“Free” Trade and the Erosion of Democratic Accountability, Part 2: NAFTA 2.0

In my last post, I began to talk about a trade agreement that is currently being discussed by eleven Pacific nations, including the U.S., in secretive, closed-door negotiations, focusing particularly on those parts of the agreement that have nothing to do with trade at all.

This time, I want to focus on aspects of the agreement that are at least ostensibly trade-related, in that they deal with investor rights. In particular, I want to deal with an aspect of the agreement that the Trans-Pacific Partnership (TPP) shares with a free trade agreement whose effects we’ve had nearly twenty years to observe: The North American Free Trade Agreement (NAFTA).

As I mentioned in the last post, knowing what conditions the TPP actually imposes on signatories is impossible for the general public, since we have no access to the draft agreement, or the negotiating positions of the countries involved. However, from the leaked chapters we have seen, we know that it is very likely that the TPP will include an extension of one of the most controversial chapters of NAFTA.

Investor-State Arbitration

Probably the most notable and ominous articles in the leaked TPP chapter on trade are those that deal with the “expropriation” of “investments” by signatory states. The TPP seems likely to ramp up and extend measures from NAFTA that deal with the arbitration of trade disputes between signatory states and ‘investors’ (read: multinational and/or foreign corporations).

What sounds undoubtedly like another rather dull and academic topic once again has absolutely massive implications for domestic policy and has almost nothing to do with actual trade.

The driving thought behind investor-state arbitration of trade disputes is that corporations should stand on the same level as sovereign states when it comes to arbitrating disputes between the two parties. For example, if, say, a state was to unjustly intervene in the internal political affairs of another country by “training, arming, equipping, financing and supplying” counter-revolutionary forces, the dispute between the two countries would have to be resolved in an international court, subject to and judged by standards of international law.

Investor-state arbitration provisions within the TPP could, if NAFTA is anything to go on, place corporations on the same footing as states by allowing corporations to ‘resolve trade disputes’ (read: sue governments) using international trade dispute tribunals in much the same way that state-state disputes are resolved through international courts.

Protecting the Rights of Multinationals

Aside from the simple absurdity of treating multinational corporations as legal entities on a par with countries (and giving them a higher status than some), these sorts of measures extend the rights and privileges of multinational corporations far beyond those of domestic businesses and national citizens.

If you were to set up a business in a country, you would (obviously) be subject to the laws and regulations of that country and/or the state (county, district etc…) that you were based in. If you wanted to market a product in a way that contravened national law, or set up a plant with working conditions that violated national- or state-level worker protection measures, you could not, and the government would have the right to prevent you from doing so. This much should be obvious.

Now imagine that you are not a national business, but a large multinational corporation that has ‘investments’ in a TPP-governed country. If the TPP includes investor-state arbitration provisions that allow, as with NAFTA, “regulatory takings” cases (read: cases based on damages to profit rather than actual expropriation of resources or nationalisation of foreign business interests), as leaks indicate it likely will, you would not be subject to these same laws. In fact you could sue that state for damages if you felt that these laws constitute ‘indirect’ expropriation of your ‘investment’.

Investor-state arbitration measures give multinational corporations ways to circumvent national law by appealing to international courts to decide whether the laws of a state constitute a violation of the treaty and an unacceptable restriction on the trading rights of these corporations, rather than deciding the issue on the basis of the appropriate national or local (state/county) law. Domestic firms have no such avenue for circumventing relevant laws, meaning that such measures simply increase the power of these multinationals to endlessly accumulate capital and economic power, at the expense of the domestic businesses in those countries within which they ‘invest’.

Political Power and International Trade Dispute Arbitration

Aside from the comparative advantages that such measures confer on multinational corporations over and above national and local businesses and citizens, an even more pressing concern is the political power that this confers on such corporations.

Let’s say that you’re one of the smaller states signing on to the TPP such as, for example, New Zealand. New Zealand is a country with a very modest GDP, and a big focus on environmental protection, which is a potentially disastrous combination for a TPP signatory.

Let’s say that New Zealand wants to pass a law that would ban products that contain substances harmful to its citizens or to the environment, on the basis of new research on the toxicity or harmfulness of that substance. If a multinational corporation deems that this law would harm its business interests in the country, for example if one of its products contains this substance, the New Zealand government might find itself on the end of a billion-dollar lawsuit.

It may fail, it may succeed. Either way, the New Zealand government, whose annual spending on environmental protection is less than the yearly profit of many multinational corporations, would have to foot the bill for the legal fees to fight the battle. If it lost, it would have to pay even more to the corporation in question to compensate them for their losses. In the case of New Zealand this may be more than the small country can afford.

If the TPP contains these sorts of measures, this will constitute a radical shift of political power into the hands of multinational corporations. Effectively the people and government of a signatory country could be held to ransom by multinationals when deciding on policy. Even if a policy has the support of an overwhelming majority of the electorate it may simply be impossible to enshrine this policy in law if there is a large chance that it infringes, even indirectly, upon the interests (read: profits) of a corporation with ‘investments’ in that country, for the simple fact that the country may not be able to afford to pass the law when legal fees and compensation are added on top of the cost of implementing the policy in the first place.

Whilst the arbitration of such treaties have no force to overturn laws, such powers are not the only way that corporations can attain political control, and if TPP includes hyped-up NAFTA-style measures for investor-state dispute arbitration, political power will be shifted far in favour of democratically unaccountable corporations and away from elected officials and citizens.

Who Arbitrates Trade Disputes?

Aside from the fact that international dispute resolution can effectively function as a method for multinational corporations to violate national laws or even exert political pressure to prevent such laws from passing, there is a further concern about the legitimacy of the arenas within which these disputes will be arbitrated.

Not only do the tribunals operate independently of national law and, hence, remain essentially unaccountable to the people of the countries whose laws are being circumvented, in addition, the institutions used to resolve these disputes under NAFTA—the International Center for the Settlement of Investment Disputes (ICSID) and the United Nations Commission on International Trade Law (UNCITRAL)—were initially designed for the arbitration of relatively small trade disputes between corporations and, hence, are subject to a substantial amount of secrecy and confidentiality.

Whilst lack of transparency in resolving trade disputes between private corporations might seem acceptable, when issues of national interest are being debated, and potentially huge financial costs could result for states (and hence their citizens) as a result, openness is essential. But if you are a citizen of an affected country, there is effectively no way for you to know the full proceedings of these tribunals, who is arbitrating them, nor their results.

Although we cannot know how the arbitrations would actually proceed under TPP (for familiar reasons), the proceedings under NAFTA raise questions about the impartiality and fairness of any such tribunals. Proceedings so far seem to indicate that rulings will be “capricious and arbitrary“, swaying in favour of corporations rather than governments, given that members of the tribunal are appointed on an ad-hoc basis by parties to the dispute and there is no requirement for transparency or democratic accountability.

Overall, if the TPP agreement extends NAFTA-style investor-state arbitration of trade disputes to much of the rest of the pacific, including to countries with smaller economies and less resources with which to fight such legal battles, the effect will be devastating for local and national businesses, tax-payers, voters, and will undermine democracy in signatory states in favour of increasing the political and economic power of foreign and multinational corporations.

Come back for Part 3 in which I deal more generally with the harmful and undemocratic effects of ‘free’ trade agreements, and use NAFTA and the TPP to draw some lessons.