It's So Easy to Set Up A Tax Haven in Panama, Even An Intern Could Do It!
Climate Policy's Unwelcome House Guest

Corporates Out of Step in Today's Hearing on Investment, Panama, etc.

The House Ways & Means Trade Subcommittee had a hearing on investor protections in U.S. trade and investment agreements. I gave testimony for the record, which you can read here.

As we detail in our recent book, "The Rise and Fall of Fast Track Trade Authority," investment rules in trade deals are a classic non-tariff, non-trade provision. We wrote:

Largely flying under the radar, the 1984 act dramatically expanded the subject matter and the types of agreements that the president was authorized to negotiate. Title III of the act authorized the president to collect information on (and enter into agreements related to the elimination of) "barriers to international trade in services" and "the trade distortive effects of certain investment-related measures." Service and investment barriers were defined as denial of "national treatment and restrictions on the establishment" of service operations and investments; "foreign industrial policies;" "export performance requirements;" and "direct or indirect restrictions on the transfer of information into, or out of" a given country.

The 1988 Fast Track went even further, specifying that:

The principal negotiating objectives of the United States regarding foreign direct investment are --

(i) to reduce or to eliminate artificial or trade-distorting barriers to foreign direct investment, to expand the principle of national treatment, and to reduce unreasonable barriers to establishment; and

(ii) to develop internationally agreed rules, including dispute settlement procedures, which --

(I) will help ensure a free flow of foreign direct investment, and

(II) will reduce or eliminate the trade distortive effects of certain trade-related investment measures.

This delegation of Fast Track produced NAFTA. And despite efforts in the 2002 Fast Track and the May 2007 deal to change the investment provisions in the "cookie cutter" trade template, U.S. trade agreements' investment provisions (such as those in CAFTA and now in the U.S.-Panama FTA) have delved ever more deeply into regulatory policy space. And indeed, in today's hearing, Thea Lee of the AFL-CIO in particular pointed out that the [preambular] language added as a part of the May 2007 deal is non-binding in nature.

One of the richest debates at today's hearing was the nature of the changes made to investment provisions of trade deals since 2002, in particular with respect to so-called exceptions (i.e. protections for governments from having to cough up cash or change laws in response to successful trade-pact challenges by foreign investors and governments) for prudential/ financial and tax measures. You don't often get that kind of substantive debate in a congressional hearing, and perhaps it was too substantive for some, judging by the small attendance by the end of the hearing. As it happens, these so-called exceptions are a subject of our latest report on Panama's tax-haven practices and the U.S. FTA.

As the Harrison Institute's Bob Stumberg outlined, the so-called prudential exception in the WTO and our FTAs appears to be self-cancelling. Take this from Chapter 12 of the U.S.-Panama FTA:

Notwithstanding any other provision of this Chapter ... with respect to the supply of financial services in the territory of a Party by an investor of the other Party or a covered investment, a Party shall not be prevented from adopting or maintaining measures for prudential reasons, ... Where such measures do not conform with the provisions of this Agreement ..., they shall not be used as a means of avoiding the Party’s commitments or obligations under such provisions [emphasis added].

The first sentence of this exception says prudential measures are allowed; the second sentence qualifies the first by saying that prudential measures can't conflict with the obligations of the agreement. (As we show in recent memos on similar provisions in the WTO, these obligations are quite restrictive.)

Theodore Posner of Crowell & Moring LLP responded by saying that the model BIT/FTA has provisions that would trigger state-state chats if an investor-state case were launched against a prudential measure. Stumberg responded by saying that is the type of consultation that should happen anyway, and typically the cases proceed to UNCITRAL or ICSID if there is not agreement between the parties (which, why would there be in the case of a country so willfully pursuing tax sheltering policies as is Panama).

Stumberg and Posner also clashed on the question of whether a foreign subsidiary of a U.S. company could launch an investor-state case against the United States. They agreed that they could, but Posner suggested it was unlikely because it would be too complicated for a U.S. company to set up a subsidiary in a country like Panama, and then have that subsidiary reinvest into the United States. Stumberg's retort was priceless: that's why we go to law school, he said. To figure out how to game the system on taxes, regulations and other rules.

But really, Linda Menghetti of the Emergency Committee for American Trade really took the cake in terms of defending an indefensible system. Her talking point, which was echoed by some of the GOP members, was that, because the United States has never lost an investor-state case, the system must be fine.

This really shows how out of step the corporate types are with prevailing public sentiment. Most people feel that the de-regulation over the last few decades was a mistake. The cookie-cutter FTA/BIT investor-state mechanisms are the poisonous icing on the deregulatory cake: in essence, they show that not only will our government deregulate, not only will they lock in that deregulation through trade deals, but that, moreover, we want to give corporations the right to sue us and whip us if we ever re-regulate. THAT is why these relics must be kicked to the dustbin of history: because they are radically out of step with our values and with the lessons of the failed deregulation period.

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