“Free” Trade and the Erosion of Democratic Accountability, Part 3: Free for Whom?

In my last two posts I covered some of the crucial and most troubling measures that are likely to be in the Trans-Pacific Trade (TPP) agreement, a secretive ‘free’ trade agreement currently in the last rounds of negotiation.Whilst a lot of what has been said already touches on the detrimental effect that the TPP could have on democracy, this final post will focus more generally on how trade agreements and the liberalisation of trade erode democracy.


Given that there can be confusion over exactly what is meant by democracy or democratic accountability, I’m going to take a moment to give a quick explanation of what I mean. I take it that the point of democratic forms of government—whether representative or direct—is to give the citizens of a state the ability to take control over the political and economic forces that dominate their lives. If the people of a country, for example, are to be subject to a law, then they should be able to have a say, however indirectly, in whether this law gets implemented and if so, how.

It is common to conflate democracy itself with democratic forms of government, but it’s crucial for my purposes that we don’t make this mistake. I take it to be obvious that a ‘democratic’ government is neither necessary nor sufficient for democracy in the sense above.

It is not necessary because even if there was no government, as in some left libertarian or anarchist forms of political organisation, there could still be democratic control over the economic and political forces and institutions that are present. Such a form of political organisation would enshrine the principles of democracy in the above sense, without having a single ‘democratic’ governmental body accountable to the people. In fact, even within societies with a ‘democratic’ government, this sort of democratic control is exerted by the people on a smaller scale. For example, if you are fortunate enough to work in a sector that still has some shadow of a functioning trade union system left then this is but another means for you to exert some control over a major economic force in your life (your employer).

More importantly for present purposes, a ‘democratic’ government is not sufficient for democracy in this sense either. If a society has governmental body that is in principle responsive to the will of its people, but the government has no way to implement measures that embody this will, due to a lack of political or economic power, the overall system of political organisation is manifestly not democratic in any sense but name. I want to suggest that this is precisely the situation that we are slipping in to as a result of globalisation, ‘free’ trade measures and the liberalisation of trade.

The Basic Problem

Given that I want to comment on the effect that the liberalisation of trade and the implementation of ‘free’ trade agreements (which, as we have seen, often go far beyond merely liberalising trade) has on democratic accountability, it is important to differentiate the basic problem itself from the compounding effects of liberalisation on this problem.

Democracy is supposed to give people a means to exert control over the economic and political forces that contribute so drastically to their welfare and living standards. The job you have, the pay you receive, your working conditions and so on are the most crucial factors in understanding how well your life will go for you, your life expectancy, education and so on. The basic problem is that the average person’s ability to exert control over these factors, and hence to determine how well their life goes, will decrease in proportion to the degree to which economic power has concentrated into a small number of institutions like corporations.

There are two ways that this basic problem manifests itself, one focused on internal control and another focused on external control. The first is simply that corporations are effectively “private tyrannies“, in the following sense: from within a corporation, there is little to no way, if you are outside the concentration of power at the top of the institution, to influence its general practices and operations, or to change your working conditions. If you have a desk job in a major multinational corporation and you have some qualms about the way the company is being run by those in positions of power, your only real option is to quit. This is not to say that corporations couldn’t in principle listen to their workforce, only that they generally don’t unless they are forced to.

Secondly, the extent to which external control over corporations is possible will also be inversely proportional to the extent to which economic power has been concentrated. To cite a familiar example, say that the people of some state want to implement large-scale regulation of corporations. Such suggestions are inevitably dismissed, often not because we shouldn’t regulate corporations or tax them too heavily or close corporate tax loopholes, but that we can’t. If we did, it is argued, the economy would collapse because, as everyone knows, such measures would scare off corporate investment, incite mass capital flight, increase levels of straight-up tax evasion and ultimately the über-capitalists would all run off and start their own utopia, leaving the rest of us to wallow in our socialist hell-hole.

These sorts of arguments illustrate neatly the basic problem as it manifests itself in the form of external control over concentrations of economic power like corporations. There are certain laws that cannot be passed, whether the people want it or not, because, in essence, the rich would punish any government that chooses to pass such a law by de-funding its economy. The greater the share of the economy these corporations are responsible for, the greater this punishment will be and the more power they will have to economically veto laws that conflict with their interests, limiting drastically their democratic accountability.

In a society in which economic power has massively concentrated into the hands of a small number of corporations, there will be two main ways that it will be possible for the majority of people not in a position of power within these institutions to exert an influence on their operation, and ‘free’ trade measures undermine both.

Holding Workers to Ransom

The first way is for the workers themselves to engage in collective bargaining through unionisation in order to achieve some level of control from within these organisations. After all, corporations are only as large as they are thanks to the size of their workforce. Whilst individual ability to exert internal influence will decrease in proportion to the size of the corporation, the potential collective bargaining power should, in theory, increase. Unions offer a way for a large number of workers to effectively stack up the small amounts of power that they have individually and use this to bargain with those individuals near the centre of the concentration of power.

Unfortunately, NAFTA provides a case in point regarding how trade agreements undermine the ability of unions to exert internal control over corporations, removing one major avenue for making corporations democratically accountable. This is because in order for unionisation to be an effective tool for exerting a democratic influence from within, they actually have to have some sort of bargaining power.

The problem is that trade agreements like NAFTA and TPP not only make it easier for domestic countries to export to other countries, but they also make it easier for companies with enough capital to move parts of their business—or the whole business itself—to countries with cheaper labour and production costs, or with less unionisation, and simply export the final product to the market back home. The more mobile the industry, the easier this will be—whilst it will be almost impossible to move, say, mining operations abroad, financial institutions can transfer capital at the click of a mouse.

In other words, ‘free’ trade measures geographically liberate corporations from the country within which their market lies, giving them the opportunity to produce in those countries with the cheapest labour and then export, with little to no financial penalty, to those countries with the biggest markets. One unfortunate result of this freedom is that it makes it easier for corporations to simply threaten unions with plant closure in order to counteract strike threats and other bargaining measures used by unions, undermining the control that the workforce has over these institutions.

Not only is this effect of liberalising trade obvious to anyone willing to reflect on the balance of power within corporations, but in addition corporations themselves have predictably lived up to expectations. Robert E. Scott of the Economic Policy Institute helpfully summarises the research as follows:

Wall Street Journal survey in 1992 reported that one-fourth of almost 500 American corporate executives polled admitted that they were “very likely” or “somewhat likely” to use NAFTA as a bargaining chip to hold down wages (Tonelson 2000, 47). In a unique study of union organizing drives in 1993 though 1995, it was found that more than 50% of all employers made threats to close all or part of their plants during organizing drives (Bronfenbrenner 1997b). This study also found that plant closing threats in National Labor Relations Board (NLRB) union certification elections nearly doubled following the implementation of NAFTA, and that threat rates were substantially higher in mobile industries, where employers can credibly threaten to shut down or move their operations in response to union activity. Bronfenbrenner updated her earlier study with a new survey of threat effects in 1998 and 1999, five years after NAFTA took effect (Bronfenbrenner 2000). In her updated study, Bronfenbrenner found that most employers continue to threaten to close all or part of their operations during organizing drives, despite the fact that, in the last five years, unions have shifted their organizing activity away from industries most impacted by trade deficits and capital flight.

‘Free’ trade agreements like NAFTA thus undermine one of the only means of effecting change from within corporations by decreasing the restrictions and regulations that would otherwise prevent corporations from moving their base of operations. This gives corporations more bargaining chips with which to overpower unions and erodes internal democratic accountability as a result. The result of this erosion of democratic accountability is that wages are driven down, both at home and abroad, and there are huge levels of job displacement.

Holding Governments to Ransom

The second way for people to exert influence on corporations is for the government to exert control on their behalf. Given that governments are also usually large sources of economic and political power, they can often enact laws that regulate the activities of corporations or force them to conform to certain standards. An obvious case would be the implementation of anti-discrimination laws that require corporations (in principle) to enact equal hiring policies.

In the last post, I already covered some of the effects that so-called free trade agreements like NAFTA and TPP have on the ability of citizens to pass laws that benefit them when the interests of the populace clash with the interests of the corporation. Specifically, when corporations are given the power, through international tribunals, to effectively fine the population for infringing on their right to endlessly accumulate capital, the government becomes unable to pass legislation that comes into conflict with these interests.

This is precisely a situation in which the state, even if it is directly accountable to the people, cannot function democratically; that is, in which trade agreements undermine the external democratic accountability of corporations. However, the ability of corporations and other concentrations of economic power to hold the state and its people to ransom does not require investor-state arbitration measures of the sort present in NAFTA and other trade agreements. Even traditional, pre-NAFTA-era ‘free’ trade agreements and efforts to ‘liberalise’ trade erode democratic accountability.

For one, we have already seen that the basic problem is that when a small number of corporations are responsible for a large proportion of a country’s economy, they effectively obtain veto-power over laws that conflict with their interests by threatening to withdraw their investments in that country. However, measures that aim to liberalise trade and capital flow will simply increase the extent to which this tactic can be employed by institutions with a great deal of economic power, for reasons similar to those given in the last section.

Just as individual corporations can use the threat of plant closure to undermine the control that their workers have over working conditions, so too can the corporate sector of the economy as a whole use the threat of capital flight and outsourcing to surpress laws that conflict with their interests. Liberalising trade only makes these threats more credible and the costs to corporations that choose to do so smaller.

Finally, aside from their veto-power over laws that conflict with corporate interests, the ‘free’ trade measures themselves are ways to limit the exercise of democratic control over concentrations of economic power. They effectively forbid the population from exerting any kind of control over the operations of corporations and concentrations of economic power by preventing the state from passing laws that would regulate or control the operations of business, even when these operations are damaging to the people of the country within which they are operating.

‘Free’ trade measures simply add to the already substantial bargaining powers that corporations have and give them extra ways to erode democratic accountability both from within and without, whilst those without substantial economic power (i.e. the majority of the population) have no means to exert an influence over those forces that shape their lives and influence their wellbeing.

In other words, ‘free’ trade agreements are only free for those that already have vast amounts of economic power, for everyone else they are at once an economic fetter and a noose.

“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.