TWN Info Service on WTO and Trade Issues (May16/06)
9 May 2016
Third World Network
Dear friends and colleagues,
We are pleased to share with you several recent articles that shed light on the nature of past and present “free trade” and investment agreements.
In the first article (1), Executive Director of the Geneva-based South Centre, Martin Khor, writes of the growing skepticism and opposition within the heart of the capitalist West to the previously sacrosanct concept of “free trade”.
While expressions of anti-free trade sentiments are not surprising coming from the likes of heterodox economists such as the Nobel laureate Joseph Stiglitz and leaders of union and civil society organisations, it is of interest that they have also been forthcoming from US Democrat and Republican contestants vying to be their parties’ candidates for the country’s presidential contest scheduled to be held later this year.
Also striking is the publication in Western ‘establishment media’ of many articles on the collapse of popular support for free trade in the US, including by former Treasury secretary Lawrence Summers, The Economist, the Financial Times and even the Wall Street Journal, says Khor.
Underscoring the irony in these developments, Khor points out that for decades, the West had “put high pressure on developing countries, even the poorest among them, to liberalise their trade.” This shift against free trade in the US has significant implications for both within the country (and, in turn, the TPPA), and without in relation to the World Trade Organisation, says Khor.
He concludes by pointing out that “if the US itself is having growing doubts about the benefits of “free trade”, less powerful countries should have a more realistic assessment of trade liberalisation. “As free trade and trade policy reaches a crossroads in the US and the rest of the West, developing countries have to rethink their own trade realities and make their own trade policies for their own development interests.”
The second article (2) is by South Africa-based economics professor Uma Kollamparambil, who highlights research and analysis that confirm the need for developing nations to be wary of the risks associated with bilateral investment treaties whose sole concern is the protection of investors and the lopsided ISDS regime. These risks include the inconsistencies and contradictory awards by the ISDS tribunals, the legitimacy of the awards, the lack of transparency, the high costs and concerns about the qualifications of arbitrators.
Kollamparrambil points out that the findings of systematic, scientifically-conducted research confirm the correctness of the call by developing countries for a new foreign investment policy framework. Such a framework, she adds, should promote foreign investment and enable developing countries to regulate investment in line with their domestic public policy priorities.
With best wishes,
“Free Trade” in Trouble in the United States
“Free trade” seems to be in deep trouble in the United States, with serious implications for the rest of the world. Opposition to free trade or trade agreements emerged as a big theme among the leading American presidential candidates.
Donald Trump attacked cheap imports especially from China and threatened to raise tariffs. Hillary Clinton criticised the Trans-Pacific Partnership Agreement (TPPA) which she once championed, and Bernie Sanders’ opposition to free trade agreements (FTAs) helped him win in many states before the New York primary.
That trade became such a hot topic in the campaigns reflects a strong anti-free trade sentiment on the ground. Almost six million jobs were lost in the US manufacturing sector from 1999 to 2011. Wages have remained stagnant while the incomes of the top one percent of Americans have shot up.
Rightly or wrongly, many Americans blame these problems on US trade policy and FTAs.
The downside of trade agreements have been highlighted by economists like Joseph Stiglitz and by unions and NGOs. But the benefits of “free trade” have been touted by almost all mainstream economists and journalists.
Recently, however, the establishment media have published many articles on the collapse of popular support for free trade in the US:
- Lawrence Summers, former Treasury secretary, noted that “a revolt against global integration is under way in the West”. The main reason is a sense “that it is a project carried out by elites for elites with little consideration for the interests of ordinary people”.
- The Economist, with a cover sub-titled “America turns against free trade”, lamented how mainstream politicians are pouring fuel on the anti-free trade fire. While maintaining that free trade still deserves full support, it cites studies showing that the losses from free trade are more concentrated and longer-lasting than had been assumed.
- Financial Times’ columnist Phillip Steven’s article “US politics is closing the door on free trade” quotes Washington observers saying that there is no chance of the next president or Congress, of whatever colour, backing the TPPA. The backlash against free trade is deep as the middle classes have seen scant evidence of the gains once promised for past trade deals.
- In a blog on the Wall Street Journal, Greg Ip’s article The Case for Free Trade is Weaker Than You Think concludes that if workers lose their jobs to imports and central banks can’t bolster domestic spending enough to re-employ them, a country may be worse off and keeping imports out can make it better off.
Orthodox economists argue that free trade is beneficial because consumers enjoy cheaper goods. They recognise that companies that can’t compete with imports close and workers get retrenched. But they assume that there will be new businesses generated by exports and the retrenched workers will shift there, so that overall there will be higher productivity and no net job loss.
However, new research, some of which is cited by the articles above, shows that this positive adjustment can take longer than anticipated or may not take place at all. Thus, trade liberalisation can cause net losses under certain conditions. The gains from having cheaper goods and more exports could be more than offset by loss of local businesses, job retrenchments and stagnant wages.
There are serious implications of this shift against free trade in the US. The TPPA may be threatened as Congress approval is required and this is now less likely to happen during Obama’s term. Under a new president and Congress, it is not clear there will be enough support. If the US does not ratify the TPPA, the whole deal may be off as the other countries do not see the point of joining without the US.
US scepticism on the benefits of free trade has also now affected the multilateral arena. At the World Trade Organisation, the US is now refusing attempts to complete the Doha Round.
More US protectionism is now likely. Trump has threatened to slap high tariffs on Chinese goods. Even if this crude method is not used, the US can increasingly use less direct methods such as anti-dumping actions. Affected countries will then retaliate, resulting in a spiral.
This turn of events is ironic. For decades, the West has put high pressure on developing countries, even the poorest among them, to liberalise their trade. A few countries, mainly Asian, staged their liberalisation carefully and benefited from industrialised exports which could pay for their increased imports.
However, countries with a weak capacity, especially in Africa, saw the collapse of their industries and farms as cheap imports replaced local products.
Many development-oriented economists and groups were right to caution poorer countries against sudden import liberalisation and pointed to the fallacy of the theory that free trade is always good, but the damage was already done.
Ironically, it is now the US establishment that is facing people’s opposition to the free trade logic.
It should be noted that the developed countries have not really practised free trade. Their high-cost agriculture sector is kept afloat by extremely high subsidies, which enable them to keep out imports and, worse, to sell their subsidised farm products to the rest of the world at artificially low prices.
Eliminating these subsidies or reducing them sharply was the top priority at the WTO’s Doha Agenda. But this is being jettisoned by the insistence of developed countries that the Doha Round is dead.
In the bilateral and plurilateral FTAs like the TPPA, the US and Europe have also kept the agriculture subsidy issue off the table. Thus, the developed countries succeeded in maintaining trade rules that allow them to continue their protectionist practices.
Finally, if the US itself is having growing doubts about the benefits of “free trade”, less powerful countries should have a more realistic assessment of trade liberalisation.
As free trade and trade policy reaches a crossroads in the US and the rest of the West, developing countries have to rethink their own trade realities and make their own trade policies for their own development interests.
About the author: Martin Khor is executive director of the Geneva-based South Centre. The above article is reproduced from the Malaysian daily, the Star, 25 April 2016 (http://www.thestar.com.my/opinion/columnists/global-trends/2016/04/25/free-trade-in-trouble-in-the-united-states-as-free-trade-reaches-a-crossroads-in-the-us-developing-c/) and carried by the May issue of Third World Network Features (#4375/16).
Why Developing Countries Are Dumping Investment Treaties
Bilateral investment treaties have been a source of political controversy in recent years. This is clear from the alarming increase in the number of disputes between investors and governments. The treaties create an unequal distribution of rights and obligations between developed countries, which are the source of most foreign direct investment, and developing countries, which are mainly recipients. They lead to the increased risk of litigation and have a negative impact on the net benefit of investment to recipient countries.
Investors have initiated a large number of cases against countries that have bilateral investment treaties. Moreover, the benefit of these treaties in attracting foreign direct investments is not seen to compensate for the litigation initiated against these countries.
This is why there is a growing view that the traditional model for bilateral investment treaties needs a review. This must focus on developing a new generation foreign investment policy framework. This should, along with promoting foreign investment, also enable recipient countries to regulate foreign direct investment in line with their public policies.
What treaties were designed to do
Bilateral investment treaties provide for international arbitration of disputes between investors and governments. Arbitration can happen at the World Bank’s dispute settlement body, the Stockholm Chamber of Commerce or the International Chamber of Commerce in Paris.
Alternatively there is an ad-hoc tribunal set up under the United Nations Commission on International Trade Law. The World Bank’s body accounts for 62% of all cases, the UN’s for 28%, Stockholm’s for 5% and others, including the Paris-based organsisation, for 5 percent.
Cases that go to the UN body are registered publicly. This is not the case in other forums. And parties to a dispute before the UN body could until recently invoke rules that allow proceedings to be kept secret. This has been changed.
The number of bilateral investment treaties has grown from about 500 in 1980 to 2,923 in 2014. This is attributed to the competition between developing countries for foreign direct investment which, in turn, is driven by the belief that these investments promote economic growth. They do this by helping recipient countries narrow the gap between domestic savings and the size of capital they need for investment. Foreign direct investment also opens the door to the latest technology and enables developing countries to plug their economies into global export networks.
Cases before the UN body grew from 5 of 12 new arbitrations in 2000, to 12 of 14 in 2001, and a striking 15 of 19 in 2002. There were 38 cases pending in the World Bank body based on alleged violations of bilateral investment treaties in April 2003. There was a tenfold increase in just over ten years, rising to 436 cases by December 2014. This clearly points to the increased number of cases handled by the World B ank body since the proliferation of bilateral investment treaties.
Why countries thought treaties were a good idea
In the absence of a multilateral framework, bilateral investment treaties were seen by developing countries as a way to signal that they were a safe destination for investment. So far, quantitative studies have concentrated on analysing the impact of the treaties on promoting foreign direct investment. The conclusions are not unanimous. Recent studies indicate that treaties merely affect the direction of investment inflows, not the quantity. This suggests that multinational corporations route their investments through countries like the Netherlands, which have clauses in their bilateral treaties that favour investors.
It’s therefore not surprising that in recent years bilateral investment treaties have been a source of political controversy. At least 45 countries and four regional integration organisations are revising or have recently revised their model agreements. The aim has been to include provisions on pre-establishment commitments (that ensure National treatment and Most Favoured Nation treatment of investment) and sustainable development-oriented clauses.
South Africa terminated its treaties with the Netherlands, Switzerland and Germany in 2014. It has since given notice that it will terminate its treaties with Belgium, Luxembourg, Spain and Indonesia. South Africa is replacing these treaties with the Promotion and Protection of Investment Act.
Undue risk on host nations
After the explosive expansion of these treaties in the 1990s, there has been a reduction in the number of new ones. This has been brought about by the realisation that traditional treaties put undue risk on host nations without obligating investors to contribute to development requirements.
The number of cases settled through arbitration has increased dramatically from 50 cases in 2000 to 608 cases in 2014. The gravity of the situation is clear from the large number of claims made by investor litigants that put host states under serious fiscal strain.
Literature on the impact of bilateral treaties on arbitration cases is mostly qualitative, dealing with either anecdotal cases or legal analysis of treaties. These studies have highlighted the inconsistencies and contradictory awards by tribunals. This in turn has led to the legitimacy of awards being questioned.
Other studies have pointed out additional factors that contribute to deficiencies in the system. These include a lack of transparency, high costs and concerns about the qualifications of arbitrators.
An overwhelming majority of disputes between investors and governments are initiated by investors from developed countries (North) against developing countries (South). This is despite the fact that North-North foreign direct investment accounts for a bigger share of global foreign direct investment compared with North-South foreign direct investment.
Poor judicial processes and other idiosyncratic characteristics of developing countries may explain this anomaly. But to establish whether this is caused solely by bilateral treaties one would have to control for other factors that may contribute to it.
Analysis of investment dispute cases handled by the World Bank’s dispute settlement body shows that most of the cases brought by investors are against countries with treaties. Moreover, the net benefit accruing to countries with treaties is substantially lower than for countries without.
Our analysis (http://www.econrsa.org/publications/working-papers/bilateral-investment-treaties-and-investor-state-disputes) confirms the need for developing nations to be wary of the risks associated with traditional treaties whose sole concern is the protection of investors.
Our findings confirm the correctness of the call by developing countries for a new foreign investment policy framework. This should promote foreign investment and also enable developing countries to regulate investment in line with their domestic public policy priorities. Social and developmental interests of the host developing countries must be included in treaty negotiations.
The United Nations Conference on Trade and Development’s Investment Policy Framework for Sustainable Development is a step forward. A new generation of investment treaties must balance investment policy and the development strategies of host countries while ensuring responsible investor behaviour.