Honduran coup-plotters hurl racial insults at President Obama

Cadejo4 at DailyKos has the full and completely starling story, and BoRev reacts to the racist comment. And Das Racist has a suitably mind-numbing song to accompany the reading...

Panamanian Firm Beats U.S. Taxpayers

The Wall Street Journal reports that Starr International Co., a Panamanian firm led by former AIG head Maurice Greenberg, has prevailed in litigation against AIG.

A little background is necessary. Over several decades, Greenberg helped convert AIG from a sleepy insurance company with origins in pre-revolutionary China into a world-threatening leviathan, which expanded into insuring collateralized debt obligations via credit default swaps. The firm became too interconnected to fail, and when the value of the underlying mortgage-backed securities it was insuring went south, AIG ended up owing money to all sorts of counterparties all over the U.S. and global economies. Greenberg was also deeply involved in policy matters, serving as midwife to the WTO's Financial Services Agreement.

Now U.S. taxpayers, as the primary shareholders in AIG (Greenberg's SICO is the second largest) are trying to get capital back on the firm's books so that the firm and its counterparties can begin to return to health and the taxpayers can get their money back, with some return.

And, then there's the interesting part...

As we reported in March, under Greenberg, AIG maintained affiliations with a variety of offshore entities,  including Panama's SICO, often to provide reinsurance and other services. Part of SICO's role in the division of labor was to operate a compensation pool for top AIG staff, who would get rewarded for good behavior with AIG stock held by SICO. As the WSJ reported:

The trial was basically a dispute over tens of millions of shares in AIG held by Starr but used for decades when Mr. Greenberg was AIG's chief executive to fund a long-term compensation plan for AIG employees. Mr. Greenberg left AIG in 2005 while it was under investigation for its accounting. When he left, the program ended and Starr later sold off some of the shares; AIG maintains it should control the shares.

The verdict is a setback for the insurer, which has been hungry for funds to repay a federal bailout in September that rescued the storied firm from the brink of bankruptcy. The government has made as much as $173.3 billion in aid available to AIG.

Greenberg's victory not only pushes AIG (and us, as its owners) farther away from financial health, it also shows the power that a Panama-registered company can wield in the U.S. court system, in a case against a government-owned company.

Just imagine what such a firm might be able to do if it had even greater rights under the Panama FTA. Earlier this year, we asked you to contact your member of Congress and let them know that these foreign investor rights should be stripped from U.S. trade and investment agreements. With Greenberg's latest success against U.S. companies and taxpayers, now's a good time to let them know that this issue hasn't gone away! Congress should "just say no" to the Panama FTA, and "just say yes" to positive trade legislation like the TRADE Act.

We'll continue to follow the AIG-SICO story, which is not yet over. AIG is suing the U.S. taxpayers for back taxes it owed related to its (and SICO's) Panamanian operations. And, will AIG and other mega corporations continue to push for the Panama FTA, which grants them rights that go beyond U.S. law? Stay tuned.

Tantamount To, Equivalent To

One of the most controversial provisions in trade and investment agreements is the following provision, taken from CAFTA: "Article 10.7.1: No Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization (“expropriation”)..." CAFTA goes on to say:

The Parties confirm their shared understanding that:...
3. Article 10.7.1 addresses two situations. The first is direct expropriation, where an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure.
4. The second situation addressed by Article 10.7.1 is indirect expropriation, where an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure.

(a) The determination of whether an action or series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that considers, among other factors:

(i) the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred;
(ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and
(iii) the character of the government action...

Virtually every NAFTA investor-state case has claimed that certain policies were "tantamount to" an expropriation (the language was changed to "equivalent to" in the post-NAFTA period). We did a report that touched on some of these issues back in 2005. As we wrote then:

NAFTA’s investment rules give foreign investors new rights that go significantly beyond the rights available to U.S. citizens or business under the Takings Clause of the Constitution. In the 1993 Concrete Pipe case, the U.S. Supreme Court held that “our cases have long established that mere diminution in the value of property, however serious, is insufficient to demonstrate a taking.” In contrast, NAFTA Chapter 11 tribunals have defined compensable takings as “the incidental interference” with the use of property that need only cause a “significant” or “substantial” impairment of an investment. Thus, in the Metalclad case, a municipality’s denial of a construction permit to a U.S. company seeking to expand an existing toxic waste facility on land it had purchased was found to be an indirect expropriation requiring compensation under NAFTA. Rather than fixing the problems caused by NAFTA’s loose rules and troubling case history, the USTR has merely made cosmetic changes in the new FTA’s foreign investor protection provisions. For instance, one “fix” the USTR attempted in CAFTA was to eliminate the phrase government actions “tantamount to” an expropriation that appears in the NAFTA text as activity requiring compensation. However, that change is merely cosmetic. The new FTAs still require compensation for “indirect” expropriations, which is the operative term NAFTA panels have relied on in finding regulatory takings. Indeed at least two NAFTA panels have held that the “tantamount to” clause in NAFTA is redundant and does not expand upon the scope of NAFTA’s terms requiring compensation for direct and indirect expropriation. The Bush administration could have conformed the new FTAs to U.S. law which, among other things, requires the demonstration of a near total takings of the property as a whole before a regulatory takings is found, but failed to do so. The end result is that foreign firms are still being granted substantive and procedural legal rights that go beyond what is provided in the U.S. Constitution as interpreted by the U.S. Supreme Court.

These provisions not only expose governments to liability that they often would not have under domestic law with domestic investors, but can also chill policy initiatives. As we said in our report:

A March 16, 2002, article in the Toronto Globe and Mail surprised Canadian health officials who were preparing to issue a new regulation on cigarette labeling. The newspaper reported that Philip Morris, the U.S. tobacco giant, was considering a Chapter 11 investor-state suit under NAFTA because of a proposed public health rule that would ban the words “light” and “mild” from cigarette packaging, terms that have misled smokers into believing that they were using a safer product.

In a submission to the Canadian government, Philip Morris argued that the proposed ban of the descriptors “light” and “mild” would be “tantamount to an expropriation” of its tobacco trademarks containing those words in violation of NAFTA Article 1110, because it had invested millions “developing brand identity and consumer loyalty.”...

While Philip Morris has told Public Citizen that it is not moving forward with the threatened NAFTA case, the Canadian public health legislation is not moving forward either. A spokesperson for Physicians for a Smoke Free Canada thinks that the Philip Morris threat as well as threatened domestic court action has played a role in stalling passage of this important public health policy.

What Happens in Guatemala...

One of the first CAFTA investor-state cases is underway, and it has been brought against Guatemala by a U.S. company (Railway Development Corporation, or RDC) that won a contract to take over operation of Guatemala's privatized railroad system in 1996-97. (As Sarah reported, another case has been launched against El Salvador related to mining issues.) In 2006, Guatemala's government initiated the process of declaring the contract "injurious to the interests of the state," known in Spanish as a "declaración de lesividad."

The company alleges that this administrative proceeding, and the events that it set off (loss of other contracts, a fall-off in police protection of the railway, etc.), violate the company's CAFTA rights, including provision of a "minimum standard of treatment" (Article 10.5), national treatment (Article 10.3), and protection against measures "equivalent to expropriation" (Article 10.7). A great part of their case rests on the observation that the Oscar Berger administration appeared to be on the side of Guatemalan sugar oligarch Ramon Campollo, who wanted to take over part of the railroad concession that RDC had not built out.

RDC is asking for Guatemalan taxpayers to compensate it over $64 million, which is the equivalent of the total annual income of over 26,000 Guatemalans. Guatemalan papers report that it has already cost that country's taxpayers (among the poorest in the hemisphere) hundreds of thousands of dollars to defend the case.

I've scanned the "Claimant's Memorial on the Merits," which is basically a detailing of RDC's version of the events leading up to and following the declaration. Here are some of my initial reactions to the document:

• The lesividad declaration is a long-established practice within Spanish administrative law, dating back to the 19th century. It is on the books in Guatemala and other Latin American countries with Spanish legal systems. Indeed, in the memorial, RDC surveys a long history of "lesivo" resolutions brought by the Guatemalan government, dating back to 10 years prior to RDC's initial negotiations with the government. Presumably, some of these many cases were also brought against Guatemalan nationals. In other words, RDC should have known what it was getting into when it invested in a country that had lesivo declarations as part of their legal system.
• Lesivo declarations could be seen as blunter form of backstop regulation, and an alternative to other measures, such as expropriation or renegotiation of contracts. So, to the extent that RDC's claim is successful in arguing that lesivo declarations violate CAFTA's minimum standard of conduct, CAFTA can be seen as pushing deregulation, even when domestic regulations are used against both domestic and foreign corporations.
• It is worth pointing out that RDC's business model is thoroughly wrapped up with pushing railway deregulation and privatization, often in developing countries. This is a choice that RDC makes, to invest capital in developing nations rather than at home. There's a simple reason for this: companies can often make higher returns in developing nations, for minimal investments with minimal regulatory oversight. According to textbook economics, this higher return compensates investors for taking the higher risks associated with investments in developing nations. Heads, you make a killing; tails, your investment goes under. It should not be the role of public policy (such as trade pacts) to remove these risks - after all, the home country public gets none of the upside if the investment works out. Again, if RDC didn't want to deal with lesivo declarations, it could have invested in a country that didn't have them on the books, rather than call on the nanny state to bail it out when it got into trouble.
• Part of RDC's concession was the exclusive right to use at least five different "routes" in Guatemala. While RDC indicated that they would build out all the routes, they decided (as per their apparent contractual rights) that business conditions did not favor building out any but one of the routes. The Berger government, and Ramon Campollo, for whatever their faults, wanted to build out the other routes. RDC didn't want to build them out, and didn't want to let others build them out. Instead, they wanted to sit on the route and let nothing happen. This is rentier type behavior if I have ever seen it. This is an important part of the backdrop to the CAFTA claim, and one that should serve as a warning sign to governments that auction off exclusive rights to use privatized assets.
• RDC gripes about some of its contracts falling through, and faulty police protection of their railway installations following the lesivo resolution. While the fall out does sound rather unpleasant, the question remains: how much liability should the state have for actions that are indirectly caused by government action?
• This case illustrates how FTAs bind the room for maneuvering of successive governments, and thus frustrate democracy. RDC signed the original contract with the civil war-ending Alvaro Arzu government, tangled with the right-wing Berger government over the lesivo declaration, but then decided to bring the CAFTA case against the (relatively) progressive government of Alvaro Colom, in office since early 2008. Why should the Colom government, not to mention the Guatemalan people, be liable for the behavior of the man - Oscar Berger - that they defeated in the last election?

Finally, a wide number of bilateral trade and investment cases have dealt with this notion that measures can be "tantamount to" or "equivalent to" expropriation (or be an indirect expropriation) without actually being an expropriation. I'll run an update on this later today or tomorrow, with some of my notes on the recent Glamis ruling.

EOT Prize for Best Coverage of Honduras Coup in a Blog Goes to...

...The folks at BoRev.Net. Melvis may have left the building, but democracy supporters want the fair trader back!

Chilling Policy While the World Burns

Team Obama made some news recently when they went out of their way to criticize a (relatively modest) border adjustment tax measure included in the Waxman-Markey climate legislation as part of last-minute negotiations with Ways and Means trade subcommittee chair Sander Levin (D-Mich.).

For the uninitiated, a border adjustment tax in the climate context is a charge placed on imports from countries that do not have comparable carbon emission reduction schemes. It's intended to ensure that U.S. industries do not lose competitiveness as a result of a domestic cap-and-trade scheme, and that the carbon reduction in the U.S. is not canceled out by an increase in emissions in say China as a result of increased, cap/trade-induced offshoring to that country.

It's political commonsense that a strong border adjustment tax is about the only way you're going to get Midwestern (and many others besides) senators to vote for a climate bill. At a time of high unemployment and manufacturing job loss, it's pretty difficult to ask members to vote for a bill that (without adequate green industrial policy and trade measures) will make matters worse.

That is why it is so surprising that Obama would choose to criticize this measure on the basis of WTO compatibility, as Lori explained here.

What was even more surprising was that the WTO put out a report just days before, appearing to give the WTO seal of approval to border adjustment taxes, something that had Paul Krugman giddy (but which others warned against getting too giddy about). It's odd to say the least that Obama would position himself to the right of the commerce-uber-alles WTO.

FTAs = Destabilization

Fair traders have long maintained that NAFTA-style trade deals promote instability.

The case of Mexico clearly showed this, with massive amounts of post-NAFTA rural displacement leading to sharp increases in immigration and narcotrafficking, leading the country to the brink of failed statehood.

Earlier this month, the thesis was proved again in Peru. In 2007, Peruvian fair-traders warned against signing the FTA, arguing that it would incentivize further rainforest destruction. Sure enough, within months of the deal going into effect, huge parcels of the Amazon were sold off to developers, and indigenous forest-dwellers were locked in a life-or-death battle with the government.

Now, over the weekend, fair trader Manuel Zelaya (president of Honduras) was ousted in the region's first military coup since the Cold War. Opposition to CAFTA ran high in Honduras, but local elites signed the deal anyway. This led to a groundswell of support for a president that kept getting more and more progressive, most recently signing onto the Bolivarian Alternative of the Americas, an alternative to NAFTA-style FTAs. The country's elites wanted to block these changes, so pushed a coup. (More information on how you can take action is available here.)

Looking ahead, as the debate continues in the United States over the Panama FTA, some comments made by that country's peasant leaders are worth considering. He said of the FTA:

In Panama, the poverty rate is nearly 40 percent, and it is even higher for the rural areas (65 percent) and indigenous communities (95 percent). If we experience even a fraction of what happened to Mexico in terms of the flood of subsidized U.S. agricultural products, our rural population will disintegrate and look for any survival option – including immigration to the United States.

This kind of trade agreement will only increase hunger and misery in the indigenous and peasant sectors of Latin America, pushing our countries even faster into the arms of leftist governments, which has already happened in South America proper.

The message is clear: if you want increase in desperation and polarization, push FTAs. If you want preservation of democracy and stability, choose fair trade.

Fair Trader Al Franken Certified Victor of MN Senate Race

The Minnesota Supreme Court just certified Al Franken as the winner of the long-disputed Senate race in that state.

Franken campaigned on a strong fair-trade platform, as this video shows.

That was not the end of Franken's fair-trade positioning:

• In response to a Minnesota Fair Trade Coalition questionnaire, Franken committed to oppose the WTO Doha Round and Colombia, Panama and Korea FTAs, support the renegotiation of NAFTA and replacement of Fast Track, and oppose any trade agreement that includes NAFTA-style investor rights, among other commitments. 
• His campaign website said: “I favor a balanced approach to trade that recognizes the importance of opening up markets for our products but protects our farmers as well as our workers, our consumers, and our values. Frankly, the Bush-Coleman approach gives away too much for too little – CAFTA, for example, sold out Minnesota's entire sugar industry for access to six markets with the combined size of Columbus, Ohio. I will support fair trade agreements, but I won't sell out our farmers in a bad deal like CAFTA.” 
• He also said: “we should re-examine the economic and trade policies that have contributed to illegal immigration. Working to improve economic conditions in Mexico, which we’ve tried and failed to do with NAFTA, could help reduce the incentive many have to attempt to enter the United States illegally.” 
• In their first debate, The St. Paul Pioneer Press reported that, “Franken, who often called the sitting senator ‘Norm’ through the debate, said Coleman takes huge contributions from the oil industry, works in lockstep with President Bush and left farmers behind by voting for the Central American Free Trade Agreement in 2005. ‘That was not a good deal,’ Franken said of CAFTA.”

For our complete analysis of the role of fair trade in the 2006 and 2008 elections, when 72 fair-traders displaced anti-fair traders, go to the politics section of our website.

Unifying the Dems across Caucuses

With Congress in recess this week, we're finally able to take a step back and analyze just how significant last week's TRADE Act roll out was.

What's most impressive is just how diverse the list of TRADE Act cosponsors are. We put together a handy list of cosponsors, and we're all jazzed when we see the 17 members of the Blue Dog Caucus together with 14 members of the New Democrat Caucus and 19 Congressional Black Caucus members. I'd be really interested in seeing a list of bills cosponsored by both Barbara Lee (D-CA) AND Leonard Boswell (D-IA).

And then you have members like freshman Rep. Tom Perriello (D-VA), who won his seat by 727 votes in a district President Obama lost by 2500 votes, connecting the dots between the current economic crisis and 16 years of the NAFTA trade model at the roll out press conference. What Perriello gets, and Democrats must to keep their majority, is that the politics of trade reform play especially well for Democrats in those red or purple districts that Democrats originally lost back in 1994. If I were knocking on doors for a candidate in Virginia, North Carolina or upstate New York, I'd be keeping the TRADE Act's call for a review and possible renegotiation of NAFTA high up on my clipboard.

Blue Virginia gives Rep. Tom Perriello a shout out for his leadership on the issue here.

Videos from yesterday's TRADE Act presser

We've got statements from six members on video from yesterday's TRADE Act news conference. Here are the goods (all these links go to YouTube):

• Statement by Rep. Betty Sutton
• Statement by Rep. Tom Perriello (embedded above)
• Statement by Rep. Rosa DeLauro
• Statement by bill sponsor Rep. Mike Michaud
• Rep. Michaud answering a question about Obama's trade promises
• Rep. Perriello answering a question about Obama's trade promises

Also, check out this Reuters story on the Washington Post website, which says:

Trade deals with Panama, Colombia, and South Korea were negotiated by the Bush administration, but must be ratified by Congress before they can go into effect.

The House legislation "sets a clear standard for where House Democrats are on trade," said Bill Holland, a spokesman for Public Citizen, a consumer advocacy group that supports the bill.

"Those three (pending) agreements are built on the NAFTA model, and today's introduction of the Trade Act is a clear rejection of that model and a call for change," he said.

Finally, here are some letters of support for the TRADE Act from prominent organizations. A few samples: AFL-CIO; Change to Win; Sierra Club; Friends of the Earth (all PDF downloads).