transportation. Even local land use and zoning policy is implicated.

These rules would even cover the movement of natural persons across borders to deliver a service, otherwise known as immigration and visa policy. Some past U.S. trade deals have guaranteed specific numbers of U.S. work visas. Other countries are demanding the same in the TPP. Whatever your views of these issues, it’s a bad idea to make immigration policy behind closed doors as the byproduct of a trade pact whose terms cannot be altered without consent of all parties.

Several chapters impose limits on product environmental, health, and safety standards. The U.S. has proposed a new “regulatory coherence” chapter that would require each signatory country to establish an agency to do cost-benefit analysis of regulation. Constraints on food and product safety and inspection are also being negotiated, including a requirement that the U.S. accept imported food that does not meet our safety laws.

 

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Consider seafood, much of which is imported from TPP target countries. Before WTO and NAFTA, half of the seafood consumed here was imported. Today that figure is 84 percent, while the Food and Drug Administration tests only 0.1 percent of it. Democratic Representative Rosa DeLauro of Connecticut uncovered that, even with lax inspection, last year the FDA issued numerous import alerts for Vietnamese seafood detained for misbranding, E. coli, antibiotic residues, microbial contamination, and other serious safety problems. The TPP could undercut even our current safety rules.

The same provisions deemed to be a threat to Internet freedom and innovation found in the discredited Stop Online Piracy Act are lurking in the TPP. This includes a requirement that each country establish large mandatory fines for unintentional, noncommercial, small-scale copying of Internet content protected by copyright. Also forbidden would be circumvention of digital locks, even for lawful uses such as playing a DVD that you purchased and run using Linux. As well as exposing us all to personal liability, these measures could stifle competition, given the threat of multimillion-dollar lawsuits.

Why Obama, Why Now?

All this invites the obvious question: Why are Obama trade negotiators pushing this deal now? Certainly the White House policy team does not want international preemption of the domestic agenda it is fighting to enact. Nor must the Chicago re-election campaign team be celebrating a deal that will infuriate its base while benefitting only Obama’s most implacable corporate opponents.

The hopeful explanation is ignorance made possible by the elite fealty to a failed conception of free trade and the extraordinary secrecy that has forestalled the external alarms that might otherwise sound. Those in the U.S. government positioned to know the expansive non-trade policy implications are also those who support this approach, including many Clinton-era retreads connected to the passage of NAFTA.

Yet if these talks result in the adoption of a final agreement based on the framework now under negotiation, it could commit our country to a devastating future path.

The only good news is that past attempts to use the Trojan Horse of trade negotiation to impose and lock in massive deregulation have been foiled. Citizen activism and publicity derailed the proposed Free Trade Area of the Americas in 2005, the aborted Multilateral Agreement on Investment in 1998, and the original attempt to negotiate a free-trade area for Asia-Pacific Economic Cooperation nations, many of which are parties to the TPP. Now, as then, the public, policy-makers, and the press can help derail these deceptive attempts to undermine democracy by awakening to the threat before it is too late. 

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