FREE TRADE AND LEGISLATION FOR SUSTAINABILITY

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By Elze van Hamelen (C13)

Published 5.14.15

What bar will we set for a level playing field for international trade?


The US is currently negotiating free trade deals with the EU (Transatlantic Trade and Investment Partnership, or TTIP) as well as the Trans-Pacific Partnership (TPP) with Canada and multiple Asian countries, not including China. If ratified, these agreements will impede or stop progressive legislation in support of sustainability.

Why free trade agreements are bad for workers and the environment

In economic theory, free trade agreements are thought to bring participating nations economic benefits because of comparative advantage. As Donnella Meadows explainscomparative advantage arises when goods are able to move freely between countries. However, the reality in a globalized world is that capital is able to move freely too – and capital will move where there is absolute advantage. Faced with a choice to produce the cheapest product or no product at all, any legislation that may increase price, such as laws regarding environmental protection, workers’ rights, minimum wage and so on are actively discouraged. The result is a level playing field at the lowest possible bottom.

Experiences with NAFTA demonstrate this effect. NAFTA resulted in a loss of workers’ rights and a downward pressure on wages. Jeff Faux in the Huffington post: In the global trade system initiated by NAFTA, any job that can be done with a computer can be out-sourced, unless American workers are willing to work at the wages of Mexico, India or China.

In 2014 the Sierra Club reported about the social and environmental consequences of NAFTA: it was a stimulus for exports in fossil fuels – creating a boom in mining in Mexico and enabling the recovery of oil from tar sands in Canada by undermining legislative capacities for regulation – thus increasing pollution, greenhouse gas emissions and habitat destruction; it facilitated export-oriented large-scale farming while pushing out small farmers, many of whom became undocumented migrants in the US; and it weakened domestic environmental standards, which did not provide protection against the increase in water and air pollution that accompanied economic growth.

Both trade deals, TPP and TIPP, are modeled after NAFTA. Therefore, there is no reason to assume that the consequences of the deals will be different. Robert Reich, economist and former Secretary of Labor under the Clinton administration, foresees:The plain fact is that the Trans-Pacific Partnership is going to undermine all sorts of labor protections as well as consumer and environmental protections.”

Winners and Losers

Classic economic theory on comparative advantage acknowledges that by opening up trade, there will be winners and losers, and that losers should be compensated. Not only have such compensations been absent, in effect the system has rewarded winners rather than redistribute gains to losers. There is academic consensus that US trade deals have significantly increased income inequality. In his series on inequality, Nobel laureate and former chief economist at the World Bank Joseph Stiglitz argues that “every new policy, program or law should be examined from the perspective of its impact on inequality […] Trickle-down economics is a myth. Enriching corporations — as the TPP would — will not necessarily help those in the middle, let alone those at the bottom.

Undermining legislative processes at all state levels: Regulatory cooperation and investor-state dispute settlement (ISDS)

As tariff barriers around the world are already low, the trade deals are specifically focused on removing non-tariff barriers – meaning, among other things, barriers created by legislation. Between the EU and the US, this poses a fundamental challenge. Federal US legislation and EU legislation are often diametrically opposed: the US puts the burden of proof of suffering from detrimental effects of businesses and their products on the consumer; the EU pursues the “polluter pays” principle. The US is fanatically opposed to the precautionary principle; in the EU it forms the basis of chemical regulation, REACH (Registration, Evaluation, Authorization and Restriction of Chemicals).

A level playing field is supposed to be created through regulatory cooperation through which decisions about hairy subjects are postponed until after signing the TTIP deal. Procedures proposed in leaked documents include the obligation of regulators to discuss with businesses any regulation with an effect on trade; requirements of cost-benefit analyses that assess the effects of any regulation on trade—at taxpayer expense; direct access for lobbyists to the European Commission advisory groups; and a “Regulatory Cooperation Council” to oversee the legislation process.

ISDS clauses, included in both the TPP and TTIP drafts, have been widely used by corporations to sue nations for changes in legislation that had a negative effect on anticipated profits. For example, Philip Morris has sued Uruguay over its anti-smoking laws. Even the Economist has argued against ISDS clauses. ISDS lawsuits take place outside the public legal system, do not have any democratic oversight, and have no option for appeal; they do not build jurisprudence, nor are the tribunals independent. Yet these tribunals can overrule legislation that came about through democratic processes, and force nations to pay billions. For examples of ISDS cases, see this link.

A trade deal with such premises will not only stall existing legislative processes; because of fear of multi-billion-dollar claims, it will have a dampening effect on much-needed progressive future legislation. A case in point was illustrated by Bas Eickhout, a member of the European Parliament, in a discussion about TTIP: the ban on tar sand oil was removed from the EU Fuel Quality Directive after it was perceived as a threat to the trade negotiations between the EU and Canada (CETA).  This effect will also be palpable in the US: although the legislative process has stalled on a federal level, there are multiple states with progressive environmental legislation. These states may well face lawsuits – for example, through claims by which they are forced to compensate losses attributable to moratoria on hydraulic fracking, or to remove these moratoria altogether

The lack of science underpinning the proposed benefits

Proponents of the trade deals say that they will create growth. However, economist Jeffrey Sachs warns that “the Obama administration has not presented one analysis of the cost and benefits with regard to jobs, different industries, income distribution, economic growth and trade.”

In the EU, the reports with positive predictions, presented by the European Commission, have been criticized by economists for their lack of depth and not taking into account important parameters. According to Professor Clive George, a senior economist at the University of Manchester: “Economic models, on which such estimates are based … have been described by some of the leading modelers as ‘highly speculative.”

Growth, for whom? 

The widespread argument in favor of trade deals is that they will create growth, jobs and exports. And to some extent, they do. However, it is important to take a closer look and ask – growth for whom, and of what? The Great Recession saw a recovery in jobless growth accompanied by a surge in income inequality. What kind of growth are we talking about? Will it translate into jobs for people earning middle and low incomes?

NAFTA, the model for TTP and TIPP, while creating some growth, “directly cost the U.S. a net loss of 700,000 jobs (the promise was the creation of 200,000 jobs). […] The surplus with Mexico turned into a chronic deficit.” Adding to that, Robert E. Scott mentions in the Economic Policy Institute blog that the “U.S.-Korea Trade Deal (KORUS) resulted in growing trade deficits and nearly 60,000 lost jobs.” The TPP will likely have a similar effect.

The agenda of proponents

If the evidence is weak for purported benefits of trade deals such as growth and job creation, why is there such a push for them? Besides the financial benefits of deregulation, TPP and TIPP have some other perks:

  • Geopolitics: With the power of both the US and the EU receding, trade deals that exclude China may partially redistribute the balance of power. And though the differences between the EU and the US are vast, they are much more similar in comparison to China.
  • Defense: TTIP will likely facilitate and increase defense trade between the US and the EU.
  • Oil and gas exports: The EU is largely dependent on Russia for its gas, and it would like to shed this dependency. Therefore, it has been pushing the US to open up trade for energy exports of gas and oil.
  • IP protection to increase monopoly rents: Two years ago, the Anti-Counterfeiting Trade Agreement (ACTA) was rejected in European Parliament on the grounds that it would infringe on people’s privacy and right to access information and restrict access to medicines in developing countries. Some NGOs mention that TTIP is slipping ACTA through the back door.
  • Tax evasion: Freer movement of capital also means an increased ability to avoid paying taxes by moving capital to locations where tax structures are most beneficial.
  • Financial deregulation: Past trade agreements have restricted the use of capital controls. Leaked documents suggest that TTIP and TPP would make it easier for banks to sell risky derivatives, partly reversing the financial regulation implemented through the Glass–Steagall Act. A stimulus in this kind of speculative and unregulated trade also means a push to the next financial crisis.

Balancing State and Market 

With mixed success, and much instability and criticism, the European Union is coming to terms with how to manage the open market of the EU. Markets do not function by themselves; they need rules and regulation.

As 30 years of neo-liberalism teach us, markets do not act in the interest of the common good. To quote George Soros“Markets are designed to facilitate the free exchange of goods and services among willing participants, but they are not capable, on their own, of taking care of collective needs such as law and order or the maintenance of the market mechanism itself. Nor are they competent to ensure social justice. These ‘public goods’ can only be provided by a political process. […] Markets are amoral: They allow people to act in accordance with their interests, but they pass no moral judgment on the interests themselves.” 

Balancing a free market with regulation is a grand issue that the EU has struggled with since it opened up its borders. The issues that a free market between the US and the EU, and the US and the Pacific, will create should not be underestimated. The TPP and TTIP trade deals should include clear provisions about how the common good will be protected, for existing and future regulations, including a provision for independent legal and democratic institutions to which the public can appeal in case of grievances.

Sachs recommends: “[There] should be a clear statement about the primacy of every country's sovereign right and responsibility to pursue sustainable development over specific clauses of trade and investment that might be agreed.”

The negotiation processes and the lurid lack of transparency

The processes in which these trade deals are being developed are characterized by a lack of transparency and intensive corporate lobbying. In preparation for the TTIP negotiations, business lobbyists were grossly overrepresented in “stakeholder” encounters with the EU, making up 92% of consulted interest groups (Corporate Europe Observatory). In response to public outcry, the EU created some transparency on TTIP starting January 7 2015. Before this date, most of the known content has come from documents leaked in Brussels; we still know little about the position of the US. Even members of the European Parliament do not have access to the full content of trade deal. Yet, when the draft is finished, EP’s can only vote for or against the entire deal, not parts of it.

In the US, the negotiations have been equally shrouded in secrecy, except for the members of the official US trade-advisory system, 90% of whom represent industry interests. Unions have voiced their concern about not being able to influence TPP in a meaningful way. It is in this light that opponents of the trade deals, such as Jeffrey Sachs, Joseph Stiglitz, Robert Reich and many NGOs, argue that they foster a deregulation agenda, driven by corporate interests.

In the State of the Union address Obama asked for fast-track authority for TTIP and TPP. This would mean that Congress can only approve or reject the deal, and not request revisions or amendments. With a legislative proposition of congressional leaders, Obama got one step closer to achieving fast-track authority for TPP on April 16.

Democracy?

It is alarming that the two regions that birthed modern democracy and advocate its values of liberty, rule of law and protection of the individual feel justified to negotiate such impactful deals in secrecy. It showcases the democratic deficit on both sides of the Atlantic, and how politics have been hijacked by corporate agendas. When corporate lobbying dominates politics, politics will serve a corporate agenda, not public interest or the common good.

Design principles for sustainable trade

Trade deals such as NAFTA, KORUS, TTIP and TTP have a single-bottom-line focus, and are outdated in an era when we face multiple global crises – climate change, resource depletion and biodiversity loss against a booming population. We need business as a driver to help solve these crises – not exacerbate them. The current system is challenging for businesses that aim to have a positive impacts, and rewards those that do not. It is the rules that are imposed on businesses that will help them pursue a sustainable or unsustainable strategy.

When Amsterdam’s population quadrupled in the course of a century, and plans were laid out for the city’s expansion, limits were placed on the maximum size of lots that were sold. You will find no exorbitantly large houses in the city’s inner center. Additionally, taxes were levied based on the breadth of the houses, which is why they are so narrow. These simple rules, which still dominate Amsterdam’s landscape to this day, have created a livable city for more than 300 years. What kind of trade design principles will get us to a sustainable future?

At a minimum, a 21st-century-proof trade agreement should take into account the effects on the environment, labor, inequality, climate change and resource depletion. And, true to trade theory, it should include mechanisms to compensate losers.

Looking for a solution

Firstly, we need a broad public discussion on the content of the documents. We should be discussing protection of existing rules and regulations, such as those relating to food safety, use of chemicals and moratoria on fracking; the institutions that will regulate the new markets; and, more importantly, how future regulation will be treated under TPP and TTIP.

Secondly, since this deal is going to supersede national sovereignties, more transparency and democratic consultation is merited—for instance, through referenda.

Lastly, the purpose of a trade deal is to create a level playing field. What if, instead of hollowing out existing environmental and labor protections, we set that level high and give a boost to sustainable trade and innovation?

Elze van Hamelen (C13)

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