[A2k] FT: Trade deals: Toxic talks

Thiru Balasubramaniam thiru at keionline.org
Mon Oct 6 23:10:37 PDT 2014


October 6, 2014 6:31 pm
Trade deals: Toxic talks

By Shawn Donnan
Critics claim that international arbitration has morphed into a weapon that
multinationals wield to threaten and influence


Australia’s insistence that cigarettes be sold in drab olive packaging with
warning labels featuring tar-stained lungs and malignant tumours set a
precedent for public health officials around the world. With a substantial
decrease in the number of Australians lighting up and other countries such
as France, Ireland and the UK poised to follow suit, the health policy
battle seems largely won.

But the impact of Australia’s 2011 plain packaging law is reverberating far
beyond the world of public health. The battle provoked by the law change
has strayed in to global trade and investment policy.

Shortly after the measure passed parliament, the tobacco industry began a
legal assault that continues to this day. Cigarette makers filed a suit in
Australia calling the new law unconstitutional. Countries such as Indonesia
and Ukraine – siding with the tobacco industry – brought cases against
Australia in the World Trade Organisation, arguing that it violated global
trade rules.

But the industry also took a second, more unconventional legal avenue. In
June 2011, shortly after the law was agreed, tobacco group Philip Morris
International <http://markets.ft.com/tearsheets/performance.asp?s=us:PM>
invoked
the dispute clause in a 1993 investment treaty between Australia and Hong
Kong. Unless an “amicable settlement” could be found, it said, it would
circumvent the Australian legal system and seek compensation before an
international arbitration panel for what it called the government’s
“expropriation” of its intellectual property.

By neutering its brands, Australia had destroyed the value of its
investments in the country , the tobacco company claimed, adding: “Legal
action is not a course we take lightly, but the government has
unfortunately left us with no other option.”

The case remains un resolved. But its importance has grown in the past
three years amid an escalating global debate over the role international
arbitrators should play in deciding, or resolving, investment disputes
between countries and multinational companies.

Business groups insist the global arbitration system, in place for more
than 50 years and shaped, by some 4,000 bilateral investment treaties,
offers legal protections to foreign investors. Without it, they say,
investors are vulnerable to local court systems and the whim of governments.

However, a growing number ofcritics point to a surge in cases over the past
decade arguing the system has morphed from a legitimate way for foreign
investors to challenge extreme injustices such as expropriations, into a
way for them to threaten, or influence, government regulations and even
policy.

In the past year Indonesia and South Africa – both of which have been on
the receiving end of punitive judgments in investor arbitration cases –
have said they would either end, or allow to expire, all their bilateral
investment treaties
<http://www.ft.com/cms/s/0/3755c1b2-b4e2-11e3-af92-00144feabdc0.html?siteedition=uk>
containing
such dispute clauses.

The threat comes as the US, EU, Japan and other big economies seek to
complete trade agreements that include protections for investors. The
debate looms large over the EU-US trade talks.
<http://www.ft.com/cms/s/0/a290b1d2-ed66-11e3-8a1e-00144feabdc0.html?siteedition=uk>It
casts an even longer shadow over investment negotiations with China, where
foreign companies are coming under increasing – and some argue unfair –
regulatory scrutiny even as Beijing complains about the treatment its own
companies receive overseas.

The debate is at its most lively in Europe, where
<http://www.ft.com/cms/s/0/671841da-44c1-11e4-bce8-00144feabdc0.html?siteedition=uk>the
European Commission is wading through more than 150,000 submissions after a
public consultation on its plans to include what is technically known as an
“investor-state dispute settlement” or ISDS, in the US agreement. Germany
has already said it will seek to strip out the right of foreign investors
to seek international arbitration from an EU trade deal nearing conclusion
with Canada and the far-bigger one being negotiated with the US.

When Cecilia Malmström, the Swede set to become the EU’s next trade
commissioner, appeared before the European Parliament for her confirmation
hearing last week she spent most of it fending off questions on ISDS.

“It is indeed a very toxic issue in this parliament and elsewhere,” Ms
Malmström told the international trade committee.

In the hearing she suggested the ISDS mechanism could be left out of the pact
with the US, but made clear
<http://www.ft.com/cms/s/0/d7e2b408-47f1-11e4-b5ad-00144feab7de.html?siteedition=uk>that
she believed they were a legitimate means of settling commercial disputes.

“I agree that there are problems with ISDS because there have been abuses,”
she told the trade committee. “But [investment treaties] exist. We can’t
just think them away globally.”

American officials remain convinced of the need to include investment
protections in any transatlantic pact. They also insist – as does Ms
Malmström – that the goal is to close loopholes in existing bilateral deals
and set a high standard for future trade agreements.

James Bacchus, a former Florida congressman who heads the International
Chamber of Commerce’s committee on investment policy, says the system works
better than its critics allow. While opponents have latched on to cases
such as Philip Morris’ against Australia the fact is, Mr Bacchus says, that
most rogue cases do not succeed.

“It is very easy for lawyers to invent reasons to bring a lawsuit. It is
much harder for them to win one,” he says.

More importantly, he argues, that, with investment negotiations looming
with China, both the EU and the US need to stay their course.

“How in the world can the US and Europe expect the rest of the world to be
bound by investment rules if they are unwilling to be bound by investment
rules themselves?” he says.

Over the past six decades EU member countries have signed more than 1,400
bilateral investment treaties, the vast majority of which allow for
investors to seek international arbitration in the case of disputes. And EU
companies account for most of the cases filed using ISDS mechanisms.
According to the UN Conference on Trade and Development, by the end of
2013, 568 ISDS cases involving 98 countries had been filed. EU companies
were responsible for more than half of those cases.

But the system remains opaque, masking its success or failure rate. That
murkiness is part of a bigger problem. Owing to the vague nature of the
dispute clauses in many existing treaties, they have often been open
to abuse. Hearings, documents and judgments often remain private. They also
contain loose definitions of grounds under which foreign investors may seek
compensation. Taken together, those loopholes have allowed lawyers to
exploit the system and led to a surge in cases, critics argue.

The European Commission, which gained responsibility for EU investment
policy in 2009, argues it is trying to clean up the mess with new
agreements.

The first dispute resolution mechanism negotiated by the EU – in the deal
with Canada – runs to 22 pages and includes requirements for all hearings
and documents to be public. But critics argue it still allows
multinationals to circumvent local courts and raises the possibility of
many more cases.

The problem, says Matthew Rimmer, a law professor at Australian National
University, a leading critic of investor protection clauses, is that too
many areas of government remain open to challenges. “The troubling thing
with all those agreements is they still have an expansive view of what an
investment is,” he says.

Critics argue this can lead to “regulatory chill” where governments, afraid
of having to fight such cases, stop themselves from introducing regulations
or passing laws.

That fear is fuelling European criticism. In Germany much of the opposition
to the clauses has sprung from a case brought by Vattenfall, the Swedish
energy group, over the abrupt changes in policy that Berlin pushed through
<http://www.ft.com/cms/s/0/02d594d8-29d8-11e4-914f-00144feabdc0.html?siteedition=uk>after
the 2011 Fukushima nuclear disaster in Japan.

In France environmentalists have raised the prospect of US oil companies
suingunder a transatlantic trade pact’s ISDS clause to overturn future bans
on “fracking” for shale gas or oil. British trade unions say they fear the
potential impact on the National Health Service. The simple threat of
multi-million-dollar lawsuits brought before international arbitration
panels, they argue, might pre-empt any efforts by future governments
to keep drug prices low, for instance.

The problem business groups and other advocates face is that the opposition
is increasingly organised and drawing together sometimes unexpected
ideological bedfellows.

Liberal economists such as Nobel laureates Joseph Stiglitz and Paul Krugman
argue that ISDS mechanisms undermine the sovereignty of nations. The
libertarian Cato Institute has also weighed in to demand that investor
protections be stripped out of a proposed EU-US pact.

Daniel Ikenson, who heads the Washington-based think-tank’s trade division,
argues that investor protections in bilateral treaties and trade agreements
amount to a corporate subsidy that has encouraged the “discretionary
offshoring” of American jobs. He also argues that they ought to be ditched
from trade talks because they have become such an obsession of
anti-globalisation activists that they are now “toxic”.

Critics such as Mr Stiglitz point out there are plenty of other options for
businesses to insure against political risk when they make foreign
investments. The World Bank houses the International Centre for Settlement
of Investment Disputes, where many of the ISDS cases in the world are heard.

There is also a legitimate question over just how much investment treaties
– and investor protection clauses – do to lure foreign investors. Neither
Brazil nor China have many treaties in place, yet both have attracted
enormous amounts of foreign direct investment.

UN economists studying whether investment treaties promote FDI found that
other factors were often more important. Investment agreements “cannot
substitute for sound domestic policies,” the UN Conference on Trade and
Development found.

Six years after the global financial crisis it is hard to find a government
that is not going out of its way to lure foreign investment. Even as the
debate on just what they have to do to attract investors, and what
protection they need to offer them, is only really getting started.

*Germany: The chicken that sparked a trading spat*

Nowhere is the debate over the EU’s planned trade pact with the US more
passionate than in Germany
<http://www.ft.com/cms/s/0/671841da-44c1-11e4-bce8-00144feabdc0.html?siteedition=uk>.
And nothing has stimulated more passion than the humble chicken, *writes
Stefan Wagstyl*. Transatlantic Trade and Investment Partnership critics
claimed that the proposed deal would open EU supermarkets to
chlorine-washed US chickens. They insisted such birds were a consumer
health risk.

It took chancellor Angela Merkel’s personal intervention to lick the
chicken campaign: she promised that the pact would not affect the EU’s
chlorine-washing ban.

But her pledge has done little to slow the anti-TTIP campaign. The critics
are now focusing their attacks on investor protection rules, which would
allow companies to appeal to international tribunals. The campaign’s energy
has created the impression that Germans are against TTIP. They are not. A
Pew Research poll this year showed 55 per cent backed the pact, with 25 per
cent against. But with a further 20 per cent uncertain, TTIP’s opponents
sense there is plenty to fight for.

Ms Merkel’s government is committed to TTIP and to the Comprehensive
Economic and Trade Agreement, the planned trade pact with Canada. But the
agreements require parliamentary approval, so creating hope for critics.

The parliamentary assaults are spearheaded by the opposition Linke, the
far-left party, with some support from the Green party, which wants a
rethink of both deals to give more weight to consumers’ rights.

The campaigners appeal to popular concerns about globalisation, the
infringement of sovereignty, and the protection of consumers, workers and
the environment. Sahra Wagenknecht, Linke’s deputy parliamentary chief,
said: “Fundamentally, these undemocratic free trade agreements which
threaten the general good must be stopped.”

The anti-TTIP lobby has also capitalised on a resurgence of
anti-Americanism driven by whistleblower Edward Snowden’s revelations of
widespread US secret surveillance.

TTIP’s backers are led by Ms Merkel’s CDU/CSU conservatives, who argue that
Germans will benefit hugely from the increased trade the pact would bring
and the opportunity to develop global commercial standards, including for
investor protection. Michael Grosse-Brömer, the CDU chief whip, told the
Financial Times: “The biggest advantage is that when the EU and the US make
this deal, it will include standards which can be applied worldwide.” The
BDI, the German business association, says that investor protection is
“essential” for export-oriented German companies.

However, Ms Merkel’s social democrat coalition partners are divided. Sigmar
Gabriel, vice-chancellor, told parliament last month that while free trade
was good, investor protection rules would give “unnecessary” and “unfair”
extra help to multinationals.

The SDP is split between globalisation-wary leftwingers and rightwingers
worried that a failed TTIP could hurt the EU’s economic clout and damage
transatlantic ties. As a former SDP minister says: “If TTIP collapses, the
political backlash could last 10 years.”



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