Will TPP Stop China’s Rise?

A major thrust of President Obama’s pitch for the Trans-Pacific Partnership agreement, or TPP, is geopolitical. As the president himself put it last year,

The world has changed. The rules are changing with it. The United States, not countries like China, should write them. Let’s seize this opportunity, pass the Trans-Pacific Partnership and make sure America isn’t holding the bag, but holding the pen.

In other words: there’s a race for influence in the Asia-Pacific between the U.S. and China. Only one can win. Either China sets the rules, or the U.S. does. If China gets there first, their rules will prevail.

This story seems to assume that the rules the countries would set are different. Is this true?

We don’t have to guess. Wolfgang Alschner and Dmitriy Skougarevskiy are the brains behind the website Mapping Investment Treaties. The site allows text-as-data comparisons between thousands of ratified and proposed international treaties. In an article published earlier this year, Wolfgang and Dmitriy concluded:

China is likely to be most sympathetic to a multilateralization of investment disciplines around TPP. The country is among the states that have concluded most investment agreements. Moreover, its recent BIT with Canada overlaps textually to 50% with the TPP and converges in substance in some areas. When it comes to MFN, for instance, the China–Canada BIT is the closest treaty to TPP in our database.

That said, they go on to note several differences between the U.S. and Chinese templates.

I wanted to know just how different the two pacts where, so I asked this legal power duo to create a special feature on their website to allow the rest of us to compare Obama’s TPP with the Canada-China bilateral investment treaty, or BIT, which was signed in 2012 and entered into force in 2014. Thankfully, they agreed.

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Crossposted from Roosevelt Forward. To see the full article, go to the Roosevelt Institute‘s site; produced in collaboration with Mapping Investment Treaties website.

 

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What would be the consequences of pulling out of the WTO?

Donald Trump recently made headlines for threatening to pull out of the World Trade Organization, or WTO.

The proposal by the Republican presidential candidate would be a major break with the past. The 163-country pact has structured trading relations for over two decades, and a predecessor agreement goes back to roots in the 1940s.

What would the impact be of such an unprecedented move? While the future is unknowable, there are a few things to consider.

First, when people refer to “the WTO,” they can mean a few different things.

  • The WTO is an actual It has a building in Geneva, Switzerland, and a full-time Secretariat staff that helps keep the lights on.
  • The WTO is also an intergovernmental body. The Secretariat helps provide a forum for governments to negotiate and talk to one another about policies affecting trade in goods and services. The U.S. delegation is led by the Deputy U.S. Trade Representative Michael Punke, who serves under USTR head Mike Froman. Like Froman, Punke has ambassador status; unlike Froman, he wrote The Revenant – remade as a movie starring Leo DiCaprio. But trade negotiations have stalled since the late 1990s, so the importance of the inter-governmental part of the WTO has been downgraded to mostly routine bureaucratic meetings.
  • Finally, the WTO is a set of treaties and a court that adjudicates disputes under them. The WTO consists of 17 treaties, each of which lay out commitments and obligations for the organization’s members. Under the Dispute Settlement Body, governments and the Secretariat supervise adjudicators hired by the case to decide on challenges by WTO members against one another. If disputing governments do not like the outcomes of these lower panels, they can appeal the decision up to an Appellate Body staffed of tenured adjudicators. If a respondent country loses a case, they are supposed to (in theory) change the policy so that it complies with WTO rules. In practice, countries often drag their heels or outright refuse to change the offending policy. There is then a further set of procedures for fixing an amount of permissible trade retaliation. There have been over 500 intergovernmental challenges launched since the WTO opened its doors in 1995.

The pact’s multi-faceted nature makes it tricky to know what exactly a WTO critic is criticizing.

Second, the WTO should not be confused with a specific content of national policy. It is a legal-diplomatic construct that is distinguishable from national economic policy choices.

The debate around the UK’s vote to leave the European Union illustrates the distinction I am trying to make. Now that UK leaders are going forward with Brexit (unnecessarily, IMHO), they must decide if and how to restructure their relationship with the EU. The models that are often mentioned are Norway and Switzerland, who are not voting members of the EU but have nonetheless committed to follow EU rules on trade and immigration. So, not a member of the EU, but having national laws that are nonetheless consistent. A bitter pill for many Brexit supporters no doubt.

Put bluntly, the WTO doesn’t diminish national sovereignty, at least not in the first instance. It simply creates a series of potential legal and financial consequences for stepping out of line. This means that a country can leave the WTO and still have national policies consistent with WTO rules. It means also that a country can be in the WTO with national policies that are not consistent with the rules, and still face no consequences (either because other countries don’t notice or aren’t willing or able to mount a legal challenge).*

To follow this through to the present context, Trump would not need to leave the WTO to jack up tariffs on Chinese goods.** He would, however, almost assuredly face a challenge at the dispute settlement body if he tried to do so, as it is a blatant violation of most-favored nation rules. (For this reason, the policy would also probably be ineffective and likely lead to more imports from third countries.) He could also leave the WTO, but not jack up tariffs.

So, what are observers worried about when they question Trump’s WTO threats? On the one hand, they’re worried about jeopardizing some of the gains from trade under the WTO – which economists estimate at a few percentage points of global income. But such models are really capturing the autonomous national policy changes that each WTO member enacted. It is at least conceivable that they could have happened without the WTO, although many political economists consider the system indispensable for helping countries trust one another to make the baby steps needed to liberalize.

And, thus, we get to the real issue. Pulling out of the WTO should not be feared for any necessary economic fallout. The U.S. and world could get by just fine. Rather, what observers should be worried about is the potential diplomatic signal it sends. This could lead to a chain reaction of tit-for-tat retaliation by nervous politicians who seek to shield their population from the externalities of Trump’s effort to protect U.S. workers.

So, the WTO is not so much a global government as it is a framework for structuring retaliation. Trump’s comments envision a return to a world where retaliation is not so structured. Where that takes us is any one’s guess.

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FOOTNOTES

* A trickier problem is that there may be no consensus about what a WTO obligation actually means in practice. In such cases, panelists and appellate body members get to moonlight as rule writers – taking over for gaps left by actual government negotiators.

 

** Depending on how exactly he took the action, he could take an action under executive branch powers. Alternatively, he might need Congress to modify U.S. tariff rules or the Uruguay Round Agreements Act that greenlit U.S. membership in the WTO. This was a bill supported by the Bill Clinton administration – passed by a lame duck Congress full of Democrats that just lost their seats, most of whom had not read the legislation. (Interestingly, the Obama administration is suggesting doing something similar with the Trans-Pacific Partnership after the November elections.)

 

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Final Dem Platform Lays Out Trade Reform Agenda

The Democratic Platform was recently posted, and it includes a lot of discussion of trade and global economic governance.

The language was extensively debated, including an internecine fight at the platform drafting committee over how explicitly to oppose the Trans-Pacific Partnership, or TPP. Bernie Sanders’ delegates to the convention warned that Democrats should not cede that ground to the GOP and Trump campaign, and that anti-TPP themes would be part of the GOP platform. (Which they are, kinda but not really.)

Here’s the section on trade policy:

Promoting Trade That is Fair and Benefits American Workers

Democrats acknowledge that for millions of Americans, global trade has failed to live up to its  promise — with too many countries breaking the rules and too many corporations outsourcing  jobs at the expense of American workers and communities. Over the past three decades, America has signed too many trade deals that have not lived up to  the hype. Trade deals often boosted the profits of large corporations, while at the same time  failing to protect workers’  rights, labor standards, the environment, and public health. We need  to end the race to the bottom and develop trade policies that support jobs in America. That is  why Democrats believe we should review agreements negotiated years ago to update them to  reflect these principles. Any future trade agreements must make sure  our trading partners  cannot undercut American workers by taking shortcuts on labor policy or the environment. They  must not undermine democratic decision – making through special privileges and private courts  for corporations, and trade negotiations must be transparent and inclusive.

Democrats’ priority is to significantly strengthen enforcement of existing trade rules and the  tools we have, including by holding countries accountable on currency manipulation and  significantly expanding enforcement resources. China and other countries are using unfair trade  practices to tilt the playing field against American workers and businesses. When they dump   cheap products into our markets, subsidize state – owned enterprises, devalue currencies, and  discriminate against American companies, our middle class pays the price. That has to stop. Democrats will use all our trade enforcement tools to hold China and other trading partners  accountable — because no country should be able to manipulate their currencies to gain a  competitive advantage.

While we believe that openness to the world economy is an important source of American  leadership and dynamism, we will oppose trade agreements that do not support good American  jobs, raise wages, and improve our national security. We believe any new trade agreements must  include strong and enforceable labor and environmental standards in their core text with  streamlined and effective enforcement mechanisms. Trade agreements should crack down on the  unfair and illegal subsidies other countries grant their businesses at the expense of ours. It should  promote innovation of and access to lifesaving medicines. And it should protect a free and open  internet. We should never enter  into a trade agreement that prevents our government, or other  governments, from putting in place rules that protect the environment, food safety, or the health  of American citizens or others around the world.

These are the standards Democrats believe must be applied to all trade agreements, including the  Trans – Pacific Partnership (TPP).

The platform again comes back to the themes in the section on labor…

International Labor

Democrats believe that a key element of American leadership is growing our economy and protecting American jobs. We also believe that the world will be safer when there is greater prosperity. That is why we will prioritize and strongly enforce provisions on decent work and worker’s rights in all American diplomatic, trade, and programmatic efforts. We think it is wrong for workers in the United States to have to compete against poverty – wage, child, or slave labor.

Democrats will fight to end child labor. We will promote broad – based economic growth across the world, pursuing a global economic agenda that promotes rising wages and invests in quality  public services, workers’ rights, and environmental protections. We believe that we need to coordinate our economic actions with other countries to address economic insecurity, specifically youth un- and underemployment, gender inequality, the digital transformation, and the transition towards green jobs.

In the foreign policy section, trade also gets a mention in the section on the Western Hemisphere.

Americas

The Americas are a region of singular strategic, economic, and cultural importance and  opportunity for the United States. Democrats reject Donald Trump’s proposal to build a wall on  our southern border and alienate Mexico, a valuable partner. We will instead embrace our  neighbors and pursue strong, fruitful partnerships across the region, from Canada to Latin  America and the Caribbean. We will bolster democratic institutions, promote economic  opportunity and prosperity, and tackle the rise of drugs, transnational crime, and corruption.

The platform also explicitly takes on Trumpian unilateralism in its closing paragraphs:

Global Economy and Institutions

Democrats will protect and grow the global economy. While Donald Trump wants to default on our debt, which would lead to a disastrous global economic crisis, we believe we must be responsible stewards and work with our partners to prevent another worldwide financial crisis.

Democrats believe that global institutions — most prominently the United Nations — and multilateral organizations have a powerful role to play and are an important amplifier of American strength and influence. Many of these organizations need reform and updating, but it would be reckless to follow Donald Trump and turn our back on the international system that our country built. It has provided decades of stability and economic growth for the world and for America.

To sum up, it seems like the following are the elements of the Party’s new agenda:

  1. Blue-Green: Use trade deals to raise labor and environmental standards abroad.
  2. Reducing role of private actors: No investor-state dispute settlement.*
  3. Transparency: Greater transparency in trade negotiations.
  4. Enforcement: greater use of existing trade enforcement tools.
  5. Economy and security test: trade deals must somehow “support good American jobs, raise wages, and improve our national security,” although these elements are not defined.
  6. Anti-subsidy: Trade deals must crack down on foreign subsidies.
  7. New intellectual property rules? Trade deals should promote innovation, health, and the open Internet.
  8. Reform – not abolition – of existing and proposed treaties to meet these standards.

Compared to the 2008 Democratic Platform, this is more specific on benchmarks. While that platform committed to a vague amendment of NAFTA, this platform envisions reform of all past agreements to meet these standards.**

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FOOTNOTES

* Actually, it doesn’t say that, although I don’t think there’d be any way to argue that the system was not a “special privilege” for investors. It’s more arguable whether the system is a “private court”: many public international lawyers would disagree, and many arbitrations take place at inter-governmental institutions like the World Bank. The platform’s language about trade deals not preventing government from “putting in place rules” about environment, food safety, and health seems superfluous.No trade deal preempts regulation in the first instance. Many allow corporations to later sue over regulation once it is put in place, however.

** Here’s the trade section from that platform:

Smart, Strong, and Fair Trade Policies

We believe that trade should strengthen the American economy and create more American jobs, while also laying a foundation for democratic, equitable, and sustainable growth around the world. Trade has been a cornerstone of our growth and global development, but we will not be able to sustain this growth if it favors the few rather than the many. We must build on the wealth that open markets have created, and share its benefits more equitably.

Trade policy must be an integral part of an overall national economic strategy that delivers on the promise of good jobs at home and shared prosperity abroad. We will enforce trade laws and safeguard our workers, businesses, and farmers from unfair trade practices–including currency manipulation, lax consumer standards, illegal subsidies, and violations of workers’ rights and environmental standards. We must also show leadership at the World Trade Organization to improve transparency and accountability, and to ensure it acts effectively to stop countries from continuing unfair government subsidies to foreign exporters and non-tariff barriers on U.S. exports.

We need tougher negotiators on our side of the table–to strike bargains that are good not just for Wall Street, but also for Main Street. We will negotiate bilateral trade agreements that open markets to U.S. exports and include enforceable international labor and environmental standards; we pledge to enforce those standards consistently and fairly. We will not negotiate bilateral trade agreements that stop the government from protecting the environment, food safety, or the health of its citizens; give greater rights to foreign investors than to U.S. investors; require the privatization of our vital public services; or prevent developing country governments from adopting humanitarian licensing policies to improve access to life-saving medications. We will stand firm against bilateral agreements that fail to live up to these important benchmarks, and will strive to achieve them in the multilateral framework. We will work with Canada and Mexico to amend the North American Free Trade Agreement so that it works better for all three North American countries. We will work together with other countries to achieve a successful completion of the Doha Round Agreement that would increase U.S. exports, support good jobs in America, protect worker rights and the environment, benefit our businesses and our farms, strengthen the rules-based multilateral system, and advance development of the world’s poorest countries.

Just as important, we will invest in a world-class infrastructure, skilled workforce, and cutting-edge technology so that we can compete successfully on high-value-added products, not sweatshop wages and conditions. We will end tax breaks for companies that ship American jobs overseas, and provide incentives for companies that keep and maintain good jobs here in the United States. We will also provide access to affordable health insurance and enhance retirement security, and we will update and expand Trade Adjustment Assistance to help workers in industries vulnerable to international competition, as well as service sector and public sector workers impacted by trade, and we will improve TAA’s health care benefits. The United States should renew its own commitment to respect for workers’ fundamental human rights, and at the same time strengthen the ILO’s ability to promote workers’ rights abroad through technical assistance and capacity building.

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Toxic Lawsuit Showcases State Solidarity in ISDS

A U.S. junk bond company’s attempt to collect $800 million from Peruvian taxpayers over an environmental clean-up dispute was dealt a blow earlier this week. In an award released to the public on Tuesday, a trio of arbitrators ruled that the company had failed to correctly file their litigation materials. As a result, the tribunal had no jurisdiction over the case.

Like the Philip Morris cases I discussed earlier this week, the Renco Group v. Republic of Peru case had become a poster child for critics of so-called investor-state dispute settlement, or ISDS. The company was owned by Ira Rennert, a controversial billionaire accused of bleeding distressed companies into bankruptcy and building one of the largest homes in the United States. And he was suing Peru for – among other things – not granting him a third extension of his clean-up obligations for a pollution-emitting smelter he owned there. The facility was faulted for turning the village of La Oroya into one of the 10 most polluted places on the planet, leading to cancer and other ailments in the local population.

The case has taken many twists and turns since being filed in late 2010. For instance, Rennert argued that his claim – brought under the U.S.-Peru trade agreement – shielded him from a tort claim brought by La Oroyans in Missouri state courts. For a timeline of the messy treaty and domestic proceedings, see here.*

Although two of the arbitrators sided with Peru in the decision this week, the matter is far from settled. Renco immediately announced their intention to re-file the case with the corrected paperwork. Thus, a case where the preliminary phases had already dragged on for years could drag on for years more.

Here are a few takeaways from the case.

Getting the rules right matters

The momentary win for Peru highlights a key role that policymakers can play in carefully limiting investors’ access to the jurisdiction of ISDS tribunals.

Continue reading

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GOP Platform: No TPP in Lame Duck

Okay, it doesn’t utter those words, just as the Democratic Platform will not. But it pretty much calls for the same thing. Here’s the full trade section of the agreed platform:

A Winning Trade Policy

International trade is crucial for all sectors of America’s economy. Massive trade deficits are not. We envision a worldwide multilateral agreement among nations committed to the principles of open markets, what has been called a “Reagan Economic Zone,” in which free trade will truly be fair trade for all concerned.

We need better negotiated trade agreements that put America first. When trade agreements have been carefully negotiated with friendly democracies, they have resulted in millions of new jobs here at home supported by our exports. When those agreements do not adequately protect U.S. interests, U.S. sovereignty, or when they are violated with impunity, they must be rejected.

We cannot allow foreign governments to limit American access to their markets while stealing our designs, patents, brands, know-how, and technology. We cannot allow China to continue its currency manipulation, exclusion of U.S. products from government purchases, and subsidization of Chinese companies to thwart American imports. The current Administration’s way of dealing with these violations of world trade standards has been a virtual surrender.

Republicans understand that you can succeed in a negotiation only if you are willing to walk away from it. A Republican president will insist on parity in trade and stand ready to implement countervailing duties if other countries refuse to cooperate.

At the same time, we look to broaden our trade agreements with countries which share our values and commitment to fairness, along with transparency in our commercial and business practices. In pursuing that objective, the American people demand transparency, full disclosure, protection of our national sovereignty, and tough negotiation on the part of those who are supposed to advance the interests of U.S. workers. Significant trade agreements should not be rushed or undertaken in a Lame Duck Congress (emphasis added).

Would be hard to argue that the TPP is not “significant,” and it’s the only deal anyone is thinking of “undertaking” in the Lame Duck. Obama was at one point betting he would have willing allies in Mitch McConnell and Paul Ryan. But that seems to have evaporated in recent days. So unclear who would help Obama bring in more votes, since Hillary Clinton and the Democrats are mostly opposed to a lame duck vote.

A few further notes:

  • Note no hard and fast rejection of TPP after the lame duck.
  • Unclear which trade deal provisions would or would not compromise sovereignty, as the platform isn’t explicit. (See here for one possible take.)
  • There’s a tension between signing agreements only with democracies, insisting on a worldwide trade deal (which would include non-democracies), but then also saying we should walk away from integration on a country-by-country basis. These are not compatible visions.
  • Finally, I don’t think there’s a clear pattern of a favorable U.S. export balance with trade partners that are democracies – as the platform seems to suggest. Econometric tests might be able to tell us more, although I can’t think of a clear theoretical mechanism for expecting any particular result. (e.g. does more inter-branch deliberation make foreign citizens want more U.S. goods?)

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What the Close Decision on Philip Morris Tells Us About ISDS

Sometimes corporations don’t get what they want. That was the case earlier this month when a World Bank arbitration tribunal ruled against tobacco giant Philip Morris in its suit against Uruguay. In a split decision, a majority of two arbitrators sided with the Latin American sovereign’s right to regulate, while a dissenting arbitrator sided partly with the corporation (which had appointed him to the panel).

Philip Morris launched the case in 2010, after Uruguay introduced a set of cigarette labeling policies to deter smoking. First, all cigarette packages were required to have graphic warning labels on 80 percent of their surface area. Second, each cigarette brand family could have only one design presentation. (Uruguay argued that tobacco companies used different color and design schemes to suggest certain variants were healthier than others.) These policies were driven by the administration of Tabaré Vázquez, a left-leaning oncologist first elected president in 2005. Although Philip Morris is headquartered in the U.S.—and although the U.S. and Uruguay have a bilateral investment treaty, or BIT—the tobacco company used its Swiss subsidiary and a Switzerland-Uruguay BIT to bring the case, as it is permitted to do.

In recent years, the case had become the poster child for critics of so-called investor-state dispute settlement, or ISDS. This legal procedure is contained in thousands of international trade and investment treaties, and permits foreign investors to sue governments over alleged harms suffered from regulation. Critics maintain that ISDS chills ambitious public interest regulation, while proponents argue that it helps reassure foreign capital that it will be treated fairly overseas. Once an obscure issue, the investment rules catapulted into the national spotlight in the past year, figuring prominently on late-night talk shows and the Democratic Party’s platform fight over the Trans-Pacific Partnership, or TPP.

Despite (or likely because of) critics’ attention to the case, the arbitration tribunal did pretty much what you would want an international court-like body to do. First, the arbitrators clearly understood both the business and regulatory issues that concerned both Philip Morris and Uruguay. Second, the tribunal refused to second-guess the public health experts. Third, the arbitrators refused to second-guess the Uruguayan courts that had already heard the case. Finally, even the dissenting arbitrator raised reasonable points and did not toe the party line of his appointer.

I’ll go into more detail on each of these points below. Continue reading

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Trump’s VP Pick His Opposite on Trade

Donald Trump is set to announce Indiana Governor Mike Pence as his running mate in a news conference tomorrow.

The media is just beginning to parse the two men’s similarities and differences on policy. Trump has never held elected office, while Pence served in the U.S. House of Representatives from 2001 to 2013.

One of Trump’s leading policy issues is his rejection of current trade agreements. This has put him at sharp odds with Republican campaign donors, a distinction he appears to relish.

On this issue, Pence is Trump’s opposite. While in the House, he supported every trade deal he voted on. Combined with key procedural votes, that’s a 100% track record (13/13 votes) of supporting the legacy trade policy that Trump is running against. Even when some Tea Party Republicans voted against recent trade agreements supported by President Obama, Pence crossed the aisle.

For those looking to cast doubts on Trump’s sincerity on trade policy, Pence’s voting record may provide ammunition:

  1. Voted for Fast Track.
  2. Voted for Chile FTA.
  3. Voted for Singapore FTA.
  4. Voted for Australia FTA.
  5. Voted for Morocco FTA.
  6. Voted against withdrawing from the WTO.
  7. Voted for CAFTA. Abstained on the Bahrain FTA.
  8. Voted for Oman FTA.
  9. Voted for Peru FTA.
  10. Voted against cancelling Fast Track.
  11. Voted for Obama’s Colombia FTA.
  12. Voted for Obama’s Panama FTA.
  13. Voted for Obama’s Korea FTA.

UPDATE: Jay Chittooran and I share a brain, apparently. He wrote a very similar post a few hours earlier – catching some Pence statements. Check it out here.

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