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

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

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

U.S. Export Growth Falters under FTAs

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

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

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

• Ignoring imports: U.S. Chamber of Commerce studies regularly omit mention of soaring imports under FTAs, instead focusing only on exports. But any study claiming to evaluate the net impact of trade deals must deal with both sides of the trade equation. In the same way that exports are associated with job opportunities, imports are associated with lost job opportunities when they outstrip exports, as dramatically seen under FTAs.

• Counting “re-exports:” NAM has misleadingly claimed that the United States has a manufacturing surplus with FTA nations by counting as U.S. exports goods that actually are made overseas – not by U.S. workers. NAM’s data include “re-exports” – goods made elsewhere that are shipped through the United States en route to a final destination. Determining FTAs’ impact on U.S. jobs requires counting only U.S.-made exports.

• Omitting major FTAs: The U.S. Chamber of Commerce has repeatedly claimed that U.S. export growth is higher to FTA nations that to non-FTA nations by simply omitting FTAs that do not support their claim. One U.S. Chamber of Commerce study omitted all FTAs implemented before 2003 to estimate export growth. This excluded major FTAs like NAFTA that comprised more than 83 percent of all U.S. FTA exports. Given NAFTA’s leading role in the 443 percent aggregate FTA deficit surge, its omission vastly skews the findings.

• Failing to correct for inflation: U.S. Chamber of Commerce studies that have claimed high FTA export growth have not adjusted the data for inflation, thus errantly counting price increases as export gains.

• Comparing apples and oranges: The U.S. Chamber of Commerce has claimed higher U.S. exports under FTAs by using two completely different methods to calculate the growth of U.S. exports to FTA partners (an unweighted average) versus non-FTA partners (a weighted average). This inconsistency creates the false impression of higher export growth to FTA partners by giving equal weight to FTA countries that are vastly different in importance to U.S. exports (e.g. Canada, where U.S. exports exceed $251 billion, and Bahrain, where they do not reach $1 billion), despite accounting for such critical differences for non-FTA countries.

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

NAFTA a way to restart Keystone Pipeline?

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

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

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

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

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

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

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

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

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

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

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

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

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

Good and bad news from your corporate rulers

There's been a flurry of activity recently in the world of investor-state arbitration.

For the uninitiated, these are the foreign tribunals where corporations can directly sue governments for environmental and other policies. These proceedings take place outside of national judicial systems, where corporations can demand compensation from taxpayers for alleged interferences with future expected profits.

This very controversial system has generated some good and some bad news of late.

First, the good news. Last night, the U.S. Court of Appeals for the D.C. Circuit overturned a 2007 investor-state ruling under the U.K.-Argentina Bilateral Investment Treaty (BIT). [HT to Investment Arbtiration Reporter for catching this very quickly.]

Argentina has been hit by dozens of investor-state claims from U.S. and European companies following its 2001-03 financial crisis. (We detail some of these happenings here.)

In the 2007 ruling, Alejandro Garro (U.S./Argentina), Albert van der Berg (Netherlands) and Guillermo Aguilar-Alvarez (Mexico) comprised the panel of three unelected tribunalists that ruled in BG Group's (a U.K. corporation) favor. The panel wrote:

"Argentina adopted certain measures to address its economic, political and social crisis. It is not for this Tribunal to pass judgment on the reasonableness or effectiveness of such measures as a matter of political economy."

Such loving nods to sovereignty are but the preface for the slap-down. The panel wrote that Argentina guaranteed that the energy companies would be paid in dollars at a set rate. When the 2001-03 economic crisis forced revision of the dollar-peso peg (a key recommendation of neoliberal advisors), Argentina was acting "unreasonably" and therefore in violation of the BIT obligation to provide "fair and equitable treatment" (FET).

The panel ordered Argentine taxpayers, many of whom had been pushed into poverty after following the policy advice of the IMF, to cough up roughly $200 million. (This included paying the fees of the company's lawyers. Awesome.)

A U.S. court had jurisdiction to hear an appeal of the investor-state ruling under the U.S. Federal Arbitration Act. National courts hardly ever overturn these investor-state rulings, but the U.S. court wrote:

"Although the scope of judicial review of the substance of arbitral awards is exceedingly narrow, it is well settled that an arbitrator cannot ignore the intent of the contracting parties. Where, as here, the result of the arbitral award was to ignore the terms of the Treaty and shift the risk that the Argentine courts might not resolve BG Group’s claim within eighteen months pursuant to Article 8(2) of the Treaty, the arbitral panel rendered a decision wholly based on outside legal sources and without regard to the contracting parties’ agreement establishing a precondition to arbitration. Accordingly, we reverse the orders denying the motion to vacate and granting the cross-motion to confirm, and we vacate the Final Award."

This is is a positive sign that there are some limits on obscene investor-state rulings. However, U.S. trade and investment agreements don't even have this 18-month requirement, so don't expect any similar overturnings of rulings under NAFTA-style deals anytime soon.

++

Speaking of which, there was a ruling over very similar issues under the U.S.-Argentina BIT that was just recently released to the public. That award came down in favor of U.S. investor El Paso Energy International Company, which ordered Argentine taxpayers to pay out over $43 million.

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.

GAO Finds that FTAs Include “Limited Efforts to Promote Progress” on Environmental and Labor Rights

The Government Accountability Office (GAO) released a report this month examining American “free trade” agreements (FTAs) with Morocco, Singapore, Chile, and Jordan, to see if the agreements were advancing U.S. commercial interests and strengthening trading partners’ labor and environmental laws.  While the GAO analysis found positive commercial results, the report faulted U.S. agencies for uneven progress on environmental and labor goals and insufficient American involvement in promoting these goals.  The report lamented the “significant and sometimes worsening systematic deficiencies in certain partner nations” and was conducted at the behest of Senator Finance Committee Chairman Max Baucus (D-MT). 

GAO concludes that, “Notably, USTR’s lack of compliance plans and sporadic monitoring, State’s lax management of environmental projects, and U.S. agencies’ inaction to translate environmental commitments into reliable funding all limited efforts to promote progress.” 

GAO’s study confirms that even the minimal provisions promoting labor and environmental rights in FTAs are not being enforced and further illustrates that all current FTAs need to be reassessed, as proposed in the TRADE Act. 

On Jordan Standard and Bush's Corporate "wink and a nod"

Sen. Sherrod Brown (D-Ohio) was on CNN last night talking about the state of play on the Deathstar Deal, and had this to say:

I think the comment from some individual leaders in the Chamber of Commerce, National Association of Manufacturers is that they're kind of getting a wink and a nod from Secretary Schwab - the U.S. trade rep Schwab saying and perhaps Secretary Paulson saying well, these standards look good, labor will be happy, environmentalists look happy, they are good in terms of the substance. But they know they are not going to be enforced. We went through this with Jordan in 2000. Congress passed a Jordan trade agreement. It's one I voted for because it had strong labor and environmental standards. It has not been enforced and Jordan has become a sweat shop for that part of Asia. With Bangladeshi workers working there producing all kinds of apparel that ends up in our country, duty free, products of sweat shops.

The Jordan FTA is an important piece of evidence as people consider the Deathstar Deal. Consider the following: