CAFTA’s Decade of Empty Promises Haunts the TPP

Ten years ago, after a flurry of backroom deal-making, Congress passed the Central America Free Trade Agreement (CAFTA).  In the dead of night.  By a single vote.  

Exactly one decade later, today trade ministers are gathering in Hawaii to try to conclude deadline-missing negotiations on the Trans-Pacific Partnership (TPP) – a sweeping deal that would expand the CAFTA model of trade across the Pacific.

In attempt to quell the controversy surrounding the TPP, the administration is recycling the same lofty promises that were used to push for passage of CAFTA: the deal would safeguard public health, spur economic prosperity at home and abroad, and protect workers, consumers, and the environment.

After 10 years of CAFTA, the emptiness of such promises is on full display. Today in Central America, life-saving medicines are more expensive due to monopoly protections that CAFTA gave to pharmaceutical corporations – protections that are slated for expansion in the TPP.  And the headlines from several CAFTA countries do not report economic prosperity, but economic instability, drug violence and forced migration.  Meanwhile, CAFTA’s labor provisions have failed to halt the assassination of dozens of Central American union workers who were trying to end unmitigated labor abuses like wage theft.  In contrast, the pact’s foreign investor privileges, which the TPP would expand, have succeeded in empowering multinational corporations to challenge domestic laws, including consumer and environmental protections.

Worse than repeating the mistakes of the past, the TPP would repeat the mistakes of CAFTA’s present.

Making life-saving medicines unaffordable

During the debate over CAFTA, health experts warned that by handing pharmaceutical firms greater monopoly protections, the deal would restrict Central Americans’ access to more affordable generic versions of life-saving drugs.

Unfortunately, they were right.  Take, for example, Kaletra, a drug used to fight HIV/AIDS.  Under CAFTA rules, Kaletra has enjoyed monopoly protections in Guatemala, making generic versions unavailable, for the entire first decade of CAFTA.  Without a generic alternative, Guatemala’s public health system pays about $130 per bottle of Kaletra.  In contrast, the generic version of Kaletra costs less than $20 per bottle, according to the Pan American Health Organization reference price.  For Guatemala’s taxpayers, paying more than six times the generic price for Kaletra under CAFTA means less money to build schools or bridges.  For Guatemala’s HIV/AIDS patients, it can mean the difference between life and death.

Like CAFTA, the TPP is slated to include extreme monopoly protections for pharmaceutical corporations.  Indeed, the deal even omits limited provisions to protect access to affordable medicines that were included the most recent U.S. free trade agreements.  That’s why Doctors without Borders has described the TPP as not only worse than CAFTA in restricting access to medicines, but “the most damaging trade agreement ever for global health.” 

Turning a blind eye to labor abuses

One decade ago, the Office of the U.S. Trade Representative sold CAFTA as the “best ever trade agreement on labor,” boasting “world class” labor provisions.  Those provisions failed to prevent the murder of 68 Guatemalan unionists over the course of seven years without a single arrest.  In 2008, the AFL-CIO and Guatemalan unions filed an official complaint under CAFTA’s labor provisions, calling for an end to the rampant anti-union violence, wage theft, and other abuses.  It was not until six years and dozens of unionist murders later that the U.S. government moved to arbitration on the case.  Today Guatemala’s union workers still endure frequent attacks with near-total impunity.

CAFTA’s labor provisions have proven similarly ineffective in the Dominican Republic, where sugar cane workers endure 12-hour workdays in hazardous conditions without receiving legally-required overtime pay.  A Spanish priest who filed an official CAFTA complaint in attempt to rectify the abuses was informed by U.S. Department of Labor officials, “Nothing is going to happen on account of not complying.”  Indeed, nothing has happened.  Despite CAFTA’s “world class” labor provisions, the Dominican Republic’s underpaid cane workers continue laboring in squalid conditions.

Why has CAFTA, like U.S. trade agreements before and since, failed to curb widespread labor abuses?   Kim Elliot, a member of the Department of Labor’s National Advisory Committee on Labor Provisions of U.S. Free Trade Agreements, recently offered this blunt explanation: the labor provisions of U.S. trade deals “are in there because they’re necessary to get deals through Congress.”  She added, “It’s really all about politics and not about how to raise labor standards in these countries.”

Now, in attempt to get the TPP through Congress, the Office of the U.S. Trade Representative is parroting the same promise it made for CAFTA, claiming that the deal would include “the highest-ever labor commitments.”  While the TPP’s labor provisions have been described as more “enforceable” than those in CAFTA, this is nothing new.  The last four U.S. Free Trade Agreements (FTAs) already included such “enforceable” terms, but still failed to end on-the-ground offenses, according to a 2014 U.S. government report.  Colombia’s unionists have faced dozens of assassinations and hundreds of death threats despite the Colombia FTA’s inclusion of TPP-like labor provisions.  And last year Peru explicitly rolled back occupational health and safety protections for workers despite the Peru FTA’s “enforceable” labor provisions.  Neither country has faced penalties under the FTAs.  It’s unclear why the TPP’s replication of such unsuccessful labor provisions should be expected to curb the systematic labor abuses in TPP countries like Vietnam, which bans independent unions, uses forced labor, and, by the Vietnamese government’s own estimate, has more than 1.75 million child laborers.

Empowering corporate attacks on consumer and environmental protections

In contrast to CAFTA’s unenforceable “protections” for workers, the deal granted highly enforceable privileges to foreign corporations.  This includes empowering them to bypass domestic courts and challenge domestic consumer and environmental protections before extrajudicial tribunals via “investor-state dispute settlement” (ISDS).

Corporations have not held back in using this controversial parallel legal system to challenge pro-consumer policies, including government efforts to keep electricity affordable.  In 2010 a U.S. energy company with an indirect, minority stake in Guatemala’s electric utility used ISDS to challenge Guatemala’s decision to lower electricity rates for consumers.  The next day, the company sold off its minority share.  A three-person ISDS tribunal generously decided to treat the firm as a protected “investor” in Guatemala and ordered the government to pay the corporation more than $32 million.  In another energy-related CAFTA case, a U.S. financial firm challenged the Dominican Republic’s decision not to raise electricity rates amid a nationwide energy crisis.  The government decided to pay the firm to drop the case in a $26.5 million settlement, reasoning that it was cheaper than continuing to pay legal fees.

CAFTA countries also face an increasing array of ISDS cases against environmental protections.  A U.S. mining company, for example, has launched a claim against the Dominican Republic for delaying and then denying environmental approval for an aggregate materials mine that the government deemed a threat to nearby water sources.  Other U.S. investors in the Dominican Republic have threatened to launch a CAFTA claim against the government for denying environmental approval for their plans to expand a gated resort.

The TPP would dramatically expand the controversial ISDS system, newly empowering more than 28,000 additional foreign-owned firms to ask private tribunals to order taxpayer compensation for commonsense environmental and consumer protections.

Fueling economic instability

Ten years ago, CAFTA proponents promised the deal would bring economic prosperity to Central America, making it “the best immigration, anti-gang, and anti-drug policy at our disposal.”  Today, CAFTA countries Honduras, El Salvador, and Guatemala are plagued by drug-related gang violence and forced migration.  While the causes are many, “economic stagnation” has fed the crisis, according to the U.S. State Department.  CAFTA clearly failed to deliver on its promise of economic growth for the region.

Worse still, CAFTA has contributed to the region’s economic instability.  Before the razor-thin passage of CAFTA, development organizations warned that the deal could lead to the displacement of the family farmers that constitute a significant portion of Central America’s workforce, by forcing them to directly compete with highly-subsidized U.S. agribusiness.  Indeed, agricultural imports from the United States in Honduras, El Salvador, and Guatemala have doubled since the deal went into effect, while the countries’ agricultural trade balance with the United States has dropped, spelling farmer displacement. 

And despite promises that CAFTA would make up for rural job loss by creating new jobs in apparel factories, apparel exports to the United States from Honduras, El Salvador, and Guatemala have actually fallen $1.6 billion, or 21 percent, since the year before CAFTA took effect.  Not only has the promise of new factories disappeared – so have existing factories.  

If the TPP were to take effect, the apparel jobs of Central America would be expected to decline even quicker, contributing to further economic instability.  That’s because the TPP includes Vietnam, a major apparel exporter where independent unions are banned and where the minimum wage averages less than 60 cents an hour – a fraction of the minimum wages in Central America (or even in China).  Central America is already losing the race to the bottom.  It will only fall further behind if the TPP makes Vietnam the newest low-wage competitor. 

The promise-defying track record of CAFTA need not be repeated.  When the TPP negotiators meeting today in a resort hotel in Hawaii finish this round of negotiations, we are likely to hear a familiar litany of promises about how the TPP would benefit consumers, workers, and the environment.  With those promises punctured by a decade of CAFTA’s stark realities, we have a unique opportunity to say “enough is enough.” 

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New Public Citizen Report Documents Systematic Bipartisan Betrayals on ‘Deals’ Made by Presidents, Congressional Leaders in Exchange for Trade Votes

Broken Promises, Lost Elections: Goodies Promised in Exchange for Trade Votes Don’t Materialize, Don’t Shield Representatives From Voters’ Wrath

As the Obama administration and GOP congressional leaders resort to promising special favors in attempt to entice members of Congress to buck majority opinion and support Fast Track, a report released today by Public Citizen reveals that such promises to extract controversial trade votes consistently have been broken, exposing representatives to angry constituents and electoral losses.

Facing bipartisan congressional opposition to Fast Track trade authority and polls showing majority U.S. public opposition, the Obama administration has moved beyond trying to sell Fast Track on its merits and is now offering rides on Air Force One, promises of infrastructure legislation and pledges to help representatives survive the political backlash of a “yes” vote on Fast Track. GOP congressional leaders are promising post-hoc policy fixes to trade laws and more. A comprehensive review of the past two decades of such trade vote deal-making shows that promises of policy changes, goodies for the district and political cover for unpopular trade votes rarely materialize, contributing to electoral upsets for representatives of both parties who trade their votes.

“Members of Congress should know better than to trust an exiting president’s promises of political cover or to rely on vote-yes-now-goodies-later deals for voting ‘yes’ on such a controversial, career-defining issue as Fast Track,” said Lori Wallach, director of Public Citizen’s Global Trade Watch. “Our research of scores of deals over the past 20 years shows no matter who the president or congressional leadership is, almost all of the promises made in the heat of a trade vote go unfulfilled, and representatives who vote ‘yes’ are repeatedly left in political peril.”

Already the first promise of the 2015 Fast Track battle has been broken. U.S. Sen. Maria Cantwell (D-Wash.) and colleagues cast deciding Senate votes after obtaining commitments that Congress would have votes to reauthorize the Export-Import Bank before its June 30, 2015, sunset. Now GOP leaders have made clear this will not occur. Whether Ex-Im will ever be reauthorized is in doubt.

Members of Congress repeatedly have endured such trade vote-swapping deals gone wrong as pledged import safeguards have not materialized, promised funds for community development or worker assistance have proven illusory, and dreams of new infrastructure projects have remained dreams. Among current members of Congress featured in the report who experienced deals for trade votes gone bad are:

  • U.S. Rep. Robert Aderholt (R-Ala.) and the Empty Sock: Aderholt still awaits changes to the Central America Free Trade Agreement (CAFTA) to protect his district’s now-devastated sock manufacturers.  President George W. Bush promised this in 2005 to obtain Aderholt’s “yes” vote for CAFTA. 
  • U.S. Rep. Sam Farr (D-Calif.) Flower Deal Wilts: Farr voted for the North American Free Trade Agreement (NAFTA) after the Clinton administration promised to safeguard the California cut flower sector from import surges. After four years of ballooning flower imports from Mexico displaced California producers, Farr voted against giving President Clinton Fast Track in 1998.
  • U.S. Rep. Alcee Hastings (D-Fla.) Tomato Wipeout: Hastings and other Florida representatives voted for NAFTA on the basis of the Clinton administration’s promises to protect Florida’s tomato growers from destabilizing surges in tomato imports from Mexico. But the Clinton administration did not honor its pledge when, within two years of NAFTA, tomato imports multiplied, Florida’s tomato revenues dropped more than 40 percent, and the number of Florida tomato growers fell 60 percent.

“Even in the rare case where a promise to ‘fix’ a controversial trade deal has been upheld, the acclaimed tweak has failed to offset or outlast the damage wrought on local communities,” said Ben Beachy, research director of Public Citizen’s Global Trade Watch. “Voters do not tend to remember boasts of finite safeguards or worker assistance funds, while mass layoffs, farm foreclosures and news reports on inequality provide fresh, ongoing reminders of how their member of Congress voted on Fast Track and Fast Tracked deals.”

For some members of Congress, the decision to cast controversial trade votes in exchange for empty promises of political cover has exposed them to such constituent ire as to lead to electoral defeat:

  • Former U.S. Rep. Robin Hayes (R-N.C.) provided the final votes to pass Fast Track in 2002 and CAFTA in 2005, after telling his constituents he would oppose both. He flip-flopped on the basis of promises that failed to prevent thousands of trade-related job losses in his district, many of them at textile factories. In the 2008 election, a former textile worker, Larry Kissel, decisively beat Hayes after hammering him for his trade vote swaps.
  • Former U.S. Rep. Matthew Martinez (D-Calif.) stated support for Fast Track in 1997 as an apparent quid-pro-quo for President Clinton’s promise to approve a highway extension project in his district. Martinez never got the highway, but he did lose his job. In 2000, Martinez, an 18-year incumbent, lost 29 to 62 percent to a primary challenge by Hilda Solis, who ran against his support for Fast Track.

“This report provides a somber warning to members of Congress who may be approached by the Obama administration or GOP congressional leader to vote for Fast Track in exchange for promised new programs or policies to ameliorate feared damage or in exchange for unrelated goodies for the district,” said Wallach. “The trade votes and the damage wrought by bad trade agreements last forever, with voter ire only escalating over time, while our research shows that few deals made for trade votes are met and the few that are often fail to remedy the feared problems.”

Today’s report includes an annex of 92 promises made for trade vote support. Only 17 percent of these promises were kept, even though many were memorialized in the text of trade agreements’ implementing legislation. The overall finding of the report is that if appropriated funds are not locked in an account and if the policy change or amendment to a trade pact is not made before the trade vote, funding and follow-through is not likely to be forthcoming after the vote. Promises to seek future renegotiations of trade agreement provisions or to take action in future negotiations were broken most of the time. Of the past 64 policy promises designed to put a gloss on a contested agreement and give political cover to members of Congress, just seven were kept and 57 broken. Public Citizen also documented 28 pork barrel deals made in exchange for “yes” votes on trade agreements, of which nine were kept and 19 broken. 

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CAFTA and the Forced Migration Crisis

What does a trade agreement have to do with the thousands of unaccompanied children risking their lives to try to cross the U.S. southern border?  

Earlier this month Congresswoman Marcy Kaptur (D-Ohio) hosted a congressional briefing entitled "Economic Underpinnings Of Migration In The Americas," focusing on the role that the U.S.-Central America Free Trade Agreement (CAFTA) has played in contributing to the forced migration crisis.  

Watch Congresswoman Marcy Kaptur and GTW research director Ben Beachy explain how CAFTA has exacerbated the instability feeding this crisis in the video below.  Ben's prepared remarks follow. 

0:00 -- Congresswoman Kaptur introduces the event
4:57 -- Ben delivers remarks
16:40 -- Congresswoman Kaptur answers a question about Fast Track
24:34 -- Ben answers a question on how to achieve a more fair trade model


CAFTA and the Forced Migration Crisis

Ben Beachy, Research Director, Public Citizen's Global Trade Watch

I’d like to start with a quote from former Representative Tom Davis, from my home state of Virginia, when he was speaking on the House floor in favor of CAFTA on July 27, 2005.  He said:

“…we need to understand that CAFTA is more than just a trade pact. It's a signal of U.S. commitment to democracy and prosperity for our neighbors. And it's the best immigration, anti-gang, and anti-drug policy at our disposal…Want to fight the ever-more-violent MS-13 gang activity originating in El Salvador but prospering in Northern Virginia? Pass CAFTA …Want to begin to ebb the growing flow of illegal immigrants from Central America? Pass CAFTA.

One day later, the House passed CAFTA, at midnight, by a single vote.

Nine years later, gang and drug-related violence in Central America has reached record highs and the “growing flow” of immigrants from Central America that Representative Davis referenced has surged.

At a minimum, CAFTA failed to stem violence and migration from Central America as Rep. Davis and other CAFTA proponents promised.  But it’s worse than that.  The deal appears to have actually contributed to the economic instability feeding the region’s increase in violence and forced migration. 

I’m not going to argue that CAFTA is singularly responsible for the surge of Central American children trying to cross the southern border into the United States.  The horrific violence in Honduras, El Salvador and Guatemala is the proximate cause of this crisis.  But that violence has been fed by economic instability in those countries.  And it makes sense to examine whether CAFTA has done more to mitigate or to exacerbate that instability. 

The evidence, unfortunately points to the latter.  Under CAFTA, family farmers in El Salvador, Guatemala and Honduras have not fared well, the economies have become dependent on short-lived apparel assembly jobs – many of which have vanished, and economic growth has actually slowed. 

First, let’s look at the situation for family farmers.  A number of development groups unfortunately predicted during the CAFTA debate that the deal could lead to the displacement of the family farmers that comprise significant portions of the region’s workforce.  Indeed, that should have been the expected result if NAFTA, the predecessor to CAFTA, offers any indication. 

NAFTA removed Mexican tariffs on corn imports and eliminated Mexican supports for small farmers but did not discipline U.S. subsidies.  The predictable result was an influx of cheap U.S. corn into Mexico, which caused the price paid to Mexican farmers for the corn that they grew to fall by 66 percent, forcing many to abandon farming.  An estimated 1.1 million small-scale farmers and 1.4 million other Mexicans dependent on agriculture soon lost their livelihoods.  Immigration to the United States soon soared.  While the number of people immigrating to the United States from Mexico remained steady in the three years preceding NAFTA’s implementation, the number of annual immigrants to the U.S. from Mexico more than doubled in NAFTA’s first seven years. 

Under CAFTA, family farmers in Honduras, El Salvador, and Guatemala have been similarly inundated with subsidized agricultural imports – mainly grains – from U.S. agribusinesses.  Agricultural imports from the United States in those three CAFTA countries have risen 78 percent since the deal went into effect.  While these exports represent a small fraction of the business of U.S. agricultural firms, they represent a big threat to the Central American family farmers who do not have the subsidies, technology, and land to compete with the influx of grain.  

And despite promises to the contrary, most small-scale farmers in those countries have not seen a boost in exports of their products to the United States.  The growth in agricultural exports from El Salvador to the U.S. under CAFTA has actually been lower than global growth in agricultural exports to the U.S.  And Honduras’s agricultural exports to the U.S. have been swamped by the surge in agricultural imports.  Honduras went from being a net agricultural exporter to the United States in the six straight years before CAFTA to being a net agricultural importer from the United States in the six straight years after the deal took effect. 

Some CAFTA proponents understood that Central America’s small-scale farmers may not fare well under the deal, but promised that displaced workers could find new jobs in the garment assembly factories, or maquilas, producing clothing for export to the U.S.  These factories are not only notorious for abusing workers’ rights and paying low wages, but for leaving a country as soon as cheaper wages can be found in another low-wage country.  Indeed, this race to the bottom was evident in Mexico under NAFTA.  Maquila employment surged in NAFTA’s first six years. But since 2001, hundreds of factories and hundreds of thousands of jobs in this sector have been displaced as China joined the WTO and Chinese sweatshop exports gained global market share. 

Apparel production in Central America’s factories has faced a similar fate.  Apparel exports to the United States from each of the three countries in question – Honduras, El Salvador, and Guatemala – were lower last year than in the year before CAFTA took effect.  In Honduras, apparel exports to the U.S. have fallen more than 20 percent in CAFTA’s first 9 years.  Guatemala has seen a nearly 40% downfall.  Jobs in the apparel factories of Central America would be expected to disappear even quicker if the controversial Trans-Pacific Partnership would take effect.  The TPP contains Vietnam, where the average minimum wage is 52 cents an hour – a fraction of minimum wages in Central America, and even in China. 

A final promise of CAFTA that I’ll highlight is that the pact would boost Central American economic growth.  This promise was also made for Mexico under NAFTA.  But since NAFTA took effect, Mexico’s average annual per capita growth rate has been just 1 percent, significantly lower than the pre-NAFTA rate. Indeed, Mexico had the third-lowest per capita growth rate in all of Latin America during the first 20 years of NAFTA. 

The outcome has not been much better under CAFTA.  The average annual GDP growth rates in El Salvador, Honduras and Guatemala have all been lower than the overall growth rate in Latin American developing countries in CAFTA’s first 9 years. In fact, the average annual growth rates of El Salvador and Honduras have fallen since the deal took effect, while the growth rate of Guatemala went from being above the regional average before CAFTA to falling below it since CAFTA. 

These aggregate numbers of course represent thousands of individual families who have found themselves facing increased economic instability and greater difficulty in making ends meet.  Thousands of youth more susceptible to the influence of gangs and drugs.  And thousands of children who have decided that a life threatening journey to the United States is better than an even more life-threatening existence at home.  

In sum, representative Davis was clearly wrong, as were the other CAFTA proponents who promised the deal would bring “prosperity” to Central America, thereby diminishing gang and drug-related violence and stemming the need to migrate to the U.S. 

While Rep. Davis is no longer in Congress, his arguments are still here.  Some members of Congress and industry lobbyists are making very similar promises regarding the proposed Trans-Pacific Partnership – which would expand the NAFTA/CAFTA model across the Pacific.  They have argued, essentially, that this time will be different.  That this time, a more-of-the-same trade deal will actually spur prosperity among our trade partners. 

Most members of Congress, thankfully, are not buying it.  Most Democrats have opposed the effort to Fast Track the TPP through Congress, as has a sizeable bloc of Republicans.  For those still on the fence, it would be prudent to consider the failed legacy of past agreements before committing us, and our trade partners, to a new one.  

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Central America Crisis Belies CAFTA’s Empty Promises


“…[the Central America Free Trade Agreement (CAFTA) is] the best immigration, anti-gang, and anti-drug policy at our disposal…”

--Representative Tom Davis, July 27, 2005 – one day before Congress passed CAFTA

“Something must be happening that children and their mothers are now leaving for the United States in busloads…People are saying, ‘There’s no future here.’”

--Miriam Miranda, Honduran human rights leader and recent kidnapping survivor, July 30, 2014


Nine years ago this week, the polemical Central America Free Trade Agreement (CAFTA) was passed by the House of Representatives…in the dead of night…by a single vote.  

CAFTA proponents promised the deal would reduce gang and drug-related violence in Central America, boost economic development, and diminish the factors pushing Central Americans to migrate to the United States. 

Such promises already sounded hollow when they were voiced in 2005.  Today, as thousands of Central American children leave their homes and risk their lives to try to make it to the United States, CAFTA’s promises have proven tragically empty.  

When trying to secure passage for CAFTA’s expansion of the controversial North American Free Trade Agreement (NAFTA) model to five Central American nations and the Dominican Republic, the Bush administration and corporate lobbyists could not rely on the standard promises of job creation and deficit reduction that had proven false under NAFTA.  Instead, they launched a barrage of political arm-twisting and horse-trading to convince members of Congress to vote against the anti-CAFTA opinions of their constituents.  

Many CAFTA backers also resorted to selling the deal as a pathway to peace and prosperity for Central America.  Here is Representative Tom Davis (R-Va.) speaking on the House floor in favor of CAFTA on July 27, 2005:

“…we need to understand that CAFTA is more than just a trade pact. It's a signal of U.S. commitment to democracy and prosperity for our neighbors. And it's the best immigration, anti-gang, and anti-drug policy at our disposal…Want to fight the ever-more-violent MS-13 gang activity originating in El Salvador but prospering in Northern Virginia? Pass CAFTA …Want to begin to ebb the growing flow of illegal immigrants from Central America? Pass CAFTA.

One day later, Congress passed CAFTA.

Nine years later, gang and drug-related violence in Central America has reached record highs and the “growing flow” of immigrants from Central America has surged.

On Wednesday, Miriam Miranda, coordinator of the Fraternal Black Organization of Honduras (OFRANEH) traveled to Washington, D.C. to speak to congressional staff about the rampant violence and unrelenting poverty in her home country and its neighbors. Miriam spoke not only of the skyrocketing homicides and widespread gang and paramilitary control in Honduras, but the economic instability undergirding such violence.

The issue is not theoretical for Miriam – just two weeks ago she survived an attempted kidnapping by armed men.

I asked Miriam what she would say, if given the opportunity, to the members of Congress who had promised CAFTA would spur development and reduce violence and migration pressures in Central America. She responded:

“It’s more than evident with what has happened in the last eight to nine months – this massive exit from Central America – that these policies that they have implemented are completely mistaken. They don’t respond to our needs…We have to question this model of development – development for whom?” 

Not only did CAFTA fail to stem violence and migration from Central America as Rep. Davis and other proponents promised. The deal appears to have actually contributed to the economic instability feeding the region’s increase in violence and forced migration.

That’s the conclusion reached by the 67 members of Congress’ Progressive Caucus, who included CAFTA in their recent summary of the root causes of the refugee crisis occurring along the U.S.-Mexico border: “free trade agreements, including the North American Free Trade Agreement (NAFTA) and the Central America Free Trade Agreement (CAFTA) have led to the displacement of workers and subsequent migration from these countries.”

How has CAFTA led to displacement and migration?  Under CAFTA, family farmers in Honduras, El Salvador, and Guatemala have been inundated with subsidized agricultural imports – mainly grains – from U.S. agribusinesses. Agricultural imports from the United States in those three CAFTA countries have risen 78 percent since the deal went into effect. 

While agricultural exports to Central America represent a small slice of U.S. agricultural corporations’ business, they present a large threat to the livelihoods of small-scale Central American farmers who cannot compete with highly subsidized and mechanized U.S. firms. When Mexico experienced a similar surge in agricultural imports under NAFTA, more than 2 million Mexican farmers and agricultural workers lost their livelihoods and migration to the United States doubled.  

In the lead-up to CAFTA, development groups like Oxfam warned of such displacement, stating that when considering the impacts on Central American rice production alone, CAFTA threatened the livelihoods of up to 1.5 million people in the region.  Central American immigrant advocacy groups like CARECEN, CONGUATE, and SANN also raised such concerns early in the CAFTA negotiating process, but were ignored by the Bush administration.

Certainly the economic instability and violence plaguing Central America, and the resulting surge in migration to the United States, cannot be pegged on CAFTA alone. The causes of the crisis are manifold, and many have been amply discussed.  But though CAFTA did not singlehandedly spark this fire, it appears to have contributed to the kindling.

And clearly, CAFTA has utterly failed to deliver on the far-fetched promises used by Rep. Davis and other proponents to sell the controversial deal to a skeptical Congress back in 2005.  I wish Representative Davis, and all those who voted for CAFTA, would have been there on Wednesday to hear Miriam’s words.  

I wish the same for the members of the Obama administration who are now pushing to expand the NAFTA/CAFTA trade model across the Pacific under the Trans-Pacific Partnership (TPP).  As with CAFTA, some are trying to sell that deal with rosy promises that it will spur development in TPP countries. 

In the words of Miriam, development for whom?  

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U.S. Trade Deficits Have Grown More Than 440% with FTA Countries, but Declined 16% with Non-FTA Countries

The aggregate U.S. goods trade deficit with Free Trade Agreement (FTA) partners is more than five times as high as before the deals went into effect, while the aggregate deficit with non-FTA countries has actually fallen. The key differences are soaring imports into the United States from FTA partners and lower growth in U.S. exports to those nations than to non-FTA nations. Incredibly, the U.S. Chamber of Commerce website states, “For those worried about the U.S. trade deficit, trade agreements are clearly the solution – not the problem.” Their pitch ignores the import surges contributing to growing deficits and job loss, while their export “data” is inflated, using tricks described below.

The aggregate U.S. trade deficit with FTA partners has increased by more than $147 billion (inflation-adjusted) since the FTAs were implemented. In contrast, the aggregate deficit with all non-FTA countries has decreased by more than $130 billion since 2006 (the median entry date of existing FTAs). Two reasons: a sharp increase in imports from FTA partners and significantly lower export growth to FTA partners than to non-FTA nations over the last decade. Using the Obama administration’s net exports-to-jobs ratiothe FTA trade deficit surge implies the loss of about 800,000 U.S. jobs. Trade with Canada and Mexico (our first and third largest trade partners, respectively) contributed the most to the widening FTA deficit. Under the North American Free Trade Agreement (NAFTA), the U.S. deficit with Canada ballooned and the small U.S. surplus with Mexico turned into a nearly $100 billion deficit. The trend persists under new FTAs – two years into the Korea FTA, the U.S. trade deficit with Korea has jumped more than 51 percent. Reducing the massive trade deficit requires a new trade agreement model, not more of the same.

U.S. Export Growth Falters under FTAs

Growth of U.S. exports to countries that are not FTA partners has exceeded U.S. export growth to countries that are FTA partners by 30 percent over the last decade. Between 2003 and 2013, U.S. goods exports to FTA partner countries grew by an annual average rate of only 4.9 percent. Goods exports to non-FTA partner countries, by contrast, grew by 6.3 percent per year on average. Since 2006, when the number of FTA partner countries nearly doubled with the implementation of the Central America Free Trade Agreement (CAFTA), the FTA export growth “penalty” has only increased. Since then, average U.S. export growth to non-FTA partner countries has topped average export growth to FTA partners by 47 percent.

Corporate FTA Boosters Use Errant Methods to Claim Higher Exports under FTAs

Members of Congress will invariably be shown data by defenders of our status quo trade policy that appear to indicate that FTAs have generated an export boom. Indeed, to promote congressional support for new NAFTA-style FTAs, the U.S. Chamber of Commerce and the National Association of Manufacturers (NAM) have funded an entire body of research designed to create the appearance that the existing pacts have both boosted exports and reversed trade deficits with FTA partner countries. This work relies on several methodological tricks that fail basic standards of accuracy:

  • Ignoring imports: U.S. Chamber of Commerce studies regularly omit mention of soaring imports under FTAs, instead focusing only on exports. But any study claiming to evaluate the net impact of trade deals must deal with both sides of the trade equation. In the same way that exports are associated with job opportunities, imports are associated with lost job opportunities when they outstrip exports, as dramatically seen under FTAs.
  • Counting “re-exports:” NAM has misleadingly claimed that the United States has a manufacturing surplus with FTA nations by counting as U.S. exports goods that actually are made overseas – not by U.S. workers. NAM’s data include “re-exports” – goods made elsewhere that are shipped through the United States en route to a final destination. Determining FTAs’ impact on U.S. jobs requires counting only U.S.-made exports.
  • Omitting major FTAs: The U.S. Chamber of Commerce has repeatedly claimed that U.S. export growth is higher to FTA nations that to non-FTA nations by simply omitting FTAs that do not support their claim. One U.S. Chamber of Commerce study omitted all FTAs implemented before 2003 to estimate export growth. This excluded major FTAs like NAFTA that comprised more than 83 percent of all U.S. FTA exports. Given NAFTA’s leading role in the 443 percent aggregate FTA deficit surge, its omission vastly skews the findings.
  • Failing to correct for inflation: U.S. Chamber of Commerce studies that have claimed high FTA export growth have not adjusted the data for inflation, thus errantly counting price increases as export gains.
  • Comparing apples and oranges: The U.S. Chamber of Commerce has claimed higher U.S. exports under FTAs by using two completely different methods to calculate the growth of U.S. exports to FTA partners (an unweighted average) versus non-FTA partners (a weighted average). This inconsistency creates the false impression of higher export growth to FTA partners by giving equal weight to FTA countries that are vastly different in importance to U.S. exports (e.g. Canada, where U.S. exports exceed $251 billion, and Bahrain, where they do not reach $1 billion), despite accounting for such critical differences for non-FTA countries.

Chart: U.S. Trade Deficit Rises by $147 Billion with FTA Partners, Falls by $131 Billion with Rest of the World

FTA v non-FTA 3

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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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Railroading Sovereignty

Last Friday was a sad day for Guatemalans, a day that unveiled the merits ruling on the first investor-state case brought under CAFTA. The case, Guatemala vs. Railroad Development Corporation (RDC), produced an $11.3 million judgment in favor of Pittsburgh-based RDC and against Guatemala, which has the second-lowest human development index in the Western Hemisphere.  The decision of the ICSID-hosted tribunal not only sacked the Guatemalan government with a fine equivalent to its health care provision for over 160,000 Guatemalans, but created a precedent that threatens to breach sovereignty and curtail policy space throughout Central America.

The dispute between the RDC and the Guatemalan government arose over RDC’s operation of Guatemala’s railway system. In 1997, RDC won a government contract to operate the country’s newly-privatized rails for 50 years (para. 30). For the following decade, RDC reopened several defunct rail lines, but did not restore the rail network to the extent the government had envisioned. In particular, it started but did not finish a planned corridor to link Guatemala with Mexico. (It seems that RDC’s sluggish investment stemmed from sub-par financial performance—in its first eight years, the company was not able to turn a profit on its Guatemala operations, a fact that the tribunal acknowledged—see para. 269.)

After months of negotiations with RDC failed to produce results, in August 2006, Guatemala’s executive branch declared RDC’s contract to be lesivo—or injurious to the interests of the State. The lesivo is a legal carve-out for the executive branch that has existed on the books for decades in several Latin American countries. In Guatemala, an executive declaration of lesivo initiates a legal process in which an administrative court weighs the executive branch’s accusations against the defense of the investor, which has the right to appeal the resulting decision to the Supreme Court (para. 91). Yet, RDC argued before the ICSID tribunal that the lesivo declaration itself gravely tarnished the company’s image, causing it to lose business contracts, lines of credit, potential investors, and even police protection (para. 124). While defending itself in Guatemala’s lesivo-prompted administrative court process, RDC opted to also sue the government under CAFTA to the tune of $64 million for having used the lesivo.

In the suit, RDC accused Guatemala of three trade “crimes” forbidden by CAFTA: indirect expropriation of RDC’s investment, national treatment (such as for favoritism for domestic over foreign investors), and failure to afford the company a “minimum standard of treatment.” The ICSID tribunal nixed the first two accusations as baseless, but upheld the third as sufficient cause for slapping Guatemalan taxpayers with an $11.3 million blow.

Before delving into RDC’s accusations, it’s worth underscoring the radical nature of the entire investor-state dispute mechanism enshrined in CAFTA and employed in this case. Here, CAFTA’s investment chapter has granted authority to a trade tribunal—three unelected men from foreign countries—to determine the legitimacy of a sovereign government’s contracts. Governments sign contracts for all manner of public purposes, including the provision of essential infrastructure, such as railways. Should foreign tribunals be permitted to rule on the validity of such public contracting, or to fine the government millions of dollars when they opine against its practices? The answer of course has been an adamant “no” from activists, scholars, and governmental representatives seeking to defend democracy and the public interest.

However, it now appears that US trade negotiators intend to mimic such sovereignty-breaching investor protectionism via the Trans-Pacific Partnership (TPP). The leaking of the TPP’s investment chapter last month sparked outrage when it revealed that the TPP would permit foreign corporations to directly sue the US and other participating governments over contract claims, once again to be decided by a foreign tribunal. (The U.S. appears to be pushing especially hard in this respect, such as by insisting that “investment agreements” with governments be subject to investor-state dispute settlement.) Just as CAFTA’s investment chapter subjected Guatemala’s railroad contracting practices to a multi-million dollar fine, the TPP’s expansion of this extreme investor-state system threatens the environmental, human rights, and Buy America conditions that the US places on its contracts.

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El Salvador loses on three out of four counts, as anti-environment and anti-development case launched under CAFTA drags on

El Salvador lost three out of four of its major arguments in last Friday’s Pac Rim Cayman LLC v. El Salvador jurisdictional ruling. Even though it narrowly won dismissal of its CAFTA case, the underlying claims will proceed at World Bank-based hearings as a challenge under El Salvador’s domestic Investment Law.

The lowlights?

  • El Salvador lost on three out of four counts, and Pac Rim Cayman LLC's attack on El Salvador's mining policies will proceed. The government may still have to pay millions in tribunal and legal costs for the CAFTA portion that was dismissed.
  • CAFTA's extraordinary investment protections kick in for existing investments even without a firm making any new investments after CAFTA went into effect.
  • Government actions that predate CAFTA - but continue after it went into effect – can be a "continuing omission" that can keep governments on the hook years later. In this case, Pacific Rim's mining permit was presumptively denied before CAFTA went into effect, but the firm and the government continued to discuss it and the permit remained not granted to date. Following this logic through, a company’s failure to meet a regulatory requirement in the year 1800 can constitute a “continuing omission” attributable to the government (as if it were a contract) for centuries to come, provided the government is nice enough to continue to talk about it. 
  • The dismissal of CAFTA jurisdiction was on worryingly narrow grounds: had the firm reorganized its corporate structure so that its pre-existing U.S. corporate entity obtained ownership of the Salvadoran mining interest (rather than Pacific Rim's Cayman subsidiary that owned those assets being reincorporated as a new U.S. entity to pursue the CAFTA case), El Salvador could have been held liable for a CAFTA violation on the basis of a dispute that actually started before CAFTA, just because the governmental authorities were kind enough to keep speaking to the company about their permits.
  • Through this narrow dismissal of the CAFTA complaint, the tribunal practically laid out a road map for future aggressive nationality planning companies to abuse the investor-state system to attack environmental policies.

Please find the official docs in this case here, our earlier statement from Saturday here, and our earlier backgrounder on the case here. (See here for our analysis of the closely related Commerce Group v. El Salvador case.)


As the complainant’s name implies, Pac Rim Cayman LLC started out as a Cayman Islands company. The firm was a subsidiary of Pacific Rim Mining Corp., a Canadian company, that had sought but failed (as of March 2005) to qualify for a gold exploitation license, after having made a tepid but ultimately failed attempt (as of December 2004) to secure the necessary environmental permits.

In March 2006 – long after these facts – the U.S.-Central America Free Trade Agreement (CAFTA) went into effect. CAFTA provides certain outrageous benefits to U.S. investors to challenge El Salvadoran environmental and health measures for cash compensation, outside of Salvadoran courts for acts or omissions that would not be violations of Salvadoran law. The Cayman subsidiary reincorporated in the U.S. state of Nevada in December 2007. In March 2008, El Salvador’s then-president Elias Antonio Saca, gave a speech that various foreign investors deemed as announcing a ban on gold mining. In April 2008, Pac Rim Cayman LLC began threatening to launch a CAFTA claim as an allegedly “U.S.” investor, which they did formally in December 2008. (Canadian investors in El Salvador, in contrast, would not generally be protected by CAFTA.)

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CAFTA Ruling Continues Corporate Attack on Environmental Protection

Part of Attack on Mining Law Will Proceed at International Tribunal; El Salvador May Pay Millions in Tribunal, Legal Fees Even for Dismissed Claims

WASHINGTON, D.C. – A tribunal constituted under the Central America Free Trade Agreement (CAFTA) ruled that Pacific Rim Mining Corp. could proceed with half of its attack on an El Salvadoran mining law strongly supported in that country by the left and right political parties and the Catholic Church. Given the extraordinary facts of this case, the only reasonable outcome should have been total dismissal and that today’s outcome is even possible spotlights why the extreme investor rights and their private enforcement in foreign tribunals included in past U.S. “trade” pacts must be ended, Public Citizen and Sierra Club said today.
Legal observers expected the tribunal, constituted under the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), to deny all jurisdiction. Not only is Pacific Rim a Canadian firm, but it failed to complete the permitting process to operate a mine. The tribunal also held that the Canadian firm could not pursue claims under a trade pact between the United States and six Central American countries, but refused to waive millions in tribunal costs and legal fees accrued by El Salvador defending against that aspect of the attack. It permitted Pacific Rim’s claims at ICSID under an investment law with provisions similar to CAFTA to continue.
“The fact that corporate attacks on a sovereign country’s domestic environmental policy before a foreign tribunal would even be possible – much less cost a country millions when a key element of the attack is dismissed – highlights what is wrong with our ‘trade’ agreement model,” said Lori Wallach, director of Public Citizen’s Global Trade Watch. “These investor rules are an outrageous example of how ‘trade’ pacts have been stuffed with special-interest terms that empower corporate attacks on basic democratic public interest policymaking at home and abroad.”

“The CAFTA attack on mining policy has reignited the debate about trade pacts’ threats to the environment and public health, and spotlights why the Obama administration must exclude these extreme investor rights for future trade deals,” said Margrete Strand Rangnes, director of Sierra Club’s Labor and Trade Program. “Even when a country successfully defends against elements of an attack on its environmental laws, it can face major legal costs. The very existence of this undemocratic mechanism threatens critical environmental and health improvements.”
Unfortunately, the long tragedy of the Pacific Rim case is not over. The tribunal found that, thanks to a neoliberal law put in place by El Salvador in 1999, many claims similar to those under CAFTA can continue to be adjudicated in foreign courts, namely at ICSID. That poor countries have been pushed to offshore their very judicial systems – through trade pacts’ investor-state enforcement systems and through investment laws like El Salvador’s – show that the world needs a fundamental rethink of the way we regulate foreign investment, said Public Citizen and Sierra Club.

The tribunal’s conclusion that this Canadian firm could not pursue CAFTA claims is welcome. But that El Salvador could be charged millions for costs related to that aspect of the case is outrageous, given Pacific Rim had no U.S. business activity and established a U.S. corporation only months before launching its CAFTA case. Public Citizen and Sierra Club urge the tribunal to waive these costs, already totaling millions.
Pacific Rim began exploring for gold in El Salvador in 2002 and applied for an “exploitation permit” in December 2004. Its application lacked three of the five required elements, and no permit was issued. A year later, CAFTA went into effect. In December 2007, Pacific Rim reincorporated a Cayman Islands corporate shell (which had formally owned the Salvadoran operations) in Nevada. Shortly thereafter, the company launched the first environmental challenge under CAFTA, using the extremely controversial “investor-state” enforcement procedure. This process allows investors to directly sue signatory governments in foreign tribunals, where they can demand cash compensation for government policies they claim undermine their new CAFTA investor rights. Pacific Rim’s attack on El Salvador demanded more than $200 million in compensation, alleging (among other claims) that the failure to automatically issue an exploitation permit was a violation of CAFTA.

“These trade pact investor attacks ring an alarm across the political spectrum – from conservatives concerned about sovereignty threats posed by the U.S. government being under the jurisdiction of foreign tribunals, to progressives concerned about corporate attacks on domestic environmental or health policies,” said Wallach. “Do we want to leave a two-track justice system to our children: one for multinational corporations and another for average citizens?”

The Pacific Rim CAFTA case also spotlights how a U.S. “trade” agreement can be exploited by a multinational mining firm to attack El Salvador’s fragile democracy, which emerged from 12 years of civil war, and to undermine the laws enacted by its elected leaders to regulate mining and safeguard the environment. Although Salvadoran civil society has been effective in getting the government to review the potential environmental and social impacts of mining, the government has made no decisions about future mining policy. CAFTA’s extreme investor rights now loom over these policy decisions, with the government forced to calculate potential CAFTA liabilities against publicly demanded improvements in environmental policy. Another CAFTA attack on the mining law by U.S. firm Commerce Group was dismissed last year because that firm had not terminated its domestic legal challenge of the law, but the firm has since filed to annul the dismissal.
Increasingly, multinational companies are using trade-agreement investor rights in situations where natural resources and public health are at stake. Of the 137 investment cases pending before ICSID, 59 cases relate to oil, mining or gas projects. The Pacific Rim case also raises much broader concerns about the foreign investor rights provided in U.S. trade agreements. Even assuming that foreign firms meet all laws in effect in another country when setting up operations, a trade agreement should not guarantee that foreign firms are sheltered from or compensated for having to meet new laws that apply to foreign and domestic firms equally that are enacted through normal democratic practices, Public Citizen maintains.

“We have seen an alarming increase of cases related to oil, mining and gas projects with hundreds of millions of dollars already paid to corporations through these secret trade tribunals,” said Strand Rangnes. “Not only are the environmental and health implications for local communities severe, but this is also the exact wrong way to go as we look to curb global warming and climate change.”

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NAFTA a way to restart Keystone Pipeline?

The Obama administration made a lot of us environmentalists happy with yesterday's decision to reject the Keystone XL pipeline.

Given that the Canadian government and corporations appear to be steaming mad about this, it's worth all of us reflecting on what their next move could be. A NAFTA case, for one, does not seem out of the question.

(If it seems far-fetched that Canadian entities might pursue these options, think of how much energy they've put into this pipeline. Compare this with how relatively little energy they've put into opposing U.S. financial regulations, yet in that case, they've already threatened to invoke NAFTA to derail the Dodd-Frank financial reform legislation.)

On what basis might a Canadian corporation, say, challenge the decision to reject the pipeline? The pending case against the Sultanate of Oman brought by U.S. investor Adel A Hamadi Al Tamimi under the US/Oman FTA is instructive. (That FTA is modeled on NAFTA.)

Mr. Al Tamimi is a UAE native, naturalized U.S. citizen and real estate developer in New England who invested in Oman through two UAE shell companies.  In 2006, his companies concluded ten-year lease agreements with the Oman Mining Company LLC (OMCO, a state-owned enterprise) related to a limestone quarrying/crushing operation.  OMCO committed to “use its best endeavors” to obtain “the necessary environmental and operating permits.”  In August 2007, OMCO told al Tamimi’s companies that the permits had been obtained, and that he was contractually required to commence operations,  which he did in September. Within weeks, officials from the Commerce and Environmental Ministries told al Tamimi that the final permits had not been obtained, and various stop-work orders were issued. 

As al Tamimi states, “OMCO now had to make a choice: it could fulfill its obligations under the Lease Agreements, which would mean disobeying or confronting the Environmental and Commerce Ministries, or it could use whatever leverage it had over the Companies and exert every effort to get them to suspend their operations until a solution could be found to the permitting issues. It chose the latter.”

By April 2008, al Tamimi had ceased operations.  Al Tamimi racked up various environmental fees, which he apparently did not pay.  In April 2009, OMCO told al Tamimi that he was in violation of environmental laws,  and in May 2009, he was arrested.  After being convicted of stealing and breaking environmental laws by a criminal court in November 2009, his conviction was overturned by an appeals court in June 2010.

Tying this back into the FTA rules... In 2011, al Tamimi launched an investor-state case under the Oman-U.S. FTA. He alleges that Oman expropriated his property rights by terminating the leases and bringing “the full force of the police power of the State to ensure cessation of all activities…”  He additionally claims that Oman undermined “his legitimate expectations” that he would be able to conduct quarrying operations and failed to provide “protection and security,” in violation of the U.S.-Oman FTA’s fair and equitable treatment (FET) standard.  He also says that other quarrying operations which he “believes to be owned and controlled by nationals of Oman” have been allowed to operate quarrying operations, in violation of the FTA’s national treatment obligations.

Similar arguments could be constructed in the Keystone case under NAFTA. TransCanada could point to a long string of overtures by the U.S. government that led it to develop "legitimate expectations" (as that is defined under trade law) that it would be able to build the pipeline, going from the private assurances in favor of the pipeline (recently revealed by FOIA documents to Friends of the Earth) and ending in the December 2011 payroll tax cut (which included Keystone-related provisions).

Those "expectations" could be then measured against what could be characterized under the FET standard as an arbitrary decision-making process, as when the Obama administration delayed the pipeline decision in November 2011 until after the presidential election.

TransCanada could point to some domestic pipeline operators that have not confronted similar hurdles as a basis for a National Treatment claim under NAFTA, while they could point to any lost expected future earnings as a basis for an "indirect expropriation" claim.

Stranger cases over much smaller sums of money have been launched before. There's been an outrageous string of cases against El Salvador over mining permitting issues. Over $350 million in compensation has already been paid out to corporations in a series of investor-state cases under NAFTA-style deals. This includes attacks on natural resource policies, environmental protection and health and safety measures, and more. In fact, of the over $12.5 billion in the 17 pending claims under NAFTA-style deals, all relate to environmental, public health and transportation policy – not traditional trade issues. For a full rundown of these NAFTA-style cases up until now, see this link.

If all of this seems like an outrage, it is. And what's worse is that the Obama administration is considering putting similar investor rules in a NAFTA-style deal with nine nations, called the Trans-Pacific FTA. Stay tuned for more on this!

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Sherrod Brown Tosses the Panama FTA

Well, not quite. But, man, that FTA text does look pretty heavy, and like it could put a hurtin' on some of the senators in the room that are against fair trade.

But here's a floor speech from fair trade champion Sen. Sherrod Brown (D-Ohio) on the night the Senate voted on the Panama, Korea and Colombia trade deals. It's about 30 minutes, and a very eloquent description of why these trade deals are no longer primarily about "trade," but about how we regulate our domestic economy. Brown's TRADE Act would go a long way to getting "trade" policy right.

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Unlike Budget Debate, Basic Math Error on Trade Continues to Go Unchallenged

The Obama administration spent much energy over the weekend attempting to discredit Standard & Poor’s credit rating agency’s downgrade of U.S. debt, which they said was based on a “basic math error of significant consequence.”

In sum, the administration argued that S&P applied the Budget Control Act’s deficit reduction dollar amount of $2.1 trillion to a non-inflation adjusted baseline scenario, when that number was derived from a scenario where discretionary spending levels grew with nominal GDP. In 2021, government debt as a share of GDP would be 93 percent under S&P’s original methodology, while it would be 85 percent under what Treasury maintains is the correct methodology. This claim of an error has been all over the press for days.

It would sure be nice if the Treasury and press got as worked up about basic math errors that the White House itself is making on the three pending trade deals with Korea, Colombia and Panama.

The administration maintains that the Korea deal will boost U.S. exports by $11 billion, when in fact the administration’s own numbers within the U.S. International Trade Commission study show that the deal will lead to a decline in net exports of about $416 million. The S&P’s debt number overstated the debt by about nine percent, but the administration’s claim of exports under the Korea deal overstates the magnitude of the change in the trade balance by 25,000 percent, in addition to getting the direction of the change wrong. If, as the Treasury Department says, the S&P debt error was “of significant consequence,” the administration’s trade-deal export claims must qualify as a misstatement of colossal consequence.

Similarly, the administration says that U.S. exports will increase by $1 billion under the Colombia deal, when the administration’s own numbers show that net exports will take a $66 million hit under the deal. (No estimates have been provided for the U.S.-Panama deal.)

Why these discrepancies? In its public statements, the administration is selectively looking only at one side of the ledger, extracting a number for bilateral exports, while not accounting for the overall change (the change in exports minus imports under the deal). In budget economics, this would be akin to looking only at what the government is taking in as revenue, without looking at what the government is spending. If the government simply assumed away any government spending, I’m betting that the press would call them on this “basic math error of significant consequence.”

The administration is also selectively looking at just the change in U.S. exports to Korea and Colombia under the pacts. But as the administration’s own reports show, these deals will also induce changes in trade patterns with other countries. At the end of the day, the U.S. is projected to be importing more than it is exporting as a result of these deals.

It is newsworthy that the administration’s own reports (produced by the USITC) conclude that net exports will decline under the deal, especially since their primary public rationale for the deals is that exports will increase. These USITC reports in the past have tended to be wildly optimistic, such as underestimating the increase in the U.S.-China trade deficit after China entered the World Trade Organization by $166 billion. But, the reports have nonetheless always concluded that, even if bilateral deficits increase, the global U.S. balance will improve. That is, until the reports on the three pending deals, and the deal with Peru (negotiations on all four were concluded in 2007), predicted a worsening of the overall balance.

This fact was even trumpeted by no less of a champion of NAFTA-style deals than Sen. Chuck Grassley (R-Iowa), who said that the total net export number is the “the one number that is of significance to our economic health.” (See full quote below, after the jump.)

It is unclear why the press continues to report as fact (or unchallenged assertion) the claim that the pending trade pacts will create jobs. These claims rely on using the wrong trade numbers from the government’s own study. Unlike many complex economic debates, all these numbers are publicly available, very straightforward and involve reading no more than two pages in two reports to simply verify the administration’s claims (pages 2-14 and 2-15 of the Korea report and pages G-12 and G-13 of the Colombia report). Moreover, the administration’s basic math error has been known for over nine months, and communicated to reporters and their editors repeatedly over that time (see “Survey of Studies on Potential Economic Effects of the Korea FTA Show Rising Deficits and Job Losses”,  “Survey of Studies on Potential U.S. Economic Effects of Korea Trade Deal Shows Rising Deficits and Job Losses, 2010 ‘Supplemental Deal’ Does Not Alter These Outcomes”, “Guide to the the State of the Union on Jobs, Exports”, “Previewing Ways and Means Chair Camp’s Request for USITC Analysis of the December 2010 Korea FTA Supplemental Auto Deal”, “The Korea FTA is Lose-Lose for the U.S. and Korea: The Facts”, “Here’s an Impediment to Job Creation That Ways and Means Hearing Should Discuss: Korea Trade Deal Is Projected to Increase the Overall U.S. Trade Deficit”.

Reporters can and should quote advocates of these trade deals, and explore their reasoning for wanting Congress to pass them. But, to the extent that job and export claims are based on the administration’s basic math errors, this needs to be pointed out in reporting.

(For what it’s worth, there is also no historical support for the notion that NAFTA-style deals increase exports in relative terms. This would also cast doubts on the administration’s stated rationale for pushing the agreements. However, one would not even have to examine the record to report that the administration is misrepresenting its own research.)

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Bulldozing Democracy One FTA at a Time

The vicious murder of university student and environmental activist Juan Francisco Duran Ayala earlier this month has stunned community members in the Cabanas region of El Salvador and beyond. Ayala is the fourth anti-mining activist from the Cabanas region to be killed in the past two years as growing community opposition to gold mining projects has been met with violence. Community groups, international NGOs and political leaders are calling for a thorough investigation into the material and intellectual authors of these murders.

This recent tragedy has brought renewed attention to the local conflicts erupting throughout Latin Mining America - from Peru to Mexico - regarding oil, mineral and gas extraction projects and their effects on the local environment.

And in recent years, many of these companies have gained new powerful foreign investor rights via so-called "free trade agreements" (FTAs) and bilateral investment treaties (BITs) that allow them to legally bulldoze through local community opposition and even to shape environmental policies in order to make sure their projects move forward. There are approximately 32 such investor cases launched by extractive industry
companies pending before the International Centre for Settlment of Disputes (ICSID) for hundreds of millions of dollars.

Over the weekend, the New York Times published a top story on this exploitation as it unfolds in El Salvador. As local and nation-wide opposition to precious-metals mining began to gain momentum in 2009, Canadian mining company  Pacific Rim Mining Corp. launched a case against El Salvador under the Central American Free Trade Agreement through a U.S. subsidiary.

The company is using CAFTA to challenge El Salvador's environmental policies and is seeking over $100 million in damages for allegedly not being given the green light to begin operating its "El Dorado" mine in the Cabanas region (the Salvadoran government argues the company did not complete the permitting process). The case is currently being heard before a World Bank tribunal in Washington, DC.

Although investment cases like these represent one of the most alarming institutional shifts in power between the public and corporations in decades (if not generations), the NYT, to our knowledge, has only written a total of three articles that explore the issue in any depth (including the one referenced above and here and here).

Hopefully in the weeks leading up to Congressional votes on new FTAs which will empower thousands of  companies with rights to seek compensation for state and federal policies in the U.S., Korea, Colombia and Panama, the NYT and other media outlets will delve more deeply into how these investor rights are already playing out in communities across the Americas.

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FTA Investors Rules Not Fixed by Preamble Change from 2007

As EOT regulars know, NAFTA-style trade deals contain investment rules that allow corporations to bypass national legal systems and launch attacks on governments in international tribunals. The basis for these attacks can be as simple as institution of a new environmental policy that affects the corporation’s expected future profits. Judges for these so-called “investor-state” cases are selected in part by the corporation, and the trade-pact rules are tailored to corporate demands. Often the mere threat of one of these investor-state awards can cast a chill on public-interest regulation.  All told, more than $350 million has been paid to date in these cases.  Moreover, there are over $9.1 billion in claims in the 13 investor-state cases outstanding under NAFTA-style deals, relating to environmental, public health, and transportation policy.  An additional $483 million has been awarded under U.S. Bilateral Investment Treaties (BITs), which contain similar investment rules. Billions of dollars are also pending in BIT cases now underway.

The Panama, Colombia and Korea “free trade agreements” (FTA) may be considered by Congress in the near future. These pacts constain investment rules that are almost identical to those in NAFTA, except where they are worse. There was one investment-related addition made to the preambles of these FTAs as part of a May 10, 2007 deal with the Bush administration. It stated that the parties: “AGREE that foreign investors are not hereby accorded greater substantive rights with respect to investment protections than domestic investors under domestic law where, as in the United States, protections of investor rights under domestic law equal or exceed those set forth in this Agreement.…”

Some have suggested that this provision goes all or most of the way towards resolving the concerns with these provisions. This is not the case. There is no certainty as to the legal meaning of the May 2007 preambular provision.

Public Citizen has just published a memo that examines six different approaches to preambular language, including the four that have been taken by the tribunals under the 45 final awards issued under U.S. FTAs and BITs.

The memo finds the May 2007 preambular modification fails to address the main concerns raised by scholars and members of Congress with regard to the investment provisions. Indeed, there is scant historical support for the notion that pro-public interest provisions of preambles are protective of regulatory prerogatives: nearly 90 percent of the time, tribunals have given them no weight at all. The remainder of the time,tribunals found that pro-public interest provisions had to be balanced against, and possibly watered down by, pro-investor provisions.

Deeper changes will be required to the investment provisions of the proposed FTAs with Korea, Panama and Colombia, as well as a Trans-Pacific FTA (which includes Peru, the U.S. and eight other countries) now under negotiation. 

To read the memo, go here.

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Trade Deficit with FTA Countries Continues to Climb

Yesterday the Census Bureau released the March trade flow numbers, revealing that our trade deficit continues to worsen. The U.S. trade deficit rose by $2.8 billion, or 6.2 percent, between February and March on a seasonally-adjusted basis.

With Congress on the verge of considering another set of trade agreements based on the NAFTA model, digging into the data of this new release could help illustrate whether existing NAFTA-style trade agreements are aiding or hindering the fight to keep the trade deficit under control.

The most recent trade data shows that the deficit with our 17 FTA partners continues to worsen, adding to the body of evidence that NAFTA-style trade agreements are hurting American workers. Between February and March, the U.S. trade deficit with U.S. FTA partners grew by $1.6 billion, or 12.3 percent. News reports on the trade deficit noted that the dramatic rise in the price of oil in March accounted for much of the widening of the overall trade deficit. Do oil imports explain the rise in the trade deficit with our FTA partners? No, the jump in the trade deficit with U.S. FTA partners is still huge when you take out oil to account for the jump oil prices. With oil excluded, the trade deficit with FTA partners increased by $846.9 million, or 13.9 percent, between February and March. The non-oil trade deficit with countries that are not FTA partners grew by only 6.8 percent over February-March, less than half the pace of the growth in the deficit with FTA partners.

The latest trade numbers are a sign that the trade deficit is acting as a brake on the momentum of the economic recovery. Given that trade with our current FTA partners act as a primary force in that brake, it is time for the Obama administration to rethink the Korea, Panama, and Colombia FTAs and chart a path away from the old trade model that leads to skyrocketing deficits.

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Commerce Group CAFTA Ruling Highlights Threat of Foreign Investor Rules Also Included in Korea FTA

Even as Mining Firm's Frivolous Challenge of Environmental Policy Is Dismissed on Technicality, El Salvador Must Pay $800,000
Statement of Lori Wallach, Director of Public Citizen's Global Trade Watch

That El Salvador must pay more than $800,000 in legal fees to defend itself against a frivolous corporate challenge of its environmental laws under the Central America Free Trade Agreement (CAFTA) provides a glaring example of why having the same provisions in the Korea trade pact now before Congress is so dangerous. In fact, there are nearly $9.1 billion in claims in the 14 known investor-state cases outstanding under NAFTA-style deals. None of them relate to traditional trade concerns; all of them relate to environmental, public health and transportation policy...

The tribunal in this case made clear that Commerce Group Corp. had the right under CAFTA to challenge El Salvador's mining policy. The case was dismissed on a technicality: If Commerce Group had simply written a letter to the Salvadoran judiciary informing it that it was waiving its right to challenge revocation of its environmental permits in Salvadoran courts, then Commerce Group's attack on Salvadoran mining policy would likely be going forward under CAFTA.

Indeed, when El Salvador attempted to recoup its legal costs, the tribunal sided with Commerce Group that its case was not frivolous. The fact that a corporate attack on a sovereign country's domestic environmental policy before a foreign tribunal would even be possible - much less cost a country almost a million dollars when they win the case - highlights what is wrong with our current trade agreement model.

The same outlandish investor rights were in the trade deal George W. Bush signed with Korea that President Barack Obama now wants to push through Congress early this year. If Congress implements the U.S.-South Korea Free Trade Agreement (FTA), the hundreds of Korean firms operating here would get new rights to skirt our court system and domestic laws and demand taxpayer compensation before foreign tribunals for U.S. policies that they don't like, just as these mining corporations are doing in El Salvador. In contrast to pacts such as CAFTA, the Korea FTA involves a country that has 270 corporate affiliates established in this country - all of which would be newly empowered to attack our public interest laws before foreign tribunals to demand taxpayer compensation for loss of expected future profits. 

These trade pact investor attacks ring an alarm across the political spectrum - from conservatives concerned about sovereignty threats posed by the U.S. government being under the jurisdiction of such foreign tribunals to progressives concerned about the 200-plus Korean affiliates that would be newly empowered to attack domestic environmental or health policies.

The question is: Will we allow this kind of thing to keep happening? These cases reignite the debate about trade pacts' threats to the environment and public health, remind people that Obama promised during his campaign to fix this very problem and shine a spotlight on the same horrible terms in the pending Korea trade deal.

The mining environmental and safety regulatory policies at issue in this CAFTA case was of vital importance to environmental protection and the future of democracy in El Salvador.

Continue reading "Commerce Group CAFTA Ruling Highlights Threat of Foreign Investor Rules Also Included in Korea FTA" »

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Shell, shell, shell companies

Last year, we reported on how a Canadian-Cayman mining company, Pac Rim Cayman LLC, was using the U.S.-Central America Free Trade Agreement to challenge El Salvadoran mining policy. There are seven parties to CAFTA, and none of them is Canada or the Cayman islands.

In the months before launching a CAFTA case, Pac Rim Cayman LLC changed its incorporation from Cayman Islands to Nevada. El Salvador reasonably got suspicious about this convenient change of nationality, and is asking a CAFTA court convened at the World Bank (ICSID) to dismiss the case because of a lack of jurisdiction.

The case represents the most detailed analysis of corporations' "nationality planning" by an investor-state panel under a U.S. trade or investment agreement. Some of the key highlights from El Salvador's most recent objection to ICSID jurisdiction:

"77. In fact, Claimant has been forced to admit that CAFTA was at least a consideration in the decision to change the nationality of Pac Rim Cayman from the Cayman Islands to the United States. Mr. Shrake states, "[a]s part of this overall assessment of the Companies' organizational structure, I also considered the Companies' potential avenues of recourse if a dispute with El Salvador were ever to arise in the future."...

86. On the record there can be no doubt that the main reason to move Pac Rim Cayman to the United States in December 2007 was to gain treaty protection for the existing dispute related to the El Dorado mine. In its Counter-Memorial, Claimant does not dispute the facts: Pac Rim Cayman was not "repatriated" as Claimant asserted in its August 17, 2010 letter to the Tribunal; it has no office or assets in the United States; the capital invested in El Salvador was transferred from Canada; and there were no other changes to Pac Rim Cayman as a Nevada company.

87. Nevertheless, Claimant now alleges that the change of nationality was to save money. But, despite Claimant's suggestion that 2007 differed from other years because Pacific Rim Mining Corp. recorded a big loss, the truth is that Pacific Rim Mining Corp. has a history of losses, including $4.6 million for fiscal year 2005, $6.9 million for fiscal year 2004, and $2.8 million for fiscal year 2003. Moreover, although Claimant claims that the move saved it "the costs of maintaining Pac Rim Cayman in the Cayman Islands," Claimant presents no evidence that the costs of maintaining a limited liability company in Nevada are significantly cheaper than being incorporated in the Cayman Islands.

88. In fact, given the actual costs involved, the assertion that cost savings was the primary reason and access to CAFTA just a convenient afterthought, is hardly credible. According to the Cayman Islands Chamber of Commerce, a non-resident company currently pays between U.S. $488 and $689 to register and as an annual fee in the Cayman Islands, while an exempt company pays between $573 and up to $2400 for companies with maximum shareholder capital. Cost could not have been a major concern. Moreover, Claimant spent at least $575 to register, submit an initial list of managers, and acquire a business license in Nevada...

106. As discussed above and in El Salvador's Memorial, there is no evidence of Pac Rim Cayman having any business activities whatsoever. It is a shell moved around for the purposes of Pacific Rim Mining Corp. This is hardly disputed. All that Claimant argues is: "Pac Rim Cayman is . . . engaged in the substantial business activities of holding and managing investments in El Salvador from its headquarters in Nevada." Even this statement is misleading. The evidence produced by El Salvador clearly demonstrates that Pac Rim Cayman—a company with no employees, no office space leased under its name, no telephone, no office equipment, and no bank account—has no capacity to manage anything. Moreover, while there is no doubt that it is a holding company, Pac Rim Cayman does not even hold "investments" in El Salvador. It holds shares in Salvadoran companies used as investment vehicles by the common parent company Pacific Rim Mining Corp. Pac Rim Cayman's only "activity" is the purely passive holding of shares in two other companies under its name.

107. As El Salvador stated in its Memorial, holding shares in its name cannot be substantial business activity: "every shell company set up by a non-Party national to try to gain CAFTA jurisdiction will have 'holding' activities related to the investments of the non-Party parent company." The denial of benefits provision would be rendered meaningless if merely holding shares or investments qualified as "substantial business activities in the territory of any Party."

108. Moreover, the fact that an officer of the Canadian parent company was located in the United States when he made decisions about what other subsidiaries the Cayman Islands subsidiary, Pac Rim Cayman, would hold, does not amount to business activities for a U.S. enterprise. Like Claimant's other arguments, this would defeat the purpose of a denial of benefits clause. The alleged substantial activities must be connected to the enterprise when it is a national of the Party.

109. Of course, some holding companies may be able to establish that they are legitimate entities functioning within the territory of a Party. Pac Rim Cayman is not such a holding company. This is clear from Claimant's misleading attempt to align itself with the AMTO claimant: "[m]uch like Pac Rim Cayman, AMTO was a holding company with two fulltime employees." In fact, unlike AMTO, Pac Rim Cayman has no employees. In response to El Salvador's request for information ordered by the Tribunal, Pac Rim Cayman was not able to produce any evidence that it pays the salaries of any employees, or even a portion of the salaries of its two managers, who are also officers of the Canadian parent company and paid by the Canadian company and other subsidiaries. In addition, unlike Pac Rim Cayman, AMTO paid income tax and social insurance payments for its two employees, had a bank account, and leased an office for several years during which the investment was made and the dispute arose. The only thing that Pac Rim Cayman and AMTO have in common is that they are holding companies. Pac Rim Cayman has none of the characteristics that led the AMTO tribunal to conclude that AMTO had substantial business activities.

110. Claimant is a shell company, with no employees, no office, and no revenue. Pac Rim Cayman's subsidiaries, PRES and DOREX, are investment vehicles in El Salvador that do not contribute to Pac Rim Cayman having any activities in the United States. The activities of Pacific Rim Exploration, minimal as they are, should not be counted as activities of Pac Rim Cayman, because Pacific Rim Exploration was only moved to be held through Pac Rim Cayman as part of the abusive scheme to gain jurisdiction, at the same time Pac Rim Cayman's nationality was changed from the Cayman Islands to the United States. The only business activity Pac Rim Cayman can claim—"holding" the shares in the investment vehicles in El Salvador—is clearly insufficient.

El Salvador's legal defense is doing its best to ward off the attack on its environmental policies, but the underlying rules on how "investor" is defined by CAFTA and other NAFTA-style agreements are pretty lame. For instance, Pac Rim Cayman LLC, in its counter memorial on jurisdiction, wrote:

"Far from being “passive” vehicles for questionable purposes, holding companies have been described as “the fundamental building block of the global economy,” a “common and legal device for corporate organization [that] face the same legal obligations of corporations generally.” A holding company is a “company formed to control other companies, usu[ally] confining its role to owning stock and supervising management.”...

there is nothing wrong with an investor’s decision to structure its business activities in order to gain CAFTA’s benefits after investing in the territory of a CAFTA Party and before a dispute with that Party has arisen. Respondent itself admits as much, acknowledging that “prospective nationality planning has generally been accepted by arbitral tribunals, even if the nationality of the foreign investor has been selected to gain tax advantages or treaty protection in the event of future disputes.” One such instance
was in the Aguas del Tunari case, where the tribunal noted that it was “not uncommon in practice” to “locate one’s operations in a jurisdiction perceived to provide a beneficial legal and regulatory environment in terms, for examples, of taxation or the substantive law of the jurisdiction, including the availability of a BIT.”...

Penalizing an investor for taking prudent steps to protect itself in the event that the host State later purports to deny CAFTA’s benefits to the investor would only serve to discourage investors from investing in the territories of the Parties, and would, moreover, undermine CAFTA’s purpose of providing for the settlement of investment disputes."

El Salvador had to agree, saying,"As Claimant points out, structuring an investment ahead of time in order to gain treaty protection may be acceptable, but changing nationality after a dispute has arisen in order to qualify for treaty protection is Abuse of Process."

We need a different set of rules to ward off against investor-state challenges from shell or near-shell companies. After all, NAFTA-style deals prohibit countries from requiring foreign investors to give back to the community or protect environment (so-called "performance requirements".) But the deals don't set up any economically meaningful threshold for an investor actually creating a significant number of jobs before they can use NAFTA- or CAFTA-style rights. This is putting investors ahead of the public and national interest, even when they're not making investments.

(Kind of an analogue to the U.S. tax policy debate, where both parties compete to give corporations back money so that they can invest it "without any government meddling", that they go on to hoard rather than invest.)

It is ridiculous that El Salvador is forced to argue about precedents that would have allowed as few as two employees to be considered substantial business activities. While we debate whether the stimulus package created or saved closer to a million or closer to two million jobs, it seems a little ridiculous to be advancing investment provisions of NAFTA-style trade policies that split hairs about whether as few as two employees entitles a company to massive investor rights. And we wonder why the U.S. government has a hard time creating jobs: we've forgotten how to protect the policy space to actually create jobs, either at home or abroad.

But, there's a fair trade way of re-writing these "denial of benefits" provisions of trade deals. We suggest some ways this could be done here.

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How much will this party cost?

Earlier this month, the Washington Post reported a dramatic uptick in the number of corporate investor4100628349_2ebd7ddc84_t challenges being heard by the International Centre for Settlement of Investment Disputes (ICSID) - a World Bank group charged with arbitrating investment disputes. So much so, that a new legal niche is growing to meet the demand:

Geography has been kind to the District law firms equipped to handle international dispute resolution. As the host city of the ICSID, which has seen its caseload grow from between one and four cases a year from 1972 to 1996 to an apogee of 37 cases in 2007 and 27 in the fiscal year of 2010, the attorneys here are in close proximity to the action. The nation's capital is also seen as a key connection point between Latin America, where nearly a third of ICSID cases originate, and the rest of the world. The Argentine economic crisis of the late 1990s and early 2000s prompted at least 40 ICSID cases on its own, prompting the country to open a special District office to oversee its interests here.

There must a better way to create jobs in Washington, DC - perhaps a way that doesn't also facilitate the  trampling of local public health and environmental protecions or drain taxpayer resources in the United States and in trading partner countries? For more details about the kinds of cases multinational investors bring before ICSID, see Public Citizen's NAFTA Chapter 11 database. Also read up on El Salvador's struggle to preserve its environment in the face of two recent CAFTA cases challenging Salvadoran mining policy decisions. 

In the coming months the U.S. Congress will decide whether to expand the ICSID party! If implemented, the Korea FTA would empower hundreds of U.S. and Korean multinational investors to bring suits against the U.S. and Korean governments at ICSID should they want to argue that their slew of new investor rights has been violated.

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Follow the Climate Reality Tour!

DSC01484 We’re pleased to unveil an exciting new project: the Climate Reality Tour.

You may have caught an earlier post, but in case you didn't, let's fill you in The Climate Reality Tour is a movement-building road trip to promote global economic policies that are fair for workers and shift away from the climate- and job-destroying status quo. The destination? The United Nations Climate Negotiations in Cancun in late November. And to bring home the sustainability point, we decided to go by bike. Yep, by bike!

With the world in the grips of overlapping global crises – food, economic/financial and climate – the stakes are high indeed. To save the planet requires confronting these crises simultaneously, and that means overcoming the false jobs vs. environment trade-off. In truth, corporations benefit from exploiting both while human beings and the earth suffer.

But this requires political will and resolve far beyond what we’ve seen from either political party, and even many leading civil society organizations. At Public Citizen, we’ve long believed our unsustainable global economic order, as etched in the tomes of the WTO and NAFTA-type trade deals, unfairly pits workers and ecosystems against one another. We’ve decried how the status quo sanctifies the rights or multinational corporations to exploit and destroy – even above the democratic rights of a people determine their own economic and eological futures.

Continue reading "Follow the Climate Reality Tour!" »

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Lori Wallach on HuffPo: "Tribunal OKs Mining Corp’s CAFTA Attack on Green Policy: Did Team Obama Really Need More Reasons to Renegotiate Bush’s NAFTA-Style Trade Deals?"

Check out Lori Wallach's latest piece on the Huffington Post:

HuffPo logo

Tribunal OKs Mining Corp’s CAFTA Attack on Green Policy: Did Team Obama Really Need More Reasons to Renegotiate Bush’s NAFTA-Style Trade Deals?

“[Pacific Rim Mining Corp.] is using the CAFTA provisions that grant foreign investors expansive new rights to sue governments in foreign tribunals over regulations or government actions that conflict with the pacts' special rights for foreign investors and that could undermine their future expected profits. …The same provisions appear word-for-word in Bush Free Trade Agreements (FTAs) with Korea, Colombia and Panama… The fact that an attack like Pacific Rim’s would even be possible highlights what is wrong with our current trade agreement model.”

Read the entire piece at the Huffington Post.

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Pac Rim CAFTA Challenge of Salvadoran Environmental, Mining Safety Policies Given Go-Ahead by Tribunal

Initial Win for Corporation in Trade Agreement Attack on Environmental Policy Poses Complications for Obama Administration as It Tries to Revive Korea FTA

WASHINGTON, D.C. – An international tribunal’s decision to allow a controversial suit against El Salvador under the 2005 Central America Free Trade Agreement (CAFTA) will fuel demands by many in Congress that the Obama administration alter the foreign investor terms in three North American Free Trade Agreement (NAFTA)-style trade pacts inherited from the George W. Bush administration and new pacts under negotiation, Public Citizen said today.

“The fact that an attack like this would even be possible highlights what is wrong with our current trade agreement model,” said Lori Wallach, director of Public Citizen’s Global Trade Watch. “The same crazy investor rights are in Bush’s leftover trade deal with Korea that President Obama wants to move forward. Unless they fix Bush’s deal, the hundreds of Korean firms operating here would get new rights to skirt our court system and laws and use foreign tribunals to demand taxpayer compensation for laws that they do not like, just like Pac Rim is doing to El Salvador.”

This month, the Obama administration must decide how to proceed with Bush’s leftover Korea-U.S. Free Trade Agreement (FTA), which contains the same CAFTA special rights for foreign investors and private enforcement of them through “investor-state” tribunals. A CAFTA panel for another mining-related investor challenge brought against El Salvador by Milwaukee-based Commerce Group for $100 million was constituted a few weeks ago.

“Today’s ruling just provides another reason why a bipartisan majority of Americans oppose the Bush NAFTA-style trade model and expect President Obama to deliver on his campaign commitments to replace it,” Wallach said.

The CAFTA ruling issued today from the International Centre for the Settlement of Investment Disputes (ICSID) rejected the Salvadoran government’s preliminary objections, which could have led to the dismissal of Canadian-based Pacific Rim’s CAFTA claim. The mining firm is demanding hundreds of millions of dollars in compensation from the government of El Salvador over a dispute about a large gold mine with cyanide ore processing that the corporations sought to operate. The firm never completed the process to obtain a permit to operate the mine and filed its CAFTA case in 2008.

The same provisions in CAFTA that allow multinational corporations to challenge domestic environmental and public health regulations in private, foreign tribunals are also found in the Korea FTA. Obama has called on his negotiators to fix outstanding issues with the Korea FTA, saying that he wants to bring the pact – negotiated by the Bush administration – to Congress for a vote by early next year. However, to date, the administration has stated that it intends only to remedy market access issues for U.S. autos and beef. Labor unions and other civil society groups, as well as many members of Congress, are opposed to the Bush Korea FTA text and have demanded that the extraordinary investor rights and their private enforcement be removed. There are currently 85 Korean-owned multinational companies with about 270 establishments in the United States that would be newly empowered under the Korea FTA to challenge U.S. policies in foreign tribunals if the pact went into effect. There are also hundreds of  U.S. firms operating in Korea that could use the same system to attack Korean public interest laws.

The case is being prosecuted under extremely controversial CAFTA provisions that grant foreign investors expansive new rights to sue governments in foreign tribunals over regulations or government actions that conflict with the pacts’ special rights for foreign investors and that could undermine their future expected profits. These terms are included in all three of the Bush-signed but unapproved trade agreements with Panama, Colombia and Korea that the Obama administration inherited.

Continue reading "Pac Rim CAFTA Challenge of Salvadoran Environmental, Mining Safety Policies Given Go-Ahead by Tribunal" »

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Quick Observations on Pac Rim ruling

Pac Rim Cayman LLC v. El Salvador, the fist first major corporate attack under CAFTA against the environment, just unfortunately advanced to the next stage. We'll be sharing our official statement momentarily, but you can check out the CAFTA tribunal's decision on preliminary objections here, and other documents related to the case here.

In the meantime, I thought I'd share a few thoughts on the award itself. (For more background on the underlying issues, check out our backgrounder here.)

Continue reading "Quick Observations on Pac Rim ruling" »

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CAFTA Case Challenges Mining Laws

Pit-mine Earlier this week, an arbitration panel at the World Bank heard the first round arguments of the first environmental case under the investor-to-state arbitration mechanism of the Central America Free Trade Agreement (CAFTA) to date.  The case stems from Pacific Rim’s bid to establish a gold mine in the basin of El Salvador's largest river, Rio Lempa.  Pacific Rim planned to use hundreds of tons of cyanide and hundreds of millions of liters of water per year to recover the gold from the ore, threatening the water resources that thousands of people rely upon.  

Initially Pacific Rim possessed a permit to conduct exploration activities near Rio Lempa, but regulations required it to submit a feasibility study and gain government approval before it could begin actual exploitation of the mine.  Although Pacific Rim applied for an exploitation permit, it failed to submit the feasibility study.  In the face of growing opposition, Pacific Rim

never completed a feasibility study necessary to obtain an exploitation permit for its mine and the government did not issue the exploitation permit.

In December 2008, Pacific Rim formally launched a CAFTA claim for hundreds of millions of dollars in compensation, claiming that El Salvador’s actions constituted discriminatory treatment and expropriation of its investment.  CAFTA’s investor-to-state dispute settlement provision is very similar to NAFTA’s investor-to-state provision in which foreign corporations can claim damages if a government action, including environmental regulations, constitutes expropriation of an investment or discriminatory treatment. Under NAFTA, several environmental and public interest laws have been challenged in the United States, Canada, and Mexico (see our page on these cases here for more info).  It seems that trade negotiators did not learn the lesson from NAFTA and included this investor-state provision in CAFTA, opening the door to outrageous challenges to essential environmental laws like we now see in the Pacific Rim case.

On Monday and Tuesday the tribunal at the World Bank heard Pacific Rim and El Salvador wrangle over El Salvador’s preliminary objections to the case proceeding. Lawyers for El Salvador argued that El Salvador was properly following its own mining laws and that these laws apply equally to all mining companies so they cannot be discriminatory.  Lawyers for Pacific Rim, on the other hand, mostly argued procedural questions.  The arbitration panel is expected to render its decision by August 2nd, at which point either the case will be dismissed or hearings on jurisdiction and standing will proceed. A video of the hearings can be viewed here.

You can take action to ask President Obama to exclude these investor-to-state arbitration provisions from future trade agreements here.

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Seattle Employment Not Harmed by NAFTA? O RLY?

Ron Kirk photo Last week U.S. Trade Representative Ron Kirk was in Seattle to meet with Association of Southeast Asian Nations (ASEAN) trade ministers and business executives.  In conversations with reporters, he seemed to imply that Washington workers haven’t experienced the devastating effects of the NAFTA trade policy model like workers in the Midwest have:

"When I'm east of the Mississippi, people think I'm a two-headed monster," he quipped. He said he loves coming here. "For every five trips to Michigan and Illinois I ought to earn one trip to Seattle."

Eh? Is it true that Seattle has escaped the fate that has befallen Michigan and Illinois?

No. The manufacturing base of Seattle has been crippled in the NAFTA/WTO trade policy era.  Since the implementation of NAFTA in 1994, the Seattle area has lost 29,600 manufacturing jobs, a decline of 16 percent, according to the Bureau of Labor Statistics.  Washington as a whole has lost 51,100 manufacturing jobs since NAFTA entered into force. These are prime high-paying jobs with good benefits to support families, and the NAFTA trade model was a contributing factor in their disappearance.  In fact, a study conducted by the Economic Policy Institute (EPI) found that the increase in the deficit with Canada and Mexico alone since NAFTA’s implementation has cost Washington 16,500 jobs.

The Trade Reform, Accountability, Development and Employment (TRADE) Act offers a way to fix the flawed NAFTA model through ensuring that U.S. trade agreements include strong labor, environmental, and consumer protections that would help grow jobs instead of destroy them.  If Seattle-area Representatives Jay Inslee, Jim McDermott, David Reichert, and Adam Smith were to join the 140 cosponsors of the TRADE Act, it would go a long way toward reversing the devastating effects of the NAFTA model on Washington workers.  EPI’s recent study on the effect of the rise in the trade deficit with China since it joined the WTO in 2001 upon jobs should give the members of Congress extra incentive to support the fair trade policy embodied by the TRADE Act.  Here are the EPI-estimated job losses from the China deficit in each of their districts:

1st District (Rep. Jay Inslee): 6,800 jobs lost

7th District (Rep. Jim McDermott): 5,600 jobs lost

8th District (Rep. David Reichert): 7,100 jobs lost

9th District (Rep. Adam Smith): 4,900 jobs lost

For more analysis about why the NAFTA model is bad for Washington workers, see The Real Pirates of the Caribbean: U.S. High Tech Industry’s False CAFTA Promises Disguise Bad Policy by the Washington Alliance of Technology Workers, The Society of Professional Engineering Employees in Aerospace, and The American Ingenuity Alliance (with some help from Global Trade Watch).

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Trade Tribunals: The Canary in the Mine?

“Mining for Profits in International Tribunals,” a report recently released by the Institute for Policy Studies, presents evidence that transnational corporations are litigating for profit in trade tribunals such as the UNICTRAL (United Nations Commission on International Trade Law)  and the ICSID (International Centre for Settlement of Investment Dispute).  In the process, court rulings favoring corporations are undermining countries’ ability to implement important health, environmental and public safety policies.  This gross usage of the tribunals points to the disturbing role that our current trade agreements have in sacrificing the public welfare for the corporation’s profit margin.

The report, which examines the international trade tribunal framework, details how transnational corporations like Chevron and the Pacific Rim are increasingly using tribunals to gain millions dollars in profit by bringing cases against host countries.   Many of these cases evolve around allegations of “lost profit” due to a country’s environmental or health standards. For example, in February 2010 the Canadian mining firm Blackfire Exploration reportedly threatened to sue Mexico due to its closing of an open pit barite mine in Chiapas.  The mine had been ordered to be closed by officials due to its detrimental environmental and health effects. Sources suggest Blackfire threatened officials with an $800 million dollar claim of compensation!

Leaders need to take notice of the trend this report reveals about the larger international trade regime, as these courts are supported by a system of free trade agreements (FTAs) and bilateral investment treaties (BITs). The report concludes by saying there tribunals are “just one illustration of the imbalance in the current rule that govern international investment.”

This phenomenon should be the canary in the mine for today’s leaders and serve as a warning about the need to reform the current trade regime, remedy this imbalance and in the end promote public welfare – not corporate profits.

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TPP as Backdoor Colombia FTA?

Colombia_and_Australia_Foreign_Ministers In Australia last week, the Office of the U.S. Trade Representative (USTR) participated in the first round of the talks of the Obama administration for the Trans-Pacific Partnership (TPP) agreement (the Bush administration already had three rounds of talks in 2008 with Chile, New Zealand, Brunei, and Singapore before the TPP process expanded to include Australia, Peru, and Vietnam). The USTR revealed little about what was discussed last week in its statement announcing the conclusion of this round of talks, but there was one intriguing bit of information that flew under the radar of most of the news media covering the TPP talks.  The Foreign Minister of Colombia, Jaime Bermudez, was in Australia from Wednesday to Saturday of last week for meetings with Australian officials.  The Australian Minister for Foreign Affairs, Stephen Smith, hinted that Colombia could join the TPP process in a joint press conference with Bermudez:

But the other important matter we discussed, and the [Foreign] Minister [of Colombia, Jaime Bermudez,] will have a conversation, a detailed conversation with [Australian Minister for Trade] Simon Crean about this, of course we saw this week, a very important trade Asia Pacific initiative, with the start of the Trans Pacific Partnership discussions.

Currently we have four members of the TPP, we now have eight countries involved in those discussions. The [Foreign] Minister [of Colombia] is going to have a detailed discussion with Simon Crean, but of course there is also some rationale, given that in the TPP we find Chile a member, Peru, one of the negotiating eight. There is a rationale for Colombia also putting itself forward in due course for that, and we're looking forward to a good conversation between Simon Crean and the Minister on that front as well.

The possible entry of Colombia into the TPP illustrates the unprecedented nature of the TPP.  The TPP negotiating partners, including the USTR, envision structuring the TPP so that countries could join the agreement more or less at will after its implementation.  According to a December 15, 2009 article in Inside U.S. Trade, the USTR already “has extended an invitation” to Japan, Malaysia, and Korea to join the TPP before or after talks conclude. 

The potential for expanding the TPP to include more countries after the agreement is finalized creates huge concerns about its impact on democracy and sovereignty.  Congress has already told the USTR that Colombia must address concerns about its very poor human and labor rights record (among other issues) before the Colombia FTA can be reconsidered.  Could an automatic expansion process in the TPP bind the U.S. to a trade agreement with Colombia without Congress ever voting on it?  What about a trade agreement with Burma or China? 

If there will be a possibility of allowing countries into the TPP after it is implemented, the USTR must ensure that the approval process for any new proposed TPP partners is exactly the same as it is for a new trade agreement outside of the TPP, including a vote on the floors of the House and Senate.  The TPP should also include a democracy clause that would require TPP parties to have democratic forms of government so that we do not have a repeat of the Honduras-CAFTA debacle of last year. Otherwise, the TPP could take us down a dangerous road where we could be stuck with trade agreements with some very unsavory governments.

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What a Difference a CAFTA Makes

IMF logoThe IMF just released a new research paper about the effect of the U.S. economic downturn on 
Central American countries entitled “Spillovers to Central America in Light of the Crisis: What a Difference a Year Makes.”  The main finding of the paper is pretty shocking: Each 1.0 percent decline in U.S. GDP during the most recent economic crisis caused a 0.7 to 1.0 percent decline in Central American GDP.  In total, the link between the Central American and U.S. economies lowered Central American GDP by 4 to 5 percent.

And guess what the culprit is? According to the paper,

Spillovers [from the U.S. economy] have typically been transmitted through both financial and trade links, while remittances were not found to play an important role in transmitting business cycles across borders.

The author of this paper also discusses a paper published in 2005 that “predict[ed] that CAFTA-DR would cause a significant increase in the effects of U.S. shocks on the region.” In other words, the implementation of CAFTA meant that Central American economies are now more sensitive to downturns in the U.S. economy.  So now even the IMF agrees that tearing down trade barriers willy-nilly can expose your country to stronger foreign macroeconomic shocks that have nothing to do with how well your domestic businesses perform.

Coincidentally, the IMF also just released a staff position paper that reversed the IMF’s longstanding opposition to controls on capital inflows that could reduce financial volatility. According to the New York Times,

The other paper, released Friday, said that in the aftermath of the crisis, officials were “reconsidering the view that unfettered capital flows are a fundamentally benign phenomenon.”

“Concerns that foreign investors may be subject to herd behavior, and suffer from excessive optimism, have grown stronger; and even when flows are fundamentally sound, it is recognized that they may contribute to collateral damage, including bubbles and asset booms and busts,” the fund’s deputy director of research, Jonathan D. Ostry, wrote, along with five other authors.

Are these two papers a sign that the IMF wants to turn over a new leaf and pull back from its insistence on excessive economic liberalization for developing countries?  Let’s hope so.

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Trade Preferences Suspended in the Name of Democracy

The Obama administration deserves applause for suspending the African Growth and Opportunity Act (AGOA) trade preferences of Niger, Guinea, and Madagascar last week.  Under the AGOA legislation, the President has the power to deny AGOA preferences to a country that has not “established, or is making continual progress toward establishing….the rule of law, political pluralism, and the right to due process, a fair trial, and equal protection under the law.”  The Obama administration suspended the trade preferences of Niger, Guinea, and Madagascar because they have all experienced undemocratic transfers of power recently.

It’s too bad the standard trade agreement model doesn’t contain these types of democracy-preserving provisions, as Hondurans found out when their democratically elected President was ousted in a coup this June. 

Given that 70% of Honduran exports go to the United States, the threat of trade sanctions would have been a powerful bargaining chip as the U.S. tried to reverse the coup. Our reckless trade policy came back to bite us, however. In an August press call, the State Department explained the source of our powerlessness:

REPORTER: Yeah. I just wanted you to elaborate why [suspending trade preferences] is not a possibility.

SENIOR STATE DEPARTMENT OFFICIAL ONE: We have an agreement called the CAFTA agreement [i.e. the Central American Free Trade Agreement], and apparently provisions in that make it impossible – very difficult, if not impossible, for us to do that, so we can’t – it looks like we cannot go down that route.

Our trade policy should be promoting democratic governance instead of handcuffing our ability to discourage coups and dictatorships.  Signing CAFTA-style trade agreements is a surefire way to diminish our capacity to conduct effective foreign policy.

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U.N. Report Shows Global Wages Falling

On Nov. 3 the U.N. agency on labor, the International Labor Organization (ILO), released a 15-page report finding that real wages fell in countries around the world, including the U.S. and some other wealthy nations, raising questions about whether workers are sharing in any global economic recovery.

The report included data from 35 countries, and found that monthly wages have fallen almost 2 percent in the U.S. since January 2009. The ILO found that inflation-adjusted wage growth fell sharply around the world in 2008 to 1.4 percent, down from 4.3 percent in 2007, and wages continued to fall in a number of countries in 2009.

This continuing drop in real wages around the world illustrates the need for trade policies and agreements that protect workers’ rights and prevent a further “race to the bottom” in global wages. Fair traders have long warned that trade agreements such as NAFTA, CAFTA, and other NAFTA-type trade agreements would deflate wages and threaten workers’ rights. The ILO’s report on the drop in real wages for workers in the global economy is disturbing and makes a strong case for renegotiating these pacts and preventing new trade agreements based on the flawed NAFTA model.
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Offshoring airline safety

Last week, NPR ran a three-part story on U.S. airlines sending airplane maintenance work - formerly a high-paying, unionized domestic profession - offshore, particularly to Central America and Asia. The lead story, To Cut Costs, Airlines Send Repairs Abroad, summarizes much of the relevant information, but the entire three parts are worth a read. Also note that this is not the first time that this issue has made headlines in recent years. At issue here are both the offshoring of quality jobs and the problems with regulating safety under today's trade model. Some of the money quotes from the first NPR story regarding the latter:
"The FAA does not require airlines to report exactly where they send their aircraft for which kinds of repairs. So, FAA inspectors are not sure which of the roughly 700 foreign repair shops they should inspect... The FAA's inspectors didn't even show up at some foreign repair stations to monitor their work for as long as three to five years."
The second story in the series details some of the questionable practices at one Salvadoran repair operation, Aeroman:
...[Aeroman] mechanics say managers keep pressuring them to fix the planes faster. For instance, if there's rust on a metal beam, but it's just a little over tolerance, "the supervisor says, 'Oh, just leave it like that,'" the mechanic says, through an interpreter. "'There's no need to repair it.'" [...] Another mechanic ticked off other problems at Aeroman. Some employees don't store glues at the required temperatures, he says. That means the glues could fail — which potentially means that parts of the airplane could fall apart... And this mechanic says some workers can't even read the airlines' repair manuals. The manuals are written in English, but some mechanics at Aeroman can't read English — including him.
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Trade a Flash Point Issue in Pennsylvania’s Democratic Primary

As Rep. Joe Sestak (D-Pa.) is set to challenge Sen. Arlen Specter (D-Pa.) for his U.S. Senate seat in the upcoming Democratic primary, trade policy has surfaced as a point of contention between the two candidates. Both have criticized the other as being supportive of unfair trade agreements and Specter agreed with the accusation that Sestak is “weak on trade.”

The candidates have a mixed vote record on trade. Specter voted for both NAFTA and the WTO, but has made occasional fair trade votes in recent years, by voting against China PNTR and CAFTA. On the Senate floor in 2005, Specter said of CAFTA,

“This trade agreement would adversely affect this job loss in the United States… many U.S. corporations would have to shut down their operations, export their jobs, and leave skilled workers jobless. This agreement would aggravate the problem. In addition to job loss, this agreement fails to enhance workers' rights…Ultimately, CAFTA would create downward pressure on wages because it would force our American workers to compete with Central American workers who are working for lower wages. This would allow foreign based companies to expand while leaving America more dependent on imports from abroad, which in turn would lessen the demand for domestic production and create even greater economic instability.”

Sestak for his part voted to deny fast-track treatment to the FTA with Colombia and has said that he plans to vote against the Korea and Colombia FTAs.

Yet, both candidates voted for the Peru FTA in 2007 and at this point, neither has cosponsored the TRADE Act – a key demand of fair traders.

The fact that the two candidates are analyzing each other’s trade policies and referring to specific trade agreements shows that political candidates are becoming more educated about trade policy and are using the issue as a platform for (re)election. In other words, trade continues to be a major election issue.
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CAFTA Signatory Honduras Falls Victim to a Coup

Recently ousted Honduran President Manuel Zelaya was in Washington, DC earlier this month and met with Secretary of State Hillary Clinton. Zelaya was roused from bed at gunpoint by the Honduran military, forced on a plane, and flown to Costa Rica in June. Since then, the de facto government has violated civil liberties left and right: The Huffington Post reports that Zelaya supporters have been killed, hundreds of people have been assaulted by armed forces, and over a thousand have been illegally detained. Meanwhile, press and media outlets have been shut down and journalists have been arrested and detained. 

Zelaya was criticized by Honduran elites for his progressive policies: During his tenure, Zelaya’s administration raised the minimum wage, gave out free school lunches, provided pensions for the elderly, distributed energy-saving light bulbs, decreased the price of public transportation, expanded scholarships for students, and passed legislation to protect the environment. He enjoys broad popular support, especially from unions, human rights groups, indigenous groups and peasant associations. 

The situation in Honduras has a number of important implications: Fair traders have long argued that NAFTA-style deals promote instability and now Honduras, a signatory to CAFTA, has suffered Central America’s first coup since the Cold War. CAFTA was approved in Honduras by local elites, the same interests who are threatened by Zelaya’s progressive policies. The instability in Honduras is an illustration of how NAFTA-style trade agreements can undermine democratic governance in member nations.
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University of California Study Finds that CAFTA Intellectual Property Rules Hinder Access to Medicines in Guatemala

A new study from the University of California concludes after rigorous analysis that the Central American Free Trade Agreement (CAFTA) elevates the prices of medicines in Guatemala while removing cheaper, generic options from the market. 

Guatemala is a low-income country with a domestic generic drug industry.  CAFTA’s intellectual property rules affect the drug market not as much through patent protections, but through data protection (or data exclusivity), which inserts an administrative barrier to generic drugs entering the market even if there is no patent in place, providing one company with a monopoly. Not only are generics denied registration and entry into the market by CAFTA’s market protections but generics already in the market are removed. 

The study looked at drugs used to treat some of the most common causes for sickness and mortality in Guatemala, including cancer, pneumonia, diabetes, and cardiac disease and stroke. The intellectual property rules in CAFTA have had a significant effect on medication costs in Guatemala, making many of them prohibitively expensive. In every case included in the study, the data-protected drug was more expensive than its generic equivalent. For example, the insulin Lantus, used to treat diabetes, costs 846 percent more than its generic equivalent. The antifungal Vfend, used to treat infections, costs 810 percent more than the generic medication. 

In fact, CAFTA’s rules on intellectual property provide even stronger monopoly protections than U.S. law or the WTO’s Agreement on Trade-Related Aspects of Intellectual Property (TRIPS).  Unfortunately, Guatemala is a prime example of the effects of CAFTA’s intellectual property rules and the Guatemalan people are paying the price, literally and figuratively. 

For more information, see GTW’s information on CAFTA and access to medicines.

The University of California article, entitled “A Trade Agreement’s Impact on Access to Generic Drugs,” can be found here
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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...

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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.

Continue reading "Tantamount To, Equivalent To" »

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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.

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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!

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FTAs = Destabilization

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

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

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

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

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

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

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

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

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Pacific Rim Uses CAFTA to take on Mining Regs in El Salvador

Canadian mining company Pacific Rim Corp. has responded to grassroots efforts against its proposed mining project in El Salvador by filing a CAFTA investor suit against the Salvadoran government.  

Communities in northern El Salvador, worried about the environmental impacts of proposed mining projects, campaigned vigorously along with environmental, religious and human rights organizations to hault what would be El Salvador's first large-scale mine in 70 years. They were successful in convincing President Tony Saca to rethink issuing the permit for Pacific Rim's El Dorado mine.

The Miami Herald explains:

President Saca fears mining would cause cyanide contamination of water much in the way it did in the 1950s at the El Dorado mine, the same underground mine in the eastern region of Cabañas which Pacific Rim wants to reopen and expand.

''I won't give any mining exploitation permits because mining is definitively harmful,'' Saca said.

Saca's position has been echoed by his successor, president-elect Mauricio Funes, whose left-wing FMLN party ended 20 years of right-wing rule with their victory in the March elections. Funes will officially take power in June.El Sal protest

El Salvador is not alone in choosing to preserve natural resources over mining projects that do not bring long-term employment and whose profits will flow out of the country. And Pacific Rim is not alone in using NAFTA or CAFTA investor rights to challenge local decisions over mining. The United States is currently fending off a $50 million NAFTA investment suit over California's mining regulations.

Although Pacific Rim is a Canadian company that shouldn't even be eligible to utilize investor rights under CAFTA (an agreement between the United States and five Central American countries), they have found a way around this problem. Pacific Rim Mining Corp. will bring this investment suit through its Nevadan subsidiary, Pac Rim Cayman LLC! As with all NAFTA and CAFTA investor-state cases, the case will be decided outside of domestic courts by a panel of arbitrators.

And all this talk of a Panama FTA, which contains the same kind of investor rights found in NAFTA and CAFTA could makes matters much worse. Panama is home to an estimated 350,000 subsidiaries of foreign mulinational companies. Just as Canadian company Pacific Rim used its Nevadan subsidiary to file a CAFTA investor suit against El Salvador, so could any of the 350,000 parent companies use their Panamanian subsidiaries to take the United States government to task over environmental and other public interest regulations.

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Fair Trader Wins Salvadoran Presidency

Funes Count one more fair-trade government in Latin America. The Washington Post reports the winner is Mauricio Funes:

Funes, a dynamic speaker and political outsider who compares himself to President Obama and pledged to be an agent of change in the small Central American nation, was leading the polls late Sunday night with 51.2 percent of the vote and more than 90 percent of the ballots counted...

Funes's opponent, former National Police chief Rodrigo Ávila, who represented the Nationalist Republican Alliance (ARENA), was trailing with 48.7 percent of the vote. Ávila conceded defeat, telling supporters, "We will be a constructive opposition."

The Committee in Solidarity with the People of El Salvador (CISPES) is hopeful about the prospects for the country under the new government:

CISPES also wants to pass on a profound congratulations for the Salvadoran people, who today triumphed over fear and joined the countries of Latin America who are proving that indeed another world is not only possible, it is in formation!

Amen to that!

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Fair Traders Hang Tough in Salvadoran Elections

The Salvadoran fair-trade party FMLN (Frente Farabundo Marti de Liberacion Nacional) - vehement in its opposition to CAFTA - is leading the presidential race, but facing typical last-minute shenanigans from the right wing. And given the recent interventions by Republican congressmen - not unlike Bush administration's meddling in the CAFTA Referendum in Costa Rica - the FMLN is holding its breath.
FMLN Slate

A recent Washington Post piece reveals that while polls show the fair-trade FMLN candidate Mauricio Funes up by 18 points on the CAFTA-fans and privatizers' candidate Rodrigo Ávila of the ruling ARENA party, there's always a chance that something will give.

The February polls show Funes up 49 percent to Ávila 's 31 percent, but Aguilar [a commentator] cautioned that the race remains dynamic. Other polling shows the race to be a virtual dead heat.

That something might just be the not-so-veiled threats made by GOP congressmen yesterday, orchestrated to dominate the Salvadoran headlines the final moments of the campaign. As highlighted by CISPES, the Committee in Solidarity with the People of El Salvador (who also urges you to take action to make the clear U.S. neutral position):

Rep. Dan Burton (R-IN) stated, “Those monies that are coming from here to there I am confident will be cut, and I hope the people of El Salvador are aware of that because it will have a tremendous impact on individuals and their economy.” Indeed, these threats carry considerable weight for Salvadoran voters, as 25% of the Salvadoran population lives in the U.S., and 20% of the nation's economy consists of remittances from those family members.

This sort of meddling was full anticipated, which is why Rep. Raul Grijalva (D-Ariz.) coauthored a letter signed by 33 members of Congress to the State Department, calling for a preemptive declaration of U.S. neutrality in the Salvadoran elections. Now we clearly see why this was necessary.

You can see Grijalva's press conference here, or below on yesterday's Democracy Now:

The Post reports on Funes' own reaction to the scare tactics:

During his speech in Metapan, Funes promised that "we will end the economy of privilege for the few," a reference to the so-called 14 major families of the Salvadoran elite, who have dominated the country for generations. He urged the crowd not to believe ARENA's "propaganda." "They're desperate because they know they're going to lose," he said. "If you vote for me, light is at the end of this tunnel."

Eyes on Trade will be watching and will keep our readers posted.

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One Third of CAFTA 30 Are Gone!

After the razor-thin margin for CAFTA passage back in 2005, we highlighted what we called the CAFTA 30, which was basically the CAFTA 15 Democrats that voted for the deal plus a few handfuls of Republicans who had committed (or who politically should have) to vote against.

Well, as of today, nearly a third of the CAFTA 30 are gone - ousted from office or otherwise replaced.

  • In 2006, Reps. Charles Taylor (R-N.C.), Richard Pombo (R-Calif.), Mike Fitzpatrick (R-Pa.) and Mark Foley (R-Fla.) were ousted by Heath Shuler (D-N.C.), Jerry McNerney (D-Calif.), Patrick Murphy (D-Pa.) and Tim Mahoney (D-Fla.) - who all called out the Reps' bad CAFTA positions. (Mahoney later sold out fair traders, but that's history, since he also lost his re-election.)
  • Now, in the 2008 races, there are four more casualties: Rep. Chris Cannon (R-Utah), Phil English (R-Pa.), Robin Hayes (R-N.C.) and Marilyn Musgrave (R-Colo.) -- all who were ousted by fair traders Jason Chaffetz (R-Utah), Kathy Dahlkemper (D-Pa.), Larry Kissell (D-N.C.) and Betsy Markey (D-Colo.). 
  • Additionally, Rep. William Jefferson (D-La.), one of the CAFTA 15, lost his 2008 election, and Rep. Jo Ann Davis (R-Va.) passed. And Sens. Norm Coleman (R-Minn.) and Elizabeth Dole (R-N.C.), whose bad CAFTA votes we also highlighted, lost their elections to fair traders Al Franken (D-Minn.) and Kay Hagan (D-N.C.).

This contradicts the claims of some corporate groups that voting for CAFTA was a not a political liability.

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3 Years and 3 Strikes for CAFTA

The Stop CAFTA Coalition just released their third annual DR-CAFTA monitoring report highlighting the damages of this particular Bush trade deal. The report focuses on the three cases of the Guatemala, El Salvador and Nicaragua, the first three countries to implement CAFTA. Despite the warnings of people in each country, those three governments each swung hard, and missed big.Strike

CAFTA has failed to bat in the promised shared prosperity and economic development. From the Stop CAFTA Coalition's press release:

Patterns of growing inequality and ongoing poverty within the signatory countries have only become more extreme, contrary to the promises of supporters of the agreement.

Coalition members are calling for the incoming Obama administration for at least a thorough renegotiation of the Central America Free Trade Agreement, and a moratorium on further NAFTA-style trade deals. In the Stop CAFTA Coalition's press release Burke Stansbury of the Committee in Solidarity with the People of El Salvador (CISPES), a member of the coalition, summarizes:

We believe that the results of CAFTA demonstrate the failure of ‘free’ trade and justify a definitive split with this model by the incoming Obama Administration... Not only should the Democratic Congress reject pending agreements such as the Colombia Free Trade Agreement, but the party in power should take this opportunity to introduce a new trade policy based on human rights, and economic, social and environmental sustainability.

Katherine Hoyt of the Nicaragua Network, also a coalition member, elaborates on the problems as seen from Central America:

Unless there is a significant shift in the economic model, employment opportunities will continue to be scarce, agricultural prices will continue to fall, the poor will become poorer, and immigration will increase.

UmpYou can view the full report here.

When the new home place ump, and increasingly fair trade 1st and 3rd base umps arrive in January, the fans will be doing the wave demanding action to match words. They earned their posts by promising change toward fair trade, and they be cheers for them to make good on renegotiations of not just CAFTA but NAFTA, and to pass structural reforms like the TRADE Act. The air will be crisp, the beer flowin', red hot hot, and it'll be hard to ask for a better night for a ball game.

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CAFTA Continues to Crawl

It’s now been over four years since the Central American Free Trade Agreement (CAFTA) was signed by Nicaragua, El Salvador, Honduras, Guatemala, and Costa Rica (and later the Dominican Republic) in March 2004, and two years since it was to take effect in March 2006. Two years later in March 2008 was the deadline for full implementation of the provisions. Yet countries, especially Costa Rica, have been slow to dive head first into this agreement.

In February of 2007, tens of thousands of Costa Ricans took to the streets to demonstrate the ratification and implementation of CAFTA, but it narrowly passed through a country-wide referendum vote in October 2007. Since then it’s been inching its way through the court system and government. The March 2008 implementation date has been extended several times, and just this past week was extended again til January 1, 2009.

All eyes are on this country, with the most prosperous economy in Central America and the third largest goods export market for the United States in Latin America. So while the US continues to pressure Costa Rica’s implementation of the agreement, the implementation date seems to float farther away as citizens and farmers speak out against CAFTA's lack of labor, environmental and health provisions, among a host of other concerns.

In other news, U.S. corporate takeover of Central America has continued. You may remember that Wal-Mart was able to buy control of Central America’s leading retail chain in 2006 when CAFTA went into place. Once the Central American Retail Holding Company (CARHCO), the retail chain has now been renamed to Wal-Mart Central America. Clever, eh? Guatemala experienced some of the largest Wal-Mart infiltration, with hundreds of stores being sucked into the international Wal-Mart conglomerate and out of the local economy.

Just as CAFTA encourages this sort of foreign investment, it makes sure to transfer plenty of control from the domestic government to the investing corporations.  As part of CAFTA’s Investor Protection Provisions, foreign corporations are able to sue the local governments for any "potential loss of profit" for the company, as already demonstrated in dozens of cases through NAFTA.

Recently this incredibly vague provision in CAFTA began working its way through the Dominican Republic’s energy sector. The French investor Societe Generale sued the DR’s government for $680M in potential losses related to allegations that the government’s mistreatment of the company has led to a diminished value of EDE Este, a Societe Generale power company. More specifically, the company claims “catastrophic losses” due to allegations that the government has failed to prevent the theft of electricity, blamed the company for power blackouts, and encouraged Dominican citizens to forgo paying their electricity bills. That’s a $680 million whine that could transfer millions of taxpayer dollars to the hands of a foreign private corporation.

Take heed Costa Rica, it could get ugly.

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Making a story where there isn't one

(Disclosure: Global Trade Watch has no preference among the candidates.)

Philip Elliott of the AP writes an unusual story the headline of which is "NAFTA Bashing off the Democrats' Agenda" and the lede of which is: "The once-decried free trade deals of the primaries have been all but abandoned as political boogeymen."

Yet the story goes on to say that both Obama and Clinton campaigned and won primaries based on their NAFTA criticism, and all of the people cited argue that trade is and was a potent political issue.

So what's the evidence for the proposition in the lede and headline?

During the Democrats' nominating convention here this week, nary a mention arose about the North American Free Trade Agreement or its peers... Part of the reason Obama has gone silent on NAFTA is because it riles up some unions and staunch Democrats, but not independent and swing voters. NAFTA is an easy target because some voters blame such trade deals for lost jobs, but its details don't work well in 30-second soundbites.

This last sentence might have been the lede: I think I would advise anyone running for office not to talk about investor-state mechanisms in their nomination speech too, much as I am fascinated by the topic.

The para is also off on its politics: independents and swing voters are MORE trade-skeptical than Democrats, as this Pew poll from May shows:

In general, Republicans express more positive views than do Democrats about the impact of free trade agreements on the United States. Still, as many Republicans see free trade agreements as a bad thing as a good thing (43% vs. 42%). Democrats, by 50% to 34%, say free trade agreements are bad for the United States. A narrow majority of independents (52%) views free trade agreements as bad for the country.

Solid majorities of Democrats (64%), independents (64%) and Republicans (55%) say that free trade agreements lead to job losses - rather than create jobs - in the United States. There also is fairly broad agreement that free trade agreements lower, rather than raise the wages of American workers. Democrats, by nearly four-to-one (57% to 15%) say that free trade agreements slow the economy down rather than make it grow; this also is the prevailing view among independents (50% vs. 18%).

Continue reading "Making a story where there isn't one" »

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The Punditocracy: Speaking for the Wretched of the Earth

For those of us who get dizzy listening to the circular logic of the paragons of Punditocracy (especially of the capital P variety), Roger Bybee's (Fairness and Accuracy in Reporting) excellent historical round-up of Fareed Zakaria's noxious views on trade and globalization issues offers a welcome breath of cold, clean facts  after some pretty serious doses of post-Doha death vertigo from the 'powers that be'...

Fareed Zakaria, now the highly influential editor of Newsweek International, author of The Post-American World, and host of Fareed Zakaria GPS, constructed a landmark of unintended irony when he regally pronounced that “the downtrodden beg to differ” with protesters of corporate globalization (Foreign Affairs, 12/13/99).

Those who demonstrated against the World Trade Organization at the famous “battle of Seattle” in 1999, he asserted, were displaying the hubris of the “rich and privileged,” who were delivering “a familiar plea for the downtrodden of the world” by challenging the WTO’s promotion of sweatshops and environmental degradation in the impoverished Third World.

In other words, Zakaria denounced the arrogance of those who presume to advocate for the world’s poor—while appointing himself, the son of a prominent Indian attorney and politician, as the poor’s spokesperson. “There’s just one problem: The downtrodden beg to differ,” Zakaria declared.

In his eyes, the Third World’s poor eagerly welcome Western investment on any terms as a vast improvement over their current misery. Microscopic wages, long hours and heartless management in sweatshops, along with befouled air and water, might seem horrific to wealthy Westerners, but are gratefully welcomed by the desperate people of nations like Mexico, China and India. “In fact, if the demonstrators’ demands were met, the effect would be to crush the hopes of much poorer Third World workers,” he declared (12/13/99)...

On globalization, Zakaria zealously denounces opponents of corporate-determined trade agreements as seeking to impose utopian rules for the global economy that are widely rejected, especially by the most wretched of the earth....

Zakaria’s “anti-democratic” and “minority” accusations invert reality in...critical ways....

A recent multinational Chicago Council/ poll (released 4/25/07) found majorities in most poor nations insisting that globalization be accompanied by global standards to prevent a “race to the bottom.”

“Strong majorities in developing nations around the world support requiring signatories of trade agreements to meet minimum labor and environmental standards,” the survey concluded, citing data from China, India, Thailand, the Philippines, Argentina and Mexico. “Nine in 10 Americans also support such protections for workers and the environment.”

Elites in Third World nations, in contrast, staunchly opposed such standards, the study noted:

The leaders of less developed nations have generally opposed including language mandating minimum standards for working conditions and environmental protections in trade deals, arguing that such rules are protectionist and would undermine their ability to compete in major markets such as Europe and the United States.

“It has often been assumed that when leaders of developing countries argue against including labor or environmental standards in trade agreements, they represent the wishes of their people,” added Steven Kull, director of WorldPublic “However, it appears that these publics would like to see the international community put pressure on their governments to raise their standards.”

These findings directly contradict Zakaria’s simplistic worldview that the free-trade agenda of America’s political and business elite reflects overwhelming public sentiment in both poorer nations and the U.S.

And, closer to home (and to the other salient topic of the day - the upcoming November polls - about which Zakaria is busy confusing the American electorate daily), Bybee reminds us of the ultimate price yet to be paid by those candidates who forget that the people actually know what's going on...

While elites across the globe support unregulated globalization, majorities in both the U.S. and poorer nations essentially seek to restructure globalization so that it benefits everyone—as signified by the flipping of 37 congressional seats in the 2006 mid-term elections from “free trade” advocates to supporters of “fair trade” (Global Trade Watch, 12/13/06)."

Gotta love it when the real elites try to carve their niches by claiming to speak for the poorest of the poor. Frantz Fanon must be spinning in his grave!

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Real World of Fair Trade

(Disclosure: Global Trade Watch has no preference among congressional candidates.)

Some of you may recall that Rep. Ed Towns (D-N.Y.) was one of the CAFTA 15, in reference to the 15 Dems who betrayed their party's base and supported the NAFTA expansion to Central America back in 2005. 71m4jxmyhdl_sl500_aa280_gif Towns attracted several progressive challengers in the 2006 elections, and skated by with under 50% of the vote in a three-way primary that included Charles Barron and Kevin Powell from MTV's Real World's first season.

Well, Powell is back, and going after Towns again. And apparently, he has the support of Chris Rock, Dave Chappelle, and a bunch of other incredible Brooklyn residents. We'll stay tuned to see what happens.

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La.-6: Another fair trade election victory

Don Cazayoux, the Democrat who just won the Louisiana-6 House seat long held by the GOP, campaigned and won on a fair trade platform. Here's what he told the Daily King Fish:

I support fair trade agreements that raise labor standards for all workers - both here in the United States and abroad - while ensuring that American businesses remain competitive. I will vote to close tax loopholes that reward companies for moving our jobs overseas. I oppose the Colombian Free Trade Agreement in its current form and believe that we need to renegotiate CAFTA and NAFTA to include more protections for our workers.

Cazayoux takes the open seat vacated by Rep. Richard Baker (R-La.), who voted against fair trade on 18 out of 18 votes in his 22 years in Congress, including NAFTA, WTO, Peru FTA, and CAFTA (which even many GOP in La. opposed, including now-Gov. Bobby Jindal, who William Kristol says might be McCain's running mate).

UPDATE: Special elections this cycle have been good for fair traders. And as we documented back in March, fair trader Rep. Bill Foster (D-Ill.) took Denny Hastert's seat. Foster ran paid ads on trade. Also, fair traders were able to keep several more seats that were opened up through the special elections of Reps. Andre Carson (D-Ind.), Laura Richardson (D-Calif.), Jackie Speier (D-Calif.), and Niki Tsongas (D-Mass.). This crew all voted for fair trade in the Fast Track cancellation vote in April.

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Inglis and CAFTA 30 still feeling the pain

Rep. Bob Inglis (R-S.C.) was one of the CAFTA 30 - the most unlikely reps to vote for CAFTA back in the summer of 2005 by one vote. We predicted that these members would be hearing about their vote for a long time.

We turned out to be right. The Spartanburg Herald-Journal reports that Inglis has a primary challenger who is bringing up the CAFTA issue:

Energy, high gas prices and the future of fuel highlighted the first debate between Republican Rep. Bob Inglis and his primary challenger, Charles Jeter, Wednesday night at the University of South Carolina Upstate...

Jeter also criticized Inglis for supporting the Central American Free Trade Agreement, or CAFTA, saying such a policy was responsible for draining Upstate jobs.

In other news, the Bush administration has failed to live up to its promise of supporting Alabama's sock industry after getting Rep. Bob Aderholt (R-Ala.) to vote for CAFTA on that basis. This week, they announced a safeguard on Honduran socks, several years later and at a lower rate and for a shorter time period than promised.

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Pre-Super Tuesday reflections

(Disclosure: Global Trade Watch has no preference among the candidates.)

A lot of folks are offering their reflections the relative merits of the candidates (see here, here, here, and here.) I was able to share mine at San Francisco's NPR station a little earlier today.

As I see it, we should evaluate trade policy on three overlapping dimensions:

  1. Who is affected
  2. How is it made
  3. What are the "surprise" implications for non-trade policy

On the first front, I'm thinking of how our trade policy has resulted in (or not helped us avoid) a skyrocketing trade deficit, largely stagnant wages and farm prices, and the loss of millions of manufacturing jobs, hundreds of thousands of family farms, and an increasing number of service sector jobs. Nearly every candidate touches on this part of the issue - even Huckabee and Romney with their comments on manufacturing. (McCain has spoken about compensating losers through TAA.) With the exception of Ron Paul (who calls for scrapping the WTO, NAFTA, etc. directly), the whole field talks about the losses from trade policy for many people. They are largely silent on the trade-wage connections.

The second category relates to how we make trade policy. For four decades, our trade policy has been conceived under the undemocratic Fast Track mechanism, which takes away Congress' constitutional authority and responsibility to set our trade policy, and gives it to an executive branch that sets the terms and picks the partner countries and writes the deal, leaving Congress only an up or down vote. Obama has talked about replacing Fast Track, while Clinton has said she will hold off from asking for Fast Track until she reviews past agreements.

Finally, as we have long been arguing, trade policy these days is only marginally about trade. Much of the 600-page texts of the WTO and FTAs has to do with how we adopt policies domestically. Thus, a move to universal health care could be challenged as a limitation on market access for health insurance companies. Under our FTAs, investors can demand taxpayer money for public interest policies that limit their future expected profits. Obama has addressed investor-state, consumer protection, and domestic regulation. We haven't heard much from the other candidates on this dimension.

As we'll document in an upcoming report, both the Dem and GOP health care and climate change proposals could face WTO challenge. More specific responses to these and other questions can help voters can make an informed choice.

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