Hopping Mad

We wrote last year of the foreign multinational takeover of Budweiser, that staple of American working class life, and how trade pacts have limited efforts to encourage the local beer movement.

Now, the fallout from beer nationalism is rearing its head in the ongoing Gates Gate scandal, where the president has invited Henry Louis Gates and Sgt. Crowley to "have a beer at the White House" and settle their differences. Reports the WSJ:

Late Wednesday, White House spokesman Robert Gibbs hinted the presidential cooler will likely be stocked with what he understood to be the two guests' own personal favorites -- Red Stripe and Blue Moon.

"The president will drink Bud Light," Mr. Gibbs added.

The problem is that all three beers are products of foreign companies. Red Stripe is brewed by London-based Diageo PLC. Blue Moon is sold by a joint venture in which London-based SABMiller has a majority stake.

And Bud Light? It is made by Anheuser-Busch -- which is now known as Anseuser-Busch InBev NV after getting bought last year by a giant Belgian-Brazilian company.

Among rival brewers, the news fell flat. "We would hope they would pick a family-owned, American beer to lubricate the conversation," said Bill Manley, a spokesman for the Sierra Nevada Brewing Co., a California-based brewer that happens to be family-owned.

Jim Koch, founder of Boston Beer Co., which brews Samuel Adams, decried "the foreign domination of something so basic and important to our culture as beer."

Reflections on today's State Department Investment Hearing

I testified at the Obama administration's hearing on the Model Bilateral Investment Treaty (BIT) program today at the State Department, along with many many corporate types.

The Model BIT is important because it also serves as a model for the investment chapter of U.S. "free trade agreements," which both basically incentivize the offshoring of jobs and investment by making it very very easy for U.S. corporations to set up shop in a developing country and not have to deal with such pesky matters as normal types of interactions with poor country governments.

You can read my testimony here, but essentially I laid out a few paths for reform of these provisions:

1. End the BIT program and cut out the investment chapters. Easy, and perhaps desirable, but also a bit blunt.
2. Reform specific provisions of the BIT and FTAs to allow for prudential regulation of financial markets and certain other exceptions. This solves certain problems, but importantly might fall too far below the radar screen to have the public feel that the administration is really living up to Obama's fair trade promises during the campaign.
3. And the great middle path, the TRADE Act, which sets out a process for the GAO to discover the facts of the job impacts of trade and investment provisions, while also laying out an investment chapter of trade deals that would garner broad support from the American public.

U.S. Pushes for Ceiling on Global Financial Re-regulation

Here we go.

Since last year, we've been predicting that it was only a matter of time before governments and corporations decided to start invoking trade-law concepts to talk down the ambition in financial re-regulation, but I wouldn't have guessed that entities headed by "Barack Hussein Obama" and the "Labour Party" would be kicking off the kicking.

Reports the WSJ:

The U.S. and U.K. are lining up to change the European Union's proposed Alternative Investment Funds Directive, a sweeping bid to overhaul regulation of hedge funds, private equity and other alternative investment funds...

The directive would effectively apply to all funds and financial firms, including those based in the U.S., if they want to raise cash or provide services in Europe. This so-called equivalence test may block some U.S. companies from operating in Europe, given that the European directive goes much further than proposed increases in U.S. fund regulation. The U.S government wants hedge funds to register and provide more information but isn't looking at rules such as leverage caps.

The U.S. signaled its position in a little-noticed speech late last month by Mark Sobel, the U.S. Acting Secretary for International Affairs. "In a world of mobile capital...we cannot go our own ways, deviating significantly from international standards," Mr. Sobel told the Federation Bancaire Francaise, a Paris-based banking association. "Nor should we impose standards on one another if we are not identical."...

The U.K., which already regulates hedge-fund managers, believes the European rules go too far and will drive funds out of Europe in what was described as a "weak form of protectionism" by Paul Myners, a U.K. government minister responsible for London's financial center.

What's noteworthy about the EU proposal is that it is non-discriminatory, i.e. would apply to European and U.S. firms alike. But even non-discriminatory regulations conflict with WTO market access terms.

This is the real danger for advocates who wish to postpone or avoid the international re-regulation dimension: if you haven't adequately prepared by calling simultaneously for domestic re-regulation and removal of the WTO and other institutions' regulatory ceiling, you too could end up being called a (gasp) "protectionist." And, it ain't fun, I assure you.

Corporations Want a Monogamous Thing with USTR

I am so moved in these days of moral decline to see young people being committed, you know, really committed to one another. Too many youth just use up and spit out one another, rather than pledging themselves to the one they love for life.

That's why I was so touched to see top corporations make this testimony earlier this week to the Ways & Means Committee (from Inside U.S. Trade, non linkable):

Two witnesses who function as ITAC chairmen testified that the increased presence of NGOs on ITAC could dilute the effectiveness of the ITAC system, a claim echoed by some Republican members of the subcommittee. 

Business interests do not want an increased NGO presence on ITACs since, they claim, sensitive business information is shared during closed-door meetings and the meetings would be derailed by infighting if NGOs on the opposite side of a trade issue are involved. 

In his testimony, Brian Petty, chairman of the ITAC on Automotive Equipment and Capital Goods, also known as ITAC 2, said that adding NGOs to ITACs could cause members to discontinue their involvement within the trade advisory system. This would cause the system to simply cease, he said. 

“The voice of business would be severely diminished,” Petty said. 

Timothy Hoelter, chairman of the ITAC on Consumer Goods, ITAC 4, said NGO involvement would make the ITAC system “worthless.”

(Petty works for the International Association of Drilling Contractors, which includes members like Chevron and loads of Middle Eastern companies, while Hoelter works for Harley Davidson. The Trade Advisory Committees (TACs) are (mostly) corporate, who get privileged access to USTR and negotiating documents - including lots of stuff that Congress and the public don't even get to see.)

These corporate honchos really know how to make a gal feel special. "I want to focus on you, baby, and just look in your eyes," I imagine them saying. "With all these do-gooders around, things would get too distracting, and I'm past that 'player' period of my life, anyway. I want a commitment."

Three cheers for real love! It would really be tragic to let something like democracy get in the way of such a "rock" of a relationship as the current TAC system. Even though just letting NGOs in the room wouldn't necessarily lead to a change in policy, as a flesh-and-blood man, I can see how even their presence could lead to the temptation to go down that treacherous path. Best to keep the save-the-world seductresses at bay if committed relationships are to survive.

[In other news, I'd like to thank Steve Charnovitz of GWU Law School for his guest posts this week. His post from today touches on the same topic as my post, albeit with markedly less sarcasm. I would also note that Global Trade Watch has published two books in the last year "The Rise and Fall of Fast Track Trade Authority" and "Federalism and Global Governance" that touch on the history of and alternatives to the TAC system in some detail.]

USTR Advisory Groups Need To Be Improved

[Editorial note: This post is written by guest blogger Steve Charnovitz of George Washington University Law School. The views expressed herein are solely those of the individual contributor and do not necessarily reflect those of Public Citizen.]

Having advisory groups is important for governments and international organizations.  Left to themselves, government bureaucrats and international civil servants are often unimaginative and lack good ground-level information.  As I have noted in my scholarship over the past decades (see my website at http://www.charnovitz.org), the role of nongovernmental organizations (NGOs) has been especially fruitful and vital in international trade policy going back to 1920s.

Official US advisory committees for trade policy hark back to the Randall Commission in the 1950s.  The process was regularized in the Trade Expansion Act of 1962 which authorized the USTR to seek advice from industry, labor, and agriculture, and then further formalized in the Trade Act of 1974 which set up the advisory committee system.

Currently USTR has eight formal advisory committees.  See http://www.ustr.gov/about-us/intergovernmental-affairs/advisory-committees.

For two of them, the Agricultural Technical Advisory Committee and the Industry Trade Advisory Committees (ITACs), there is no information on the USTR website as to who got invited to sit on those Committees. Thus, I cannot comment on whether those committees have sufficient expertise and balance.  In my view, the USTR website should be completely transparent as to who sits on those advisory committees. 

For the other six committees, the USTR web does have information regarding Committee membership.  For some of these, balance and diversity is lacking.

The top level committee is the Advisory Committee for Trade Policy and Negotiations (ACTPN).  Of the 32 members, 27 come from business, two from universities or think tanks, one from a labor union, one from the federal government, and one from a state government. 

Clearly that is imbalanced.  Other than the labor union member, there are no NGOs (such as Global Trade Watch), religious leaders, foundation representatives, well-known trade economists (such as Professor Jagdish Bhagwati), or experts in international trade law.  The lack of consumer NGOs is especially odd given that consumers are the biggest beneficiaries of trade.  Also missing are experts from other countries, such as the South Centre in Geneva or CUTS in India.  I learned recently that China’s sovereign wealth fund has an international advisory committee. If China has grown out of its historical parochialism, why can’t the United States solicit the advice of most of the world that is outside of the United States?

Champagne, Caviar, and a Room At the Ritz

That's the sort of high class date that fair traders should demand when it comes to the Obama administration's dealings with human rights improvements in Colombia.

Two-time TRADE Act original cosponsor Congressman Jim McGovern (D-MA) gets this point like few others, and set the right example for his peers about the insanity of expanding NAFTA to the union murder capital of the world without seismic changes in both the text of the deal and the human rights context surrounding it.

According to Inside US Trade (subscription only):

"I don't want us to be a cheap date when it comes to human rights," he said on July 13 after an address to the U.S. Institute of Peace. "Colombia is still one of the most dangerous places in the world to be a unionist. The idea of going forward with a trade agreement when there are still significant human rights challenges doesn't make any sense."

McGovern stressed he is not involved in efforts to develop benchmarks Colombia must meet before Congress votes on the FTA, but argued the benchmarks should include fewer killings of trade unionists in Colombia.

...He also cited wariness among some stakeholders in Colombia regarding the economic effects of the trade deal.

"As we have traveled around Colombia, there are some significant questions that have been raised by different groups, legitimate groups, who believe the trade agreement will have a bad impact on them," he said. "I think they are looking at Mexico with [the North American Free Trade Agreement] and saying, 'boy, this isn't what everybody says it's going to be.'" 

...McGovern strongly criticized Colombian President Alvaro Uribe, saying he has frequently urged Uribe in private meetings not to conflate political dissidents, including trade unionists, with rebel guerrillas in the Revolutionary Armed Forces of Colombia (FARC). He also said that he felt a lack of trust for Uribe due to the fact that Uribe had initially denied connections between paramilitary organizations and the Colombian army that have now surfaced in Colombia. [all emphases added]

USTR Should Devote More Attention to Worker Issues

[Editorial note: This post is written by guest blogger Steve Charnovitz of George Washington University . The views expressed herein are solely those of the individual contributor and do not necessarily reflect those of Public Citizen.]

Does USTR care about the workers who produce the goods and services in world trade?

There is reason for doubt.

In my 34 years of being a USTR-watcher, I have observed that the level of interest in labor, employment, and worker issues at USTR is exceedingly low.  Labor is viewed by USTR as a problem, not an opportunity.

A quick look at USTR's website confirms this disinterest.  Under the “Trade Topics” being addressed by USTR (see http://www.ustr.gov/trade-topics), the topics of Employment and Workers are not listed.  The topic of "Labor" is listed, but perusing it today, on July 23, 2009, one sees that the most recent USTR press release was in June 2007 and the most recent speech was in 2005.  Think about that! 

Over seven months into the Obama Administration which promised change, USTR has not said or done anything reportable about the topic of Labor.  See http://www.ustr.gov/trade-topics/labor.

The USTR 100 Days Progress Report (dated May 1 posted at http://www.ustr.gov/sites/default/files/USTR%20100%20DAYS%20PROGRESS%20REPORT.pdf) shows a similar inattention to issues relating to "workers," "employment", "labor," or "jobs."  Sadly, those words do not appear in the Report.  Perhaps USTR is doing something constructive behind the scenes, but if so, they should be more transparent about it.

What is the employment dimension of US trade policy? That's simple. USTR should be paying attention to how trade helps or hurts workers in the United States and in other countries.  US trade policy should be crafted with an eye toward assuring that it benefits US workers and consumers, but all too often, USTR has shown much more interest in using trade policy to help special interest producer groups.

On July 16, 2009, I tested out the new "Ask the Ambassador" feature on the revamped USTR website to ask Ambassador Kirk what USTR has done during the Obama Administration regarding trade adjustment assistance, a program to help US workers, firms, and communities hurt by international trade.

So far I have not received an answer to the question I asked.  Moreover, my question was not selected for posting on the USTR blog.  In the three days after Monday when I wrote about the USTR blog on this website and noted how USTR emphasizes photos of Ambassador Kirk rather than questions and answers from citizens, I see that the Ambassador's staff has posted four new photos of him (dated July 22).  Apparently at USTR these days, photos of the Ambassador’s travels is more important than answering questions from the public.

 Here is the question I asked the Ambassador through the USTR website:

“Mr. Ambassador:

Under 19 USC Sect. 2392, the Deputy US Trade Representative serves as chairman of the Adjustment Assistance Coordinating Committee.  The Committee includes officials from the Departments of Labor, Commerce and SBA.  Although neglected by the Bush Administration, this Committee can play a central role in improving the capacity of the US government to deliver vital adjustment benefits to workers, communities and firms. I have two questions. 

First, how often has this Committee met since January 20, 2009?  Second, will you commit to holding these Committee meetings in public so that there will be more transparency and accountability?

Thank you.

Steve Charnovitz”

I eagerly await an answer to my question about when USTR will step up to meet its statutory responsibilities to coordinate the delivery of trade adjustment assistance benefits.  As I pointed out in an article I wrote many years ago in the California Management Review, “Worker Adjustment: The Missing Ingredient in Trade Policy” (see http://cmr.berkeley.edu/search/articleDetail.aspx?article=4686), an effective worker adjustment program is a prerequisite for gaining greater public support for open trade. 

Sadly, the Obama Administration seems more interested in photo opportunities rather than fulfilling its responsibilites to use trade policy to help American workers. 

Transparency Chapter of KORUS FTA Is Problematic

[Editorial note: This post is written by guest blogger Steve Charnovitz. The views expressed herein are solely those of the individual contributor and do not necessarily reflect those of Public Citizen.]

The Korea-US Free Trade Agreement (KORUS) is one of the three pending US free trade agreements that have been negotiated and signed, but not yet approved by the United States.

Chapter 21 of the KORUS is titled "Transparency" and contains useful rules regarding publication of laws and regulations, administrative proceedings, provision of information, and review and appeal. But a number of these rules raise questions as to whether the United States is in compliance. If the United States is not in compliance, that may be a barrier to US approval and implementation of the Agreement.

Article 21.1.2 provides that each Party "to the extent possible" shall publish in advance the measures that it proposes to adopt respecting any matter covered by the KORUS. Parties are also required to provide interested persons a reasonable opportunity to comment on such proposed measures. My reading of this provision is that it applies to laws as well as regulations. If so, one wonders whether the U.S. is in compliance with this provision, particularly with regard to the Congress. The Congress routinely adopts bills without giving interested person in the American or Korean public an opportunity to comment on such proposed measures.

Article 21.5 is titled "Policy on Private Purchases." It states: "Recognizing the benefits of liberalized and expanded bilateral trade and investment, each Party affirms that it is not its policy to discourage private persons in its territory from purchasing or using goods or services of the other Party through formal or informal means of influence or persuasion."

This is an unusual provision. As far as I know, it does not typically appear in US FTAs.

USTR Misleads the Public on the Status of Unimplemented Free Trade Agreements

[Editorial note: This post is written by guest blogger Steve Charnovitz. The views expressed herein are solely those of the individual contributor and do not necessarily reflect those of Public Citizen.]

Although President Obama claims to be for "free and fair" trade, he and his Administration have made no progress in securing the implementation of the three already-negotiated U.S. free trade agreements (FTAs) with Korea, Panama, and Colombia.

Yet while I can understand how the Administration would continue to sit on these agreements, since Obama campaigned against trade during the election, I do not understand why USTR seeks to misrepresent the status of these FTAs in the American political process.

The US-Korea Free Trade Agreement was signed on June 30, 2007. Neither President Bush nor Obama have sent “the final legal text of the agreement” plus implementing legislation to the Congress pursuant to Section 2105 of the Trade Act of 2002. Nevertheless, the USTR website states that the status of this agreement is “Pending Congressional Approval.” Obviously, this USTR statement is untrue. Before Congressional approval can occur, President Obama will need to formally send an implementing bill to the Congress along with a copy of the FTA. That discretionary Presidential action has not occurred, and so it is incorrect for USTR to suggest that any action on the FTA is now “pending” in the Congress.

The US-Panama Trade Promotion Agreement was signed on June 28, 2007. The status of the Panama FTA is the same as the Korea FTA, that is, the agreement continues to collect dust on the shelf within the Executive Branch. No implementing legislation has been sent to the Congress. Nevertheless, the USTR website states that the status of the Panama agreement is “Pending Congressional Approval.” Again, the USTR website promulgates a falsehood.

The US-Colombia Trade Promotion Agreement was signed on September 22, 2006. A protocol of amendment was signed later to make changes in the agreement to accommodate new U.S. demands on labor, environment, investment, and other issues. The revised agreement was sent to the Congress by President Bush with implementing legislation. I discussed this sad episode in my blog posting of December 14, 2008, “The Bush-Schwab Policy on the Colombia FTA Has Failed.” Because the implementing legislation sent by President Bush expired at the end of the 110th Congress, that legislation is no longer pending in Congress. To my knowledge, no one has introduced it in 2009. Nevertheless, the USTR website states that the status of the Colombia agreement is “Pending Congressional Approval.".

On July 17, 2009, I attended a presentation by Larry Summers, the Director of the White House National Economic Council. During the Q&A session, I asked Dr. Summers about the status of the three pending FTAs. He responded:

Will the Real New Dems Please Stand Up?

The (New) Democratic Leadership Council has just put a 14-page brief called "Toward a New Trade Agenda," and it offers anything but.

It starts off with some relatively unobjectionable material, like tariff reform for Middle Eastern and the very poorest countries.

But then, it takes a weird turn.

It calls for climate and procurement policy to be subordinated to commercial policies.

It lauds the president's food-safety plan, not because it will resolve the problem, but because of the optics: it will "ease globalization anxieties."

And while the DLC admits that the inherited Bush trade agreements with Panama, Korea and Colombia are problematic, and focuses on too small markets, it nonetheless calls for Obama to "clear the decks" by passing them. This call appears to be based on several miscalculations:

1. That FTAs "do seem to have helped boost exports." Actually, as we've shown, U.S. export growth to non-FTA countries outstrip that to FTA countries. And, as it happens, the DLC shows it too, in their Table 3. FTA country exports grew 47% from 2000-08, while non-FTA countries grew 77 percent.
2. That FTAs are divisive, but that the way out is through. Ed Gresser, the author of the report, goes to pains to note how much opposition within the party there is to the FTAs. He writes: "with trade only one of many issues on its agenda, the administration has a pragmatic interest in limiting these conflicts to genuinely important topics. And so, with the FTAs modest in scale from the start and now fading under the impact of structural change in technology and logistics, it is time to remove them from the starring role." Uh, did I miss something? These fights are divisive. Check. They require lots of political capital better spent on other fights. Check. FTAs actually aren't that useful. Check. SO LET'S PICK THAT FIGHT. There you have it folks: let's build the party by destroying it. I haven't seen such sectarian thinking since my school days!
3. FTAs help foreign policy by pleasing foreign heads of state. Actually, as Gresser notes elsewhere in the piece, we should care less about heads of state and more about the broad public diplomacy that our trade policy represents, and which FTAs undermine. (Think Mexico and Peru.)

Gresser also has a nasty habit of not taking fair traders' arguments seriously. He notes that many "unions and 'populist' politicians did not support—and often outright opposed—the agreement with Peru. They now oppose the three remaining agreements as well, despite the labor and environmental provisions. Their opposition to the Panama agreement in particular suggests the main question is not really about environmental and labor policy, but rather a more basic alarm over competition from poor countries."

Hmm. By unions and populist politicians, does he mean a majority of the House Democratic Caucus? Does he mean the 16 New Democrat Caucus members that opposed the Peru FTA?

USTR Can Do Better at Fulfilling its FOIA Responsibilities

[Editorial note: This post is written by guest blogger Steve Charnovitz. The views expressed herein are solely those of the individual contributor and do not necessarily reflect those of Public Citizen.]

I want to thank Public Citizen for inviting me to be a guest blogger this week. I believe this invitation is especially noteworthy given that I am a free trader. Many blogs do not welcome a diversity of views, but clearly Public Citizen does.

For my Monday post, I want to address is USTR's handling of Freedom of Information Act (FOIA) requests. Or rather I should say mishandling, since their actions certainly violate the spirit of FOIA if not its letter.

One of the most unfair and least accountable aspects of World Trade Organization policy is accession, that is, the negotiations that occur when countries seek to join the WTO. As I have explained in my paper, “Mapping the Law of WTO Accession," now posted on SSRN, the WTO routlnely demands that applicant countries agree to higher obligations than ordinary members have (i.e., applicant WTO-plus obligations). These discriminatory requirements sometimes arise in bilateral accession negotiations that precede the multilateral negotiations.

Trade and Transparency: Steve Charnovitz Guesting Here Next Week

On Monday, a bunch of NGO representatives including GTW's own deputy director, Bill Holland, attended a meeting with USTR regarding transparency in trade negotiations. Ironically, USTR was not particularly, well, transparent about what it proposes to do regarding transparency, as Inside U.S. Trade acknowledged in their story "This Week Likely to Bring New Signs of Obama Trade Policy" (subscription only, sorry):

USTR officials present at the meeting offered little information on which measures USTR would be prepared to take, nor for a time line for completing the new policy.

...Most of the meeting was spent discussing a draft document prepared by [Knowledge Ecology International] outlining 16 specific demands on transparency, sources said. Those demands include increased NGO representation on formal advisory committees and the release of negotiating documents.

Next week, Eyes On Trade will tackle some related issues as Steve Charnovitz, one of the leading scholars on the intersection of the WTO and environmental policy, will join us as a guest author. Steve is an associate professor of law at The George Washington University Law School and a former director of the Global Environment and Trade Study at Yale University. He blogs occasionally over at the International Economic Law and Policy Blog.

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.