Top Arbitration Lawyer Says Corporate Sovereignty System Needs 'Complete Overhaul'

from the weapons-of-legal-destruction dept

A few months back we wrote about the free trade supporter Cato Institute arguing that corporate sovereignty provisions should be dropped from trade agreements, for a variety of cogent reasons. You wouldn't expect one of the top arbitration lawyers that actually uses the system to go quite so far, but this is pretty close:

A prominent international lawyer has launched a scathing critique of the international arbitration system that deals with investor-State disputes, calling for its "complete overhaul".

...

Delivering the keynote address to the Eighth Annual Juris Investment Treaty Arbitration Conference held in Washington, D.C. in late March, George Kahale III -- who has been lead counsel in several of the world’s largest international arbitration cases, including a pending claim against Venezuela -- also listed the top ten of what he viewed were the most troubling aspects of investor-State arbitration.

His ten points are all good, and well-worth reading, but the first is particularly important. It helps to explain why corporate sovereignty has become such a big issue recently -- and why some nations are starting to withdraw from such schemes:

many governments are jumping on to the bandwagon of investment treaties -- which Kahale described as "weapons of legal destruction" -- often without scrutinising the serious implications and significance of the obligations contained therein.

Governments also often overlook the changing nature of investment treaties -- which are expanding in breadth and ambiguity -- in favour of investors with the corresponding effect that more and more types of State acts, gestures or Statements are becoming liable to challenge and compensation by foreign investors, said Kahale.

It's the fact that investor-state dispute settlement (ISDS) chapters are like a ticking trade time-bomb, just waiting to explode at some unknown future date, that makes them so dangerous. A country can't predict which apparently innocuous change to its laws or regulations will trigger a multi-million -- or even multi-billion -- dollar ISDS claim against it. Since awards must be met from the public purse, that means there could be a huge unexpected shortfall in the national budget. That lack of certainty -- and lack of financial control -- is no way to run a country, and is yet another reason why all nations, even the largest, would be wise to refuse to include corporate sovereignty provisions in their trade agreements.

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Filed Under: arbitration, corporate sovereignty, george kahale, investor state dispute settlement, isds, trade agreements

Latest Trade Agreements Are Re-defining Cultural Choices As 'Non-Tariff Barriers' That Need To Be Eliminated

from the insensitive-much? dept

It's something of a misnomer to call TPP, TTIP and TISA trade agreements: they go far beyond traditional discussions about things like tariff removal, and are encroaching on domains that are as much cultural as economic. That is, many of things that the US dubs "trade barriers" are in fact long-standing expressions of national priorities, preferences and beliefs. That's evident in an interesting post from Public Citizen's Eyes on Trade blog, which explores the 2014 National Trade Estimate Report on Foreign Trade Barriers (pdf). Public Citizen points out:

The policies of other TPP nations criticized by the 384-page USTR report include New Zealand's popular health programs to control medicine costs, an Australian law to prevent the offshoring of consumers' private health data, Japan's pricing system that reduces the cost of medical devices, Vietnam's post-crisis regulations requiring banks to hold adequate capital, Peru's policies favoring generic versions of expensive biologic medicines, Canada's patent standards requiring that a medicine's utility should be demonstrated to obtain monopoly patent rights, and Mexico's "sugary beverage tax" and "junk food tax."

None of those is a real trade "barrier", but rather a policy choice seeking to bring about certain results that presumably correspond to the wishes of the local electorate. The cultural aspects of these so-called "barriers" are even clearer in the case of Malaysia:

The report takes issue with Malaysia's "extremely high effective tariff rates" on alcohol and its strict licensing policy for the importation of pork -- strange "barriers" to highlight in a country where three out of every five people are Muslim. Malaysia's halal standards for meat have also been targeted as a "barrier" in a companion USTR report on Technical Barriers to Trade (published in 2013, the most recent edition available). USTR is concerned that Malaysia requires "slaughter plants to maintain dedicated halal production facilities and ensure segregated storage and transportation facilities for halal and non-halal products."

Again, it's quite evident neither of those has anything to do with "market distortions", and everything to do with the fact that Islam is an important cultural element of Malaysian society. It is only natural that its laws and regulations should reflect that. Similarly, the following is likely to be an expression of Japanese society itself, not some evil plan to shut out foreign companies:

The report critiques Japan's laws protecting the privacy of citizens' personal data, calling them "unnecessarily burdensome." The U.S. government, according to the report, "has urged the Japanese government to reexamine the provisions and application of the Privacy Act, so as to foster appropriate sharing of data..."

Presumably those laws were passed because the Japanese value their privacy, and specifically wish to limit the sharing of personal data. But the USTR seems to think it is reasonable to demand that Japanese society change its attitudes in order to make the laws less "burdensome" to US companies operating there. The Japanese section also contains the following:

The report calls for "timely and accurate disclosure" of key texts related to Japan's postal reform, and "public release of meeting agendas, meeting minutes, and other relevant documents." In contrast, leaks have revealed that the United States and other TPP countries have agreed to keep TPP texts classified until four years after the agreement enters into force or talks collapse.

The lack of transparency for TPP is no simple matter of hypocrisy: it is an assault on local democracy. That's because the TPP negotiations are not haggling over a few tariffs, they are imposing a wide range of economic and social norms for an entire region. Conducted in secret, without any meaningful input from the people who will be most affected, these new-style agreements undermine the usual legislative process. This shift is yet another reason why TPP, TTIP and TISA must be opened up to allow greater public participation and input. If they are not, they are likely to be perceived as something imposed from above, and lacking in legitimacy. That's precisely what happened with ACTA; it led to tens of thousands of people taking to the streets, and ultimately rejection by the European Parliament.

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Filed Under: non-tarrif barriers, policy, sovereignty, tafta, tisa, tpp, trade agreements, ttip

German Politicians Hit Back At USTR Criticisms Of European Cloud Idea

from the well,-what-did-they-expect? dept

Last week we wrote about the USTR suggesting that any attempt by the European Union to create its own local cloud in order to minimize surveillance by the NSA would violate trade agreements. This has not gone down well with European politicians, particularly in Germany, whose Deutsche Telekom was singled out for criticism. Here's what Bavaria's Minister for Europe, Beate Merk, said while visiting the US, as reported by Die Welt (original in German):

"In my talks with the USTR, I've made it clear that our discussions of a "Schengen cloud" [that is, EU-only] has no protectionist background, but is born out of need as a consequence of the lost confidence arising from the NSA business," Merk said to Die Welt.

"We have a duty to ensure that the data of people in the EU is safe from unrestrained access by third parties", Merk added. If there is no offer from the US side for more data protection and data security, one is obliged "to propose one's own ideas on this score," underlined Merk.

She also pointed out that the EU cloud proposals were being made by commercial providers, not put in place through legislation, which means that the accusation of "protectionism" was simply incorrect. A German member of the European Parliament was even more forthright:

"The criticism of the US Trade Representative is bizarre! It seems they've noticed that people have finally had enough and that spying on data will no longer be tolerated."

As Die Welt notes, thanks to the USTR's ill-judged comments on this issue:

The "Schengen cloud" has become a stumbling block for the planned [TAFTA/TTIP] free trade agreement.

Maybe not a very serious stumbling block, but combined with differences over GMOs, hormone beef and cheese names, it's enough to make achieving an "ambitious" agreement, along with its claimed benefits, just that bit more difficult.

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Filed Under: eu commission, eu only cloud, local cloud, surveillance, trade agreements, ustr

How Corporate Sovereignty Threatens Democracy

from the at-most dept

As people have begun to learn about corporate sovereignty through plans to include it in TAFTA/TTIP, the European Commission has been trying to scotch the idea that it might allow corporations to dictate policies to nations. Here, for example, is a comment in the Commission's main TTIP FAQ, which tries to answer the question "Why is the EU including Investor to State Dispute Settlement in the TTIP?":

Including measures to protect investors does not prevent governments from passing laws, nor does it lead to laws being repealed. At most, it can lead to compensation being paid.

Those are all true statements in theory, but that's probably not much comfort to Romania, which has been discovering the harsh reality in the long-running discussions over whether to allow a Canadian company to create a huge open-cast gold and silver mine in the country. Here's what happened last year:

Gabriel Resources Ltd. (GBU), backed by billionaire hedge-fund manager John Paulson, threatened to seek as much as $4 billion of damages should Romanian lawmakers vote to oppose its gold mine project in the country.

"We have a very, very robust case, and we believe we have claims up to $4 billion that we can send to the Romanian state," Gabriel Resources Chief Executive Officer Jonathan Henry said today in a telephone interview. "We will go ahead and do that if the vote is against."

As the European Commission notes, the existence of a bilateral investment treaty with Canada that includes a dispute settlement mechanism did not, in itself, stop the Romanian politicians from blocking the gold mine project in the parliamentary vote, which took place in December 2013. So everything's fine, right? Democracy prevailed, and the people were heard. After all, "at most", as the FAQ helpfully reminds us, Romania will have to pay $4 billion damages at some point.

Except that, for a country with a GDP of less than $200 billion in 2013, this represents 2% of the country's entire economic production. That seems an incredibly high price to pay for the exercise of basic democracy. The danger is that faced with the threat of such enormous fines, other parliaments will lack the courage shown by Romanian's politicians, and choose to ignore the will of their people by meekly acquiescing to corporate demands.

Does GBU deserve some compensation if a project is cancelled by the local government because of widespread public concerns about its safety? Perhaps -- although business always involves some risk, and foreign investment is no different. If a company is really worried about that aspect, it can take out insurance -- from the World Bank, for example. Does GBU deserve to be awarded 2% of a country's GDP, paid for by the citizens of a land struggling to raise its living standards? That hardly seems fair. And yet it's precisely what ISDS could allow, because the arbitration panel that decides such corporate sovereignty cases is unconstrained in what it can award, and not at all concerned with what the knock-on effects might be.

But the politicians making up the European Commission should be, since they are supposed to represent the 500 million European citizens that pay their salaries. The fact that they are pushing as hard as they can for ISDS in TAFTA/TTIP shows which side they are really on, and that they are quite happy to put corporations before nations, and profits before people.

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Filed Under: canada, corporate sovereignty, democracy, romania, tafta, tpp, trade agreements, ttip
Companies: gabriel resources ltd., gbu

USTR Warns That EU-Only Cloud To Avoid NSA Surveillance May Violate Trade Agreements

from the unwise dept

The USTR seems to have a worrying need to blame other countries. Alongside the infamous Special 301 Report which puts a selection of nations on the naughty step because of their failure to bend to the will of the US copyright industries, there's the less well-known Section 1377 Review , which considers "Compliance with Telecommunications Trade Agreements." Here's some information about the latest one (pdf):

The Section 1377 Review ("Review") is based on public comments filed by interested parties and information developed from ongoing contact with industry, private sector, and foreign government representatives in various countries. This year USTR received four comments and two reply comments from the private sector, and one comment from a foreign government.

Clearly something of a specialist area, then. One of those comments comes from the United States Council for International Business, which describes itself as "among the premier pro-trade, pro-market liberalization organizations." A concern it raises is the following:

The ability to send, access and manage data remotely across borders is integral to global services, including converged and hybrid services such as cloud services. However, the tremendous increase in cross-border data flows has raised concerns on the part of many governments. Given that cross-border services trade is, at its essence, the exchange of data, unnecessary restrictions on data flows have the effect of creating barriers to trade in services.

That seems to be reflected in the following section of the USTR's review:

Recent proposals from countries within the European Union to create a Europe-only electronic network (dubbed a "Schengen cloud" by advocates) or to create national-only electronic networks could potentially lead to effective exclusion or discrimination against foreign service suppliers that are directly offering network services, or dependent on them.

In particular:

Deutsche Telekom AG (DTAG), Germany's biggest phone company, is publicly advocating for EU-wide statutory requirements that electronic transmissions between EU residents stay within the territory of the EU, in the name of stronger privacy protection. Specifically, DTAG has called for statutory requirements that all data generated within the EU not be unnecessarily routed outside of the EU; and has called for revocation of the U.S.-EU "Safe Harbor" Framework, which has provided a practical mechanism for both U.S companies and their business partners in Europe to export data to the United States, while adhering to EU privacy requirements.

Of course, Deutsche Telekom is not the only one calling for Safe Harbor to be revoked: the European Parliament's inquiry into the mass surveillance of EU citizens has also proposed that, along with a complete rejection of TAFTA/TTIP unless it respects the rights of Europeans. Strangely, the USTR doesn't mention that fact in its complaint, but goes on to say:

The United States and the EU share common interests in protecting their citizens' privacy, but the draconian approach proposed by DTAG and others appears to be a means of providing protectionist advantage to EU-based ICT suppliers.

You've got to love the idea that too much privacy protection is "draconian". The USTR continues to tiptoe around the real reason that not just Deutsche Telekom but even Germany's Chancellor, Angela Merkel, are both keen on the idea of an EU-only cloud:

Given the breath of legitimate services that rely on geographically-dispersed data processing and storage, a requirement to route all traffic involving EU consumers within Europe, would decrease efficiency and stifle innovation. For example, a supplier may transmit, store, and process its data outside the EU more efficiently, depending on the location of its data centers. An innovative supplier from outside of Europe may refrain from offering its services in the EU because it may find EU-based storage and processing requirements infeasible for nascent services launched from outside of Europe.

The USTR saves what it obviously sees as its killer punch for last:

Furthermore, any mandatory intra-EU routing may raise questions with respect to compliance with the EU's trade obligations with respect to Internet-enabled services. Accordingly, USTR will be carefully monitoring the development of any such proposals.

Got that, Europeans? If you dare to try to protect yourselves by creating a slightly more secure EU-only cloud in response to the NSA breaking into everything and anything, you may find yourself referred to the World Trade Organization or something....

It's interesting that the USTR brings up this issue -- doubtless a reflection of the huge direct losses that revelations about massive surveillance on Europeans and others are likely to cause the US computing industry. But trying to paint itself as the wronged party here is not going to endear the USTR to European politicians. At a time when Safe Harbor and even the TAFTA/TTIP negotiations are being called into question in the EU, such an aggressive and insulting stance seems a very stupid move.

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Filed Under: cloud, eu, nsa, security, surveillance, trade agreements, ustr

EU Commission's Consultation On Corporate Sovereignty Ignores Key Issue, But Shows That Real Transparency Is Possible

from the close,-but-not-close-enough dept

One of the most dramatic developments in the negotiations for TAFTA/TTIP was the announcement that the European Commission would be holding a consultation on the corporate sovereignty chapter. That was a result of the growing concerns about placing corporations on the same level as nations, and allowing the former to sue the latter for alleged loss of future profits caused by policy changes, for example. Here's what the European Commission has to say on the consultation's home page:

The European Commission is consulting the public in the EU on a possible approach to investment protection and ISDS in the TTIP. The proposed approach contains a series of innovative elements that the EU proposes using as the basis for the TTIP negotiations. The key issue on which we are consulting is whether the EU's proposed approach for TTIP achieves the right balance between protecting investors and safeguarding the EU's right and ability to regulate in the public interest.

It's deeply troubling to see the European Commission admitting that it will trade off the EU's right and ability to regulate in the public interest in order to protect investors, when the former should always be paramount.

The good news is that anyone can submit their comments, and that they have until June 21 to do so; the bad news is that the consultation is purely about the "modalities for investment protection and ISDS in TTIP" -- not about whether it should be present at all. That's particularly surprising given that most of the document is a litany of ISDS's problems (pdf): lack of clarity, uncertainty, opacity, inconsistency, capricious decisions, biased arbitrators, conflicts of interest, frivolous claims, no possibility for appeals -- the list goes on and on. Even though the consultation seeks input on solving these many and serious problems, the overriding impression is that ISDS is a dangerous and irremediable mess.

However, the consultation document does bring one unexpected bonus: official versions of the equivalent sections of the Canada-EU trade agreement (CETA). The Introduction to the consultation explains why:

Each issue is illustrated using reference texts as examples, taken from other investment agreements and from the approach developed in the EU - Canada (CETA) negotiations, which is the most recent text negotiated by the EU.

The implication is that CETA represents the latest thinking of the European Commission on the subject of corporate sovereignty, and that it will form the basis for its approach in TAFTA/TTIP. But there's a big problem with that. As we reported a few weeks ago, the ISDS chapter in CETA is riddled with problems, some extremely serious.

Of course, the European Commission will probably reply that the consultation is designed to rectify problems that people find. Although that's a fair point, it misses a larger one: that you don't bother fixing problems in something you don't need, and the European Commission has failed to make the case that corporate sovereignty is necessary. It's not needed because both sides have extremely well-established and effective legal systems. And it's not needed because even in its absence, transatlantic investment is already taking place on a massive scale -- as the Commission's own page on trade between the US and EU makes clear:

Total US investment in the EU is three times higher than in all of Asia.

EU investment in the US is around eight times the amount of EU investment in India and China together.

EU and US investments are the real driver of the transatlantic relationship, contributing to growth and jobs on both sides of the Atlantic. It is estimated that a third of the trade across the Atlantic actually consists of intra-company transfers.

Specifically, the US has invested 1.344 trillion euros in Europe, while EU companies have invested 1.421 trillion euros in the US. ISDS is not necessary, because there is simply no problem that needs solving here.

Since the European Commission's consultation fails to explore the central question, it is largely a waste of time. However, it does have the huge virtue of showing that transparency is possible: despite this unveiling of the EU's strategy in the area of investment, the sky is not falling. It thus makes clear why openness can and should be extended to all of TAFTA/TTIP, with the possible exception of a few areas where specific figures would need to be withheld for negotiating purposes. Ironically, the consultation document even explains why transparency is vital:

Transparency is essential to ensure the legitimacy and accountability of the system. It enables stakeholders interested in a dispute to be informed and contribute to the proceedings. It fosters accountability in arbitrators, as their decisions are open to scrutiny.

Exactly the same could be said about TTIP, which means that the European Commission's proposals to increase transparency for the corporate sovereignty chapter should also be applied to the entire agreement:

The EU will include provisions to guarantee that hearings are open and that all documents are available to the public. In ISDS cases brought under TTIP, all documents will be publicly available (subject only to the protection of confidential information and business secrets) and hearings will be open to the public. Interested parties from civil society will be able to file submissions to make their views and arguments known to the ISDS tribunal.

If transparency is essential to ensure the "legitimacy and accountability" of ISDS, it's even more vital for TAFTA/TTIP. The release of this consultation on corporate sovereignty is a welcome first step, but it is only that: the US and EU must routinely release negotiating documents -- at the very latest, as they are tabled, and ideally, before that. Failure to do so simply undermines TTIP's "legitimacy and accountability" and means that the widespread and growing rejection of ISDS could well spread to the rest of the agreement.

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Filed Under: consultation, corporate sovereignty, eu, eu commission, isds, trade agreements, transparency

Hundreds Of Thousands Take To The Streets Of Taiwan To Protest Against Trade Agreement's Lack of Scrutiny

from the sound-familiar? dept

One of the key problems with both the Trans-Pacific Partnership (TPP) agreement, and the Transatlantic Trade and Investment Partnership (TTIP), is the lack of scrutiny. Both deals are being negotiated in almost complete secrecy, with very little information being released officially. The justification for this, such as it is, is that the public will have a chance to see the agreements once they are finished, and that this is the appropriate time for transparency. The emptiness of that promise has been shown by the Polish Ministry of Economy's reply to some questions from the Modern Poland Foundation:

all the information the EU member states obtained from the European Commission is classified and it is not possible to pass it on outside the state administration. This also concerns the Foundation's request to access the text of the chapter on IPR and the Polish stance in this matter.

In compliance with the EU practices, the text of the treaty will be made available only in the final stage of the negotiations, after the signing of the document by both parties.

As that makes clear, the public will only get to see TTIP after it has been signed, when it can no longer be changed. The European Commissioners' idea of transparency turns out to be a cruel joke at the expense of the public that pays their not-inconsiderable salaries.

However, TTIP and TPP are not the only trade agreements being negotiated behind closed doors. Another has been concluded between China and Taiwan, with a similar lack of scrutiny. In scenes that recall the demonstrations across Europe when people found that they had no power to change ACTA, hundreds of thousands of demonstrators have taken to the streets of Taiwan's capital city, Taipei:

Large crowds of demonstrators took to the streets of Taipei to protest efforts by the government to approve a trade pact with Beijing and show support for the students who have occupied Taiwan's legislature for nearly two weeks.

Organizers estimated that at least 350,000 people were gathered, as of 2 p.m., on the streets around the Presidential Office Building to express discontent over a pact that would open up dozens of service fields to cross-strait investment. Police counted 116,000 demonstrators by 4 p.m., according to Taiwan's Central News Agency, while some television news stations put the number as high as 700,000.

As the New York Times article quote above explains, a key complaint is the fact that there would be no meaningful scrutiny:

While many demonstrators are opposed to the service trade pact, the most widely held complaint was that the measure has not been sufficiently examined. A poll before the occupation of the legislature indicated that more than 70 percent of respondents supported a line-by-line review of the pact.

That line-by-line review is precisely what granting "fast track authority" to the White House and USTR would make impossible for TPP and TTIP; instead, Congress would have a single "yes" or "no" vote on whether to accept one or both. The ACTA demonstrations in Europe led to the agreement being rejected by the European Parliament two years ago; now it looks like the Taiwanese authorities have also admitted defeat:

On Saturday, [Taiwan's President] Mr. Ma attempted to respond to some of the students' demands, saying he would back an itemized review of the trade pact and a law that would allow the legislature to more closely monitor agreements with Beijing.

In the light of the massive protests that swept through Europe in 2012, and those now filling the streets of Taipei, both of which were triggered by the refusal to allow any meaningful scrutiny of trade agreements that would have major consequences for everyday life, the question has to be: do the USTR and European Commission really want to run the risk of repeating that experience by pushing through TPP and TTIP in exactly the same undemocratic manner?

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Filed Under: china, protests, secrecy, taiwan, trade agreements, transparency

Australia May Soon Regret Giving Up Its Refusal To Accept Corporate Sovereignty In Trade Agreements

from the why-on-earth-did-it-do-that? dept

Back in 2012, we wrote about Philip Morris suing Australia for requiring plain packets for cigarettes. Significantly, the company brought that action under a 1993 agreement between Australia and the government of Hong Kong. That's because Philip Morris was unable to use the far more important free trade agreement with the US, which Australia had wisely insisted should not contain a corporate sovereignty (ISDS) chapter. Given that experience of being sued by a company simply as result of introducing new laws to protect the health of its citizens, it's curious that the newly-installed Australian government seems to be reversing its position:

Australia's new free trade agreement (FTA) with South Korea, promoted as a win for Australian exports, includes a clause that could spell big trouble for Australia's environmental movement and sovereignty.

The FTA, agreed upon by both nations but yet to be ratified by parliament, includes an Investor-State Dispute Settlement (ISDS) provisions that allows overseas investors to challenge threats to their business interests in international courts.

As that article on newmatilda.com points out, if Australia does indeed ratify the agreement with South Korea, it may not have to wait long before ISDS gets used against it:

There are currently three South Korean mining companies in NSW with significant interests in huge and environmentally controversial coal projects.

Because of the environmental damage they cause, there is growing resistance to these kinds of projects in Australia:

Over the past three years environmental campaigners in [New South Wales] have achieved some significant wins against coal seam gas mining companies including in the Northern Rivers, at Fullerton Cove and in the Illawarra and Sydney.

The O'Farrell government has also introduced some legislation, such as the No Go Zones for Coal Seam Gas (CSG) mining in Sydney, and a moratorium on CSG in Sydney Drinking Water Catchments. The [Environment Protection Authority] has also fined, albeit extremely modestly, a number of mining companies for pollution breaches.

These hard fought wins are all in jeopardy if the foreign-owned companies can sue for loss of financial return.

The Australian Fair Trade & Investment Network (AFTINET) notes that the Department of Foreign Affairs and Trade in Australia claims public welfare, health and the environment have been excluded from ISDS in the South Korean agreement, and so there is no reason to worry that Australia will be sued because of environmental action against its coal mines, say. But AFTINET goes on to point out:

Such "exclusions" in the Peru-US Free Trade Agreement and the US-Central America Free Trade Agreement didn't stop the Renco lead mining company from suing the Peruvian government when they were required to clean up their lead pollution, or the Pacific Rim company from suing the El Salvador government because it refused a mining license for environmental reasons. Investors have pursued cases in other countries by claiming the process of developing the law did not include "fair and equitable" treatment for them.

Being sued by South Korean companies could be just the start. There are indications that Australia may also be willing to accept a corporate sovereignty chapter in TPP in exchange for better market access in the other TPP nations for Australian goods. In which case, US companies like Philip Morris wouldn't even have to use obscure treaties to sue Australia, but will be able to do so directly under TPP.

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Filed Under: australia, corporate sovereignty, isds, trade agreements

EU Re-Think Following Discovery Of Major Flaw In CETA Shows The Benefits Of Transparency

from the enough-eyeballs dept

The Canada-European Union trade agreement (CETA) finds itself in a strange situation. Although Canada and the EU announced that "a political agreement" on the key elements had been reached, there has still been no formal release of the text. Fortunately, we have had several leaks of CETA documents, handily gathered on a new site devoted to them (and to those of the TAFTA/TTIP talks). One of the most recent leaks is of the chapter dealing with corporate sovereignty. It's dated February 14, and shows a large number of alternative versions, which indicates that despite the "political agreement", CETA is far from done.

The availability of this very recent text has enabled experts in the field to examine the proposals in detail for the first time. For example, Nathalie Bernasconi-Osterwalder and Howard Mann from the International Institute for Sustainable Development have put together a fascinating analysis of the investor-state dispute settlement (ISDS) chapter, and of an earlier investment chapter leak from November 2013 (pdf). They've compared them with a document released by the European Commission in December last year, which gave some explanation of the claimed improvements to corporate sovereignty provisions (pdf). The availability of the draft texts allowed Bernasconi-Osterwalder and Mann to check the claims against the reality. Here's their summary:

In the end, and whatever the reason for the disconnect, we conclude that the actual draft legal texts in the public domain show that the European Commission's assertions are in most respects incorrect when compared to the draft legal text. The technical legal analysis is set out on each specific point below. In effect, the analysis indicates that the standards by which the European Commission itself seeks to demonstrate the success of the drafting actually show that the drafting has failed to meet its stated objectives, in fact, sometimes with the exact opposite result.

It's a really thorough analysis, and well-worth reading. But here I want to pull out just one aspect of ISDS, hitherto rather neglected. It concerns what is known as "Most Favored Nation" status:

The European Commission statement simply does not refer to what is known as the most-favoured nation (MFN) treatment clause. Yet, this clause alone is sufficient to undermine all of the objectives the European Commission states it seeks in the drafting. The reason why is explained here.

Article X.8 of the November 2013 draft [of CETA's investment chapter] contains the MFN provision. In essence, it requires, for present analytical purposes, a European state to treat a foreign investor from Canada no less favourably than it treats an investor from any third state. The problem arises from the legal reality that such treatment has been defined in investment arbitrations as including the rights of other investors under investment treaties with the host state. So, if an EU member state that has a Canadian investor also has a treaty with an African, Latin American or any other state, the investor from Canada can import the provisions of that treaty if they are more favourable than the provisions of the CETA.

The impact of this is straightforward. The European Commission statement [published in December] notes the need to "bring very significant clarifications" in order to give arbitrators "strict and detailed guidance when these provisions are invoked by an investor." Now, we have already seen from the preceding analysis that this objective has not been met in the November 2013 draft text. But let us suppose, for the sake of understanding the current issue, that it had been met. The MFN provision would in any event undo this.

That's because Canadian investors could simply invoke the MFN provision, and demand to be allowed to use earlier rights that ignore the claimed improvements to ISDS. And yet the European Commission was completely unaware of this fact until recently, as reported by the Council of Candians in a blog post:

According to Rupert Schlegelmilch, director of services, investment and procurement at DG Trade [in the European Commission], speaking on behalf of the Commission at a public debate yesterday on investor-state dispute settlement (ISDS) and the TTIP, the EU is rethinking a "Most Favoured Nation" (MFN) article in the CETA investment chapter that new analysis suggests undermines much of the more careful language in the treaty relating to a government's ability to regulate. As written, the MFN article would let Canadian and EU investors ignore the definitions of "fair and equitable treatment” or "indirect expropriation" in CETA and take other more investor-friendly language from past agreements signed by either party.

It's not clear whether the European Commission woke up to this huge loophole as a result of the International Institute for Sustainable Development analysis, although this seems likely given the timing. But the key point is that the incident raises the larger question:

"What other mistakes have the Commission and Canadian government made in CETA that compromise the ability of governments to make environmental, public health and consumer protection policies without worrying they will be sued in private arbitration, behind closed doors?" asks Stuart Trew, trade campaigner with the Council of Canadians

We don't know, because we don't have a full copy of the latest CETA draft. If we did, then independent experts could go through it and warn of other flawed passages, thus avoiding serious problems in years to come when it is too late to change anything.

This, then, is another key reason why negotiating texts must be made available as they are drafted, not after they have been signed: Linus' Law, that "given enough eyeballs, all bugs are shallow," applies to international agreements as well as to software code. But the big difference is that for programming, it's a question of how well code runs; with things like CETA, TTIP and TPP, what's at stake is the potentially huge economic and social damage that can be caused by loopholes and carelessly-worded clauses in these far-reaching international agreements.

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Filed Under: canada, ceta, corporate sovereignty, eu, isds, tafta, trade agreements, transparency, ttip

Free Trade Supporter Cato Institute Says Drop Corporate Sovereignty Provisions In Trade Agreements

from the so-that's-everyone,-then dept

Even though the formal negotiations for TAFTA/TTIP have begun only recently -- earlier meetings were largely exploratory -- it is already clear what the most contentious chapter will be: that dealing with corporate sovereignty, or "investor-state dispute settlement" (ISDS) as it's more formally known. Indeed, even back in January, ISDS was generating so much negativity that the European Commissioner responsible for TTIP, Karel De Gucht, decided to pull the corporate sovereignty chapter from the negotiations for a three-month EU consultation in an attempt to draw the sting from the criticisms.

It hasn't worked. As the Financial Times noted this week (subscription or registration required):

Faced with an increasingly vocal opposition to a landmark EU-US trade agreement, a growing number of backers of the deal are starting to ask a simple question: might the future of transatlantic trade be better served if one of its most controversial provisions was simply dropped?

Almost nine months after negotiations opened with great hope and fanfare, opponents of the mooted Transatlantic Trade and Investment Partnership, or TTIP, are rallying against a plan that would allow private investors to use the pact to sue governments if they felt local laws threatened their investment.

One fan of free trade agreements is Daniel Ikenson, director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute. He's written a great post on the Cato Institute Web site with the title: "A Compromise to Advance the Trade Agenda: Purge Negotiations of Investor-State Dispute Settlement." As he points out with reference to the faltering TPP negotiations (but it applies equally to TAFTA/TTIP):

Characterizations of the TPP as a scheme to boost the fortunes of tobacco, oil and gas, banking, and pharmaceutical companies at the expense of worker protections, the environment, public health, and food and product safety have gone viral. And without so much as a single public repudiation of these claims by the president those perceptions are sticking.

As is true of most populist causes, buried beneath the enabling mythology and hyperbole are some kernels of truth. One such truth, which this paper seeks to distill from the vacuous, anti-capitalist hyperventilation surrounding the trade agenda, is that the so-called Investor-State Dispute Settlement (ISDS) mechanism, which enables foreign investors to sue host governments in third-party arbitration tribunals for treatment that allegedly fails to meet certain standards and that results in a loss of asset values, is an unnecessary, unreasonable, and unwise provision to include in trade agreements. Although detractors may not know it by name, ISDS is a significant reason why trade agreements engender so much antipathy. Yet, ISDS is not even essential to the task of freeing trade. So why burden the effort by carrying needless baggage?

Purging both the TPP and the TTIP of ISDS makes sense economically and politically, would assuage legitimate concerns about those negotiations, splinter the opposition to liberalization, and pave the way for freer trade..

After filling in the historical background to corporate sovereignty provisions in free trade agreements, Ikenson then goes to offer what he calls "Eight Good Reasons to Drop ISDS from TPP and TTIP":

First, ISDS is overkill. Governments are competing to attract productive investment to keep their citizens employed and their economies growing. Accordingly, it is imperative to maintain smart, transparent, predictable policies that are administered fairly and nondiscriminatorily. Asset expropriation or other forms of shabby treatment of foreign companies is not likely to be rewarded by new investment.

We don't need corporate sovereignty provisions to protect investors in foreign markets because those same companies will soon shun any country where investments are seized or investors discriminated against. It's true that such investments can be risky, but Ikenson points out that multinational companies (MNCs) are actually rather good at managing that risk. And if they're really worried, they can always take out private insurance.

Second, ISDS socializes the risk of foreign direct investment. When other governments oppose, but ultimately concede to, U.S. demands for ISDS provisions, they may be less willing to agree to other reforms, such as greater market access, that would benefit other U.S. interests. That is an externality or a cost borne by those who don't benefit from that cost being incurred. In this regard, ISDS is a subsidy for MNCs and a tax on everyone else.

It is not just other companies that are subsidizing MNCs, but also the public, which must bear most of the burden of corporate sovereignty's costs. That's because awards to foreign investors that sue and win against national governments are paid out of taxes. But the benefits of ISDS only accrue to those companies actually investing abroad.

Third, ISDS encourages "discretionary" outsourcing.

This is an interesting point. Corporate sovereignty is designed to make investing overseas less risky and more attractive. But the ironic effect of this is to make the US less attractive as an investment. As Ikenson says:

Access to ISDS could be the decisive factor in a company's decision to invest in a research center in Brazil, instead of the United States. Why should U.S. policy reflect greater concern for the operations of U.S. companies abroad than for the operations of U.S. and foreign companies in the United States? Why should ISDS effectively subsidize outsourcing, and not insourcing?

His next point has been made by a number of commentators:

Fourth, ISDS exceeds "national treatment" obligations, extending special privileges to foreign corporations.

Corporate sovereignty has the effect of giving foreign corporations more privileges than domestic ones -- hardly a policy aim for either the US or EU here.

Fifth, U.S. laws and regulations will be exposed to ISDS challenges with increasing frequency.

This is hugely important, because it exposes the fact that the current push for corporate sovereignty is based on a naïve extrapolation from current corporate sovereignty experiences. Hitherto, ISDS has been a weapon for Western countries to deploy against developing nations -- something that has few downsides. But if corporate sovereignty is included in TTIP, say, we will see US companies routinely challenging EU laws and regulations -- and EU companies challenging US laws and regulations. Suddenly, Western nations will be the victims, as well as the bullies.

Sixth, ISDS is ripe for exploitation by creative lawyers.

This will come as no surprise to Techdirt readers, who have seen post after post about the abuse of the patent system by trolls and their lawyers. Introducing a supranational legal system with ill-defined rules will produce a new class of more aggressive and better-funded trolls attracted by the even higher stakes involved when the defendant is not just a company, but an entire country.

Seventh, ISDS reinforces the myth that trade primarily benefits large corporations.

Some might argue that's no myth, but Ikenson is right: the revolt against corporate sovereignty and the power that it might give transnational companies is now such that the entire TAFTA/TTIP agreement is in doubt -- recently, the influential German news magazine Der Spiegel wrote: "The battle for TTIP seems as good as lost" (German original.)

Eighth, dropping ISDS would improve U.S. trade negotiating objectives, as well as prospects for attaining them.

The idea here is to divide the opposition to TAFTA/TTIP by sacrificing ISDS. The hope is that enough organizations and people will then support the agreement, isolating those that still do not. Yes, it's cynical, but it's also a sensible approach for those in favor of such trade agreements. Ikenson concludes:

For practical, economic, legal, and political reasons, ISDS subverts prospects for U.S. trade liberalization. Yet it is tangential, at best, to the task of freeing trade. Any benefits to availing MNCs to third-party adjudication are all but totally overwhelmed by the additional costs. In the proverbial airplane that is down one engine and losing altitude, throwing ISDS out of the cargo hold to reduce unnecessary weight is the best solution.

It's a great piece, cogently argued, that is particularly important given the affiliations of the author. Quite apart from the specific reasons it lays out as to why corporate sovereignty should go, its mere existence is proof that ISDS now lacks support across the entire political spectrum. Time to drop it.

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Filed Under: corporate sovereignty, daniel ikenson, free trade, investor state dispute resolution, isds, tafta, tpp, trade agreements, ttip