TPP Financial Stability Threats Unveiled: It’s Worse than We Thought

Public Citizen’s Global Trade Watch has carefully analyzed the Financial Services Chapter of the recently released Trans-Pacific Partnership. One story that has not been told about the TPP is how this  first U.S. trade agreement negotiated since the global financial crisis  would impose the same model of financial deregulation that is widely understood to have fueled the crisis.

For the first time in any U.S. trade agreement, the TPP empowers some of the world’s largest financial firms to challenge U.S. financial regulatory policies in extrajudicial investor-state dispute settlement (ISDS) tribunals using the broadest “minimum standard of treatment” claim.

And, the TPP would be the first U.S. pact to empower some of the world’s largest financial firms to launch ISDS claims against U.S. financial policies. Now none of the world’s 30 largest banks may bypass domestic courts, go before extrajudicial investor-state tribunals of three private lawyers, and demand taxpayer compensation for U.S. financial policies. Among the top banks in TPP countries that could newly do so: Mitsubishi UFJ, Mizuho, ANZ, Commonwealth Australia, West Pac, National Australia Bank, Bank of Tokyo, Sumutomo, Royal Bank of Canada.

Despite the pivotal role that new financial products, such as toxic derivatives, played in the financial crisis, the TPP would require all TPP countries to allow new financial products and services to enter their economies if permitted in any other TPP countries.

Meanwhile, the provision USTR calls a “prudential filter” would not shut down investor attacks on financial policies. Rather, it would provide for 120 day consultation after which the case could proceed unless the government of the suing investor agreed to shut down the case.

This analysis provides interested parties with a guided walk-through of the chapter and related annexes.

Please read out analysis here:


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Leaked Text Shows Trade Agreement Threat to Deregulate Financial Services

Statement of Robert Weissman, President, Public Citizen

Note: Today, draft texts of the Trade in Services Agreement were made public by WikiLeaks. Click here to see our analysis. 

It would be helpful if policymakers acted with some recognition that the 2008-2009 financial crisis actually occurred. It shouldn’t be hard. In the United States alone, nearly $20 trillion in wealth was lost, between lost output and lost home equity; unemployment peaked at 10 percent; millions of families lost their homes. The situation was worse in much of the world, with severe problems continuing in many countries, notably in Europe.

Learning from the crisis means not repeating the deregulatory and non-enforcement mistakes that led up to it. Yet a secret international trade agreement, the Trade in Services Agreement (TISA), threatens to adopt and impose a global financial deregulatory standard.

Our analysis of a leaked version of the draft agreement, along with a draft annex on financial services, identifies threats to rules and policies ranging from limits on overall bank size to consumer protections, from prophylactic protections against new speculative financial instruments to limits on transfers of personal financial data.

It is unimaginable that such an agreement is under negotiation while the global economy is still recovering from the most severe crisis since the Great Depression, and while Greece and other countries are still reeling from developments related to the crisis.

Yet, thanks to the publication of the TISA texts by WikiLeaks, we know that such negotiations are in fact underway.

Post-crisis, the United States and countries around the world have tightened their domestic financial regulations, imposing somewhat tougher restraints on Wall Street and financial centers around the world. TISA is an effort by Wall Street and its global counterparts to undo those positive steps in a forum absolutely closed to the public.

To analyze the TISA text is to see that negotiators are ignoring the lessons from the financial crisis, and to see how vital it is to shine a light on the secret TISA negotiations. These leaks show that it is imperative for TISA negotiators to suspend their efforts, publish all texts under negotiations and not resume until there is a proper public debate about their radical deregulatory maneuvers.

Read our analysis of the leaked texts here:

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Why Warren Is Right and Obama Is Wrong on Fast Track’s Threat to Wall Street Reform

President Obama seems unaware that his controversial trade agenda could undermine the Wall Street reform agenda of his first administration. 

Fortunately, Senator Elizabeth Warren has been reminding him of this contradiction and the threat it poses to financial stability.  Last week, in a speech about the president's trade agenda, she stated, “Anyone who supports Dodd-Frank [the post-crisis Wall Street reform law] and who believes we need strong rules to prevent the next financial crisis should be very worried.”  

Unfortunately, Obama responded over the weekend by dismissing Senator Warren’s concerns and defending his controversial push to Fast Track through Congress the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Free Trade Agreement (TAFTA).

In an interview, Obama seemed unnerved by the notion that this agenda could “unravel” Wall Street reform.  Indeed, it is unnerving – because it’s true.

Just four days after Obama brushed away Sen. Warren’s concerns as “pure speculation,” Canada's Finance Minister Joe Oliver has declared that the Volcker Rule – a centerpiece of the Dodd Frank Wall Street reform law – violates the North American Free Trade Agreement (NAFTA).  Not only would the TPP replicate many of NAFTA’s pre-crisis, deregulatory rules that threaten financial regulations – it would expand them further.  

“I believe, with strong legal basis, that this [Volcker] rule violates the terms of the NAFTA agreement,” states Oliver.  If our trading partners are already invoking existing U.S. trade pacts to issue clear threats against Wall Street reform, why would we undertake an unprecedented expansion of this trade model’s threat to financial stability via the TPP and TAFTA?   

For the first time, the TPP and TAFTA would empower the world's largest banks, including 19 of the 30 biggest non-U.S. banks, to “sue” the U.S. government before extrajudicial tribunals over U.S. financial regulations. And unlike any past U.S. trade pacts, the TPP would empower foreign banks to challenge new U.S. financial protections on the mere basis that they frustrated the banks' "expectations."

The deals are also slated to include deregulatory provisions that literally were written under the advisement of Wall Street banks before the financial crisis – provisions that would conflict with bans on risky derivatives or policies to prevent banks from becoming “too big to fail.”  Sen. Warren and other Senators warned the administration about these pre-crisis provisions in a letter last December, concluding that the TPP “could make it harder for Congress and regulatory agencies to prevent future financial crises.”

And Senator Warren isn’t the only canary in this mine.  Leading members of the House of Representatives, including House Financial Services Committee ranking member Rep. Maxine Waters, have issued similar warnings about TAFTA’s threats to U.S. financial stability measures. The Americans for Financial Reform – a coalition of more than 200 groups leading the push for Wall Street reform – has repeatedly detailed how TPP and TAFTA provisions conflict with commonsense financial protections.  

Prominent economists like Simon Johnson, former chief economist for the International Monetary Fund, have explicitly backed Warren’s concerns.  And in a speech last year, Federal Reserve governor Daniel Tarullo plainly stated that proposals “to include limitations on prudential requirements in trade agreements would lead us farther away from the aforementioned goal of emphasizing shared financial stability interests, in favor of an approach to prudential matters informed principally by considerations of commercial advantage.”

But, you may be thinking, surely President Obama would not want to roll back Wall Street reform, right?  Fast Track’s threat, unfortunately, is larger than Obama, because Fast Track would outlast Obama.  Fast Track would also give blank-check powers to whoever is president after Obama to pursue additional binding agreements to which U.S. domestic laws, including financial regulations, would have to conform. Senator Warren spotlighted this threat in her response to Obama this week, stating, “If that [next] president wants to negotiate a trade deal that undercuts Dodd Frank, it will be very hard to stop it.” While an attempt to undermine Dodd Frank via normal legislation would require 60 votes in the Senate, a Fast-Tracked trade deal that undermines Dodd Frank could be implemented with a simple majority.

But even if no future trade agreements would be shoved through Fast Track’s back door, the existing trade pacts – TPP and TAFTA – present plenty of cause for concern.  Indeed, the two deals pose greater threats to U.S. financial regulations than any past U.S. trade or investment deals.  That’s largely because, for the first time, they would allow the world’s most powerful banks to use the notorious “investor-state dispute settlement” (ISDS) system – a parallel legal system for multinational firms – to challenge U.S. financial regulations.

Under current U.S. pacts, none of the world’s 30 largest non-U.S. banks may bypass domestic courts, go before extrajudicial tribunals of three private lawyers, and demand taxpayer compensation for U.S. financial policies.  Were the TPP and TAFTA to be enacted, 19 of the world’s 30 largest non-U.S. banks would be so empowered - from the UK’s HSBC (notorious for enabling money laundering by drug cartels) to France’s BNP Paribas (notorious for evading U.S. sanctions). These global banks have many subsidiaries in the United States, any one of which could serve as the basis for an ISDS challenge against U.S. financial regulations if the TPP and TAFTA were to take effect.

One of the largest banks that that would be newly empowered to challenge U.S financial protections is Deutsche Bank, a German megabank that received hundreds of billions of dollars from the U.S. Federal Reserve in exchange for mortgage-backed securities in the aftermath of the financial crisis.  The Association of German Banks, led by Deutsche Bank’s CEO, has already made clear that it has “quite a number of…concerns regarding the on-going implementation of the Dodd-Frank Act (DFA) by relevant US authorities.”

The ISDS threat is not hypothetical – foreign firms have already used ISDS to attack financial measures, such as when a Netherlands investment company demanded hundreds of millions of dollars from the Czech Republic for choosing not to bail out a bank during the country’s banking crisis.  The foreign firm was irked that the bank in which it had a minority share did not receive a government bailout while other banks did.  An ISDS tribunal of three private lawyers ordered the government to pay the firm $236 million.

Fast Track’s threat to U.S. financial regulations is also unprecedented because the TPP, according to U.S. TPP negotiators, would be the first U.S. trade pact to empower foreign banks to launch ISDS cases against U.S. financial regulations on the basis that those regulations violated a special guarantee of a “minimum standard of treatment” for foreign investors.  ISDS tribunals have interpreted this ambiguous obligation as requiring governments to maintain a “stable and predictable regulatory environment” that does not frustrate foreign firms’ “expectations.”  That is, regulations should not significantly change once a foreign investor has invested – even if the government is trying to prevent or mitigate a financial crisis. 

Due to such sweeping interpretations, this vague government obligation has become the basis for three out of every four ISDS cases brought under U.S. pacts in which the government has lost.  Unlike past U.S. trade pacts, the TPP would newly subject U.S. financial regulations to this broad and oft-used obligation.

President Obama did not address these realities when dismissing Senator Warren’s warnings about the threat Fast Track poses to Wall Street reform.  Indeed, he seemed eager to simply call Sen. Warren “absolutely wrong” and move on.  The U.S. public deserves an honest debate, not defensive one-liners, when something as sensitive as financial stability is on the line.  Let’s hope Senator Warren keeps stoking that debate. 

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Seven Corporations that Could Sponsor Obama’s Controversial Trade Deal (If His Nike Endorsement Falls Flat)

President Obama apparently has a flair for irony. He selected the headquarters of offshoring pioneer Nike as the place to pitch the controversial Trans-Pacific Partnership (TPP) trade deal in a major speech on Friday. As Obama tries to sell a pact that many believe would lead to more U.S. job offshoring and lower wages, why would he honor a firm that has grown and profited not by creating U.S. jobs, but by producing in offshore sweatshops with rock bottom wages and terrible labor conditions?

Less than 1 percent of the 1 million workers who made the products that earned Nike $27.8 billion in revenue in 2014 were U.S. workers. NikeLast year, one-third of Nike’s 13,922 U.S. production workers were cut. Most Nike goods, and all Nike shoes, are produced overseas, by more than 990,000 workers in low-wage countries whose abysmal conditions made Nike a global symbol of sweatshop abuses.

This includes more than 333,000 workers in Nike-supplying factories in TPP nation Vietnam, where the average minimum wage is less than 60 cents per hour and where workers have faced such abuses as supervisors gluing their hands together as a punishment. Instead of requiring Nike to pay its Vietnamese workers more or ending the abuse they endure, the TPP would allow Nike to make even higher profits by importing goods from low-wage Vietnam instead of hiring U.S. workers.

If using an offshoring pioneer to rally support for the beleaguered TPP does not succeed for some reason, here are seven other U.S. corporations that Obama might consider as equally fitting backup options

1.      Philip Morris

Sure, Philip Morris International – the world’s second-largest tobacco corporation – may not be the world’s most-loved corporation, but Obama would find an enthusiastic TPP corporate sponsor in the firm.  Philip Morris has explicitly lobbied for controversial TPP provisions that would Philip Morrisempower multinational corporations to bypass domestic courts, go before extrajudicial tribunals of three private lawyers, and challenge domestic laws that millions of people rely on for a clean environment, a stable economy, and healthy communities. Indeed, Philip Morris is already using this parallel corporate legal system, known as “investor-state dispute settlement,” to attack landmark anti-smoking policies from Australia to Uruguay. The TPP would newly empower thousands of multinational corporations to launch “investor-state” attacks against countries’ health, environmental and financial protections. In one fell swoop, the deal would roughly double U.S. exposure to “investor-state” attacks against U.S. policies.

2.      Goldman Sachs  (and other Wall Street firms)

If Obama’s Nike promo falls flat, maybe he should turn to a Wall Street bank as the next TPP corporate cheerleader. It’s no surprise that Wall Street firms like Goldman Sachs love the TPP.  The deal includes
Wall Stbinding rules, written before the financial crisis under the advisement of the banks themselves, that would require domestic policies to conform to the now-rejected model of deregulation that led to financial ruin. And for the first time, the TPP would empower some of the world’s largest 20 banks to directly challenge new U.S. financial protections before extrajudicial tribunals on the basis that the regulations frustrated the banks' "expectations."

3.      Pfizer  (and other Big Pharma corporations)

Pharmaceutical corporations like Pfizer are likely candidates for further corporate TPP-peddling given that the pharmaceutical industry has lobbied for the TPP more than any other. Small wonder – the deal offers pharmaceutical corporations a buffet of handouts that would allow them to raise medicine prices Pfizerwhile restricting consumers’ access to cheaper generic drugs. One TPP chapter would give pharmaceutical firms expanded monopoly protections that would curb access to essential medicines in TPP countries like Vietnam, where it is projected that 45,000 HIV patients would no longer be able to afford life-saving treatment. Another TPP chapter would establish new restrictions on government efforts to cut medicine costs for taxpayer-funded programs such as Medicare, Medicaid and veterans' health programs. A third TPP chapter would empower foreign pharmaceutical corporations to directly attack domestic patent and drug-pricing laws in extrajudicial tribunals.

4.      ExxonMobil  (and other fracking corporations)

Maybe Obama’s next TPP photo op should be in front of a natural gas fracking drill owned by TPP-supporting ExxonMobil, the world’s largest publicly traded natural gas corporation. Natural gas firms are hopeful about TPP provisions likely to spur a surge in natural gas exports. For the rest of us, that would Frackingmean an expansion of dirty fracking and an increase in electricity costs. Implementing the TPP would require the U.S. Department of Energy to automatically approve natural gas exports to TPP countries, waiving its prerogative to determine whether those exports, and the resulting incentive for more fracking, would be in the public interest. As states like New York ban fracking to protect against health and environmental dangers, the TPP would move in the opposite direction. Indeed, the TPP would open the door to more “investor-state” attacks on anti-fracking protections, like the one Lone Pine Resources has launched against a Canadian fracking moratorium that prevents the firm from fracking under the Saint Lawrence Seaway.

5.      Time Warner  (and other Hollywood corporations)

Hollywood corporations like Time Warner Inc. already have been partnering closely with the Obama administration in stumping for the TPP – recent leaks reveal that the Motion Picture Association of HollywoodAmerica literally has asked the administration to vet the corporate alliance’s pro-TPP statements. The corporations are pining for stringent TPP copyright protections that could threaten Internet freedom by pushing Internet service providers to police everyday content sharing, resulting in blocked or censored websites. Leaked proposals for the deal would even make the common, non-commercial sharing of copyrighted content (e.g. remixed songs, reposted video clips) a prosecutable crime. 

6.      Red Lobster  (and other corporations using imported fish and seafood)

U.S. chain restaurants and agribusinesses that profit from imports of fish and seafood, at the expense of U.S. independent fishers and shrimpers, could also serve as willing backers of Obama’s TPP pitch. The deal would likely reduce or eliminate U.S. tariffs on imports of more than 80 types of fish and seafood Red Lobsterproducts, increasing further the already massive flow of fish and seafood imported into the United States. Even without the TPP, the U.S. Food and Drug Administration (FDA) only physically inspects less than 1 percent of imported fish and seafood for health risks, despite that the Centers for Disease Control and Prevention has found that imported fish are the number one cause of U.S. disease outbreaks from imported food. The TPP would exacerbate this public health threat by enabling more fish and seafood imports from major exporters like Malaysia and Vietnam, where widespread fish and seafood contamination has been documented. For example, the FDA has placed 193 Vietnamese fisheries on a “red list” due to risk of salmonella contamination.

7.      Chinese Corporations in Vietnam

If Obama is willing to use Nike to promote the controversial TPP despite its reliance on low-wage labor in Vietnam, maybe he’d be willing to also solicit TPP endorsements from the Chinese corporations that are setting up shop in Vietnam in hopes of using the TPP to undercut U.S. businesses. The Chinese and Vietnam factoryVietnamese press report that many Chinese textile and apparel firms are now building factories in Vietnam in hopes of taking advantage of the TPP’s planned phase-out of U.S. tariffs on apparel imported from Vietnam. This not only would place U.S. textile producers in direct competition with Chinese-owned firms using low-wage labor in Vietnam, but also would eliminate the jobs of workers in Mexico and Central America who now make the clothes that were made in the United States before the North American Free Trade Agreement and Central America Free Trade Agreement. In addition, the TPP’s gutting of Buy American policies would newly empower Chinese firms operating in Vietnam to undercut U.S. businesses to get contracts for goods bought by the U.S. government, paid for by U.S. taxpayers. For all firms operating in TPP countries like Vietnam, the United States would agree to waive "Buy American" procurement policies that require most federal government procurement contracts to go to U.S. firms, offshoring U.S. tax dollars to create jobs abroad. 

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Obama vs. Obama: The State of the Union's Self-Defeating Trade Pitch

In his State of the Union address tonight, President Obama called for job creation, reduced income inequality, more affordable healthcare and better regulation of Wall Street. 

He also called for Fast Tracking the Trans-Pacific Partnership (TPP) – a controversial “trade” deal that would undermine all of the above.

Here's a side-by-side analysis of how Obama's push to Fast Track the TPP contradicts his own State of the Union agenda:

Obama’s Agenda

The TPP’s Counter-Agenda

Income Inequality: “Will we accept an economy where only a few of us do spectacularly well? Or will we commit ourselves to an economy that generates rising incomes and chances for everyone who makes the effort?”

An “economy where only a few of us do spectacularly well” is actually the projected outcome of the TPP. A recent study finds that the TPP would spell a pay cut for all but the richest 10 percent of U.S. workers by exacerbating U.S. income inequality, just as past trade deals have done

Manufacturing revival: “More than half of manufacturing executives have said they’re actively looking at bringing jobs back from China. Let’s give them one more reason to get it done.”

The TPP would give manufacturing firms a reason to offshore jobs to Vietnam, not bring them back from China. The TPP would expand NAFTA’s special protections for firms that offshore American manufacturing, including to Vietnam, where minimum wages are a fraction of those paid in China. Since NAFTA, we have endured a net loss of more than 57,000 U.S. manufacturing facilities and nearly 5 million manufacturing jobs.

American jobs: “So no one knows for certain which industries will generate the jobs of the future. But we do know we want them here in America.”


TPP rules would gut the popular Buy American preferences that require government-purchased goods to be made here in America, preventing us from recycling our tax dollars back into our economy to create U.S. jobs.

Exports: “Today, our businesses export more than ever, and exporters tend to pay their workers higher wages.”

Those who wish for more exports should wish for a different trade agenda. U.S. exports to countries that are part of TPP-like deals have actually grown slower than exports to the rest of the world, according to government data. Under the Korea deal that literally served as the template for the TPP, U.S. exports have actually fallen.

Small businesses: “21st century businesses, including small businesses, need to sell more American products overseas.”

Small businesses have endured declining exports and export shares under pacts serving as the model for the TPP. Small businesses suffered a steeper downfall in exports than large firms under the Korea trade pact, and small businesses’ export share has declined under NAFTA.

Economic growth: “Maintaining the conditions for growth and competitiveness. This is where America needs to go.”

An official U.S. government study finds that the economic growth we could expect from the TPP is precisely zero, while economists like Paul Krugman have scoffed at the deal’s economic significance.

Middle class wages: “Of course, nothing helps families make ends meet like higher wages.”

The TPP would put downward pressure on middle class wages, just as NAFTA has, by offshoring the jobs of decently-paid American manufacturing workers and forcing them to compete for lower-paying, non-offshoreable jobs.

Legacy of past trade deals: “Look, I’m the first one to admit that past trade deals haven’t always lived up to the hype, and that’s why we’ve gone after countries that break the rules at our expense.”

Past trade deals have resulted in massive trade deficits and job loss not because the pacts’ rules have been broken, but because of the rules themselves. The TPP would double down on NAFTA’s rules – the opposite of Obama’s promise to renegotiate the unpopular pact – by expanding NAFTA’s offshoring incentives, limits on food safety standards, restrictions on financial regulation and other threats to American workers and consumers.

Affordable medicines: “…middle-class economics means helping working families feel more secure in a world of constant change. That means helping folks afford …health care…”

The TPP would directly contradict Obama’s efforts to reduce U.S. healthcare costs by expanding monopoly patent protections that jack up medicine prices and by imposing restrictions on the U.S. government’s ability to negotiate or mandate lower drug prices for taxpayer-funded programs like Medicare and Medicaid.

Wall Street regulation: “We believed that sensible regulations could prevent another crisis…Today, we have new tools to stop taxpayer-funded bailouts, and a new consumer watchdog to protect us from predatory lending and abusive credit card practices…We can’t put the security of families at risk by…unraveling the new rules on Wall Street…”

Senator Warren has warned that the TPP could help banks unravel the new rules on Wall Street by prohibiting bans on risky financial products and “too big to fail” safeguards while empowering foreign banks to “sue” the U.S. government over new financial regulations.

Internet freedom: “I intend to protect a free and open internet…”

The TPP includes rules that implicate net neutrality and that would require Internet service providers to police our Internet activity – rules similar to those in the Stop Online Piracy Act (SOPA) that was rejected as a threat to Internet freedom.

National interests: “But as we speak, China wants to write the rules for the world’s fastest-growing region. That would put our workers and businesses at a disadvantage. Why would we let that happen?”

With the TPP, multinational corporations want to write the rules that would put our workers at a disadvantage and undermine our national interests. TPP rules, written behind closed doors under the advisement of hundreds of official corporate advisers, would provide benefits for firms that offshore American jobs, help pharmaceutical corporations expand monopoly patent protections that drive up medicine prices, give banks new tools to roll back Wall Street regulations, and empower foreign firms to “sue” the U.S. government over health and environmental policies. Why would we let that happen? 

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Congressional Leaders Reject Wall Street’s Push for Deregulatory “Trade” Pacts

The Obama administration needs to stop negotiating so-called “trade” deals with deregulatory rules pushed by the likes of Citigroup that would undermine the re-regulation of Wall Street. 

That’s the message that Senator Elizabeth Warren – champion of financial reform and member of the Senate Banking Committee, Congresswoman Maxine Waters – Ranking Member of the House Financial Services Committee, and other congressional leaders have delivered to the administration in recent letters.  

The members of Congress warn against expanding the deregulatory strictures of pre-financial-crisis trade pacts, crafted in the 1990s under the advisement of Wall Street firms, via two pacts currently under negotiation: the Trans-Pacific Partnership (TPP) and Trans-Atlantic Free Trade Agreement (TAFTA, also known as TTIP). 

As proposed, both pacts would include controversial foreign investor privileges that would empower some of the world’s largest banks to demand U.S. taxpayer money for having to comply with U.S. financial stability policies.  

Yesterday, Sen. Warren and Sens. Tammy Baldwin and Edward Markey sent U.S. Trade Representative Michael Froman a letter calling for such “investor-state dispute settlement” (ISDS) provisions, which have sparked global controversy, to be excluded from the TPP.  The letter states:

Including such provisions in the TPP could expose American taxpayers to billions of dollars in losses and dissuade the government from establishing or enforcing financial rules that impact foreign banks. The consequence would be to strip our regulators of the tools they need to prevent the next crisis.

Earlier this month, Rep. Waters and Reps. Lacy Clay, Keith Ellison, and Raúl Grijalva sent a similar letter to Froman that called for ISDS to be excluded from TAFTA to safeguard financial stability, stating:

Private foreign investors should not be empowered to circumvent U.S. courts, go before extrajudicial tribunals and demand compensation from U.S. taxpayers because they do not like U.S. domestic financial regulatory policies with which all firms operating here must comply. 

TPP and TAFTA negotiators are also contemplating pre-crisis rules that would threaten commonsense prudential regulations such as restrictions on derivatives and other risky financial products, measures to keep banks from becoming “too big to fail,” firewalls to protect our savings accounts from hedge-fund-style bets, capital controls to prevent financial crises, and a Wall Street tax to counter speculative and destabilizing bubbles.  

Senators Warren, Baldwin, and Markey made clear in their letter that such anachronistic rules must not be inserted into a binding pact:

To protect consumers and to address sources of systemic financial risk, Congress must maintain the flexibility to impose restrictions on harmful financial products and on the conduct or structure of financial firms. We would oppose including provisions in the TPP that would limit that flexibility.

So did Representatives Waters, Clay, Ellison, and Grijalva:

TTIP should also not replicate rules from past trade agreements that restrict the use of capital controls, which the International Monetary Fund and leading economists have endorsed as legitimate policy tools for preventing and mitigating financial crises. Nor should TTIP include provisions that could limit Congress’ prerogative to enact a financial transaction tax to curb speculation while generating revenue.

Similar warnings were recently issued by more than 50 of the largest civil society organizations concerned with financial stability on both sides of the Atlantic – including Americans for Financial Reform, which itself represents 250 organizations.  In a letter to Froman and other TAFTA negotiators in October, the groups wrote:

We believe it is highly inappropriate to include terms implicating financial regulation in an industry-dominated, non-transparent “trade” negotiation. Financial regulations do not belong in a framework that targets regulations as potential “barriers to trade.” Such a framework could chill or roll back post-crisis efforts to re-regulate finance on both sides of the Atlantic whereas further regulation of the sector is much needed.

While governments across the world strive to rein in risk-taking by the financial firms that brought us the worst economic crisis since the Great Depression, U.S. trade negotiators (advised by many of those same firms) appear to be moving in the opposite direction.  We cannot afford to insert into binding “trade” pacts more deregulatory constraints pushed by Wall Street.  We cannot afford the TPP or TAFTA. 

The recent letter from civil society organizations made this clear:

We are only now implementing the lessons of the last financial crisis. Let us not lay the groundwork for the next one.

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A Deal Only Wall Street Could Love

Last week, U.S. financial regulators took a step toward reining in some of the Wall Street risk-taking that led to the financial crisis by finalizing the Volcker Rule, designed to stop banks from engaging in risky, hedge-fund-like bets for their own profit.   

But this week, EU and U.S. trade negotiators could move in the opposite direction, pursuing an agenda that could thwart such efforts to re-regulate Wall Street.  

Negotiators from both sides of the Atlantic are converging in Washington, D.C. this week for a third round of talks on the Trans-Atlantic Free Trade Agreement (TAFTA).  What is TAFTA?  A “trade” deal only in name, TAFTA would require the United States and EU to conform domestic financial laws and regulations, climate policies, food and product safety standards, data privacy protections and other non-trade policies to TAFTA rules. 

We profiled recently the top ten threats this deal poses to U.S. consumers.  One area of particular concern is how TAFTA's expansive agenda implicates regulations to promote financial stability.  Here's a synopsis. 

The EU/U.S. TAFTA Agenda: Deregulation in Disguise

U.S. and EU TAFTA negotiators, advised by Wall Street banks and EU financial conglomerates, have made clear their intent to use TAFTA to roll back the financial reforms enacted in the wake of the global financial crisis. EU negotiators have explicitly called for new “disciplines” on financial regulations to be included in TAFTA. They have listed the Volcker Rule, state-level regulation of insurance and the Federal Reserve’s proposed rules for foreign banks as particular targets for regulatory rollback. U.S. negotiators have proposed regulatory disciplines under another name: “market access” rules that simply ban many common forms of financial regulation, even if applied to domestic and foreign firms equally. The U.S. plan to include such restrictions in TAFTA conflicts with:

  • Initiatives to ban various risky financial services or products, such as certain derivatives
  • Efforts to put size limitations on banks so that they do not become “too big to fail”
  • Proposals to “firewall” different financial services (a policy tool used to limit the spread of risk across sectors, as Glass-Steagall did between commercial and investment banking)

The pact’s rules could also ban financial transaction taxes (e.g. the proposed “Robin Hood tax”) or capital controls, endorsed by the International Monetary Fund, to curb financial speculation’s destructive impact.

The Bankers’ TAFTA Agenda: Deregulation without Disguise

The European and U.S. banks, in their formal demands issued to TAFTA negotiators, have been remarkably candid in naming the specific U.S. and EU financial regulations that they would like to see dismantled via TAFTA.  Here’s a sampling of the regulatory rollbacks the banks hope for in TAFTA, as stated by the banks themselves:

  • Exempt banks from regulations: The U.S. Securities Industry and Financial Markets Association – a conglomerate of Wall Street firms like AIG, Citigroup, JP Morgan, Bank of America and Goldman Sachs – suggests that via TAFTA, U.S. and EU governments could simply “agree to exempt financial services firms of the other party from certain aspects of its regulatory regime with respect to certain transactions, such as those with sophisticated investors.” That is, so long as foreign banks are dealing with “sophisticated” investors, regulators need not bother with regulating the banks.
  • Weaken the Volcker Rule: The Association of German Banks has made clear it has “quite a number of…concerns regarding the on-going implementation of the Dodd-Frank Act (DFA) by relevant US authorities,” referring to the Wall Street reform enacted in the wake of the financial crisis. The banking conglomerate includes Deutsche Bank, a German megabank that received hundreds of billions of dollars from the U.S. Federal Reserve in exchange for mortgage-backed securities in the aftermath of the crisis. The German banking behemoth particularly takes issue with the Volcker Rule, designed to keep banks from taking risky bets with federally-insured funds for their own profit, calling the centerpiece of Wall Street reform “much too extraterritorially burdensome for non-US banks.”   
  • Outsource risk regulation: The European Services Forum, a banking conglomerate including Germany’s Deutsche Bank, has stated that TAFTA should prevent U.S. regulators from placing tougher regulations on too-big-to-fail foreign banks operating in the United States unless foreign government entities do so first: “we think that it should not be possible for a company operating globally to be designated as a systemically important financial institution (SIFI) in a foreign jurisdiction but not in its domiciliary jurisdiction.”
  • Remove state-level leverage limits: Insurance Europe, a collection of Europe’s largest insurance firms, has stated its hope that TAFTA can be used to  “remove” collateral requirements enacted by U.S. states to keep insurance corporations from taking on risky degrees of leverage: “Insurance Europe would like to see equal treatment for financially secure well regulated reinsures regardless of their place of domicile with statutory collateral requirements removed.”

Investor Privileges: Empowering Banks’ Deregulatory Push

U.S. and EU corporations and officials have called for TAFTA to grant foreign banks the power to skirt domestic courts, drag the U.S. and EU governments before extrajudicial tribunals, and directly challenge domestic financial safeguards as violations of TAFTA-created foreign investor “rights.” The tribunals, comprised of three private attorneys, would be authorized to order unlimited taxpayer compensation for financial regulations perceived as undermining banks’ “expected future profits.” Such extreme “investor-state” rules have already been included in U.S. “free trade” agreements, forcing taxpayers to pay corporations more than $400 million for toxics bans, land-use rules, regulatory permits, water and timber policies and more. Just under U.S. pacts, more than $14 billion remains pending in corporate claims against medicine patent policies, pollution cleanup requirements, climate and energy laws, and other public interest polices. The EU is proposing an even more radical version of these rules for TAFTA, further empowering banks’ efforts to return to the deregulatory era that led to financial crisis. 

Fast Track: Railroading Democracy to Railroad Safeguards?

How could a deal like TAFTA get past Congress? With a democracy-undermining procedure known as Fast Track – an extreme and rarely-used maneuver that empowered executive branch negotiators, advised by large corporations, to ram through unfair “trade” deals by unilaterally negotiating and signing the deals before sending them to Congress for an expedited, no-amendments, limited-debate vote. As a candidate, President Obama said he would replace this expired, anti-democratic process. But now he is asking Congress to grant him Fast Track’s extraordinary authority – in part to sidestep growing public and congressional concern about pacts like TAFTA. We must ensure that Fast Track never again takes effect and instead create an open, inclusive process for negotiating and enacting trade agreements in the public interest. 

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Beware of Outlandish Claims About Economic Benefits of U.S.-EU ‘Free Trade’ Deal

This Week’s U.S. International Trade Commission Study Assumes Total Elimination of U.S.-EU Consumer, Environmental, Financial Policy Differences, Follows British Embassy’s 50-State Rehash of Discredited 2009 Study Based on Similar Assumption

On Thursday, the U.S. International Trade Commission (USITC) sent a report to the U.S. Trade Representative (USTR) on the projected economic impact of the Trans-Atlantic Free Trade Agreement (TAFTA), a report that is premised on the ridiculous assumption that 100 percent of the differences between U.S. and EU health, safety, environmental and financial regulations will be eliminated. Given that the report, which is not being made available to the press or public, relies on a premise that can only lead to fanciful results, U.S. negotiators should not consider it, much less use it to guide their approach to the agreement.

That study comes two days after yet another think tank report that recycled a litany of flawed assumptions from a 2009 study on TAFTA, chopping up baseless findings to present a 50-state version of imaginative projections of economic gains from a similar dismantling of public interest safeguards.

The core premise of these studies is the unproven business mantra that rolling back Wall Street reforms, food health standards and medicine safety regulations will somehow deliver economic gains to us all. The main contribution of the recent flurry of studies is the addition of extra gloss and fancy printing to the old, debunked assumption that such an assault on consumers, workers and the environment would have zero costs.

In its request for Thursday’s study, the USTR asked the USITC to assume an impossible outcome of U.S.-EU negotiations: “that any known U.S. non-tariff barrier will not be applicable” to imports from the EU if the sweeping deal were to take effect. By the USTR’s own definition, “non-tariff barriers” include differences in domestic financial regulations, food safety standards, product safety rules and other U.S. public interest safeguards that TAFTA apparently would render null. 

Even the most fanciful pro-TAFTA study, the 2009 ECORYS study prepared for the European Commission that has been regularly rehashed, including in a British Embassy report this week, avoided such an outlandish assumption, stating, “It is unlikely that all areas of regulatory divergence identified can actually be addressed … because this would require constitutional changes … ; because there is a lack of sufficient economic benefit to support the effort; …because of consumer preferences…; or because of political sensitivities.”

On Tuesday, the findings of the 2009 study were revived in another TAFTA-touting study, commissioned by the British Embassy in Washington, the Bertelsmann Foundation and the Atlantic Council. That glossy piece recycled the 2009 study’s improbable assumptions – breaking them down to state-by-state projections – to hypothesize the “gains” that TAFTA could deliver to each state if public interest safeguards were sufficiently weakened. The study assumes that TAFTA would eliminate one of every four “non-tariff barriers” – from the Volcker Rule at the center of Wall Street reform to safety standards for children’s toys to the U.S. ban on beef linked to mad-cow disease – at no cost to consumers.

While ignoring costs, the report uses a computable general equilibrium model to generate projections of hypothetical economic gains, despite studies showing that this methodology is inchoate and unreliable when studying non-tariff policies. Past studies using this cost-ignoring, gain-inflating methodology have still producedmeager projections for TAFTA’s “gains.” A pro-TAFTA study whose findings were recycled in Tuesday’s report estimated that, if TAFTA would significantly dilute or eliminate public interest regulations, the deal could produce a tiny 0.2 – 0.4 percent blip in U.S. gross domestic product (GDP). According to economists, that’s a smaller contribution to GDP than was delivered by the latest version of the iPhone

The list of “non-tariff barriers” slated for elimination in the underlying 2009 study includes food safety standards such as “Grade A dairy safety … rules and inspection requirements” for milk and financial stability measures such as the Sarbanes-Oxley Act that enacted accounting and anti-fraud standards to prevent a recurrence of Enron-like corporate accounting scandals. The study ignored the predictable social and economic costs that would result from such extreme regulatory rollback, such as an increase in the incidence of foodborne illness and a rise in financial instability.

Tuesday’s report, like its predecessors, made clear that TAFTA is not primarily about trade. Acknowledging that tariffs between the United States and the EU are “already quite low,” USTR and EU officials have made clear that TAFTA’s primary focus will be on the “elimination, reduction, or prevention of unnecessary ‘behind the border’” policies, such as the health, financial and environmental regulations targeted by Tuesday’s study. Attempts to exclusively measure the economic impact of TAFTA-prompted tariff reductions have produced embarrassingly meager results, estimating that even in the unlikely scenario of 100 percent tariff elimination, TAFTA would deliver economic benefits equivalent to three extra cents per person per day.

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Gussying Up Old Assumptions: Today’s TAFTA-Touting Report Is a Re-Run

If you say something enough times, does it become true?  That seems to be the calculation of some proponents of the Trans-Atlantic Free Trade Agreement (TAFTA), a sweeping deal that would require the U.S. and EU to conform domestic safeguards to deregulatory rules currently being negotiated under corporate supervision.  Pro-TAFTA think tanks have been rehashing the same set of starry-eyed prognostications of TAFTA economic benefits at a frequency (and concern for accuracy) that rivals iterations of the “Fast and the Furious” movie series. 

But repetition does not truth make.  As we’ve pointed out time and again, these reports keep using sweeping assumptions to project that TAFTA would bring a surprisingly miniscule economic blip.  And to get that blip, they assume that we’ll be willing to watch corporate-advised TAFTA negotiators dismantle a swath of health, environmental, financial, and other safeguards.  Click here for our retort to this parade of studies. 

Another TAFTA-touting report came out today, commissioned by the British Embassy in Washington, the Bertelsmann Foundation, and the Atlantic Council (whose advisors include executives from J.P. Morgan and Big Pharma). 

The report offers 71 glossy pages of rewarmed speculations.  Here are the five main takeaways:

1. The “new” study is not really new.  It is largely a recycled version of another recycled version of a study that appeared in 2009.  Today’s report hypothesizes what TAFTA could mean for each U.S. state, assuming economic gains primarily from the weakening of financial regulations, climate policies, food and product safety standards, data privacy protections and other “trade irritants.” Those “gains” were tabulated about four years ago, dusted off in a study disseminated in March, and sliced up by state in today’s report.

2. The study confirms again that TAFTA is not about trade.  Since tariffs (an actual trade issue) are “already quite low” between the EU and U.S., pro-TAFTA government officials have readily stated that TAFTA’s primary goal is not tariff reduction, but the “elimination, reduction, or prevention of unnecessary ‘behind the border’” policies, ranging from Wall Street reforms to milk safety standards to GMO food labels. 

That’s why attempts to measure the economic impact of TAFTA-prompted tariff reductions have produced embarrassingly meager results.  A frequently cited pro-TAFTA study estimates that even in the unlikely scenario of 100% tariff elimination, TAFTA will deliver economic benefits equivalent to three extra cents per person per day.  To project a higher benefit, the study released today had to not just repeat this unrealistic assumption of 100% tariff reduction, but also assume that TAFTA would reduce health, financial and environmental regulations that have been euphemistically renamed “non-tariff barriers.” 

3. The study assumes zero downside of eliminating consumer and environmental safeguards. Today’s study assumes that TAFTA would eliminate one out of every four “non-tariff barriers” – from the Volcker Rule at the center of Wall Street reform to safety standards for children’s toys to the ban on beef linked to mad-cow disease – at no cost to consumers.  In addition to an obvious social and environmental toll, such a degradation of safeguards would also result in quantifiable monetary costs for U.S. consumers and the broader economy.

For example, the 2009 study on which today’s report relies counts “Grade A dairy safety…rules and inspection requirements” for milk and “a US ban on the import of uncooked meat products” in the case of “a health risk” as “non-tariff barriers” that could be slated for dismantling under TAFTA. The elimination of such consumer protections would likely result in greater incidence of food-borne illness in the United States, which would not only increase the medical costs of affected consumers, but would reduce their productivity levels and number of days at work, spelling a negative impact on aggregate economic output.

In financial services, the study names the Sarbanes-Oxley Act of 2002 as a “non-tariff barrier” on the target list of EU businesses and officials. The Act created enhanced accounting and anti-fraud standards to prevent a recurrence of the Enron, WorldCom, and other corporate accounting scandals that destroyed billions of dollars of U.S. investments. Undermining such critical financial reregulation via TAFTA would risk a return to such costly scandals. Today’s study ignored such costs.

4. The study uses contested models with assumptions that can turn economic losses into gains.  While ignoring costs, today's study strives to capture all theoreticaly plausible benefits by relying on assumptions-laden methods, such as using a computable general equilibrium (CGE) model to assess removal of “non-tariff barriers” (NTBs).  A U.N. study has questioned the reliability of this inchoate approach. It argues, “ongoing liberalization policy efforts to eliminate the restrictive effects of NTBs are proceeding with little economic analysis…the modeling of NTBs using general equilibrium modeling techniques is still in its early stages.” The U.N. study tested the usage of differing assumptions in a CGE model to estimate the economic effects of NTB removal and found that a change in the assumptions meant that the net economic effect of NTB removal actually switched from positive to negative for some countries (even before taking into account the above costs).  If today’s study performed any such testing of assumptions, it did not reveal the results. 

5. The study assumes a massive rollback of Buy American and Buy Local policies.  Another assumption of today’s study is that TAFTA would eliminate one half of all “procurement barriers,” a euphemism for popular policies like Buy American and Buy Local to ensure that U.S. government projects, funded by U.S. taxpayers, are used to create U.S. jobs.  It is rather fanciful to think that the U.S. Congress, state legislatures, or the U.S. public would accept such a clear-cutting of policies that enjoy 90% support.  Indeed, today’s study assumes an even greater undercutting of Buy American and Buy Local than the EU negotiators themselves are hoping for. In a leaked EU position paper on government procurement, the EU explicitly names 13 U.S. states and 23 U.S. cities it is targeting for rollback of Buy Local policies.  Today’s study assumes that the U.S. will offer to eliminate Buy Local in about twice as many states as the EU itself requested.

For more information on the lineage of TAFTA-touting studies from which today’s rosy report descended, click here to see our factsheet.  

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Is Commissioner Barnier the "Fat Cat's Meow"?

Fat catOn the heels of the first round of negotiations of the Transatlantic Free Trade Agreement (TAFTA) held in Washington DC last week, the European Union's Commissioner for Internal Market and Services Michel Barnier spoke at  at the Brookings Institution on his way to meet with U.S. Treasury Secretary Jack Lew.  Much to the dismay of consumer advocates who have pushed for financial re-regulation since the crisis, Commissioner Barnier has been an outspoken critic of aspects of the Dodd-Frank financial reform, and has made clear his intentions to use TAFTA negotiations to go after them! 

Big U.S., Canadian, and European banks, which have cited U.S. trade obligations in their attempts to water down pieces of Dodd-Frank, are likely quite pleased to have Commissioner Barnier on their side.  Perhaps that's why a literal fat cat with a sign that read "Banksters for Barnier Heart TAFTA's Financial Deregulation" came to greet the Commissioner outside the event at Brookings yesterday.  

The Commissioner's talk, hosted by the normally very straight-laced and dry Brookings Institution, seemed to spark activist creativity.  Not only was there a feral feline outside, but apparently the same pranksters, who had distributed cards at the TAFTA negotiations ostensibly from the National Security Agency welcoming European negotiations and thanking them in advance for sharing their negotiating positions, were at it again.  This time I saw taped up in the Brookings restroom stall a similar card that said "The NSA commends Commission Barnier on his remarks in advance (because we read all of his emails)".  That poke probably didn't sit too well with the European officials who are dealing with officials from member states who are hopping mad about the claims of NSA spying on European diplomatic missions.

NSA BarnierMr. Barnier nervously mentioned that he had "the pleasure to meet a fat cat with a sign that said Barnier is a deregulator," before giving his prepared remarks about "Restoring Momentum in Transatlantic Cooperation on Financial Reform".

During the question and answer period, I took the opportunity to ask Commissioner Barnier the following question:

"In the wake of the financial crisis, consumer protection groups have worked hard to re-regulate the financial service industry in order to avoid future devastating crises.  In the U.S., Dodd-Frank has been a key piece of this.  And as I’m sure you are aware, Wall Street firms and others have lobbied hard to water down aspects of the rulemaking on Dodd-Frank including on its cornerstone Volcker rule. Other important efforts include the proposed new Fed regulations for foreign banks' legal forms and requirements. You have stated repeatedly your concerns about these and other aspects of U.S. financial regulation and impacts on European banks, and mentioned your intent to address these concerns in the TAFTA/TTIP negotiations.  

Senators Elizabeth Warren and Sherrod Brown have publically stated that they find it inappropriate for  so-called trade negotiations to be used as a back door to undermine financial regulation.  The TransAtlantic Consumer Dialogue has prioritized its focus on TAFTA in part due to your comments.
Later you have said that you do not intend to undermine regulation. To an outside observer, including to the banks that support your call to address these issues in TAFTA, it appears that the intent is to use TAFTA to push the same agenda of the largest banks responsible for the financial crises to thwart financial re-regulation efforts in the U.S.? Can you clarify?"

Commissioner Barnier responded, "I can't imagine how anyone would use the TTIP  [which we call TAFTA] to lower the protection for consumers, small investors and taxpayers. At least I would not accept that."

We certainly hope this is the case, though his explicit targeting of specific aspects of U.S. financial re-regulation eerily echoes the desires of the biggest banks.  Just minutes prior to my question, Commissioner Barnier's answer to a question from a representative of a large Japanese bank about his opinion on the new Fed rule on foreign banking institutions was "On that point, I seek exactly what you seek yourself. I think this proposal of legislation must evolve." 

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Amid G8 Hoopla, Much-Hyped U.S.-EU Deal Hits Snags Before Negotiations Even Start

Projections of Pact’s Boost to Economic Growth Inflated, While Contentions over Data Privacy, Food Safety and Other Issues Exacerbated by Recent Developments

In the wake of President Barack Obama’s announcement at the G8 Summit of the imminent launch of negotiations on the Trans-Atlantic Free Trade Agreement (TAFTA), the benefits of such a deal remain in question. Further complicating the pact are rifts between EU member states on its contents, recent U.S. revelations about the National Security Agency’s indiscriminate collection of private data, and wheat supplies contaminated by unapproved genetically modified organism (GMO) varieties.

Tariffs between the United States and the EU are already quite low, thus projections of gains from this deal rely on hypothetical efficiency gains from changes to domestic regulatory standards. Yet, even studies used to project a “benefit” from the deal indicate that neither consumers nor legislators would allow most food safety standards, financial stability measures and environmental protections to be dismantled in the name of reducing “barriers.” France’s recent stand on preserving its cultural promotion policies that resulted in the sector being excluded from the EU’s negotiating mandate for the talks is an example of the obstacles corporations face in trying to remove many non-trade domestic policies. Those studies, however, do not take into consideration the economic and social costs of rolling back the long list of health, environmental and consumer safeguards targeted by the multinational corporations now driving the trade agreement’s agenda.

“The claims that this deal will somehow be an economic cure-all and generate significant growth are simply not supported by any reliable evidence, but we do know that the talks are based on the demands of U.S. and EU corporations that have been pushing for decades to eliminate the best consumer, environmental and financial standards on either side of the Atlantic,” said Lori Wallach, director of Public Citizen’s Global Trade Watch. “This ‘deal’ is shaping up to be just another vehicle for the largest U.S. and EU corporations to sneak in provisions they cannot enact through open democratic processes and leave citizens exposed to another financial crisis, unsafe foods and severe burdens on Internet freedom and innovation.”

Studies projecting efficiency gains from TAFTA have employed theoretical models that, according to the U.N., rest on “strong assumptions” that when modified can cause the theoretical gains to disappear. Meanwhile, actual empirical evidence from prior attempts at “non-tariff barrier” elimination has indicated negligible efficiency gains. Certain costs and uncertain benefits spell a net loss to the economy from any deal targeting critical safeguards.

The use of GMOs in the United States has long been a contentious U.S.-EU trade issue, but now faces growing scrutiny after the discovery of unapproved genetically modified wheat in Oregon. The revelation has made European consumers, already averse to genetically altered foods, all the more resistant to the calls of U.S. agribusinesses to reduce or eliminate European restrictions on GMOs via TAFTA.

Another point of controversy remains telecommunications security. As Deputy United States Trade Representative Michael Punke noted, the NSA’s indiscriminate spying on customers’ telephone records will make negotiations with the EU, whose data privacy protections are significantly more rigorous than those in the U.S., much more difficult. EU law requires U.S. corporations to meet seven privacy criteria before transferring Europeans’ phone, health and financial records to the United States, in part due to (now confirmed) fears that the U.S. government could access the private data.

In addition, the deal’s proposed expansion of the notorious “investor-state” system would empower foreign corporations to skirt U.S. legal systems and directly challenge domestic health, environmental and other public interest policies before extrajudicial foreign tribunals authorized to order taxpayer compensation. After U.S. Rep. Alan Grayson (D-Fla.) sent a single email to supporters last month to alert them to this extreme provision, about 10,000 people lambasted the investor privileges within 32 hours in comments to the Obama administration. The flood of concern signaled the public outcry that should be expected if U.S. negotiators pursue the expansion of investor privileges through TAFTA, Wallach said.

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Obama's Top Trade Official Nominee: The Good, The Bad, and The Ugly

Yesterday was the Senate Finance Committee's confirmation hearing for Michael Froman, Obama's pick to be the next U.S. Trade Representative (USTR).  

If confirmed, Froman would replace Ron Kirk, who left his post as the top U.S. trade official in March to take a job at a corporate law firm that specializes in defending multinational corporations against claims of vast environmental damage, including helping Chevron evade payment of $18 billion in damages for decades of pollution in Ecuador's Amazon.  

We've been a tad skeptical of Obama's pick of Froman, given his Wall Street roots and his role in crafting the much-maligned North American Free Trade Agreement (NAFTA) and the deficit-plagued Korea FTA.  

Here's what went down at yesterday's hearing, divided by the time-honored categories of good, bad, and ugly: 

The Good (maybe)

  • Sen. Sherrod Brown (D-Ohio) raised the fact that "Wall Street and industry-friendly European regulators are now seeking to use any means they can to roll back some of the reforms" enacted since the 2008 financial crisis to rein in banks' excessive risk-taking.  Specifically, he mentioned that big banks on both sides of the Atlantic are trying to use the newly-hatched Trans-Atlantic Free Trade Agreement (TAFTA) as a backdoor means of attacking controls on risky derivatives, too-big-to-fail regulations and other Wall Street reforms included in the Dodd-Frank reregulatory law.  Froman responded by promising, "There is nothing that we are going to do through a trade agreement to weaken our financial regulation, to roll back Dodd-Frank, or to roll back the efforts that the administration and Congress have worked on for the last four years to reform our financial regulatory system here."  Really?  If honored, Froman's promise would represent an about-face in U.S. trade policy.  USTR is currently pushing provisions in the Trans-Pacific Partnership (TPP) that would prohibit bans on risky derivatives, counteract too-big-to-fail regulations, and bar capital controls -- the very deregulatory moves that Froman says are now off the table.  Will Froman halt USTR's legacy of helping banks use "trade" deals to water down financial regulation?  Given Froman's Citigroup stomping grounds, we're skeptical.  But so long as Froman's in the business of promising change, we're in the business of holding him to that promise.   

The Bad

  • Sen. Brown also highlighted the incredible proposal to include the extreme investor privileges of past NAFTA-style deals in the U.S.-EU deal (TAFTA). The proposal -- to empower foreign corporations to circumvent domestic courts and directly challenge health and environmental policies before extrajudicial tribunals authorized to order taxpayer compensation -- sparked a flood of critical comments from the public to USTR last month.  Brown asked, "Do we need an extrajudicial and private enforcement system when U.S. and European property rights are...advanced and protected already?"  Froman dodged the question, saying the matter was a "topic worthy of discussion."  More aptly, it's a topic worthy of an answer.  The appropriate response to Brown's yes-or-no question would have been, "No. Empowering foreign corporations to completely circumvent our courts is unnecessary for investor protection, insults basic democratic tenets, and threatens consumers' health and taxpayers' wallets."  
  • Sen. Ron Wyden (D-Ore.) raised the extraordinary secrecy shrouding the Obama administration's trade negotiations to date.  Wyden has blasted USTR's incredible decision to keep the negotiating text of the sweeping TPP pact, affecting everything from food safety to Internet freedom, hidden from the U.S. public and even from members of Congress.  Not even the Bush administration attempted that degree of secrecy.  Wyden asked, "If confirmed, will you make sure that the public...gets a clear and updated description of what trade negotiators are seeking to obtain in the negotiations so that we can make this process more transparent in the future?" Wyden further asked that negotiating texts be placed online.  Froman responded by saying he agrees with the principle of transparency.  But instead of committing to a meaningful fulfillment of that principle by releasing the TPP text online (as done under Bush), he reiterated USTR's general desire to seek input from "stakeholders."  It is of course difficult for stakeholders to provide meaningful input if they cannot see the thing in which they have a stake.   
The Ugly
  • Gothmog1Froman (and Obama) plan to pursue Fast Track: "If confirmed, I will engage with you to renew Trade Promotion Authority. TPA is a critical tool."  Fast Track, cynically rebranded "Trade Promotion Authority," is indeed a tool.  A battering ram sort of tool.  A tool that, before allowed to expire, was used to shove unpopular "trade" deals like NAFTA through Congress by empowering the executive branch to negotiate and sign the sweeping pacts before sending them to Congress for a no-amendments, limited-debate, expedited, post-facto vote.  Click here for a full analysis of Fast Track's democracy-curtailing, NAFTA-enabling track record.  If past is precedent, any attempt from Froman to refurbish this antiquated legislative ramrod would prove vastly unpopular among the U.S. public and Congress.  We'll see if Froman, despite the political liability, makes good on his threat to, as one of his first acts, pick a Fast Track fight.  
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Businesses Crowd Corporate-Hosted Government Hearing on Trans-Atlantic "Trade" Deal

As the Obama Administration gets ready to negotiate a Trans-Atlantic "Free Trade" Agreement (TAFTA) with the European Union that takes aim at a host of health, financial, environmental and other regulations, a smorgasbord of corporate representatives (and a sprinkling of consumer groups) voiced their wishes for the pact this week. The occasion was a standing-room-only "stakeholder session," hosted by the administration's Office of Management and Budget and the European Commission, to get input on what TAFTA should or should not entail.  

What neutral territory did the administration choose to consider such a critical question?  Perhaps one of the many government-owned venues in downtown DC?  Nope.  They went with the headquarters of the Chamber of Commerce.  The Chamber's not exactly a disinterested party in a pact that could implicate a wide swath of U.S. regulation used to balance big business's quest for profits with the public's quest for financial stability, a healthy environment, safe products, and affordable medicines.  The venue choice is akin to the Environmental Protection Agency hosting a forum on offshore drilling...on an offshore drill.  

But at least the administration granted public interest groups like us some time to offer input.  As in, a half hour.  Total.  For all consumer groups.  In a 1.5-day-long forum otherwise filled almost exclusively by industry representatives.  If relative allotment of time is indicative of the relative importance the administration attributes to industry views on TAFTA vs. the views of everyone else, big business "stakeholders" hold 76% of the administration's attention, technical standards organizations hold 11%, and the opinions of the rest of us are worth 13%. 

During that half hour, I squashed Public Citizen's initial take on TAFTA, one of the largest "trade" deals proposed to date, into a five-minute statement.  For a nutshell view of what's at stake in TAFTA, here's the statement:

Continue reading "Businesses Crowd Corporate-Hosted Government Hearing on Trans-Atlantic "Trade" Deal" »

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New Report Spotlights Trade Rules' Conflict with Sound Financial Regulation

The 2008 global financial crisis reaffirmed the need for robust regulation to address the increasingly reckless banking and financial sector. One of the most important regulatory tools in this post-crisis era of reform is the use of capital controls to regulate cross-border finance, a policy that even institutions long-opposed to capital controls, such as the International Monetary Fund, have now formally recognized as beneficial. However, there is growing concern that the rules of trade and investment treaties may not provide enough policy space for countries to take advantage of these necessary regulatory measures.

In response to this concern, a task force convened in June of 2012 in Buenos Aires, Argentina to review the rules of the WTO and various Free Trade Agreements (FTAs) and Bilateral Investment Treaties (BITs) and examine the extent to which global trade rules are compatible with the ability to deploy effective capital control regulations. The result of this meeting is a comprehensive report released this month titled Capital Account Regulations and the Trading System: A Compatibility Review, which is comprised of chapters written by experts from around the globe (including Todd Tucker, former Research Director at Global Trade Watch and former editor-in-chief of Eyes on Trade).

The report highlights several alarming areas where trade and investment treaties conflict with and impede the ability to use important regulatory tools such as capital controls.  It goes on to offer several changes that should be made to outdated trade policies to ensure that countries have sufficient policy space to take the regulatory measures necessary to avoid future financial crises.

Unfortunately, despite concerns expressed by members of civil society, economists, policymakers, and various other international experts, the current negotiations of the Trans-Pacific Partnership (TPP) are on track to lock in the antiquated trade model of extreme deregulation, including a prohibition of bans on risky financial products and a restriction on now widely-endorsed capital controls.

Click here to check out the full report.

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New Year's Resolution for the WTO: Let Countries Regulate Finance

Here's a new year's resolution for the World Trade Organization (WTO): make sure prevailing trade law does not prevent countries from enacting policies to prevent a next financial crisis.   

Back in October, civil society organizations across the globe urged the World Trade Organization’s Committee on Trade in Financial Services (CTFS) to hold a clarifying discussion about countries’ ability under WTO rules to employ crucial capital controls and other measures to avoid and mitigate financial crises.  To that end, more than 100 organizations from across the globe participated in weeks of advocacy in support of a discussion proposal submitted by WTO member state Ecuador, releasing an impressive statement, penning op-eds, sending letters to officials, arranging meetings with ministries, and reaching out to the press.

Civil society’s persistence paid off when, at the December 5, 2012 CTFS meeting, the Committee agreed by consensus to approve the framework of Ecuador’s proposed “dedicated and focused discussion” on the experiences of WTO Members in introducing prudential measures, including macroprudential regulations or policy measures.  The discussion will be held at the first quarterly meeting of the CTFS in March 2013, with the possibility of continued discussion at the following quarterly meeting in June of the same year.

Such a clarifying discussion is timely and important because more than 100 countries (including 40 developing nations) have financial services commitments under WTO’s General Agreement on Trade in Services (GATS).  Countries that have made such commitments now face the danger that GATS rules could prohibit the usage of policy tools needed to ensure financial  stability (such as capital controls).  Given this potential contradiction between GATS and financial stability, countries face three options: (1) implement financial regulation and risk facing a WTO challenge, (2) choose not to institute a needed regulatory tool to avoid a threatened challenge, or (3) alter their GATS commitments and comply with WTO-mandated compensation to affected member states--an option that may be particularly infeasible for developing countries.

While the Committee’s agreement to simply hold a discussion on this topic may seem like a minor step, it is important to note that in 2011, the U.S., EU and Canada rejected the possibility of a review of the WTO rules in light of the financial crisis and then continued to block even a discussion in the Committee two additional times in 2012.  But pressure for such a discussion continued to mount.  In addition to the increased advocacy by consumer, labor and development organizations and growing support for a discussion by major developing countries, institutions such as the IMF have now officially shifted their position on the use of capital controls, endorsing them as a legitimate tool for financial stability.

The fact that a dedicated discussion will take place at the WTO signals that, thanks to Ecuador’s proposal and civil society’s call for action, these developed countries have been forced to acknowledge that it is necessary to address concerns about the compatibility of WTO rules with financial regulation priorities. We will be eager to see the outcome of this dedicated discussion this year.

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IMF Endorses Capital Controls while U.S. TPP Negotiators Try to Ban Them

The International Monetary Fund has now codified a significant policy shift signaled by statements over the past few years: acceptance of capital controls as legitimate policy tools.  Ironically, "trade" policy currently being hatched in Auckland, the site of the current round of Trans-Pacific Partnership negotiations, threatens to move in precisely the opposite direction.

A long and growing list of economists and governments have found capital controls to be an essential component of a policy toolbox to prevent sudden inflows or outflows of speculative “hot money,” the destabilizing impacts of which became manifest in the global financial crisis.  Beyond avoiding the crises that emerge when lemmings-like investors decide to pull funds out of a country en masse, capital controls can also be employed in an enduring form for a range of worthy goals.  These include preventing asset bubbles, forestalling currency appreciation and export deterioration, controlling inflation, maintaining effective monetary policies in the face of procyclical flows, and ensuring a stable climate for long-term domestic investment. 

A paper released this week and approved by the IMF Board (on which the U.S. holds by far the greatest voting power), states the new IMF official policy position: “In certain circumstances, introducing [capital flow management measures] can be useful for supporting macroeconomic policy adjustment and safeguarding financial system stability.” 

The newly official position is not a categorical endorsement of capital controls.  It states that controls should be “generally temporary,” “should not be used to substitute for or avoid warranted macroeconomic adjustment,” and should be considered as a last resort.  Such narrow qualifications have irked countries like Brazil, whose representative on the IMF Executive Board responded to the tepid change by saying, “The extent of the damage that large and volatile capital flows can cause to recipient countries has not been sufficiently recognized.” 

Still, the formalized policy shift, which allows the IMF to actually recommend capital controls in its regular doses of policy advice to troubled economies, contrasts starkly with its history of requiring countries to dismantle capital controls as a lending condition during the free-market-fundamentalist 1990s. 

Trade policy, by contrast, is still stuck in the ‘90s. 

The rules of the World Trade Organization, enshrined in that deregulatory era, bar most uses of capital controls.  The transfers provisions in the WTO’s General Agreement on Trade in Services forbid any country that has committed financial sectors to WTO rules from restricting capital flows in those sectors.  Under a limited exception, countries can enact capital controls during balance of payments crises, though permitted controls may only apply to capital outflows, must be temporary, and must be deemed “necessary” by a WTO body. 

NAFTA-style “free trade” agreements are even worse.  These deals prohibit capital controls without even including the WTO’s very limited caveat for balance of payments crises.  Further, they allow private investors to directly attack a government’s capital control policy, demanding taxpayer money as compensation, via the notorious and increasingly-used investor-state system. The leaked investment chapter proposed for the TPP replicates these same extreme prohibitions on a policy tool backed by a growing chorus of economists and policymakers. 

As the IMF joins that chorus (albeit as one of the more timid singers), U.S. trade officials are left making discordant noises by themselves.  Coinciding with the IMF’s release of its U.S.-approved endorsement of capital controls, this week U.S. negotiators in Auckland are pushing other TPP negotiating countries to lock in the proposed TPP prohibition of capital controls. 

This irony yields a unique diagnosis: the U.S. suffers from capital controls schizophrenia.  It appears that the U.S. officials at the Treasury Department who okayed the IMF policy shift should have a little talk with their counterparts at USTR who are actively undermining said shift. 

If they don’t, and if the TPP is allowed to contravene the solidifying consensus that capital controls are legit policy tools, TPP countries who take policy advice from the IMF may find themselves in a baffling predicament.  What happens if a TPP member like Chile, which successfully employed capital controls during the 1990s, experiences a surge in destabilizing capital inflows, gets an IMF recommendation to stem the flow, but is bound by the TPP not to?   In the 1990s we saw the IMF threaten lending cutoffs for countries that did not adhere to a NAFTA-style system of trade deregulation.  Could we now see that same system threaten investor-state attacks for countries that actually adhere to IMF advice? 

As the IMF position on capital controls begins to more closely align with the policies of many countries, the views of many economists, and the realities of the post-crisis world, the TPP capital control ban pushed by U.S. trade negotiators becomes an increasingly isolated (and continuously senseless) outlier.  

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Globe-Spanning Civil Society Groups Push Forward Critical Discussion on WTO Rules and Financial Regulation

Last week, we blogged about a statement signed by over 100 civil society groups from around the globe who are campaigning and putting pressure on their respective governments to support Ecuador’s proposal for a conversation to take place at a meeting of the World Trade Organization's Committee on Trade in Financial Services (CTFS).  The objective of the discussion is to clarify whether WTO rules provide sufficient policy space for the financial reregulation necessary to avoid another global crisis.  

Many of the signatory organizations engaged in national and regional level media outreach and advocacy, and were able to get articles placed in key publications and engage with important government officials in their respective countries.

On Monday, October 1, Ecuador’s proposal was discussed at the CTFS. While minutes to the meeting will not be available for quite some time, it appears that no country blocked Ecuador’s proposal. Below, find a summary of the great work that has helped push toward a discussion of this critical issue at the CTFS.


  • Center of Concern’s Aldo Caliari wrote a Spanish language piece that ran in Agenda Global in Peru and Uruguay.
  • Professor Kevin Gallagher’s op-ed, “Trade rules should not constrain fixing global finance,” appeared in Al Jazeera.
  • An article that appeared on October 1 in the Wall Street Journal noted that WTO Director General Lamy was forced to respond to questions raised about WTO rules and financial regulation.
  • Inside US Trade’s “This Week in Trade” linked to the sign on statement and Public Citizen’s press release.
  • The Brazilian Network for Peoples' Integration (REBRIP) translated and adapted the press release and sent it out to press in Brazil.
  • Trade and Gender Initiative worked to place an op-ed in the Nigerian press.


  • The European Consumers' Organization (BEUC), Centre for Research on Multinational Corporations (SOMO), Finance Watch, Financial Services User Group, and the European Federation of Financial Services Users (EuroFinuse) sent an open letter to EU Commissioners Barnier and DeGucht, calling on the European Union to support Ecuador’s Proposal, and did media outreach.  
  • South African Labour organizations presented the sign-on statement and a specific request from labour to the South African government's Department of Trade and Industry (DTI), asking them to officially support the Ecuador proposal at a high-level meeting of the Technical Sectoral Liaison Committee (Teselico).  Teselico is a tripartite consultative forum to discuss matters relating to trade negotiations, under the Trade and Industry Chamber of Nedlac, the social dialogue structure in South Africa.
  • The Federation of German Consumer Organizations (VZBZ) engaged on the topic with Ms. Micong Klimes, a German representative to the WTO who serves as the current Chair of the WTO’s Committee on Trade in Financial Services.
  • The Argentine Federation of Commercial and Service Employees (FAECYS) engaged in direct advocacy with Argentina’s trade ministry, speaking specifically with Maria Ines Rodriguez, a ministry official representing Argentina in Geneva. The Citizen Forum for Justice and Human Rights (FOCO) forwarded a translation of the sign-on statement to other Argentine civil society organizations.
  • Initiatives for Dialogue and Empowerment through Alternative Legal Services (IDEALS) reached out to Walden Bello, a representative from the Philippines, and members of CSOs
  • REBRIP sent letters to the Brazilian Foreign Affairs Ministry and Finance Ministry calling on them to support Ecuador’s proposal.
  • The Council of Canadians forwarded  the statement to Mark Carney, head of the Bank of Canada, as well as Canadian representatives in Geneva, the trade minister, and opposition critics.
  • The Marcus Garvey Peoples' Political Party (MGPPP) worked to get the statement to relevant ministries in Jamaica and the Bank of Jamaica.
  • The Consumers Protection Association engaged in direct advocacy with relevant ministries in Lesotho, which chairs the influential African group negotiating bloc at the WTO.
  • Public Citizen circulated the sign-on statement to trade-focused media in the United States, as well as to Representative Barney Frank, co-author of the Dodd-Frank financial reform law.
  • Tufts University’s Global Development and Environment Institute (GDAE) released a policy brief with analysis of the potential conflict between GATS / FTA financial services rules and capital controls.  GDAE sent the summary to its list of 15,000 academics, advocates and government officials.
  • The International Trade Union Confederation reached out to national affiliates in target countries to encourage them to sign on to the statement.
  • Consumers International circulated the statement to its member organizations around the world.
  • A network of organizations pushing for a financial transactions tax also circulated the statement.
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On Eve of Major WTO Meeting, 112 Civil Society Groups Tell U.S., EU: Stop Blocking Discussion of Strong Financial Regulation

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

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

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

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

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

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WTO takes on credit card regulations

The WTO issued its first ever ruling on a dispute over financial services earlier this morning. The case was brought in 2010 by the Obama administration against China's credit card policies.

This sprawling case - which alleged that a myriad of diverse Chinese policies operated collectively to violate WTO rules - failed on most counts.

But even the partial U.S. success raises more questions than in answers. U.S. credit card companies were reportedly less than enthusiastic about the case, and even the most optimistic U.S. job impact of China's credit card policies represent only a drop in the bucket relative to the considerable job displacement caused by Chinese industrial policies in U.S. manufacturing.

The greater significance of the ruling is in the precedent that it sets of a WTO member being willing to tackle another member's financial policies. Those of us who have raised the alarm about the conflict of the WTO's services agreement with financial regulation have often been told not to worry... that diplomatic restraint would keep a case from ever being launched. Even if launched, the WTO's institutional interests would keep it, the argument went, from ruling against a nation's policies.

Today's ruling totally undermines both aspects of this argument.

So what did the ruling - authored by Virachai Plasai (Thailand), Elaine Feldman (Canada) and Martin Redrado (Argentina) - say?

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Betting against Obama? The WTO may have something to say about that.

Ben Protess wrote in the NYT a few weeks ago about a new effort following from the Dodd-Frank financial overhaul legislation:

The Commodity Futures Trading Commission is poised this week to reject plans for so-called political event contracts, a lucrative derivative deal that would allow firms to wager on Congressional races as well as the presidential battle, the people briefed on the matter said...

[the The North American Derivatives Exchange,] which currently is a marketplace for derivative contracts tied to commodities and stock market indexes, wanted to offer five basic contracts. One contract allows traders to wager that President Obama will win another four years in the White House. Other contracts say that either Democrats or Republicans will control the Senate or House...

Some states explicitly outlaw gambling on elections. Even in Las Vegas, the epicenter of gambling, betting on elections is off limits, regulators say.

Intrade is the most prominent player in the world of trading political event contracts, but it is based in Ireland. It is unclear whether American law applies to Intrade.

Only academics have escaped the strict rule. For two decades, United States regulators have allowed business students at the University of Iowa to operate an electronic exchange for trading political contracts.

The basis for the CFTC decision can be found in this CFTC order, which details the statutes and regulations that lead it to rule that NADEX is against the public interest. it's also worth pointing out that Nadex - despite the homegrown sounding name - is a subsidiary of a European financial services group.

The question we like to ask often at EOT is how might the under-studied, underappreciated rules of the World Trade Organization (WTO) and other trade rules relate to this legitimate political event regulation?

Continue reading "Betting against Obama? The WTO may have something to say about that." »

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WTO still denying its Wall Street ties

Last week, we pointed out an interesting piece by the New York Times' Gretchen Morgenson, who wrote about the WTO conflict with financial re-regulation.

In this Sunday's NYT, the WTO's Keith Rockwell responds. Here's a highlight:

The most important elements of the W.T.O. commitments on financial services pertain to nondiscrimination and national treatment, meaning that if you accept opening your market, you may not apply different regulations to banks from different foreign countries or to your local banks.

We've been following this issue on the blog for years, and I'm a little underwhelmed by the WTO talking points. As far back as 2009, Pascal Lamy (the WTO head) made the same argument that Rockwell now makes: that the WTO's GATS only requires non-discrimination. And as we wrote then:

...the WTO's own Appellate Body ruled that non-discriminatory bans on the supply of services, in sectors where full market access commitments have been undertaken, are quantitative limitations covered by GATS Article XVI(2) - and thus must be removed.

This article, as it happens, was the focus of Morgenson's piece. She wrote on Article XVI or Market Access rules, while Lamy and Rockwell seem to want to only talk about Article XVII or National Treatment rules. (Their conversation on National Treatment doesn't really draw the right lessons from the case history: even policies that don't have discriminatory aims or effects can be found to violate the so-called "anti-discrimination" rules.)

Both articles are major planks of the GATS architecture: for the WTO to pretend that the former doesn't  exist is disingenous and inconsistent with the organization's own case law.

Rockwell is also off point when he writes:

As members of the European Union, Britain and Sweden provide the same degree of market access to foreign providers of financial services. Yet the crisis did not hit Swedish banks, while British banks suffered greatly. Why? Their regulatory systems differ.

The real pertinent question is whether either nation attempted to ban a dangerous financial product, cap the size of financial service providers, or restrict capital flows. If they attempted to, and they had deep financial services commitments under Article XVI, they could face dispute settlement and ultimately trade sanctions.

So, it's not ALL regulations that are banned by the GATS, but some very important ones are.

To recap: the WTO rules are enforceable and ban some very important financial regulations, while there is no international body (not BIS, not IMF, etc.) that can compel any positive financial regulation. To paraphrase Morgenson, this is an unfortunate paradox, and isn't about doing the right thing.

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Global Trade Watch's Director Lori Wallach in the Huffington Post

Trade Deals: Backdoor Financial Deregulation

Wall Street has a new power tool to demolish financial stability policies, and it comes from a source many would not expect. It's not the cozy relationship between Wall Street and some members of Congress, or the hordes of bankster lobbyists who roam Capitol Hill. Wall Street has obtained and is now pushing for more powers to challenge U.S. and other nations' financial regulations via the international agreements that it has sold to a skeptical American public under the appealing brand of export-expanding "free trade" deals.

In Sunday's New York Times, Gretchen Morgenson described how the financial provisions of the World Trade Organization (WTO) and NAFTA (the North American Free Trade Agreement) operate as backdoor deregulation instruments. Those of us who have studied these so-called "trade deals" understand that these agreements have very little to do with trade per se. Rather, they mainly include new rights for corporations and new constraints on governments' non-trade regulatory policy space.

As my piece in a special edition of the American Prospect shows, instead of following through on President Obama's campaign commitments to fix this backdoor corporate power grab, now the administration is rushing to massively expand this mess by completing a Trans-Pacific Partnership (TPP) deal now being negotiated behind closed doors with eight Pacific Rim nations.

To read the rest of the article click here or go to

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Two interesting reads on WTO conflict with financial re-regulation

In yesterday's New York Times, columnist Gretchen Morgenson sums up where we are at on avoiding another Wall Street melt-down:

Financial institutions, eager to maintain their profitable status quo, have lobbied hard against change. As a result, too-big-to-fail institutions have become even bigger and more powerful.  

In addition to lobbying, big financial players have another potential weapon in their battle against safety and soundness. This one is more hidden from view and comes from, of all places, the World Trade Organization in Geneva.

Back in the 1990s, when many in Washington — and virtually everyone on Wall Street — embraced the deregulation that helped lead to the recent crisis, a vast majority of W.T.O. nations made varying commitments to what’s called the financial services agreement, which loosens rules governing banks and other such institutions...

All this represents yet another paradox of our financial world: Even as our regulators try to devise a safer financial system, our trade representatives thwart efforts to reduce risks these operations pose to taxpayers.

Obama's trade team apparently had no comment for the article, which you can read here.

And over on the IDEAS web-page, veteran economist and policy analyst Andrew Cornford also discusses the conflict between the WTO services agreement and re-regulation, writing...

The introduction of the post‐crisis regulatory architecture for the financial sector reflects far‐reaching shifts in thinking concerning the appropriate scope and practice of financial regulation in comparison with that prevalent at the time of the drafting of the GATS rules on international trade in banking. These shifts have provided a further fillip to the debate among GATS commentators as to how far the rules accommodate prudential measures and reforms likely to constitute key elements of this new architecture.

He reviews the major interventions in the debate since the financial crisis.

Both Morgenson and Cornford's pieces are useful additions to the ongoing debate about ensuring that our trade rules don't get in the way of reining in Wall Street.

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Don't Let the TPP Prohibit Capital Controls, Say 100 Economists

+++ Joint press release of the Global Development and Environment Institute and the Institute for Policy Studies +++

In advance of Trans-Pacific trade talks, over 100 economists are sending a letter today urging negotiators to promote global financial stability by allowing the use of capital controls.

Signatories include prominent scholars from six of the nine countries currently involved in the Trans-Pacific talks:  Australia, Chile, Malaysia, Peru, New Zealand, and the United States. The other participating countries are Brunei, Singapore, and Vietnam. Trade officials will meet March 1-9 in Melbourne, Australia for the 11th round of negotiations.  Click here for the full statement and list of endorsers.

The economist statement reflects growing consensus that capital controls are legitimate policy tools.  It notes, however, that nearly all U.S. trade agreements “strictly limit the ability of trading partners to deploy capital controls – with no safeguards for times of crisis.”

They recommend that the Trans-Pacific Partnership agreement “permit governments to deploy capital controls without being subject to investor lawsuits, as part of a broader menu of policy options to prevent and mitigate financial crises.”

Continue reading "Don't Let the TPP Prohibit Capital Controls, Say 100 Economists" »

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Trying to Inch the WTO Away from Extreme Financial Deregulation

As regulators and legislators have wrestled with reforming the financial system in the wake of the crisis, one quiet corner of the debate has received less notice.  As we have reported in past posts, The World Trade Organization’s General Agreement on Trade in Services limits the kinds of financial regulations countries can impose.

These rules were hashed out during the 1990s – before the lessons of the financial crisis, and when deregulation was in vogue. Documents we obtained under the U.S. Freedom of Information Act show that, in the late 1980s and 1990s, U.S. government officials worked closely with Wall Street executives to sell these rules to wary developing nations.

Unlike the re-regulation being discussed in the G-20 or the Bank of International Settlements, these rules at the WTO are highly enforceable. While the near-total absence of re-regulation over the last 15 years has presented few opportunities to road-test this services agreement, tax havens like Panama have already threatened to use them against the tax transparency initiatives of cash-starved countries like Ecuador.  The U.S. lost a high-profile services trade case related to its ban on Internet gambling. Regulatory bans – even of questionable services – are prohibited under the WTO. And a European Commission staff paper about a potential financial transactions tax noted that it would be necessary to assess whether such a tax might conflict with the EU’s WTO commitments.

But the U.S., EU and the WTO Secretariat have spent the last 18 months trying to quash any discussion of these problems, much less consideration of possible updates to the old rules.

WTO Member States Try to Raise Issue at Ministerial Conference

Last fall, a group of countries led by Ecuador tried to get this problem on the formal agenda.  Their modest objective was for Trade Ministers at last December’s  WTO Ministerial Conference to acknowledge the need to review the WTO rules covering financial services in light of the financial crisis and the efforts internationally and domestically to strengthen regulation.

 Ecuador presented its proposal at the WTO’s Committee on Trade in Financial Services (CTFS) in late October in order to get the item on the agenda for December’s meeting.  A powerful bloc of countries – including India, Argentina, Turkey, Brazil, and South Africa – supported the proposal. However, the skewed “consensus” process in the WTO allowed the U.S., EU and Canada to block the discussion from moving forward at the Ministerial Conference, where Ministers would have been forced to recognize that there is a potential conflict between the WTO rules and the global consensus toward financial re-regulation. 

As is often the case in flawed WTO processes, it appears that Ecuador’s proposal was unfairly downplayed, perhaps to ensure that it would not be noted in the Ministerial Conference.   Because the CTFS finalized its Annual Report at the beginning of their October 31 meeting (the last meeting of the Committee in 2011), the discussion on Ecuador’s proposal that occurred later in the meeting was not included in the Annual Reports of the Committee on Trade in Financial Services or of the Council on Trade in Services.  The minutes from the October 31 CTFS meeting state that the Chair of the Committee noted that there was “some” interest in discussing the substantive issues raised by Ecuador.  An observer in the meeting, however, shared with us that the Chair had actually said that there was “broad” support.  The minutes also failed to take note that China and Venezuela supported the proposal, though the representatives from both countries joined the many others present in expressing support for the proposal. 

Ecuador reserved its right to raise the issue at the General Council meeting where the Ministerial Conference’s agenda was finalized.  Despite the fact that there was not consensus on any agenda items for the Ministerial, Ecuador’s proposal was blocked from the agenda, while other agenda items proposed by developed countries remained on the General Council agenda.   Ecuador was forced to raise its proposal under the  “Other Business,” section of the agenda, which was dealt with after 11 pm.  Despite this marginalization, again, a number of countries – including Argentina and Turkey -  spoke in favor of Ecuador’s proposal, and no countries opposed.  In the end, a brief statement about Ecuador’s proposal was included in the General Council’s Annual Report to the Ministers in the documents circulated at Ministerial Conference, but, unfortunately, the summary only lists the countries that spoke, but does not note their support, nor the fact that no country spoke in opposition. 

Activities at the Ministerial Conference

Since the efforts of Ecuador and its allies to include this issue on the agenda of the Ministerial Conference were thwarted, the government of Ecuador hosted a side event “Future of Trade in Financial Services: Safeguarding Stability” to raise this issue during the Ministerial.

During the side event, the Honourable Francisco Rivadeneira, Ecuador’s Vice Minister of Trade and Integration, strongly made the case for why Ecuador proposed a review of the WTO’s financial services rules -  to ensure that WTO members, particularly small countries like Ecuador, have sufficient policy space to engage in the regulation needed to ensure stability of the financial system. Alfredo Calcagno from UNCTAD’s  Division on Globalization and Development Strategies described in detail the concerns raised by UNCTAD’s 2011 Trade and Development Report, particularly how the ambiguities in the WTO’s General Agreement on Trade and Services (GATS) could restrict policy space for capital controls and other financial regulatory tools. Lori Wallach, Director of Public Citizen’s Global Trade Watch division, laid out the potential conflicts between GATS rules and needed financial regulations, based on a review of the legal literature.  Finally, Kavaljit Singh Director of Public Interest Research Centre in India gave a rousing presentation about how the financial sector must be properly regulated to ensure financial stability and inclusion, using examples from the Indian context.  

Unfortunately, the official proceedings of the Ministerial Conference went on in Alice-in-Wonderland - style as if no financial crisis had ever happened.   Without anything real to deliver after more than ten years of negotiations on the Doha round, the WTO struggled to demonstrate its continued relevance by trumpeting the accessions of Russia and Samoa – even though accessions are rarely considered to be news at the Ministerial Conference level.  If the powerful countries in the WTO – and its Secretariat – continue to refuse to acknowledge that its extreme deregulation rules require revision, the WTO will continue to lose legitimacy on the international stage.

 The good news is that Ecuador’s efforts did raise the profile of the issue among important WTO countries and that the Chair of the WTO’s Committee on Trade in Financial Services has agreed to keep Ecuador’s proposal for a review of the rules on the agenda for the Committee in 2012.  It will be important to watch closely to make sure that the U.S. and EU allow a robust review of the rules to go forward.


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Bankers Trying to Use NAFTA to Kill Financial Reform

Remember the Volcker Rule? Proposed by former Federal Reserve Chairman Paul Volcker and endorsed by five former Secretaries of the Treasury, it aims to prohibit commercial banks from trading stocks, bonds, currency, and derivatives for their own profit. (Customers of banks could still ask their banks to buy and sell these financial instruments if the customers front the cash.) Banks' risky trades played a huge role in the development of the 2008 financial crisis and precipitated the bailout for these overextended banks.

A form of the Volker Rule made it into the Dodd-Frank financial reform bill that became law in 2010, but bankers are trying to cripple the rule as regulatory agencies write the details of how the rule will work. The Investment Industry Association of Canada has raised the possibility of attacking the Volker Rule with NAFTA. In a letter sent to the Federal Reserve last month, the Association claims:

[T]he Volcker Rule will clearly interfere and raise the costs of cross-border dealing in Canadian securities. As a result, the Volcker Rule may contravene the NAFTA trade agreement.

The Investment Industry Association of Canada perfectly illustrates how "trade" agreements can reach inside nations' borders and interfere with public interest regulations that have nothing to do with the flow of goods between countries. Since NAFTA was enacted, bankers have gotten much more aggressive in their attempts to block regulation through trade deals. For example, the Korea FTA, passed by Congress in October, included much worse restrictions on financial sector regulations than NAFTA. On top of that, the General Agreement on Trade in Services of the WTO has its own set of rules that conflict with policies on capital controls, bans on risky financial services, size limits on banks, and “firewalls” between banking and investment services.

Necessary efforts to make our financial system stable like the Volker Rule may continue to run into obstacles unless we have a turnaround in trade policy to protect, rather than restrict, the right of governments to regulate in the public interest.

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WTO Turnaround: Food, Jobs and Sustainable Development First!

GTW will be heading to Geneva next week to join the global civil society response to the World Trade Organization's 8th Ministerial Conference. Our colleague Deborah James from Our World Is Not For Sale Network wrote this informative piece, published in Common Dreams, which explains the current complexities facing the multilateral trading system and our global call from civil society for a "WTO Turnaround".


WTO Turnaround: Food, Jobs and Sustainable Development First!

December 15-17, 2011, Trade Ministers will convene in Geneva, Switzerland for an 8th WTO Ministerial Meeting. After many failed Ministerial meetings and nearly ten years of negotiations, the Doha Round of WTO expansion is at a crossroads. Increasingly, developed countries have tried to push aside agreements to negotiate on key developing country issues intended to correct the imbalances within the existing WTO, which formed the basis of the development mandate of Doha. Instead, rich-country governments appear to be re-packaging the old liberalization and market access demands of their corporate interests as so-called “21st century” issues. This Ministerial will determine the future path of WTO negotiations, and the global Our World Is Not for Sale (OWINFS) network is calling for a fundamental transformation.

November 30 marked the 12th anniversary of the massive protests against the World Trade Organization (WTO) in Seattle, Washington, which succeeded in preventing the launch of the so-called “Millennium Round” of WTO expansion negotiations. Developing countries, led by African ministers and buoyed by massive street protests, opposed the launching of a new round of liberalization, focusing instead on their demands to fix the problems left over from the last round. Two years later, after receiving promises from rich countries that the next round would focus on development, these same countries acquiesced to a new “Doha Round.”

Throughout the last ten years, negotiations have collapsed several times, but have always been re-started. Unfortunately, the development mandate has been all but abandoned, with negotiations shifting to focus on the desires of corporations in rich countries, in services, agriculture, and manufactured goods, to achieve greater access to markets in developing countries. Nevertheless, they came perilously close to concluding in the summer of 2008. Since then, the emergence of the economic crises has resulted in a global re-think of the neoliberal economic model by citizens around the world, with resulting domestic pressure against governments to further entrench such a calamitous economic paradigm.

our world is not for sale 2photo: RonnieHall

In many countries – such as Brazil, India, South Africa, and China – leaders are no longer willing to roll over to U.S. and EU demands, as their geopolitical power has grown along with their economies. A key demand of the United States, roiling under the surface of the negotiations, is that these countries should no longer be treated as developing countries – although they have far more poor people than all of the Least Developed Countries (LDCs) combined. The Obama administration decided that since it could not get much of a stimulus package through the Republican-controlled House, the U.S. would focus on increasing exports to these “emerging markets” as a way to boost U.S. economic recovery. But since many of these countries did enact stimulus programs adequate to the size of their economies, and were thus faster on the road to recovery after the crisis than the United States, they are understandably reluctant to bail out the U.S. economy at the expense of their own jobs and development potential. (Unfortunately, past experience with WTO and bilateral trade agreements demonstrates that they are net job losers, thus exposing the jobs claim as a cover-up for pushing the trade agenda of corporate donors.)

Continue reading "WTO Turnaround: Food, Jobs and Sustainable Development First!" »

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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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NAFTA is the One Ring of our Democracy

Steven Pearlstein and Paul Krugman have nice pieces about the 25th anniversary of the Economic Policy Institute, arguably the leading labor market-focused center-left economics think-tank in D.C.

A prominent narrative is that EPI has grown to prominence for its analysis of the factors driving inequality, including trade policy. As Pearlstein writes:

While EPI and its labor allies have clearly lost the policy battle over free trade, economists have finally come around to its view that trade has had a significant role in widening the U.S. income gap. Even the Institute of International Economics acknowledges that some of the $1 trillion in benefits the U.S. economy gets every year from trade should be used to help the millions of workers who are hurt by trade.

Krugman chimes in on this point:

Since Pearlstein makes a point of mentioning some ancient disputes I had with EPI, I guess I should say something about where all that stands. The main thing, I think, is that trade policy — where I still have some differences with EPI — is much more peripheral an issue than it seemed to be in the early 1990s. I once had a conversation with Bob Kuttner in which we agreed that while we were arguing about NAFTA, Sauron was gathering his forces in Mordor.

If the point is that NAFTA and similar deals are not the only cause of rising inequality, I couldn't agree more. But that's actually the wrong question to be asking. The main raison d'etre of NAFTA-style deals is to set in place a body of rules that become the "new normal" in domestic regulation and international law. As Lori Wallach and I write in a piece published in the American Prospect yesterday:

Since NAFTA, trade agreements have grown to encompass thousands of pages of text, and only a minority of the provisions deal with tariffs—trade policy’s historic remit. Today’s so-called “trade” deals set constraints on how governments can regulate inside their own borders. For instance, the recent pacts ban "Buy America" policies that ensure tax dollars are used to purchase American-made goods and allow corporations to challenge environmental policies for cash compensation. They include such severe limits on financial regulation that the financial services industry celebrated the Korea deal in particular as “the best financial services chapter negotiated in a free trade agreement to date,” according to Citigroup.

These constraints on domestic regulation have a corrosive effect on democracy, and begin to shift the center of political gravity away from elected officials and towards unelected global bodies and corporations. Over time (and we see this every day on Capitol Hill), policy proposals are watered down in order to avoid conflicts with our trade agreements. 

Krugman and Kuttner are right that NAFTA is not to the labor market as Sauron is to Mordor. Rather, NAFTA and the WTO are to our democracy what the One Ring is to Mordor. Sauron, in this analogy, represents corporations.

As Tolkein fans know, the One Ring was designed by Sauron, and draws whoever bears it back to his Oneringdarkness. Its inscription reads: "One ring to rule them all, one ring to find them, One ring to bring them all and in the darkness bind them." The ring represents a set of dark rules that are difficult if not impossible to wield for good, and were designed with Sauron's narrow interests in mind (not all of Mordor's).

Our trade agreements provide the legal and ideological underpinning of neoliberalism. Our government (like Frodo) put these shackles on voluntarily, but now it finds its trajectory negatively influenced by the force. It is of course difficult to hypothesize whether neoliberalism would be destroyed if we got rid of NAFTA-style deals or the WTO. But the system's proponents would have to justify their corporate goals on some basis other than "it's the law."

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Key U.S. Groups Call for Review of WTO Financial Rules Post-Crisis

Today, Public Citizen joined the AFL-CIO, Americans for Financial Reform, Citizens Trade Campaign, Consumer Watchdog, and U.S. Public Interest Research Group (PIRG) in releasing a letter to U.S. Ambassador to the World Trade Organization Michael Punke calling for a review of WTO rules to ensure that countries have sufficient policy space to re-regulate the financial sector.  The letter urges the U.S. government to support a proposal raised by member state Ecuador to include language in the upcoming WTO Ministerial Declaration that instructs the WTO’s Committee on Trade in Financial Services to review related WTO rules in light of the financial crisis.

The letter says, in part:
“Given that many of us worked tirelessly on the major financial reform package promoted by the Obama administration last year, we, the undersigned organizations, are concerned about how current and any future expanded financial liberalization under the current WTO rules may affect financial reregulation efforts here at home and in other countries. Therefore, we believe it would be appropriate, now that sufficient time has passed from the height of the financial crisis, for the Ministers meeting at the WTO’s December 2011 Ministerial Conference to instruct the Council on Trade in Services and the Committee on Trade in Financial Services to conduct a thorough review of WTO rules implicating financial services in light of the crisis. In the aftermath of the global financial crisis, governments around the world as well as an unprecedented array of scholars have called for improved domestic and international-level financial regulation as a means to avoid future crises and restore global financial stability. For these measures to succeed, it is critical that the policies of the various international economic bodies are coherent.”

The full text of the letter is here and after the jump.

Continue reading "Key U.S. Groups Call for Review of WTO Financial Rules Post-Crisis" »

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Trade disaster: Congress votes tomorrow

A message from Lori Wallach, Director of Public Citizen's Global Trade Watch

You don't hear from me often. Over the past year, I have spend most of my time on Capitol Hill, meeting with members of Congress, educating them about our current flawed trade policy and how we can create a trade model that works.

I have been working to get a majority on Congress to say NO to the three devastating NAFTA-style trade deals signed by Pres. Bush that now Pres. Obama is trying to ram through Congress.

But today, I urgently need a favor from you. It will take about five minutes. Congress will vote on these job-killing, unsafe-import-flooding deals on Wednesday. I need you to pick up the phone and call 1-800-718-1008 right now to stop the three unfair trade deals with Korea, Colombia, and Panama.

Take 5 minutes to save jobs. Dial 1-800-718-1008 and tell your Representative to vote NO on all three flawed trade deals.

Here’s why:

  • The Korea trade deal is the largest offshoring deal of its kind since NAFTA. If approved, the deal will displace 159,000 American jobs in the first seven years. Even the official U.S. government study on the Korea pact says that it would increase our trade deficit, and it hits the "jobs of the future” sectors hardest – solar, high speed trains, computers. [Learn more]
  • We should have never even discussed a new trade deal with Colombia, the world capital for violence against workers. More unionists are assassinated every year than in the rest of the world combined. In 2010, 51 trade unionists were assassinated. Do you think we would consider a trade deal with a county where 51 CEOS were murdered? So far in 2011, another 22 have been killed, despite Colombia’s heralded new "Labor Action Plan.” [Learn more]
  • The Panama agreement has many of the same problems as the other two deals -- undercutting the reregulation of the big banks and speculators who destroyed our economy and empowering foreign investors to attack U.S. health, safety, labor and environmental laws before foreign tribunals. But, Panama is also one of the world’s largest tax havens. There, rich U.S. individuals and over 400,000 corporations take advantage of the offshore financial center, many dodging paying the taxes our communities desperately need. This FTA would undercut our current tools to fight tax dodging and money laundering. [Learn more]

Stop the trade deals that replicate the failed policies of the past. Call your Representative today.

Behind the scenes and throughout the country, our team has done everything we can do to try and get through to the leaders in Congress to stop these trade agreements. But it looks like many of our leaders in Washington—both Democrats and Republicans—are siding with corporate lobbyists instead of learning from the experience of working Americans.

YOU know the reality of these trade deals better than corporate lobbyists—and Congress needs to listen to you.

Please call 1-800-718-1008 right now.

Speak out with millions of Americans against the job-killing trade deals that only reward fat cats, off-shore our jobs and undermine our environmental and financial stability safeguards.

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Dylan Ratigan on Tax Cheating and the Unfair Panama Trade Deal

Check out this HuffPo piece about the Panama trade deal from MSNBC's own Dylan Ratigan:Ratigan

"If you want to know why politicians are so eager to pass a free trade agreement with Panama this month, type "Panama offshore banks" into Google and look at the paid ads. What you'll see is advertising by law firms and banks that will offer you help to set up a secret corporate structure in Panama immune from taxes.

The State Department knows this. Here's how the State Department described the Panamanian economy in 2006 in a secret memo revealed on Wikileaks.

The Panamanian "incorporation regime ensures secrecy, avoids taxes,and shields assets from the enforcement of legal judgments. Along with its sophisticated banking services, Panama remains an environment conducive to laundering the proceeds from criminal activity and creates a vulnerability to terrorist financing."

Read the whole article.

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FTA Stalled in Korean Legislature Amid Financial Deregulation Concerns

Song Min-soon As the fight against the Korea, Colombia, and Panama FTAs heats up with the AFL-CIO and the Chamber of Commerce launching dueling media campaigns, the Korea FTA fight on the other side of the Pacific continues to simmer.

The Korean National Assembly has not yet ratified the Korea FTA, and both the U.S. and Korea must approve the pact for it to go into effect. Although the pro-FTA Grand National Party currently has a majority in the Korean National Assembly, lawmakers are reluctant to bring such a controversial issue to a vote before their national elections in April for fear of provoking voters' ire. A pro-FTA legislator acknowledged that "It could already be too late" for the vote to occur before April. If they wait until after April to hold a vote, they may never get a chance, at least with the FTA in its current form, as the main Korean opposition party, the Democratic Party, opposes the FTA and could retake the majority in the National Assembly.

In an interview with the Wall Street Journal, senior Democratic Party lawmaker Song Min-soon discussed his party's opposition to the FTA. He zeroed in on the need to eliminate the strict provisions of the FTA that prohibit Korea (and the United States) from implementing a range of prudential financial services regulations, including capital controls:

[Mr. Song] says that South Korea should try to change the financial services portion of the pact to ensure that, should another financial crisis spur an outflow of capital as happened in 2008, Seoul has a full arsenal of measures to counter-act the effects.

As it stands now, Mr. Song says, the FTA may put some practical limits on measures South Korea may want to use to prevent an outflow of capital and a related weakening of the Korean won. To be sure, he says, it’s a fine line because the FTA does not “theoretically” stop South Korea from doing what it needs to do to protect the won. “But practically, it’s almost prevented,” he says.

Mr. Song has good reason to be worried about the Korea FTA tying his government's hand when it comes to regulating the flow of capital into and out of the country. He lived through the 1997 Asian financial crisis, which was precipitated by the uncontrolled flow of "hot money" into and out of national economies. Indeed, Asian countries that chose to implement capital controls faired better in the crisis than countries that stuck to complete financial liberalization. The threat to the stability of both the U.S. and Korean economies is yet one reason why Congress should reject the Korea FTA if and when the Obama administration submits it for approval.

For a detailed discussion of how the Korea FTA bans many types of financial sector regulations, check out our talking points on the subject.

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New Wall Street loophole opens U.S. up to WTO attack

The New York Times' Louise Story reported this morning that the pace of Wall Street reform has slowed to a crawl:

The rules are mandated by the Dodd-Frank financial regulatory law and range from curbs on executive compensation to consumer banking protection provisions to more transparency in the trading of derivatives, those complex financial instruments that contributed to the 2008 financial crisis.

So far, 28 of the financial overhaul rule-making deadlines have been missed, according to Davis Polk, a law firm that is tracking the rules. Of the 385 new rules to be written, the law firm says, regulators have completed only 24 requirements; they were supposed to have taken 41 such actions by now.

“There’s an attempt to kill this through delay,” said Michael Greenberger, a law professor at the University of Maryland and a former official at the Commodity Futures Trading Commission, which is in charge of writing batches of the rules.

But that's not the full story. Some derivatives rules are moving forward. They just happen to be rules that create new loopholes, as the NYT editorial page wrote last month in an editorial entitled "Mr. Geithner's loophole":

Until recently, the big threats to the Dodd-Frank financial reform law came from Republican lawmakers, who have vowed to derail it, and from banks and their lobbyists, who are determined to retain the status quo that enriched them so well in the years before, and since, the financial crisis. Now, the Obama Treasury Department has joined their ranks.

In an announcement on Friday afternoon — the time slot favored by officials eager to avoid scrutiny — the Treasury Department said it intends to exempt certain foreign exchange derivatives from key new regulations under the Dodd-Frank law. These derivatives represent a $4 trillion-a-day market, one that is very lucrative for the big banks that trade them.

There are numerous reasons to oppose the exemption of so-called foreign exchange (FX) swaps and forwards from the Dodd-Frank rules, as is ably argued by players and followers of the market themselves (see commentary from Zero Hedge, Quantitative Investment Management, Council of Institutional Investors, Stanford Professor Darrell Duffie, and the World Federation of Exchanges). The Wall Street banks that are among the huge players in this market want to preserve their elite club, even though Main Street sees little to no benefit from the trillions of dollars sloshing around the FX markets every day, much of it in speculative bets on interest rate and exchange rate movements around the world).

But there's an additional reason to oppose the swiss-cheese-ification of Dodd-Frank. The World Trade Organization's (WTO) services agreement groups FX swaps and non-FX derivatives in the same category, and subject them to similar de-regulation promoting rules. (The only exemption that the Clinton adminstration took in this sector is for ONIONS futures. You cannot make this stuff up.) These stability weakening WTO rules are strongly enforceable, unlike the stability-promoting global financial rules that others in the U.S. government are advocating.

As we noted in comments to the Treasury Department yesterday, WTO members are already suggesting that Dodd-Frank derivatives regulation may not be compatible with the WTO financial services commitments assumed by the Clinton administration during the 1990s.

The U.S. would have few strong defenses if Dodd-Frank were attacked at the WTO (or worse, by a private investor under one of our bilateral NAFTA-style deals).But the U.S. would likely cripple one of the few defenses it had if it argued that Wall Street self-regulation was merited for certain classes of financial exotica, but not for others. How then would the U.S. defend the "necessity" (a key test in trade law) of strong regulation for the non-exempted derivatives? Either government regulation is necessary across the board within the securities trading sector, or not at all. The time for carving out FX markets to a regime of self-regulation passed a long time ago - this handout to Wall Street banks should not now emperil the systemic regulation of shadow markets.

This conflict with Dodd-Frank shows the desperate need to have our "trade" rules catch up with our "financial" rules. Unfortunately, the services trade regime was crafted before the lessons of the financial crisis. The good news is, there's appetite from our trading partners - many of whom were cajoled into overcommitting in the WTO talks by Geithner in the 1990s - to reform the outdated rules. They just need to see a helping hand from the Obama administration, which up until now has simply been pushing further financial services deregulation through the Doha Round talks of the WTO.

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New memo on WTO conflict with measures to fight too big to fail banks

There are many ways that nations can check the growth of “too-big-to-fail” (TBTF) banks. One approach utilized in the past is adoption of firewalls between insurance firms, investment banks and commercial banks. This was used most famously in the United States through the Glass-Steagall Act from 1933 to 1999.

But various provisions of the World Trade Organization’s (WTO) General Agreement on Trade in Services (GATS) pose constraints on the type of size limitations a country may use. This is not surprising, since elimination of U.S. firewalls was a top priority for big banks in the original Uruguay Round GATS talks.

Moreover, Article 13.4 of the Korea-U.S. Free Trade Agreement (FTA) contains virtually identical anti-size-limiting rules,  as have many bilateral FTAs since the North American Free Trade Agreement (NAFTA).

We've just uploaded a new technical memorandum on this topic.

Section I outlines the basic policy options and debates confronting policymakers who wish to solve the TBTF problem.

Section II outlines the relevant GATS (and by implication, FTA) rules, and their possible conflict with these TBTF policy solutions – whether in the form of firewalls, licensing procedures or outright size limits. Section III concludes by suggesting a number of policy fixes.

Finally, Appendix I looks at the negotiating history of what relevant financial policies the United States bound to the GATS, including records released in response to Public Citizen’s requests under the Freedom of Information Act (FOIA). These documents show the disconnect between key U.S. negotiators and regulators during the Uruguay Round and subsequent financial services talks as to the reach of the core substantive obligations of the GATS. Appendix II details how the U.S. administered Glass-Steagall, which is useful for determining the exact intersection with GATS rules.

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Postscript on PMD

Last week's post on the WTO's prudential measures defense (PMD) sparked some discussion over at the IELP blog. (Wow, three acronyms in an opening sentence. Awesome!) It's a pretty wonkish issue, but/and I thought I'd follow up with a few additional observations.

On last week's post, I noted that there's four interpretations of the PMD: 1) it's totally self-cancelling: no prudential measures are allowed. 2) it disciplines nothing: any prudential measure is allowed. 3) that the PMD is an "exception" analagous to GATS Article XIV. 4) that the PMD is self-cancelling in the sense that the second sentence makes clear that GATS Article XVI on market access is a floor of treatment. Countries with relevant commitments at the WTO can't go below that that floor for prudential reasons, but they are given some additional flexibility vis a vis other GATS commitments.

While the debate over IELP focused on how these interpretations are different, it's worth noting what they have in common: a measure would have to be deemed "prudential" (and affect trade in financial services) to be covered. Presumably, there's a wide range of potential policies that would not be deemed prudential. (A set of recent papers from the IMF (see here and here) suggests typologies and interrelationships between measures that are about capital flow management or currency, or prudential or non-prudential. Some of the distinctions are very finely drawn, and I'm not sure at the end of the day that the distinctions have that much coherence. Not to mention that they wouldn't be binding on a WTO panel.) Casually speaking, I see "prudential" policies about keeping banks from hurting themselves (including in ways that have systemic residual effects), whereas "non-prudential" (but very important!) policies are about keeping banks from hurting the rest of us.

That's what the interpretations have in common. In essence, the PMD's first sentence represents a hurdle that policymakers have to meet: a policy has to be "prudential" for it to be covered by the PMD. (Arguably, policies that cap bank size or ban financial services or tax rapid capital outflows are about keeping banks from hurting us, not about keeping banks from hurting themselves. Thus, they may not be prudential.)

What sets Intepretation 4 apart is that it gives weight to the PMD's second sentence, and in particular its implications for GATS Article XVI that come from the applicable "exception."

Continue reading "Postscript on PMD" »

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PMD: "Strictly Business" interpretations of a WTO rule

Regular readers of the blog will recall we have a wonkish obsession with a much debated provision in the WTO services agreement related to financial regulations taken for prudential reasons. In 2009, we put out a report and literature review on the topic, and have regularly discussed the topic on the blog. For the last several years, we've submitted Freedom of Information Act (FOIA) requests from various U.S. agencies to try to get a better picture of what this and other WTO financial service obligations mean. The disclosures have been interesting, to say the least. And not only because they involve top officials and lobbyists like Tim Geithner that are still running around DC.

But before we get into what these documents show, some background is needed. For those fortunate enough to not be initiated, here is the provision, which is contained in Article 2(a) of the Annex on Financial Services to the General Agreemeent on Trade in Services:

2. Domestic Regulation    Epmd2

(a) Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system.  Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement.

We'll call this PMD, and no, that's not a reunited hip-hop crew from Brentwood minus Erick Sermon. But it does mean "strictly business." (Sorry, I couldn't resist.) 

The prudential measures defense (PMD) is highly confusing. Those familiar with other text from WTO agreements will note that the first sentence sounds like it provides a lot of flexibility for financial regulators, while the second sentence seems to take it all away. After all, a country would only need a prudential defense if it were found guilty of violating WTO rules. What good is a defense if you can't use it?

There are a variety of ways a WTO panel could approach the interpretive challenge of the PMD.

Continue reading "PMD: "Strictly Business" interpretations of a WTO rule" »

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Int'l Call for G-20 Action on WTO Financial Deregulation

As finance mininsters descended on Washington, DC yesterday for this week's G-20, World Bank and IMF meetings, over 125 organizations representing 121 countries called on them to end the WTO' risky financial services behavior.
G-20 finance ministers

The WTO has repeatedly ignored warnings from the United Nations and other experts to lift outdated restrictions on financial regulation in light of the 2008-2010 financial crisis. And so far the G-20 has not intervened to help remedy this problem. In fact, despite the G-20's stated goal of ensuring financial stability and preventing future financial crisis, repeated G-20 communiques have recommended conclusion of the Doha Round without addressing WTO limitations on some of the financial policies needed to prevent future financial crisis.

International labor, religious, farming, environment, food security and trade and finance groups are urging the G-20 finance ministers to take a more responsible position on WTO to prevent outdated WTO rules from undermining the financial regulatory reforms our governments must implement to prevent future crises. Their letter comes on the heels of a statement made by over 250 international economists criticizing trade agreement limits on capital controls.

A recent paper prepared by the Financial Stability Board, the International Monetary Fund and the Bank for International Settlements further confirms worries that int'l trade agreement limits could undermine financial re-regulation. Nancy Birdsall, President of the Center for Global Development also recently discussed trade agreement restrictions on new financial policies.

A broad range of organizations are working together to try and change these outdated international trade agreement rules. Some of the signatories to this most recent letter included the Citizens Trade Campaign, Americans for Financial Reform, Teamsters, U.S. PIRG, Public Citizen, Public Services International, the Trade Union Confederation of the Americas, the Hemispheric Social Alliance, SOMO, Third World Network-Africa, Brazilian Network for People’s Integration, Australian Fair Trade and Investment Network, Acord International- Africa, SEATINI, War on Want UK, Eurodad, Council of Canadians, Institute for Global Justice, Friends of the Earth (USA), International NGO Forum on Indonesian Development, and IBON Foundation. 


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Loophole-ridden tax treaty passes Panama's Assembly

Americans are crying out for fair trade policies and a real crackdown on tax dodging. The Obama administration’s trade and tax agreements with Panama represent neither.

The tax agreement ratified yesterday by Panama’s legislature allows the country’s government to refuse a tax information request “where the disclosure of the information requested would be contrary to the public policy” of Panama. Given Panama’s longstanding public policy of encouraging tax-haven activities, this loophole is big enough to keep its offshore economy alive and kicking.

We simply have no idea how and if Panama will cooperate with its tax commitments and other longstanding congressional demands for tax haven reform. In fact, politicians in Panama are already discussing a constitutional challenge to the tax agreement in the country’s Supreme Court.

What we do know for certain is that the NAFTA-style trade deal with Panama will allow investors registered there to attack future U.S. anti-tax haven initiatives for cash compensation, in tribunals outside of the U.S. judicial system. Such so-called investor-state challenges are far from hypothetical: there are nearly $9.1 billion in outstanding claims under NAFTA-style deals.

President Obama has now adopted a Colombia-Korea-Panama trade package that puts corporate interests above those of American workers and taxpayers. The package represents an extension of the failed Bush-Clinton-Bush trade policies that President Obama was elected to replace.

To see Public Citizen’s analysis of the impact of the NAFTA-style deal with Panama on U.S. anti-tax haven policies, see

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The Korea FTA is Lose-Lose for the U.S. and Korea: The Facts

The Korean Embassy recently released claims purporting to rebut the statements in Lori Wallach’s February 15, 2011 Huffington Post piece about the lose-lose nature of the NAFTA-style deal with South Korea. These statements do not reveal the full truth of the matter and could leave a mistaken impression of the so-called “free trade agreement” (FTA) with Korea and its consequences. We’ll be posting the facts in response to the Korean Embassy’s misleading claims throughout the week.


Korean Embassy does not even dispute that the Korea FTA could worsen financial stability and undermine labor rights. Wallach wrote that, “Another issue intensifying opposition to the FTA in Korea is the pact’s pre-crisis era financial deregulation requirements. After the 1997 Asian financial crisis wiped out decades of improvements to Korean living standards, Korea's policy response to the recent global crisis was forceful. Yet, aspects of both Korean and U.S. financial regulation would newly be exposed to direct challenge by the very firms that wrecked the global economy. Finally, the Korean union members on the delegation clearly shocked many of their audiences with their stories of how South Korean labor laws allow for strikers to be arrested for, well, striking and also allow individual strikers to be sued for compensation by their employers for lost profits.” The Korean Embassy does not rebut any of these points in their response to Wallach.


Lori Wallach’s Huffington Post piece: “…the ITC [International Trade Commission] study showed that the (overall) U.S. deficit in autos and auto parts would increase by at least $531 million under the pact.”

Korean Embassy’s claim: “The ITC study predicted that the KORUS FTA would increase U.S. auto exports to Korea by 45.5 percent to 58.9 percent and auto imports from Korea by 9.1 percent to 12.0 percent. At the request of the House Ways and Means Committee, the ITC is investigating potential effects on the U.S. auto industry of FTA modifications agreed upon in December 2010. The ITC expects to submit its findings to the Committee by March 15, 2011.”

Facts: Playing with percentages obscures the projected worsening of the auto trade deficit. The embassy’s use of percentage gains versus the net balance or quantities of vehicles obscures the reality of the data. The USITC's prediction that exports of U.S. autos to Korea would increase by 46-59 percent seems impressive at first glance, but upon closer inspection it becomes clear that the very low starting point of U.S. exports to Korea (about 6,000 vehicles in 2009) means that this percentage increase is small potatoes that will be overwhelmed by the huge increase in Korean auto exports (at about 500,000 in 2009) to the United States projected to occur under the FTA. In the USITC study, U.S. auto exports to Korea start at only $0.7 billion, but Korean auto exports to the United States start at $14.5 billion. Thus, an increase in U.S. auto exports of 46-59 percent results in $294-381 million in greater auto exports, but the increase of 9-12 percent for imports of Korean autos leads to a $1,324-1,737 million import increase, dwarfing the U.S. exports and resulting in a net increase in the auto trade deficit with Korea of $1,030-1,356 million. (Note that due to trade diversion effects, the USITC found that the total increase in the U.S. auto trade deficit with the world is less than the increased deficit with Korea itself.)

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WTO compatibility of Dodd-Frank financial regulation questioned

Late last year, Barbados raised questions about the GATS compatibilty of U.S. financial regulation efforts at the WTO, according to documents that have recently been released. 

The island nation questioned how the GATS would intersect with nearly a dozen re-regulatory efforts by various countries. But, according to the minutes of the December 20, 2010 meeting where this came up, only the United States and EU reregulatory efforts were mentioned by name. This is very significant, since WTO delegations are typically loath to mention countries by name in these settings.

The delegate from Barbados argued the following:

As part of the remedial measures put in place in the aftermath of the crisis, one was the banning of naked short selling – a measure introduced in May 2010 by the German Financial Regulator (BAFin), which enacted a ban on naked short selling of credit default swaps on Eurozone government bonds.  However, under the GATS, a Member should not normally ban a highly risky financial service if it had made specific commitments relating to that sector.  Similarly, the new financial regulatory reform bill passed in the United States Senate in May 2010 included a provision that would force some of the biggest banks to spin off their trading in swaps into special subsidiaries or be denied access to the federal emergency lending window.  Another initiative included making credit default swaps available only to people who own the underlying debt.  However, Members with specific commitments in the sector ran the risk of contravening those commitment if they imposed limits on the types of financial services which an entity may provide, except under permitted circumstances...

The notion of too-big-to-fail had always been a concern, but the current financial crisis confirmed the regulators' worst fears.  The question had arisen lately as to whether the rules should vary according to the size and  level of sophistication of the financial entity.  Regulators had been moving in this direction lately.  Other proposals for enhanced regulation included the suggestion to set up a mega regulator, which would oversee individual regulators at the national level.  The powers of enforcement of such a mega regulator and the power to impose sanctions would need to be carefully considered, so as not to endow an institution with excessive power.  According to GATS Article XVI (Market Access) governments cannot prohibit or limit the size or the total number of financial service suppliers in covered sectors.  However, under the new US Financial Reform Bill 2010, an oversight entity would be set up to do exactly that, that is, to make sure that the size of banks was reduced if they appeared to be becoming too large.

Thankfully, Barbados appears to be raising these issues not as a precursor to a WTO dispute case, but instead in the spirit of proposing amendments to the GATS. Just some of the nearly dozen reforms they propose:

  • Rolling back the "standstill" on new regulations envisioned by the Understanding on Commitments in Financial Services.
  • Expanding the circumstances under which countries can be allowed to use capital controls without running afoul of their GATS commitments.
  • Amending the market access provisions of the GATS so that regulatory bans and size limitations can be utilized.
  • Amending the GATS terms that require compensation following a withdrawal of commitments, because the GATS can make "the securing of financial stability very costly."

The WTO's Committee on Trade in Financial Services will be taking up Barbados' proposal at their next meeting, so stay tuned.

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A funny thing happened on the way to banking transparency in Panama

We always knew that Panama would drag its feet on promises to clean up its banking secrecy problems. Indeed, both government and industry have spent a lot of airtime bragging about how the deal with the United States doesn't force them to change the country's operating philosophy in major ways. See here, for instance.

But we also knew that Panama's tax haven industry would push back hard on any more substantive changes. And indeed they have. See here and here and here.

It seems like at least some of the efforts to water down the legislation worked. The National Assembly watered down the Martinelli administration proposal (itself a watering down of what tax justice groups have called for) in a couple of ways.

First, registered agents in Panama that violated the Know Your Client legislation saw their period of debarment shrink from 1-3 years in the Martinelli proposal, to as little as three months in the National Assembly approved legislation (see Article 20, as amended). So, after a little slap on the wrist, a lawyer could return to offering untransparent services to anonymous tax dodgers, assuming the laws are enforced in the first place.

Second, the Martinelli proposal required resident agents to 1. identify their clients and verify that identity through a paper trail; 2. ascertain the purpose for the creation of the corporate entity, and 3. share information with the government under certain extenuating circumstances. But the National Assembly scaled this back so that, in order to comply with item 2, "the resident agent shall not have the obligation to carry out any proactive step or verification of the information provided by the client." (Article 3, as amended). In other words, trust, but do not verify.

(You can see the original and amended versions here.)

Congress and public interest groups have been very clear about what needs to be fixed before any U.S.-Panama trade deal can be voted on. First, Panama needs to clean up its tax haven practices. Second, the FTA needs to be changed so that tax dodgers don't have FTA "hard law" means of attacking tax collectors' anti-tax haven measures, while tax collectors only have "soft law" means of asking nicely for taxes owed from tax dodgers. Thus far, the Obama and Martinelli administrations have made no progress on the latter, and the Panamanian government has dimished the former to not-even-symbolic changes.

It's pretty clear that, absent redoubled pressure, Panama will remain a top tax haven.

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Mubarak Family Takes Advantage of Bank Secrecy in Panama

The entire world has focused on the inspiring and peaceful revolution in Egypt that pushed the Hosni Mubarak regime from power. One of the primary tasks that Egyptians will face in the coming months is tracking what if any wealth the Mubarak regime stashed abroad. As the New York Times reported,

As attention turns to tracking the Mubaraks’ purported wealth, rumors of vast real estate holdings by the family have swirled. But the only property outside of Egypt that has emerged is the London townhouse at 28 Wilton Place in Knightsbridge where Gamal Mubarak lived when he was an investment banker there.

But determining the precise ownership of the house shows why investigating the family’s wealth is complicated. A woman answering the front door of the house said the Mubaraks had sold it, but property agents said there was no record of a sale, and neighbors said they had seen Gamal Mubarak and his family entering it several times recently.

According to British records, the home is owned by a company called Ocral Enterprises of Panama. The registered agent for the company in Panama is a local law firm. A lawyer at the firm said that he could not reveal Ocral’s owner. The lawyer said his firm received its instructions regarding Ocral from a company in Muscat, Oman, which he declined to identify.

Though Swiss banks have begun the search for Mubarak family assets, experts said any money would be returned to Egypt only if its new government formally demanded them.

“Egypt has to run a criminal investigation,” said Daniel Thelesklaf, director of the International Center for Asset Recovery in Switzerland. “A lot will depend on the new Egyptian government.”

As we've discussed often on the blog, Panama is ground zero for rich individuals and corporations looking to avoid taxes and regulation. Despite overwhelming international attention on the tax haven abuses in Panama, the country has responded by threatening WTO action on any country that tries to target the abuses, and then slow-walked any micro-reforms. Thus, instead of getting rid of the bearer shares that allow drug traffickers to launder money, Panama has bragged that it has merely set in place a lesser untested solution that some records be kept on owners.

The grand "compromise" brokered by Treasury Secretary Tim Geithner (and intended to jumpstart the talks on a U.S.-Panama trade deal that was delayed when Congress started asking questions about Panama's tax practices) was to get Panama to sign a so-called Tax Information Exchange Agreement and "understanding". But the deal does not require Panama to automatically share tax information, and instead forces regulators to jump through tons of hoops on investigations that are already far along. (Good luck having the enforcement capacity for that during a time of budget austerity and cuts.)

Moreover, the deal is full of loopholes, like allowing Panama to dodge a U.S. request for tax information if fulfilling the request "would be contrary to the public policy" of Panama. Since Panama's public policy is to attract foreign monies through low to non existent regulations, the TIEA seems likely to give Panama substantial room to be uncooperative.

And not to mention that, unlike the U.S.-Panama FTA, there's no meaningful enforcement regime with the TIEA. Say Congress or the public pushed the administration to block financial transfers to and from Panama until Panama started disclosing the assets of corrupt dictators. Any Panama-registered investor that didn't like the action could force the U.S. into international arbitration, where U.S. taxpayers might have to actually cough up money to the regulation-dodger. In contrast, the "soft law" of the TIEA is all based on genteel requests, and contains no enforcement mechanisms.

This corresponds to a broader problem in international law, documented in a recent academic journal issue: when it comes to measures to build economic stability or enforce transparency (like minimum capital requirements or tax transparency), governments opt for unenforceable mechanisms. But when it comes to measures that get in the way of company profits, we opt for mechanisms (like FTAs) that are not only strongly enforceable, but which companies can themselves directly enforce.

Double standards like this bode poorly for the ability of democracy activists everywhere to push for accountability from those who govern them.

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Don't abuse me: the prudential quandary

Mike Alberti over at Remapping Debate has published an investigative piece that looks at the financial services provisions of the Korea FTA. He reports:

Most free trade agreements contain a so-called “prudential carve-out” section that is designed to protect a country’s right to regulate its economy. The “Financial Services” Chapter of the FTA contains such a provision ...

Public Citizen’s Tucker wrote in an email that the net effect was the prudential carve-out section was “self-cancelling.” True exceptions to trade agreements would, in contrast, “clearly allow countries reprieve from their obligations under the agreement if the exception’s requirements are met.”...

According to Joshua Meltzer, a Global Economy and Development fellow at the Brookings Institution, who has written in support of the FTA, the limiting sentence of Article 13.10 is merely designed to “make sure that you basically don’t use prudential regulation as a disguise to get out of your commitment.”

The argument that prudential defense clauses are intended to root out abuse has been made elsewhere, and it is no more convincing this time around.

Continue reading "Don't abuse me: the prudential quandary" »

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Economists to Obama: Save U.S. Export Markets; allow Capital Controls!

Our colleages at GDAE and IPS have recently released a sign-on letter from over 250 economists calling for trade agreements to permit countries to utilize capital controls. As the letter states:

many U.S. free trade agreements and bilateral investment treaties contain provisions that strictly limit the ability of our trading partners to deploy capital controls. The “capital transfers” provisions of such agreements require governments to permit all transfers relating to a covered investment to be made “freely and without delay into and out of its territory.”

Under these agreements, private foreign investors have the power to effectively sue governments in international tribunals over alleged violations of these provisions. A few recent U.S. trade agreements put some limits on the amount of damages foreign investors may receive as compensation for certain capital control measures and require an extended “cooling off” period before investors may file their claims.iii However, these minor reforms do not go far enough to ensure that governments have the authority to use such legitimate policy tools. The trade and investment agreements of other major capital-exporting nations allow for more flexibility.

We recommend that future U.S. FTAs and BITs permit governments to deploy capital controls without being subject to investor claims, as part of a broader menu of policy options to prevent and mitigate financial crises.

Among the signatories are Nobel Laureate Joe Stiglitz, Harvard professors Ricardo Hausmann and Dani Rodrik, and Peterson Institute economist Arvind Subramanian.

As Kevin Gallagher, an organizer of the letter, points out:

The United States has trade or investment agreements with 52 countries that restrict the use of capital controls and allow private foreign investors the right to sue governments that violate these restrictions.  Several additional deals are in the works, including:

  • U.S.-South Korea free trade agreement. Status: pending congressional approval.
  • Trans-Pacific Partnership. Status:  Trade negotiators from the United States and eight other countries will meet for a 5th round of talks in Chile on Feb. 15.
  • Investment treaty with China. Status: The U.S. government is expected to soon complete a review of its model Bilateral Investment Treaty (BIT), which will accelerate negotiations with China, India, and several other countries.  Presidents Obama and Hu “reaffirmed their commitment” to these ongoing negotiations in a Jan. 19 joint statement.

Hopefully this letter will help spark some of the needed reforms to NAFTA-style deals. After all, financial crises abroad can lead to the collapse of U.S. export markets - imperiling U.S. jobs. All options should be on the table without risking trade pact challenge - including capital controls.

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Rewriting Economic History for the Korea FTA

U.S. Trade Representative Ron Kirk and Han Duk-soo, Korean Ambassador to the U.S., discussed aspects of the Korea Free Trade Agreement (FTA) at a panel on Thursday. They talked about deadlines, little anecdotes, and so forth, but what Ambassador Han had to say about how the Korea FTA would impact Korean domestic economic policymaking was most intriguing. He said:

But more important for Korea is that we develop our economy by opening it to global competition. The Asian Financial Crisis of 1997 and 1998 was a good lesson for us. What the Korea-U.S. Free Trade Agreement offers the Korean people is a comprehensive legally-binding reform package that will lead to the opening of our market.

Here Ambassador Han alludes to what Thomas Friedman called the "Golden Straightjacket". The idea is that you should force harsh economic policies on countries, often through some less-than-democratic means (in this case, a trade agreement that has been negotiated in secret), and they will eventually prosper. Ambassador Han referred to these "painful prescriptions" in an earlier speech here. (In the first chapter of Bad Samaritans, Dr. Ha-Joon Chang does a great job of exploding the Golden Straightjacket myth while demonstrating that Friedman's beloved Lexus in his Lexus and the Olive Tree could never have been produced without significant government involvement in the economy.)

It's quite perplexing that Ambassador Han would invoke the Asian financial crisis as a reason to throw all the chains off financial markets. Sure, the Korean Ambassador to the United States can do a lot, but he can't rewrite history. Financial deregulation was the major cause of the 1997 Asian financial crisis and efforts to further open financial markets during the crisis actually deepened its severity.

As Mark Weisbrot of the Center for Economic and Policy Research has pointed out, the Asian financial crisis developed because of excessive short-term international borrowing among East Asian nations. What was the cause of the excessive debt?

This build-up of short-term international borrowing was a result of the financial liberalization that took place in the years preceding the crisis. In South Korea, for example, this included the removal of a number of restrictions on foreign ownership of domestic stocks and bonds, residents' ownership of foreign assets, and overseas borrowing by domestic financial and non-financial institutions. Korea's foreign debt nearly tripled from $44 billion in 1993 to $120 billion in September 1997.

Indeed, countries that bucked the International Monetary Fund (IMF) prescriptions of greater financial liberalization, such as Malaysia, did better than countries like South Korea that had shed their financial regulations and capital controls. A paper on the Asian financial crisis published by the National Bureau of Economic Research compared the IMF strategy of complete openness to foreign investment and floating exchange rates against Malaysia's strategy of imposing capital controls to combat the crisis. The study concluded that "Compared to IMF programs, we find that the Malaysian policies produced faster economic recovery, smaller declines in employment and real wages, and more rapid turnaround in the stock market."

More than ten years after the Asian financial crisis, even the IMF has come to its senses and reversed its position on capital controls.  As we document in our memo on the Korea FTA's harmful foreign investor and financial deregulation provisions, the Korea FTA bans key measure that governments have at their disposal to prevent and combat financial crises, including capital controls. Far from a prescription for stable growth as Ambassador Han claims, enactment of the Korea FTA will leave both Korea and the United States vulnerable to future financial crises.

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Panama's “Blackmail” and “Threats” Against the US: Can Panama be Trusted?

By signing a weak Tax Information Exchange Agreement (TIEA) with the U.S. last month, Panama has tried to portray itself as finally coming out of the tax haven shadows so that Congress will approve the Panama FTA. Despite the signing of the TIEA, there still remains the question of whether Panama will faithfully implement the TIEA over the next year. Accumulating evidence suggests we can't trust the government of Panama to end its status as one of the largest tax havens in the world.

This Sunday, the New York Times reported on how the Panamanian President, immediately after being elected in July 2009, attempt to coerce the U.S. Drug Enforcement Administration (DEA) into using its wiretapping technology to wiretap his political opponents:

The United States, according to the cables, worried that [Panamanian President Ricardo] Martinelli, a supermarket magnate, “made no distinction between legitimate security targets and political enemies,” refused, igniting tensions that went on for months.

Mr. Martinelli, who the cables said possessed a “penchant for bullying and blackmail,” retaliated by proposing a law that would have ended the D.E.A.’s work with specially vetted police units. Then he tried to subvert the drug agency’s control over the program by assigning nonvetted officers to the counternarcotics unit.

And when the United States pushed back against those attempts — moving the Matador system into the offices of the politically independent attorney general — Mr. Martinelli threatened to expel the drug agency from the country altogether, saying other countries, like Israel, would be happy to comply with his intelligence requests.

The New York Times' reporting is based on several secret diplomatic cables recently released by Wikileaks. One cable dated August 2009 offered a frank assessment of President Martinelli's attitude toward following the law:

Martinelli's seeming fixation with wiretaps and his comments to [the U.S.] Ambassador during an August 12 meeting demonstrate that he may be willing to set aside the rule of law in order to achieve his political and developmental goals....He chided the Ambassador for being "too legal" in her approach to the issue of wiretaps.

On other matters of law such as drug trafficking itself, the diplomatic cables paint a dark view of the Panamanian government, noting that each month President Martinelli's cousin helps smuggle millions of dollars of drug money through Panama's main airport. Since President Martinelli apparently can't be bothered to follow the laws of his own country, how can his government be trusted to follow an international agreement and help the U.S. government ferret out tax dodgers?

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New Poll Shows GOP Voters Oppose NAFTA-Style FTAs

A new Pew poll released today found that antipathy towards “free trade” agreements and the WTO is particularly intense among Republicans and Tea Party supporters. This finding reinforces the results of previous polls that popular concern for the direction of our trade policy is spreading far beyond just Democrats.

Republicans in the survey were more almost twice as likely to believe that “free trade agreements” (FTAs) like NAFTA and the policies of the WTO harm rather than help the United States (by a 54 to 28 percent margin). This opposition is more intense than that of the public overall, more of whom still believe the U.S. is hurt by such unfair trade deals (by a 44 to 35 percent margin).

Republicans who agree with the Tea Party (think of those who had more enthusiasm to show up at the election booth last week) viewed FTAs even more unfavorably: 63 percent of them thought that FTAs and the WTO were bad for the United States, in contrast to only 24 percent who have a favorable view.

More independents also believe that these trade deals have hurt rather than helped the U.S.

If the Obama administration thought that it would be easy to pass a Korea FTA through a Republican Congress, these new poll numbers prove that it is mistaken. The Republican and Tea Party voters who elected the new Republican majority in the House are deeply opposed to more NAFTA-style FTAs, and the new members of Congress will find it dangerous to cast votes on FTAs against their constituencies. 

The poll also found that 55 percent of Americans think that FTAs have lead to job loss, while only 8 percent think that they have created jobs. This gap is even wider among Republicans and Independents. President Obama has said that his number one priority is job creation. If he is trying to convince Americans that he has his priorities straight, the last thing he should do is pass another NAFTA-style FTA, since most Americans believe that these FTAs are job killers. 

What Obama must do is follow through on his presidential campaign commitments and reform the Korea FTA, including deep changes to the labor rights, investor-state enforcement, and financial services regulation provisions of the FTA. If his administration thinks it can make some cosmetic changes and get it approved by Congress, it is in for a rude awakening.

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Obama's climate solution: undermine green standards abroad?

As we document in a new memo, President Bush's Korea trade deal, and NAFTA-style agreements in general, are the most politically toxic policy since giving Viagra to convicted child molesters.(As Ezra Klein writes, the latter is unfortunately a campaign talking point for some candidates.)

As our day-after election report will show, candidates of both parties are campaigning against unfair trade and offshoring. This includes the few Democrats that could somehow beat the odds and have the party retain the House, or the likely GOP margin makers. And 110 House members, along with the AFL-CIO and Sierra Club, have called for fundamental changes to the Korea deal's harmful deregulatory provisions on financial services and investment.

Somehow, I don't think this is what they had in mind. Mark Drajem at Bloomberg reports that...

The U.S. is asking South Korea to accept American automobile safety and emissions standards in an effort to advance a free-trade agreement, according to three people briefed on the talks.

Under the proposal, if American-made automobiles meet U.S. regulatory standards, South Korea would have to permit the vehicles to be sold in that nation...

Obama campaigned and won on calling for tough auto emissions standards here at home. And the EPA has made some important progress on this front under Obama. However, the U.S. is projected to have lower standards than Korea over the coming years, as Korea will have a 40 miles per gallon proposed standard by 2015, while the U.S. will still only have a 37.8 mpg proposed standard.

Unfortunately, this latest move from the administration is an echo of actions Treasury Secretary Tim Geithner took last year on Europe's (better) hedge fund regulations.

So, it's 2010. The glass is half-to-fully empty on environmental and financial regs here at home, thanks to watering down under industry and Senate pressure. The administration's solution should be to fill up the dang glasses, not try to break other countries' fuller ones through trade deals. We can only hope that this is a testing-the-waters kind of proposal, and that the Obama administration will commit to more robust reform prior to the G-20 in Seoul.

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IMF vs. WTO: who is better on financial services regulation?

Last month, the International Monetary Fund (IMF) prepared a "reference note" on trade deals and financial services. The note echoes our own finding that the World Trade Organization's (WTO) General Agreement on Trade in Services (GATS) constrains some regulations, even when they apply to domestic and foreign firms alike. Here are some of the more interesting tidbits from the IMF note:

If a member no longer wishes to conform to its specific commitments, it may modify its schedule by providing compensation in the form of alternative market access (even across sectors). However, this undertaking may involve difficult negotiation and can confuse understandings regarding the member’s commitments. (Page 5)

In the case of challenges by other WTO members on the legality of a specific (prudential) measure adopted by a member, a determination on the consistency of such a measure with the prudential carve-out clause would be made through the WTO dispute settlement mechanism. (Page 5-6)

While capital controls may be considered a legitimate part of the toolkit to manage capital inflows in certain circumstances,13 they may, in some cases, be inconsistent with GATS obligations. Such controls can take various forms, including pricebased measures such as explicit taxes or unremunerated reserve requirements with respect to specific investment vehicles (stocks, bonds, loans), or other measures, such as an outright prohibition against the sale of short-term securities to nonresidents. A country imposing such controls may have commitments under the GATS to allow nonresidents to provide the specific financial service unhindered and thus its underlying capital flows... (page 7)

The original commitments were often limited to the partial “locking in” of policies that had already been implemented on a unilateral basis at the time of the initial services trade negotiations (Uruguay Round, 1986–94).15 In the case of financial services, the relatively high number of commitments (second only to tourism services) is explained by the fact that negotiations were extended well beyond the Uruguay Round end date, and finally concluded in December 1997. While developed countries made more substantial commitments than developing countries,16 reflecting actual openness at the time, in practice, many WTO members have less restrictive policies than implied by their legal bindings; it would be inconsistent with their GATS commitments to apply more restrictive policies (unless justified for prudential reasons). It is nonetheless evident that, under significant external pressure, latecomers—25 emerging markets and low-income WTO accession countries—have made substantial commitments, either binding the sstatus quo or, in some cases, using those commitments to motivate domestic reform programs.... (page 8)

Some PTAs and BITs restrict the use of capital controls during macroeconomic and financial distress and do not provide for a “safeguard” clause. That is, a provision that allows a country to impose capital controls during times of macroeconomic or financial crisis. The absence of a safeguard provision can potentially create problems for the Fund... (page 11)

My main criticism of the IMF note is that it persists with the completely untested notion that the GATS prudential measures defense provision is a "carve-out" and that "governments have considerable leeway in introducing prudential measures that fit their needs." As we show here and here, these common operating assumptions miss the mark.

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