Missing Words For The New Trade Debate

With their ranks strengthened by the last elections, Congressional critics of free trade finally have the chance to go on the offensive. House Democrats have unveiled a “New Trade Policy for America” that, while short on details, clearly breaks with the Bush Administration in some significant ways.

Much to the corporate lobby’s consternation, the plan would strengthen enforcement of internationally recognized labor rights and environmental accords. Big Pharma is particularly riled up over a proposal that might weaken their monopoly patent rights over basic medicines in impoverished countries.

However, the Democrats’ agenda falls short in a number of areas. One of the most glaring: the lack of a plan to get rid of wildly excessive investor protections. They can sue over alleged violations of a long list of protections, the most controversial of which guard against government actions, including environmental and public health laws, which diminish the value of their investment.

While they cannot force a country to change its laws, they can award massive damages to the investor. And just the threat of such an expensive lawsuit can have a chilling effect. Canada, for example, repealed an environmental health regulation in the face of a suit by a U.S. corporation.

Nobel economist Joseph Stiglitz, who promoted NAFTA while working in the Clinton White House, now claims to have been oblivious to the deal’s investment rules. In a recent speech, he explained that

“It was only after it passed that the potential consequences of this agreement became clear. Chapter 11 included a regulatory takings provision that allowed investors to sue states, with damages paid by the national governments. The question was: if the United States signed on to an agreement without knowing what it was agreeing to, what did this say about other countries?”

Indeed, Pakistan’s Attorney General recently admitted that his country has unwittingly locked itself into bilateral investment treaties that have proliferated around the globe with similar investor protections as in NAFTA. “These are signed without any knowledge of their implications,” he said. “And when you are hit by the first investor-state arbitration you realize what these words mean.”

Developing countries have taken the biggest hits. Argentina has faced more than 30 investor lawsuits in recent years, most of them over measures to lessen the pain of the country’s economic meltdown. A U.S.-based gas company, for example, sued over a 2002 emergency law that froze utility rates to protect consumers from runaway inflation. The company, CMS Gas, was awarded $133 million.

Occidental Petroleum filed a suit against Ecuador after the government pulled the plug on the firm’s scandal-plagued oil operations. International activists helped pressure Bechtel to settle a suit over a water privatization fiasco in Bolivia, although the poorest South American country had to spend scarce resources on a five-year legal fight. European investors are targeting post-Apartheid affirmative action policies that require mining companies to have some black South Africans in management.

While more than 90 percent of such “investor-state” cases have been against developing countries, the United States is not immune. California legislators got an eye-opener when a state ban on a groundwater-polluting fuel additive became the target of a Canadian company’s $1 billion NAFTA lawsuit. The case was eventually dismissed, but only after the U.S. government spent an estimated $3 million in legal costs. And now California is facing another expensive case against a regulation to reduce the environmental damage of a gold mining project.

The number of cases against the United States is sure to climb, since these outrageous investor protections are now included in U.S. trade agreements with 14 countries and 40 U.S. bilateral investment treaties. One important exception is the 2004 U.S.-Australian free trade agreement. That country’s negotiators appear to have actually read the investment provisions and had the clout to reject them.

Despite a growing backlash, U.S. trade negotiators insisted on including similar investment provisions in trade pacts with Peru, Colombia, Panama and Korea that are now awaiting Congressional approval. The current impasse over these deals, along with the upcoming fight over renewal of “fast track” trade authority, offers Congress an important opportunity to take a stand against excessive investor rights

The Democrats’ initial steps are positive, but if they really want to set a fresh course, they need to take an axe to the Bush Administration’s trade policies rather than a pocketknife. And anti-democratic investor protections should be first on the chopping block.

Sarah Anderson directs the Global Economy project of the Institute for Policy Studies in Washington, DC.