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On Eve of Major WTO Meeting, 112 Civil Society Groups Tell U.S., EU: Stop Blocking Discussion of Strong Financial Regulation

On Monday, October 1st, the World Trade Organization (WTO) will make a decision on Ecuador's proposal to set up a process to discuss whether WTO rules leave policy space for robust financial regulations, including capital controls. This week, 112 major global consumer, labor, environmental and development organizations issued a strong statement urging their governments to support Ecuador’s proposal and ensure that global “trade” rules do not undermine countries’ ability to strengthen their own financial regulations to avoid future crises.

The 112 civil society organizations comprising the impressive list of signatories represent hundreds of millions of members from 160 nations. This includes the International Trade Union Confederation (ITUC), which represents 175 million workers globally, and Consumers International, an umbrella organization of 240 consumer organizations operating in more than 120 countries.

A powerful bloc of countries supported a proposal for a formal review of these WTO rules in late 2011, but some WTO members, including the United States and the European Union, blocked it. Now, the same countries have indicated their intent to quash this proposal to even discuss the issue of policy space for crucial financial regulations, much less consider updates to the old rules.

More than 100 countries, including many developing nations, have commitments under the WTO financial services rules. Countries that seek to re-regulate the financial sectors that they previously bound to comply with the WTO’s regulatory limits could face a WTO challenge and trade sanctions. To avoid such liability, they would need to avoid sensible post-crisis policies, such as banning risky financial services, limiting the size of financial institutions, imposing firewalls between commercial and investment banking, and using capital controls. 

A clarifying discussion on the importance of capital controls, which even the IMF has accepted as a crucial policy, would be particularly timely.  The statement from the globe-spanning organizations notes that "we cannot afford to wait until the next financial crisis to ensure that countries’ WTO commitments do not interfere with or chill financial regulation.”

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CAFTA Investor Squeezes Guatemala for Millions, Cites Alternate Reality

You may recall that in June an international tribunal meted out its ruling on the first suit brought by a foreign investor against a national government under CAFTA.  The ICSID tribunal used an imaginative interpretation of CAFTA-enshrined investor rights to rule that Guatemala’s taxpayers should hand over more than $11 million to U.S.-based Railroad Development Corporation (RDC) after the company failed to restore Guatemala’s national railway.  Apparently not satisfied, RDC is now seeking to double its winnings. 

In case you missed the original story, in 1997 RDC won a government concession to rebuild Guatemala’s defunct national railroad in five phases.  Nine years later, the company had completed just one of those phases.  After negotiations with the company failed to rectify the investment delay, in 2006 Guatemala’s federal government pronounced an RDC contract to be “injurious to the interests of the state.”  This official executive act, established in the federal law of a half-dozen Latin American countries, initiated a legal process to determine whether the contract should be revoked.  Before the domestic case could produce any outcome, RDC accused Guatemala of violating CAFTA for the non-binding pronouncement alone.  While the company took advantage of Guatemala’s invitation to defend itself in the domestic legal process, RDC also launched an investor-state suit against Guatemala for infringing the company's CAFTA-protected right to a “minimum standard of treatment.”

In order to rule in favor of RDC, the ICSID tribunal—three private lawyers—shirked the definition of “minimum standard of treatment” employed by most sovereign states: affording due process.  (That is, the sort of due process that RDC was concurrently taking advantage of in Guatemala’s domestic courts).  Instead, they borrowed a far more expansive interpretation of the standard, not one relied on by states, but created by yet another ICSID tribunal.  This inventive “minimum standard” puts governments on the hook for any actions toward foreign investors that could be deemed “arbitrary” or even “idiosyncratic” (para. 219).  Proceeding with this definition unencumbered by longstanding state practice, the unelected tribunal then inserted itself unabashedly into the complexities of Guatemala’s domestic contract law to conclude that the country had violated CAFTA.  To compensate, Guatemala was ordered to pay RDC $11.3 million, plus over $2 million in backdated compound interest, plus tribunal fees incurred by RDC. 

You might see how one could take issue with this ruling.  Well, one has: RDC.  Apparently not content with the millions of dollars eked out of the tribunal’s anomalous legal interpretations, the company is now pushing for more compensation.  A lot more.  On Wednesday, Investment Arbitration Reporter revealed that RDC has asked the tribunal to correct alleged omissions and errors in its award determination.  RDC estimates that after a few tweaks in the award calculations, Guatemala actually owes RDC at least $16.4 million in addition to the over $13 million already awarded.  That is, RDC’s requested “corrections” amount to more than the award being “corrected.” 

To justify the brunt of its claim, RDC quotes a provision in the ICSID convention stating that tribunals “may…decide any question which it had omitted to decide in the award” (para. 2).  RDC then argues that the tribunal “failed to address” in its award the profits that RDC could have plausibly earned on its sunk investments in Guatemala, presumably envisioning a scenario free of alleged CAFTA infringements (para. 5).  RDC specifically requests compensation for the profits it could have made starting with its first investment in 1998 and ending with Guatemala’s pronouncement against its contract in 2006, a period in which the company saw consistent losses.  To be clear, here is what RDC is asking us to assume with this claim:

  1. Guatemala is to blame for RDC’s failure to turn a profit for the eight years prior to the legal pronouncement against RDC’s contract.  That is, Guatemala’s non-binding initiation of a legal process in 2006 not only hurt RDC’s business going forward, but somehow retroactively caused the company to lose money since its first investment in 1998.  
  2. Had Guatemala not committed this remarkably retroactive CAFTA crime, RDC would have earned an abnormally handsome profit in a hypothetical alternative investment scenario.  Ignoring the negative actual rates of return that it saw on its Guatemala investments, RDC picks a “theoretical” rate of return (para. 10) that it might have earned in a parallel universe of lucrative investments: a whopping 17.36% per year (para. 15).  By comparison, S&P’s index of 500 commonly-traded stocks grew at an average annual rate of 5% during the eight years in question.  RDC apparently believes that, despite its historical pattern of losses, an alternative scenario would have allowed the company to more than triple the success rate of an average investor. 

Using such novel logic, RDC argues that Guatemala owes the company an additional $14.2 million—money that RDC could have earned had it not chosen to invest in a country apparently capable of retroactive abuse.  

It’s difficult to explain RDC's logic.  Here’s one attempt: RDC operates in an alternative dimension.  In this dimension, cause and effect moves not only forwards, but backwards.  In this dimension, a poor-performing investor can expect to achieve rates of return to rival Warren Buffett.  In this dimension, Guatemala owes RDC another $14.2 million. 

It has yet to be seen whether the tribunal also lives in this investors’ Narnia.  Despite having proven itself to also be imaginative, the tribunal appears to have already rejected RDC’s claim that Guatemala is to blame for foregone prior profits.  In their June award, after noting RDC’s sizeable losses, the arbiters plainly stated, “The Tribunal considers that the funds invested by Claimant [RDC] to cover these losses represent the risks Claimant [RDC] took when investing in Guatemala and cannot be attributed to any action of Guatemala contrary to CAFTA” (para. 270).  As Guatemala argued last week in its retort to RDC’s claim, if Guatemala is not responsible for RDC’s losses, the government certainly cannot be expected to finance the company’s hoped-for profits (para. 19). 

As the tribunal ponders its response to an investor claim that seems more inspired by fantasy novels than international statutes, we will continue to monitor the troubling precedent of this first CAFTA case.  Will the taxpayers of Guatemala, already facing over $13 million in penalties for a fanciful interpretation of an investor’s rights, now watch their burden more than double to accommodate an even-more-fanciful understanding of that investor’s costs?  Stay tuned.  

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Reporting from the TPP Negotiations: You Call This "Engagement?"

“Flush the TPP!” was the rallying cry heard outside Virginia’s Lansdowne resort on Sunday at a protest against the Trans-Pacific Partnership, as trade officials negotiated the secretive pact behind the resort’s closed doors.  “Everyone remembers NAFTA right?  How it destroyed jobs and destroyed people and destroyed communities?,” Ron Collins asked the crowd, representing the Communications Workers of America. “We're not going to allow the TPP to do the same!” Taking the microphone, Allison Chin of Sierra Club warned, “[The TPP] could increase exports of liquefied natural gas, which would mean more dangerous fracking here in the U.S.”  Matt Kavanagh of Health Gap solemnly concluded, “I stand here on behalf of people who are living with AIDS around the world who are saying no to the Trans-Pacific Partnership, who are saying that, in fact, this is life or death.”  

Throughout the rally, protestors criticized the unprecedented secrecy of the TPP negotiations.  While the office of the U.S. Trade Representative (USTR) has consulted with over 600 mostly corporate “advisors” on the content of the classified TPP text, it has consistently denied access to the public, press, and even members of Congress.  In the last few months, USTR has refused repeated demands from civil society and our elected representatives to release the TPP negotiating text, while reversing the longstanding practice of allowing members of Congress to observe "trade" deal negotiations. 

Without a hint of irony, U.S. Trade Representative Ron Kirk has declared the TPP negotiations to be “the most open, transparent process ever.”  Perhaps such claims refer to the “stakeholder engagement” activities that also took place at Lansdowne on Sunday.  While Public Citizen and other organizations welcomed the opportunity to present critiques to negotiators, calling the events “engagement” stretches the word beyond its bounds. 

The morning began with stakeholder presentations, in which groups ranging from Public Citizen to Walt Disney were granted 10 minutes each to speak on a particular aspect of the TPP. Perhaps because they regularly get direct access to U.S. negotiators, corporate representatives were outnumbered by TPP critics, who lambasted TPP proposals for threatening access to medicines, Internet freedom, and capital controls.  (In a presentation room focused on intellectual property vs. access to medicines, three out of every four presenters argued that TPP would jack up medicine prices.)  Global Trade Watch’s Lori Wallach gave a full-house presentation on the dangers of the TPP investment chapter, which would invite unaccountable private tribunals to use increasingly imaginative interpretations of foreign investors’ rights to rule against public interest regulations. 

While a continuous string of civil society presenters aired such concerns, the number of people able to hear them was severely constrained by rooms the size of a freshman dormitory.  Each of the stakeholder presentation rooms had a seating capacity of just 18 people.  While a few TPP negotiators competed with NGO and corporate representatives for standing-room-only space, most gave up and left.  Meanwhile, immediately adjacent to the briefing “dorms” were an array of larger meeting rooms, a massive ballroom, and other conference facilities—all unoccupied.  USTR’s decision to sequester civil society stakeholders to four tiny rooms in a 50,000-square-foot conference center did not signal genuine interest in engagement.

While some stakeholder sessions were prohibitively packed, others stood nearly empty.  U.S. trade officials did not notify negotiators about who was speaking when or where until shortly before the stakeholder presentations. When finally circulated, the schedule did not include the names of presenters.  Unless a speaker knew to email their target audience of negotiators directly, they often faced a room with few attendees and even fewer negotiators.

Then there was the matter of double-booking.  Rather than schedule the extended stakeholder day of past TPP rounds, this time USTR narrowed the “engagement” window to a three-hour block.  They squeezed into this block not only the stakeholder presentations, but a simultaneous period of “direct stakeholder engagement” located in a ballroom at the other end of the Lansdowne resort.  There, stakeholders were invited to stand behind tables with their materials and try to engage in one-on-one conversations with negotiators.  In response to USTR’s unprecedented efforts to conceal the secretive TPP text after two and a half years of negotiations, many civil society organizations around the room, from the American Student Medical Association to the AFL-CIO to the Electronic Frontier Foundation, displayed palm cards and stickers that proclaimed "TransParencyPlease: Release the Text!"

Public Citizen’s table featured the many recent letters from members of Congress expressing concern with the TPP, as well as updated polling data showing that a majority of the U.S. public opposes NAFTA-style free trade agreements.  Posters surrounded the table with the message "Fast Track for the TPP? Fat Chance!" translated into all the official languages of TPP countries, warning other country negotiators that they should not trust USTR’s far-fetched claim that they will easily get Fast Track trade promotion authority for the TPP.  

Nearby, the Citizens Trade Campaign set up a projection of a live twitter feed displaying in real time the messages sent to negotiators from people around the world.  An adjacent laptop provided negotiators the opportunity to respond to citizen comments (though we didn't see any negotiators actually take advantage of that opportunity).  In spite of the absurdity of the setup, with negotiators somehow expected to attend presentations at one end of the resort while simultaneously engaging stakeholders by tables at the other end, Public Citizen did manage to talk to several negotiators who expressed interest in our materials

Later in the afternoon on Sunday, lead negotiators for eight of the nine current TPP countries sat across from dozens of stakeholders in the large ballroom, now reconfigured as a briefing space, for a question-and-answer session.  There were far more questions than answers.  Stakeholder after stakeholder walked up to a microphone to ask how the negotiators planned to deal with a particularly concerning element of the TPP.  Of the 22 questions asked, 21 expressed only concern or criticism for the TPP.  While the questions tended to be targeted toward specific provisions of the deal (data exclusivity, footwear, investors’ “minimum standard of treatment,” etc.), the responses tended to be:

  • vague (e.g., “To the extent that countries have concerns or issues with the proposal that has been brought up to people, we would expect to hear a refined solution to address those concerns.”),
  • evasive (e.g., “The U.S. is reviewing that decision and will determine how or whether we think that amendments are needed to the text as we discuss internally the implications of that decision.”),
  • or missing (e.g., “I really don't have anything to add at this time.”).  

In some cases, pointed questions, such as “Do countries have thoughts about how to expand access to affordable medicines that have come forward in these negotiations?” were met with literal silence.

At the end of the day, were we, as stakeholders, “engaged?”  Not really.  We were placed in tiny rooms to give ten-minute presentations primarily attended by other stakeholders.  We were simultaneously provided with tables to stand behind while hoping for a negotiator sighting.  We were given the opportunity to ask questions to lead negotiators who were not inclined to actually respond.  And through it all, we were left to guess at the brunt of the TPP’s content while the negotiating text remained off limits.  Ron Kirk will no doubt call Sunday a day of “openness” and “transparency.”  Those of us at Lansdowne that day can attest to the elasticity of Kirk’s word choice as we continue to push for real transparency and genuine engagement. 

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Let Them Eat Steak: How Costco Totally Makes Up for NAFTA's Sordid Legacy

On Monday, the Washington Post published an article extolling NAFTA for bringing Costco to Mexico.  The article profiled the expansion of the bulk goods behemoth across the Rio Grande as an example of how NAFTA has allowed “Made in USA” products to sweep through Mexico, to the delight of U.S. workers and Mexican consumers.  It’s a happy, albeit misleading, narrative. 

The Post article missed nearly two-thirds of the NAFTA story.  It reported that “trade between the United States and Mexico is surging” thanks to NAFTA.  Indeed.  But 65% of the surge has been in Mexican products imported into the U.S., not U.S. products heading to Mexico.  While U.S. exports to Mexico have more than doubled since NAFTA, imports from Mexico have more than quadrupled (after controlling for inflation).  The net impact on U.S. workers has been the disappearance of hundreds of thousands of jobs as the small pre-NAFTA trade surplus with Mexico has crashed into 17 consecutive years of trade deficits.  Last year the U.S. trade deficit with Mexico topped $100 billion for the first time, accelerating the job atrophy.

Meanwhile, the article portrayed the comparably small rise in U.S. exports as a gift to Mexican consumers, who can now, according to the article, stroll Costco’s wide aisles for “marbled slabs of steak” and “sacks of russet potatoes.”  Really?  The populace that perfected a delectable, corn-based diet should thank NAFTA for steak and potatoes?  While Mexico's small upper-middle class may well enjoy the southward march of Costco, the 51% of Mexicans who now live below the national poverty line—a higher share than at any point in the last decade—are not loading carts with “Made in USA” steak. 

Indeed, for many Mexicans, Costco has meant fewer tamales sold, not more steak bought. The article notes that the NAFTA-encouraged proliferation of megastore chains is “challenging, for better or worse, the traditional mom-and-pop stores doling out soda, eggs and tortillas.”  Let’s see—is that “better” or “worse?”  NAFTA displaced approximately 28,000 small and medium-sized Mexican businesses in just its first four years.  Those who support small business as a means of creating jobs and overcoming poverty will find that NAFTA trend decidedly “worse.”

When newspapers perpetuate narratives that obscure NAFTA’s failures for the majority of workers at home and abroad, policymakers are more prone to replicate the failure.  And replicate they did with last year’s passage of the NAFTA-style deals with Korea, Colombia, and Panama.  With the Korea FTA now in effect since March, we are already starting to see results that all too closely resemble NAFTA’s legacy.  On Tuesday, the U.S. International Trade Commission released data for another month of FTA trade with Korea, revealing a whopping $1.9 billion trade deficit with the country in July alone, 30% above last year’s July deficit.  Overall, the U.S. trade deficit with Korea has risen to $6.8 billion under the first four months of the Korea FTA, as mounting imports have surpassed exports and eroded U.S. jobs. 

Even so, maybe the NAFTA-style deal has at least allowed Korean consumers to enjoy a new influx of Costco’s.  That is, assuming they’ve been willing to jettison small businesses in exchange for steak and potatoes.  

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Concerns about TPP's IP Chapter Grow Among Civil Liberties and Human Rights Groups

As the 14th round of TPP negotiations begins in Leesburg, apprehension about how the intellectual property (IP) chapter could affect free speech, global health and human rights continues to grow among prominent watchdog groups.

Last week, the American Civil Liberties Union (ACLU) described the TPP as "the latest threat to free speech in guise of IP reform” and criticized the negotiations for lack of congressional oversight.

Amnesty International chimed in on Thursday urging the TPP to “put people ahead of profits” and uphold basic principles of transparency and human rights.  Amnesty particularly stated concern that TPP would raise the cost of essential medicines by "stifling" generics.  For more information on how the IP chapter stands poised to jack up medicine costs, check out Public Citizen's Access to Medicines page.

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