My basic views on economics are as follows: I like markets, except in certain specific situations (e.g., health insurance) where I think they don't work well, usually for fairly specific reasons. But I think that markets obviously require regulation. For this reason I have always found the idea that support for markets somehow implies opposition to all regulation bizarre. Markets need regulation for various reasons, including: (1) Creating the ground rules that allow markets to operate efficiently (e.g., antitrust laws, requiring transparent accounting for publicly traded companies, laws governing intellectual property, etc.) (2) Dealing with market failures. (3) Codifying a national decision that there are certain things we do not want companies to do in their quest for profits. (E.g., child labor laws.)
My views on free trade are basically similar. In general, I support it. (I supported NAFTA, though I would not have done so had I known about its Chapter 11, described below.) I am not swayed by the argument that free trade costs Americans jobs: I don't particularly like it when Americans lose their jobs, but I do like it when people in poor countries get jobs, and I think that when free trade agreements are done right, the gains outweigh the losses. But my support for free trade agreements is conditional on their incorporating the sorts of regulatory structures just described, like strong provisions protecting labor and the environment.
Environmental laws are attempts to deal with negative externalities: costs associated with producing goods that are not borne by the producer or the consumer, but are instead foisted off on unconsenting third parties. If, for instance, a company pollutes the groundwater in a given community, everyone in that community suffers, but the company does not compensate them for the costs it imposes on them. Environmental laws deal with this either by banning certain forms of pollution or through taxes or fines, which attempt to place the burden of paying for the pollution on the company that produced it. In either case, they are attempts to rectify a market failure, and if they are well designed, they make the market fairer. Trade agreements, in my view, should not undo this by forcing our companies to compete against foreign firms that are allowed to externalize the environmental costs of producing goods, any more than they should force our companies to compete against firms that receive any other sort of subsidy.
Labor laws, if properly designed, do two things. First, they codify social decisions about the minimum conditions in which people should have to work. Absent such laws, companies would face competitive pressure not to try to ensure (for instance) worker safety. If we want people to be assured of some minimally safe environment, we should enact safety regulations to prevent this sort of "race to the bottom", and to allow companies to provide safe working environments without placing themselves at a competitive disadvantage. Second, they provide for collective bargaining and grievance procedures, thereby helping to ameliorate what is usually a serious power imbalance between employers and labor. Protections for individual actors are a large part of free trade agreements: for instance, they always include strong protections for investors, rather than leaving those investors' fates to the legal system in the countries they invest in. I have never seen why the same logic should not apply to workers.
I do not want our companies to have to compete against companies who trash the environment or abuse their employees, and I do want to use the leverage we have in negotiating free trade agreements to create these protections, which I believe will benefit us all. If we have the right ground rules for free trade, then it benefits people on both sides; if not, not.
That is my general view of free trade agreements. I present it so that you will know where I'm coming from. However, I also think that general views on free trade agreements are virtually useless. When it comes to free trade agreements, the devil is in the details, to a much greater extent than in most other areas of policy. And unfortunately, the details are hard for lay people to assess. I have tried to read the actual text of CAFTA, but gave up when I concluded that I was just not going to understand it. (I stopped reading Ulysses for similar reasons.) All those terms of art: what do they mean? Does CAFTA depart from established norms, and if so, how? Are there innocuous-sounding passages that would play out horribly in real life, or vice versa? I have no clue.
Below the fold, I am going to explain some areas of concern about CAFTA that I have unearthed. These lead me to oppose CAFTA. However, the real purpose of this post, besides providing a useful collection of links and thoughts, is to ask for help from anyone who understands any of the issues involved. (von, there's a question about IP below.)
(1) NAFTA's Chapter 11, redux: CAFTA is reported to contain a provision similar to NAFTA's Chapter 11, the one that gives investors from one signatory the right to challenge the laws of another, or of any of its states or municipalities. Chapter 11 is basically an investor protection provision that contains several features that are dreadful in combination. First (a non-dreadful feature), it allows investors from signatory countries to sue other countries when their property is expropriated. This is fine. However, it stops being fine once we add in the next point: 'Expropriation' is defined to include not just, well, expropriation, but any regulation that affects one's potential future profits. (You may recognize this as kin to one of the more awful bits of right-wing judicial activism: the attempt to redefine the part of the Constitution that says that the government may not take your property without compensating you to mean that it may not do anything that adversely affects the value of your property without compensating you.)
Almost all regulations affect the value of someone's property -- think of zoning regulations that forbid you to set up what might be a profitable factory on land in a residential neighborhood, or environmental laws that forbid you from profiting by polluting. And yet any such law or regulation is grounds for suit under chapter 11 of NAFTA. Moreover, this is so whether the law or regulation in question is federal, state, or local: since NAFTA obliges the federal government to eliminate laws that conflict with it, whether or not those laws are federal, the federal government can be sued by foreign investors because of a state or municipal law.
Finally, these suits are not heard in normal courts, but in special tribunals. From the New York Times: "Their meetings are secret. Their members are generally unknown. The decisions they reach need not be fully disclosed. Yet the way a small group of international tribunals handles disputes between investors and foreign governments has led to national laws being revoked, justice systems questioned and environmental regulations challenged. And it is all in the name of protecting the rights of foreign investors under the North American Free Trade Agreement."
To quote an article from the New York Law Journal:
"It is fundamentally wrong for the validity of important national - and international - environmental measures (or, indeed, other public policy issues affecting public health, consumer protection, antitrust policy or even securities regulation) to be decided in closed private arbitration proceedings that take place outside the jurisdiction where such measures take effect and outside of any meaningful public review or awareness. Both the UNCITRAL and ICSID arbitral rules referred to in Chapter 11 function well to settle private disputes where the parties have little desire for public scrutiny of their claims and the public has no direct interest in their outcome. The opposite is true, however, for most Chapter 11 disputes, particularly those involving claims that environmental or other public regulations constitute a compensable taking of property. Where the legality or reasonableness of governmental regulation is at issue, particularly in areas directly affecting the public’s health and environment, arbitration rather than judicial proceedings is, at best, a questionable forum. Where that forum is effectively secret, uninformed by the policy and legal bases for the challenged regulation and beyond the reach of meaningful judicial review, the public has every reason to be suspicious of both the process and the outcome, as environmentalists in the U.S., Mexico and Canada have made clear. When NAFTA’s Chapter 11 is used as a precedent for other U.S. trade and investment agreements, the political support for such agreements becomes even more fragile."
The idea that suits might be brought alleging that laws that in some way harm corporate profits are tantamount to expropriation is not hypothetical. Such suits have already been brought and won. From the New York Times article again:
"• The Canadian government lifted restrictions on manufacturing an ethanol-based gasoline additive that it considered hazardous after an American manufacturer said that the ban hurt its business.
• A tribunal ordered Mexico to pay an American company $16.7 million after finding that local environmental laws prohibiting a toxic- waste-processing plant that the company was building were tantamount to expropriation.
• A Canadian-based funeral company is asking the United States government for $725 million in compensation after a Mississippi jury found the company guilty in 1995 of trying to put a local funeral home out of business, and levied $500 million in damages. The company contends that the jury sought to punish it because it is foreign. If the tribunal awards compensation, critics say, all jury awards involving foreign investors may be challenged.
• United Parcel Service, the package-delivery company, has filed a complaint contending that the very existence of the publicly financed Canadian postal system represents unfair competition that conflicts with Canada's obligations under Nafta. Critics worry that if the tribunal upholds the U.P.S. claim, government participation in any service that competes with the private sector will be threatened."
In the most famous suit, a Canadian corporation has sued the federal government for $970 million over a California law banning MBTE, a gasoline additive that has seeped into California's groundwater, and that is suspected of causing cancer. The corporation, which manufactures one of the components of MBTE, alleges that this ban cost it business; hence the suit.
As noted, investors have won some of these cases, and others have been settled. But even if investors don't win, the prospect of being sued over environmental laws might be a real deterrent to a country's passing such laws, especially if the country in question were poor, as most of the countries that would be in CAFTA are. As I said above, my view is that environmental laws are necessary to place the costs of polluting on the polluters, where they belong, thereby preventing a market failure. And environmental protections are a necessary part of free trade agreements, since forcing our firms to compete against firms who can successfully impose their environmental costs on others is essentially like forcing them to compete against firms that are subsidized. Chapter 11, by contrast, actually prevents governments from enacting some environmental protections, and deters them from passing others. It therefore has exactly the wrong sort of effects: where a treaty should establish a floor below which companies cannot sink, Chapter 11 establishes a ceiling above which they cannot rise.
Besides the perverse environmental effects, the secret and unaccountable decisions on important matters of policy, and the bizarre 'takings' doctrine, Chapter 11 is also a real and excessive interference with state and local governments' sovereignty. Moreover, it actually harms businesses by creating serious uncertainty about the regulatory environment in which they must operate. It is therefore, in my view, really, really bad. (Here are good articles on this by William Greider and Chris Mooney.)
Apparently, CAFTA's provisions are even worse. From the Sierra Club:
"Instead of learning a lesson from the flaws of the investor rights provisions under NAFTA, the Bush Administration wants to expand this model to even more countries. The proposed U.S. - Central America Free Trade Agreement (CAFTA) and the Free Trade Area of the Americas (FTAA), currently under negotiation, threaten to expand the NAFTA trade model, along with its controversial investment rights provisions, throughout the hemisphere.
Astoundingly, CAFTA's investment rules go even further than NAFTA. For example, it specifically allows transnational corporations the right to challenge government policies about natural resource agreements, such as mining and offshore oil contracts. The potential threat to the environment of this Chapter 11 expansion can be seen in the Harken Oil Case.
Harken Costa Rica Holdings, a transnational corporation with close ties to Harken Energy of Texas, obtained an agreement to drill off the coast of Costa Rica, contingent on the outcome of an environmental assessment. When it was found that the drilling would pose a serious threat to the rich marine ecosystems of the Talamanca region, the Costa Rican government decided the drilling was contrary to its environmental law, and Harken was denied the right to drill. In response, Harken tried to bring an international suit against Costa Rica. It demanded the outrageous sum of $57 billion to compensate for profits Harken would have made from the drilling. A stipulation in the contract forced the company to taken their suit to domestic courts in Costa Rica, but had CAFTA's investor rules been in place, Harken could have bypassed the domestic court system and taken the case straight to a NAFTA-style tribunal."
(2) Pharmaceuticals (von?): An article in the Boston Globe argues that CAFTA's provisions on pharmaceutical patents would needlessly harm Central Americans with HIV:
"The agreement, which may be ratified by the end of the month, will force its signatories to strengthen protections on patents owned by multinational pharmaceutical companies, thus preventing the manufacture and importation of many cheap generic drugs.
In the countries bound by the agreement -- Costa Rica, the Dominican Republic, Guatemala, Honduras, Nicaragua, and El Salvador -- generic competition has allowed for widespread access to life-saving medicines. In Guatemala, some AIDS drugs are as much as 98 percent cheaper than their name-brand alternatives. The antiretroviral cocktail that costs $4,818 per year when marketed by GlaxoSmithKline as Combivir can be purchased by Guatemalans for $216 in generic form.
Given the financial strain many Americans experience when purchasing drugs like Combivir, it's not difficult to imagine how devastating similarly elevated prices would be for the farmers and impoverished city dwellers who make up the bulk of AIDS cases in Central America.
In addition to increases in patent protection, CAFTA mandates that these governments protect regulatory data on medicines -- an unprecedented step that could effectively extend patents by a decade without any form of reprieve, even in a public health emergency. Data protection for medicines means that if a drug is not patented, or if a country can somehow maneuver around the patent, generic manufacturers would still be prohibited from selling the medicine unless they repeat costly clinical trials. Since few generic manufacturers in Central America have the resources to conduct clinical trials, data protection will function as another obstacle to generic competition. (...)
The nations of the World Trade Organization recognized this dilemma, when, as part of the 2001 Doha Declaration, they unanimously resolved that public health emergencies like HIV/AIDS may require circumventing patent rules. CAFTA flouts this global consensus and is widely understood to be part of the Bush administration's larger systematic effort to undermine the WTO process -- that is, to use bilateral trade agreements to bully small developing countries into waiving their rights under the WTO's intellectual property rules. The WTO's rules allow developing countries to implement patent laws that meet their individual needs."
I do not have a problem with protecting pharmaceutical patents. I do, however, think that the exception for public health emergencies, especially in poor countries, is extremely important. If CAFTA does not include it, then that's a serious problem.
(3) The Environment: The Sierra Club's briefing on CAFTA describes its environmental provisions as follows:
"Article 17.1 of CAFTA states that each country has the right "to establish its own levels of domestic environmental protection...encourage high levels of environmental protection, and ... strive to continue to improve those laws and policies." While a country "shall not fail to effectively enforce its environmental laws" this only applies if the lack of enforcement has been a "sustained or recurring course of action or inaction," i.e. a one-time violation may not be enough. CAFTA also allows countries "the right to exercise discretion with respect to investigatory, prosecutorial, regulatory, and compliance matters," contradicting the previous article and telling the countries that 'you are supposed to enforce your environmental laws, but only if you want to.'
Countries are asked to "strive to ensure" that they don't lower or weaken their environmental laws in order to attract investment, but again, there is nothing here clearly making this a requirement, and if a country violates even this loosely worded article, there is no way to take advantage of even the limited options provided through the Dispute Settlement chapter.
However, even if there was strong enforcement language in CAFTA, the more fundamental question is about what exactly is to be enforced. Even the USTR acknowledges that the CAFTA countries' environmental laws are weak (and even in countries with relatively good laws on the books often do not fully implement or enforce these laws). So far, there is almost no funding set aside to assist the CAFTA countries in helping to develop and strengthen their environmental programs.
If a CAFTA country fails to enforce its environmental laws and regulations, a long and cumbersome process would have to be launched -- with no clear enforceable outcome should the country be found guilty. CAFTA limits any fines for failures to enforce environmental laws to a max $15 million annually, while sanctions for breaches of commercial provisions are unlimited. Fines for failure to enforce a nation's environmental laws are supposed to be spent in the violating country towards "appropriate environmental initiatives, including efforts to improve or enhance... environmental law enforcement."19 Yet CAFTA does not prohibit a violating country from redirecting its existing funds away from the area where funds are being directed, thus potentially resulting in no net increase in enforcement funding."
This does not sound good at all.
(4) Debt Relief: Here is a very interesting article about CAFTA's implications for any of its signatories who get into a debt crisis.
"Buried in the technical language of the investment chapter of the agreement are rules that would make it more difficult for the six nations that have signed the trade deal with the United States to escape heavy debt burdens or to prevent or recover from debt crises. The investment provisions of CAFTA, like other deals such as the 1994 North American Free Trade Agreement, are based on the argument that strong protections for private foreign investors will help encourage investments needed for economic growth. To this end, they require governments to comply with a long list of investor protections and grant private foreign investors the right to sue governments for damages if these obligations are violated.
For example, governments are required to treat foreign investors at least as favorably as domestic ones. This principle is known as "national treatment." They must also ensure what is called "most favored nation" treatment, meaning that they cannot discriminate against (or give special preferences to) the investors of one country that is a party to the agreement without granting the same treatment to investors of other parties to the agreement. These rules mean that governments cannot favor domestic interests (or investors from a particular country) even if doing so would support social goals or other national interests."
The author then goes on to explain why there are sometimes quite good reasons for treating foreign and domestic investors differently. (Update: not in general, but during debt crises. One example from the article: "the debtor might also need to accord priority to domestic debt in order to protect the financial system. In this sense, it has been pointed out that sovereign debt restructuring has a double impact on the financial system. On the one hand, the impact on assets of the reduction in the value of bonds held as part of their capital by financial entities. On the other, the general increase in uncertainty, which could affect the overall credibility of the system. The IMF has also stated that in these cases special treatment to domestic debt might enable the debtor to protect "a core of the banking system by ensuring the availability of assets required for banks to manage capital, liquidity and exposure to market risks." ") Having recently read quite a bit on debt crises, what he says seems plausible to me, but I would welcome expert opinions. He concludes:
"CAFTA's application of controversial investor protections to sovereign debt would suppress the few options available to countries trying to prevent or exit from debt crises. As shown by the experience of countries undergoing such crises, inability to exit a crisis situation might cause economic losses that far outweigh any commercial gains achieved through signing a treaty. Debt campaigners are urged to join forces with trade campaigners to raise public attention to this issue and ensure it remains front and center in the debate. "
Preserving ways for developing countries to extricate themselves from debt crises is a very big deal. If this article is on target, this consideration alone would probably lead me to oppose CAFTA.
(5) Labor: I am less clear on this aspect of CAFTA, since I have not found many sources that I trust. However, Human Rights Watch writes as follows:
"The substantially finalized version of CAFTA, made public on January 28, 2004, does not include adequate workers’ rights protections. It fails to require compliance with even the most basic internationally recognized labor rights norms and specifically fails to protect women workers against discrimination. While the accord calls on countries to uphold their own labor laws, which may or may not be consistent with international standards, it provides a weak enforcement mechanism for that limited commitment. It also fails to require that parties’ enforcement of their labor laws include procedural guarantees and provide for adequate remedies to redress any violations. Finally, while CAFTA creates a labor cooperation and capacity building mechanism, which some government officials have touted as a key tool to promote labor rights, there is no guarantee of funding and thus no guarantee that the mechanism will operate, much less perform this function."
"Now comes CAFTA, which promises Central American workers the same kind of raw deal. CAFTA would actually weaken the not very formidable labor standards that currently exist in the Central American nations. Under the current Generalized System of Preferences, those nations are required to take steps "to afford internationally recognized worker rights." Should CAFTA pass, the nations will be required only to enforce their own worker-protection laws, which they'd be perfectly free to repeal. That's the primary reason why the major union federations in Central America have joined the AFL-CIO in opposing CAFTA's ratification."
In this context, it's also worth noting that the Bush administration is refusing to release a report on Central American countries' labor laws, the laws CAFTA would require them to enforce.
"Rep. Sander Levin (D-MI) yesterday (April 21) announced he will introduce a House resolution to force the Labor Department to release a controversial report that assesses the labor laws of Central American countries and the enforcement of those laws in an attempt to end a fight that has lasted longer than a year. The labor rights practices of Central American countries have come into focus as Congress is debating a free trade package the Bush Administration has negotiated with Central America and the Dominican Republic. (...)
At the hearing, Levin released the paperwork that the Labor Department presented to ILRF in its effort to suppress the report. Levin said he knows very little about the ILRF report except that it reveals how much the labor laws of the Central American region deviate from the core standards of the International Labor Organization and how poor the enforcement is, a point confirmed by Athreya.
She said that the organization has posted on its website a report by the Costa Rican labor rights organization, ASEPROLA, which largely mirrors the reports the ILRF conducted for the Labor Department. That report shows that some Central American countries deny workers the right of association, for example.
These findings contradict Bush Administration arguments in the debate over the DR-CAFTA that these countries’ laws largely reflect ILO standards and that the only problem is enforcement. Levin and other opponents of the DR-CAFTA charged in a letter to USTR that these statements are a misrepresentation since the State Department and an ILO analysis have identified 20 specific areas where DR-CAFTA countries’ labor laws fall short of ILO standards."
As I said, though, I'm open to persuasion.
I'd really appreciate it if anyone who understands any of the issues raised by CAFTA would comment. I'm way out of my depth, and the econ blogs, newspapers, etc. that I normally read have not done a good job of explaining the issues in any kind of depth. Thanks.