Rethinking Trade - Season 1 Episode 37: Hyperglobalization, COVID and Failed Supply Chains: Now What?

In our very first episode, we looked at how corporate-led globalization has fueled shortages in our medical supply-chains and limited our ability to fight COVID-19 Today, we catch everyone up on the latest, discussing two Biden-Harris Administration initiatives aimed at addressing this mess -- a targeted supply chain-review and an executive order on Buy American procurement rules. We also make sense of the latest U.S. trade data, which suggests a record trade deficit in 2021. Yup, that's probably another COVID symptom…

Music: Groove Grove by Kevin MacLeod.

Link: https://incompetech.filmmusic.io/song/3831-groove-grove.

License: http://creativecommons.org/licenses/by/4.0/

Transcribed by Sally King

Ryan 

Welcome back to rethinking trade where we don't just talk about trade policy, we fight to change it. I'm Ryan, and I'm joined once again by our in-house trade expert, Lori Wallach. Lori, and one of our very first episodes, we talked about how decades of hyperglobalisation have undermined our resilience against the COVID-19 crisis, and how the government has to actively intervene in the economy to rebuild a domestic manufacturing base. Today, we wanted to update listeners on what has been and hasn't been happening since that time. Let's start with an overview of the big picture. What does the pandemic look like today from a trade policy perspective?

Lori Wallach 
So, on the one hand, the expected shift towards more domestic supply chains in response to what proved from COVID, to be enormous vulnerabilities in this country, but around the world created by hyperglobalisation. And these very thin, brittle globalized supply chains. This has not happened as quickly as one might hope and expect. In part, the corporations, the big multinationals, the Amazons and other mega retailers, who've made a lot of money on that race to the bottom hyperglobalized system of sweat labor, supply chains, and just-in-time production, are very keen to maintain that system, which prioritizes their profits, and what they will consider efficiencies, no redundancy, over reliance, reliability of supply and deliverability of critical goods. And so they're pushing back. And also, we've had that system being pushed for the last 25 years of the World Trade Organization, the NAFTA Free Trade Agreement model. So it's a steamline are heading in the wrong direction, it takes a long time to turn. The evidence of that is that we have seen increased imports from China into the US, of the medical supplies we've needed from personal protective equipment, PPE to different kinds of medicines that we've needed to deal with the COVID crisis. We have seen a lot of spending domestically, as people are stuck at home and not spending more on restaurants and travel on kitchen goods, you know, fancy ovens and other things, a bunch of which are imported. So our trade deficit has gone up. Interestingly, the WTO has reported that's contrary to the cheerleaders of the corporate globalization model, there haven't been a lot of enduring trade barriers. So countries didn't use emergency tools to shut down trade and force domestic sourcing. The WTO just issued a report that many of the trade restrictions that emergency restrictions that have been put in place during the height of COVID, have been lifted. And that actually, if anything, there's been more removal of trade barriers and attempt to get the important goods that the production of which is over-concentrated in a few locations. And on the other hand, there have been some very inspiring moves by the Biden administration, which include a supply chain review in some key sectors and also a Buy American executive order. Now, we also saw during the Trump administration, some similar announcements and executive orders. And the proof is always in the pudding. The Trump administration didn't follow through, they had a lot of power and opportunities to do things just unilaterally without Congress. They didn't take them. The bind administration has taken some specific steps, and we're gonna have to watch carefully to see if they actually follow through on all of it.

Ryan 
Those specific steps are what my questions are based on the first big item I wanted to tackle you just mentioned, which is the supply chain review being conducted by the administration. What does this review entail? Like what is it what's its purpose? And what is the status of it?

Lori Wallach 
In the spring, the body Harris administration announced they would do 100 Day Review to figure out the weaknesses in and plans to strengthen certain critical supply chains. And they pick three sectors. And they pick three important sectors: critical medicines, critical minerals, the production and processing of, so for instance, the minerals used in making cell phones and the communications equipment, and then also semiconductors, and then also the supply chain for batteries, electric batteries, which is to say, the sort of advanced batteries that are used for electric cars. And then June 8, they published a report, it was perhaps the first time since Alexander Hamilton, that the US laid out a detailed industrial policy in writing. And I'm only slightly exaggerating, the report itself was incredibly inspiring. It's laid bare, the deep flaws in the current system, in a way that I would say, as someone who's observed these issues for 30 years, one could hardly have ever predicted would come out of the US government, and was quite smart in laying out the ways in which the old regime failed. And I know that wasn't easy, because some of the agencies and for that matter, even President Biden had supported the past policies that led to these problems. So in that regard, it was incredibly impressive and helpful because the only way you get a different outcome is when you start to admit that the status quo didn't work. And it takes you know, it takes bravery if you were part of hoping those old policies would work and pushing them. And some of the proposed changes of how to fix the problem, were also really inspiring and were spot on. And were things you would never expect to come out of any US administration. And by the way, weren't the kind of things that the Trump administration dug into not neither in detail of thinking it through and figuring out the solutions as compared to a bunch of superficial rhetoric that also are not compatible with the status quo big business model. So now the proof is going to be in the pudding about whether those kind of changes actually get made. And if they were changes proposed across the board, using existing authorities, things that the executive branch could do in their own capacity with respect to strengthening the Buy America policies, and Buy American policies, which has to do with the government using government procurement resources to shape the market. It included changes in the tax code, it included uses of the defense production act, for the government to create demand and incentives for changes. And it's really if implemented, could make some big differences. And now we need to see if it gets implemented.

Ryan
Another big item and you just mentioned this is the modifications the administration is made to Buy American rules. We've covered this at length in previous episodes. So listeners can go back and get even deeper into this topic. But maybe you could give us a quick introduction to what these policies are, and then talk more about what is being done and what hasn't yet been done in relation to the Buy American rules in the context of the pandemic especially.

Lori Wallach 
So again, here, the good news is the administration's executive order on Buy American and Buy America was quite broad. It covered all the programs, it covered a lot of the needed territory, and proposes to increase the domestic content rule for what qualifies is Buy American, which right now is just 55% of the value of a good needs to be American made, which is pretty pathetic. But unfortunately, it didn't really close the biggest loophole. And that is even that 55% rule is waived entirely with respect to any government procurement over a certain threshold value. That's about $180,000, which for the federal government means most of the contracts, most of them are bigger than $180,000. Because under our trade agreements Buy American is waived for 60 countries that have trade agreement, procurement agreements that basically guarantee that these foreign countries, companies and products get treated as if they were made in the US for Buy American is called the Trade Agreements Act waiver. And it is the exception that eats the rule. And the way that works is not only to goods from Hong Kong, which now is China and from Mexico and Japan and Korea in all of Europe, not only are those treated, Taiwan, treated as if they were from the US, and the government gives equal credit, equal purchasing priority to those goods, but almost worse, any good over that threshold, the domestic content rule is waived whether or not that country has a trade agreement. So that means that all that has to happen is the last step in processing has to happen in America. And there are companies have gotten that so skilled in doing this, that they basically like can construct the better part of a whole building, with all of its walls poured the plumbing in there, the electrical in there, different pieces of you know, built-in furniture in there, they ship those on barges. And then as long as like the whole building is put together all that content, all that value, that is considered meeting the Buy American rule for all of those goods that are in that building or with respect to Buy America. That is the final assembly is happening here now Buy America is stricter than Buy American. So I don't want to simplify this. I want everyone who wants to know the details to go to a website at tradewatch.org and go to the procurement section, and we have a memo that lays out all of these issues and where the gaps and flaws are. But the thing to know is that the executive order like Trump's executive order, I'm Buy American doesn't close this huge loophole. And that's a problem. The President did say that they would as a candidate, that they would be closing these loopholes. And in some of his initial statements, they said that they would and now the executive order doesn't. What the executive order does do is ask for a bunch of data. And there's a hearing this very week about what the flaws are and the current data keeping, because it's so sloppy, we don't really know what is really domestic versus what is just assembled here without domestic content versus what is from one of the 60 countries versus what is domestic content and assembled here. So it's really hard to know what's really going on. And as a result, the data makes it look like there's less of a problem than we know that there is. So with respect to the Buy American and Buy America rules, that executive order is one big piece. The other big piece is the infrastructure bill. So the house infrastructure bill explicitly didn't prioritize that trade agreement waiver, but the Senate version does. And now there's a lot of pressure to just use the Senate version, because the vote was so narrow there, and it almost didn't pass at all, the Senate version does expand Buy America. That's the construction money, and it has it go to a lot more programs and my going down to the states. And that's great. And it strengthens the rules with respect to us made iron and steel. And that's great. But it doesn't really fix the Buy America problem. And it doesn't fix the waiver there. So there's a lot more work to be done there. And there is, you know, enormous opportunity in the existing statute where the President just like President Biden can do this. Now President Trump could have and didn't, can use existing authority to simply waive that trade agreement exception, the President can just take that away. And that would certainly be something that would be smart. And if you again, go to our website, tradewatch.org, you can see letters from very senior members of the House and Senate urging him to do that very thing, President Biden.

Ryan
So my final question also involves reports and data and things you can find on the Public Citizen website, which is the fact that, so a lot of these measures that we've been discussing haven't been fully enacted yet. And so the trade data, the deficit report still shows a rising US trade deficit in manufactured goods. So the reason analysis on the website on the Public Citizen website, suggested 2021, could actually be a record high. Can you talk about the Census Bureau's trade data report? And some of the things you found those meaningful in it what's in the analysis that we published?

Lori Wallach 
Here's the thing for folks to know, it looks like the 2021 annual trade deficit could top $1 trillion for the first time in US history. And that's just horrific and astonishing. However, that says something different than what you'd normally expect, which is to say what that says most and this is where our analysis points out, is that the US has had an economic recovery from the COVID recession that is faster and broader than most other countries. So we're actually our consumers have started to buy stuff, our demand has increased. At the same time, Ryan, as you just pointed out, these initiatives by the Biden administration, which is you know, been in office for seven months now have not had an opportunity to go into effect. So to the extent that the US has had an economic recovery and people want to buy stuff, the supply chains still are largely those old ones. So there aren't, you know, yet great opportunities. If the supply chain review brings those names supply chains home, if the Buy American and Buy America improvements actually happened with a waiver closed, and as a result, there's more domestic government demand for goods. And as a result, there's more investment. And as a result, there more opportunities for folks to be able to buy American made everything, then that change hasn't happened yet, even though the demand is picked up. So as a result, what we see is our imports are way up, because we want to buy stuff, but we don't have it domestically made yet. And you know, please at the Biden administration falls through so that in a couple of years, that data doesn't look like that. At the same time in the rest of the world, there still is much more of a recession going on. So our exports stayed down, there isn't demand for our stuff. And because we have demand here, our imports go up. And so we have a pretty whopping trade deficit. The COVID phenomenon, and the economic implications of it really are overshadowing what otherwise we could see in the trade data. Because for instance, there's another indicator about manufacturing, it's a study that is done that, you know, every month looks at sort of the projections for supply chain and manufacturing. And that and domestically, and that is that that number is up that's that's doing fairly well. So normally, you wouldn't see that number go up in the trade deficit go up at the same time. But that is that is the COVID effect. I think we're all incredibly impatient to see the horrors of the COVID lessons about hyperglobalisation quickly translate into more domestic investment, more domestic manufacturing, more resilience, more reliability. For all of us more good manufacturing jobs, the proof is going to be in the pudding over time, and the Biden administration is going to have a fight in its hands with all these corporations that want to do the same old, same old, you know, "China's too expensive, let's make it in Vietnam," kind of agenda of manufacturing. And I think they're going to stick to their guns only if we really all are pushing to make that happen. Because the counter push is going to be enormous. And there is a lot of inertia of this old system. But I think what we see in what the Biden administration's supply chain reviews and what they Buy America order is showing, is there a lot of people in there now, unlike any pastime, high level Biden administration officials, who deeply understand the problem, and really do you want to change and as frustrating as it may be, that's not going as fast as we want, are there parts of it that aren't done. It behooves us all to basically make common cause with those allies, and really push hard to try and help those folks in the inside who want to make these changes because it's a unique opportunity. It's the first time in 30 years of my doing this work that that possibility even exists, and so we need to make it work for us.

Ryan 
You can check the description of this podcast for links to both of the reports that we discussed in the episode. Rethinking Trade is produced by Public Citizen's Global Trade Watch. To learn more you can visit rethinktrade.org. You can also visit tradewatch.org. Stay tuned for more and thank you for listening.

Rethinking Trade - Season 1 Episode 36: U.S. Inaction is Enabling COVID-19 Variants to Spread

The world celebrated when President Biden announced the U.S. would support a temporary waiver of World Trade Organization “TRIPS” intellectual property barriers to boost global production of COVID-19 vaccines. But months later, Big Pharma’s monopolies remain. 

The administration has failed to deliver on the waiver or to get vaccine makers to share their recipes. That means dire shortages of vaccines continue and with the vast majority of people worldwide exposed, COVID is on a murderous, variant-spawning rampage.

Now the delta variant first detected overseas is burning through the U.S. Public health experts are warning that lockdowns and perhaps other measures, like postponing in-person learning, may be necessary. The U.S. must act now to end the pandemic. Every moment of further inaction enables COVID-19 variants to develop and spread.

Take Action: rethinktrade.org.

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Music: Groove Grove by Kevin MacLeod.

Link: https://incompetech.filmmusic.io/song/3831-groove-grove.

License: http://creativecommons.org/licenses/by/4.0/

Transcribed by Sally King

Ryan
Welcome back to Rethinking Trade where we don't just talk about trade policy, we fight to change it. I'm Ryan and I'm joined once again by our in-house trade expert, Lori Wallach. Lori, on May 5, the Biden administration announced its support for waiving TRIPS intellectual property barriers for COVID-19 vaccines at the World Trade Organization. As we've detailed in previous episodes, a waiver proposed by South Africa and India would help facilitate more production of COVID-19 vaccines, tests and treatments around the world. By reversing the Trump administration's block against the waiver, the administration created momentum for it to be adopted at the WTO. But today, three months later, the deal is not done. And with the Delta variant spreading rapidly, pressure is mounting on the administration to do more to make the waiver a reality. What is the current situation with the TRIPS waiver? And why are groups urging more to be done,

Lori Wallach
Just to remind folks TRIPS stands for the agreement and trade-related aspects of intellectual property. It's an agreement enforced by the WTO that all of the WTO is members, 160 countries are obliged to give Big Pharmaceutical companies monopoly control. So for instance, right now, a handful of companies are deciding if and when vaccines are made, there's a dire shortage as a result, a few companies have the powers over how many tests are made and treatments that are critical to saving the lives of people with COVID. So this waiver is urgent, and not a dang thing has happened. And that is where it is. So two things are going very wrong. One, on the one hand, the binder administration on May 5 did a historic thing and switching sides, having the US be on the right side of history and joined 130 other countries calling for this temporary waiver of these intellectual property barriers in the face of this unprecedented 100 years health crisis to try and save lives, it was exactly the right thing to do. But since then, the US has not really shown the kind of leadership that in the past has been shown at the WTO or other international negotiations, when there really is the US on a mission to get it done. Now, it's tricky, because the WTO is a place where if big developed countries too heavy-handed, it can backfire. But there is sort of a Goldilocks position not too hard, not too soft, just right. And we're not there yet with the US is leadership to try and get the deal done. On the other hand, the European Union has come in like gangbusters to mess the damn thing up. So Germany is leading has pushed the European Union, which operates the WTO is a block to oppose a waiver. And they have been strategically obstructionist. They have been merciless, they have been impossible. And instead of the US basically meeting fire with fire, the US has been fairly passive. And so the situation now is more or less Germany with the UK and Switzerland kind of hiding behind the German government, which has ginned up the whole European Union is blocking 130 plus countries that see this urgent waiver as necessary, not sufficient, there's more, but necessary to start to scale up the needed production of vaccines, tests and treatments. So what's happening now is basically Germany needs to get the hell out of the way, at this point, it is becoming a Germany versus humanity problem. This is not good history, this is not good luck. They just need to get out of the way. And then you've got the US, which needs to step up and help lead with some of the countries like South Africa and India that have this initiative in the first instance, towards getting a deal because three months of so-called negotiations have led to nowhere since the US switch sides and the US showed amazing leadership and getting some of the other small but powerful bloc of countries to stop blocking. So Japan came inside and Mexico and Canada, they're a bunch of countries that were doing the wrong thing and the US got that fixed, but they still have not been able to deliver the deal. And President Biden and USTR Tai were spot-on. The number one priority needs to be to save lives. And right now it's not just lives overseas, as important as it is that tens of millions of people could die needlessly. To put this in perspective, of the 4 billion and change vaccines that have been produced and used 85% of them have been used by just 10 countries. So if you're in the US and you're hearing this, you're getting scared about Delta, but you've had some months of having a sense of security of having some sense of the vision of what could be normal. There are dozens of countries that haven't a single shot available, and most of Africa's below 10% immunized is not supposed to be getting a full set of shots under the current production capacity until maybe 2024. Which, you know, just to be very narrow-minded. What do you think the Delta variant in any other variant is going to be coming from but from where the Coronavirus is raging? It is killing people and it is cooking up at some point a vaccine-resistant variants. So when people say no one's safe until everyone's safe, they just a slug. So we just need to get the TRIPS waiver done like two months ago as the critical first steps that we can get more vaccines, tests and treatments made around the world and end the damn pandemic,

Ryan
You were just talking about the Delta variant. We've talked about the threat of variants in the past. And that's been one of the things we've been saying about the TRIPS waiver that it would help prevent them from emerging and spreading in the first place. Now we're seeing the reality. The Delta variant is obviously threatening to bring about a new round of mask mandates and lockdowns in the US and elsewhere. Can you talk a bit more about the issue of variants and the TRIPS waiver?

Lori Wallach
So here's the deal. Variants emerge naturally out of viruses, but they need a place to be created. So the virus has to be replicating, that's when you get variants. That's where you get mutations. And if there are vast numbers of people who are infected, if there are raging outbreaks, it doesn't just kill tens of millions of people who do not need to be losing their lives at this point, because there is a vaccine, even if the vaccine, like with the Delta variant can't stop an infection, it's proving to keep people from being hospitalized or from dying. Most of the world is now in the face of huge third-wave, raging outbreaks, and just not being covered here. So the horrors that we saw in India, that's right now in Indonesia, that has been in Peru and Nepal and Pakistan, it is all over Africa. People are dying, and they have no vaccine, they have no treatments, and they're totally unprotected. And in the midst of all of that, death, destruction, economic wreckage, new variants are also breeding. And the reason why is the virus is trying to make itself better, stronger, more likely to spread and continue on. So these Greek letters, now we've heard about lambda, they are four significant variants that have basically been developed because there have been outbreaks where the virus can mutate. And then the new version can spread. And as we saw with Delta, if it's much more infectious, it just takes over. And so we practically greedily thinking just about that handful of countries have vaccines, we the privileged to have vaccines have equal interests as the person who doesn't have them in the entire world getting vaccinated. Because as long as there are raging outbreaks anywhere, there are going to be variants until there's a variant that literally gets all the way around the vaccine makes you really ill, kills people at the same numbers, and then we're going to be on global lockdown again and back to scratch. So whether you're motivated by the self-interest of not getting back to that situation, or you are horrified by the prospect of all these needless deaths, or it's a combination, it is in everyone's interests in the battle of vaccines versus variance, to get enough vaccines to wipe out the hot spots where massive new variants will develop and spread worldwide.

Ryan
And I haven't met many people who are not upset when they hear about this stuff, what needs to happen now, you know, what can get us out of this mess?

Lori Wallach
So at this point, I think the only thing that is going to change the circumstances is if people in the developed countries who've been privileged to have the vaccines and who now are the seat of Europe blocking the waiver, and the US not leading strongly enough to get the waiver. People in the rich countries need to reactivate the campaigning that, for instance, in the United States led to this amazing outcome of having the US for the first time in history, put people's health and global health ahead of Big Pharma. People did that. The President obviously has a strong moral compass in his Catholic social justice, faith-based value of caring for people's lives around the world. That is for sure with the president. But amongst many different things that were clamoring for attention, many crises, it was public attention and demand that helped make this wave or something, then in May, with all the other things demanding a president's time the President supported, and we're just gonna have to gear up another campaign at the same level, because a lot of other things are sucking up a lot of the oxygen in the room. And people in the White House, people across the country need to basically have this rise back up. And then sadly, I think the Delta variant is part of how that's going to happen anyway. But you know, as we're thinking about what can make a difference, the answer is not, "Oh, we all should get a booster." The answer is we need to get that third shot that we will be taking unless you're super immune-compromised super all there's some real reason you need it, that needs to go into an arm and someone in one of those countries where there no vaccines, and then we need to make a ton more vaccines. That's the bottom line. There are three ways this can happen. This is not rocket science. This is a question of people power. Step one. on leash the intellectual property, get the barriers out of the way. That is the waiver of the WTO rules. Simply get rid of these barriers temporarily so that it is allowed around the world to make more of the vaccines, treatments and tests. Number two technology transfer. What does that mean? It means the difference between someone giving me the piece of paper and saying legally, okay, here's the IP waiver. Here's a list of ingredients and you have the right now to take my information that previously was under monopoly control, and you can do it too. But he was cooked anything with the recipe knows listening gradients isn't sufficient you need the how you do it, what is the order of it, what you stir with what where does the egg beater come in? And so the technology transfer is that part of the recipe, where it says here is how you make, for instance, these mRNA vaccines, which actually are the easiest to scale up, because they don't require the enormous specialized like vats that you need to brew certain kinds of virus-based viral injections. units in your chemistry, you need clean manufacturing could be in a computer chip factory, it could be in another pharmaceutical factory, but you need the technology. So that's a matter of being able to do that as Moderna's chief scientists said is getting lines up in three to four months, not taking a year to reverse engineer how the hell you put the ingredients together. So number one TRIPS waiver, liberate the intellectual property. Number two, to speed up the production technology transfer. And by the way, the US government paid a lot of money to Moderna to Pfizer, to J&J. And there is, particularly with Moderna, even government patents in the vaccine. So there is leverage the Biden administration needs to exercise it is basically to say, guys, we'll even compensate you for some of this, but you just have to share the know-how. And then number three is just a good old cash money to basically scale up the manufacturing. And what is clear is this has to happen in hubs around the world, we don't have the capacity and make it out here and ship it there. Besides the fact, we all know how that will go. As soon as there is a real scare here, no one is going to be willing to send the stuff made here or there. So yeah, we need to increase production here both for more capacity for our own use. And then we can make some more and send some more. But there needs to be production capacity around the world. And the good news is and every part of the world there are companies that could do it. Some people say at this moment, there are 2 billion doses not being made were the IP liberated and the technology transferred, that could be online in the matter of months. But even more production needs to be set up. And so for instance, Public Citizen did a study, and for $25 billion, 8 billion more doses could be constructed by either retrofitting existing facilities, or adding new lines to existing clean manufacturing facilities, which again, that's all you need for mRNA. You don't need the huge vats, etc. and that work is going to take cash both for the construction, but actually the thing that's the most expensive is just the inputs. So as Professor Joe Stiglitz, the Nobel Prize winning economist says if you can get the IP barriers out of the way, the market can solve for a lot of this. So if you need more inputs to make mRNA vaccines, you need more lipids, you need more glass vials, as soon as you liberate the IP and get the technology transferred so actually, there is a demand for all that stuff. The market will solve for making more but but it's going to take money. So wave the IP transfer, the technology, manufacturing that is funded and distributed around the world. That is how we get the hell out of this disaster. That is the only way we're going to stop this pandemic. And the way to make that happen is only going to be people power. Pharma has no interest in this. The pharmaceutical companies are right now have a monopoly on these vaccines. They're not just thinking about their greedy boosters for $150 a shot, which Pfizer's literally said that's what they're going to do; not the 20 bucks a shot, that they're now charging for pandemic pricing vaccines. It's not just the vaccines where they hope to make the $150 booster shot, which is what Pfizer is on the record said they're going to do and replace $150 shot with for the $20 pandemic pricing original vaccine. It's also because these handful of companies want to corner the market, have a monopoly on this platform of mRNA with respect to cancer cures and AIDS cures and, and malaria, and the greed of thinking about these future profits over the prospect of tens of millions of people dying and never getting out of this cycle, this vicious cycle, which is profitable for Pharma to have a new variant that needs new boots so that they can then sell to the rich people. But that that is like that has no future for our world. So the one-two-three stops, people power is going to make it happen. And the very first thing I recommend is join all these organizations nationwide, that have sort of hit that basta point where it's like enough already, the Biden administration needs to step it up. And in the US there's a big petition drive and their visits with members of Congress has a lot of activity going on. And in Europe, led by the Germans same things going on basta, we've had it! The EU needs to get the hell out of the way starting with Germany and that transatlantic people power given the leadership's already come from the developing countries and their governments. That's how we're going to get this done.

Ryan
And if you check the summary of this podcast, there are links to some of the actions that Lori just described. Rethinking Trade is produced by Public Citizen's Global Trade Watch. To learn more you can visit rethinktrade.org. You can also visit tradewatch.org. Stay tuned for more and thank you for listening.

XL Pipeline Absurd $15 Billion NAFTA ISDS Claim

By Noa Levin, Daniel Rangel

TransCanada Energy (TC Energy) announced on July 2, 2021 that it would be filing a legacy North American Free Trade Agreement (NAFTA) claim under the Investor State Dispute Settlement (ISDS) system, seeking US$15 billion in compensation for the Biden administration’s revocation of the Keystone XL pipeline permit. While the United States-Mexico-Canada Agreement (USMCA), which replaced NAFTA, gutted ISDS between the United States and Canada, the parties agreed to allow a three-year post-termination period for “legacy” claims arising from investments that predate the entry into force of the USMCA. This is the basis for TC Energy’s claim.

A review of TC Energy’s annual fiscal reports reveals that $15 billion is an arbitrarily large damage claim, completely unrelated to the value of investments made or the actual hit that the company is assuming from the project’s cancellation.

TC Energy claimed in their 2020 Annual report that the carrying value of the Keystone XL plant, property, and equipment was US$2.2 billion, and the carrying value of associated projects was US$0.2 billion (a combined carrying value of US$2.4 billion).[1] This carrying value, which represents the asset’s worth (measured by taking its cost and factoring in any depreciation), underscores that the Keystone project was valued at only US$2.4 billion prior to its cancellation. In 2016, when TC Energy launched its first ISDS case against the United States, the corporation  claimed that it had spent US$3.1 billion on the project. It is apparent then that the company did not undertake any substantial further investment after then-President Trump issued a new permit in 2017.

Now, this does not mean that the actual “damage” caused to the Canadian firm ascends to US$2.4 billion. The project might have been cancelled, but TC Energy could sell or repurpose many of the assets initially devoted to the pipeline to reduce the financial burden. As a matter of fact, it seems that this is what has been happening since. In its First Quarterly report of 2021, TC Energy reported that the cancellation of the Keystone XL pipeline led to an after-tax asset impairment of US$1.8 billion.[2] In other words, the cancellation of the project resulted in a financial hit of US$1.8 billion for investors.

This is considerably smaller than the $15 billion demanded through ISDS. Yet, this number must be reduced further because TC Energy did not finance the pipeline alone; a significant amount of funds came from outside investors, most notably the Government of Alberta, which invested approximately US$1 billion in the project.[3] Excluding these external investments, TC Energy reported a personal financial exposure (loss) of US$0.8 billion.[4]

So, while it is demanding $15 billion in compensation from U.S. taxpayers, TC Energy actually took a financial hit of US$0.8 billion from the cancellation of the Keystone XL pipeline.

In a nutshell, TC Energy expects to get 15 times more money, coming from taxpayers’ pockets, than the asset losses it experienced from the revocation of a permit, that was already denied twice. Rather, the $15 billion reflects what the corporation in some way gauges to be its expected future profits. Or, to put it another way, $15 billion is the corporation’s projected return on an investment that generated widespread opposition across potentially impacted communities in the United States.

Are more reasons needed to swiftly and definitively end ISDS? 

 

[1] In Canadian dollars, these values are $2.8 billion, $0.2 billion, and $3 billion respectively, using the December 31, 2020 exchange rate of 0.7875 USD for 1 Canadian dollar.

[2] Or 2.2 billion Canadian dollars, using the March 31, 2021 exchange rate of 0.79601 USD for 1 Canadian dollar.

[3] $1.3 billion Canadian dollars, using the March 31, 2021 exchange rate.

[4] $1.0 billion Canadian dollars, using the March 31, 2021 exchange rate.