Reagan before it was cool

“Reaganism” predated Reagan, as recent diplomatic disclosures again confirm.

The Gipper gets a lot of heat and love, depending on one’s perspective, for having supposedly pioneered many “free market” or “pro-corporate” policy innovations. But recently declassified documents from the State Department show that much of the Reagan agenda came from the Jimmy Carter administration, and that many of these tools were not so much anti-state interventions, as pro-certain types of interventions.

Let’s take the example of international investment agreements that allow investors to sue governments. The US didn’t roll out any of these until the Reagan years. But the seeds for the Reagan strategy were set a few years prior, in a  declassified memo authored by Carter official C. Fred Bergsten (who went on to found a center-right research center) in the summer of 1977. (It’s not easy to find: it is located on page 173 of a nearly 1,200 page PDF.)

In the memo, Bergsten lamented the lack of “enforcement teeth” in existing approaches to investment disputes, and considered a variety of approaches, from tax treaties, judicially enforceable trade remedies for goods made at expropriated factories, to insurance conditions, to multilateral and bilateral investment agreements. This last option he called a “GATT for investment”, after the trade agreement now under the WTO.

While today, investment treaties are sometimes justified as market-friendly, Bergsten took a different approach, emphasizing treaties’ interventionist nature:

The U.S. has traditionally not taken an active role with respect to foreign investment, in accordance with our general free market philosophy. This philosophy is not shared, however, by other governments which often intervene in investment to and from the United States. The interventions which have the most conspicuous effect on our national interests are the performance requirements imposed on firms by host governments, including quantitative and qualitative job quotas, minimum export quotas, “local content” requirements, and limitation of capital and local ownership. The United States is not necessarily worse off as a result of such intervention than it would be in the absence of foreign investment, but it is very likely worse off with foreign intervention than without it…

Cooperation of other governments in pursuing a GATT for Investment would depend on the specific contents of our proposal and the force with which we pursued our objective. Our case should be based on the general proposition that unregulated competition among governments in the investment area is just as detrimental as it would be with respect to trade, and on the proposition that we will no longer passively accept the interventionist policies of other nations. No explicit threats would be necessary, but we would have to make it clear that we are ready to take measures such as regulating  the outflow of investment and technology in accordance with our national interests…

A generation of scholars has puzzled over why the investment landscape is bilateral rather than multilateral. The key study on this question argues that it was developing countries who preferred the bilateral format – a “rational” response to the global competition for capital. Bergsten shows the developed country side of that equation: that US officials saw bilateral negotiations as less “political” and easier to conclude. This was in part because of their low visibility, which he also saw as a downside in terms of idea dissemination. A key factor also seems to be that bilateral rules would be less watered down. Bergsten writes:

The five basic questions we should have to address in making the complex decision as to which forum or forums we should use to pursue our investment objectives are as follows:

1. Should we rely on a single forum or pursue our objectives in a coordinated fashion in several forums at one time? A single new or existing forum would focus public attention on the negotiating process and facilitate bargaining across issues; multiple forums would result in less politicized negotiations.

2. Should we propose establishment of a new organization for the purpose of negotiating and eventually administering the proposed agreement or rely on existing institution or institutions? Creation of a large new organization would give investment issues a greater prominence in international economic affairs approaching that of the monetary, trade, and development areas. On the other hand, we could expect to encounter resistance from other countries on the grounds that a new initiative in the investment area would undermine ongoing codes of conduct negotiations in the U.N. and in the OECD. The relationship between these exercises and the new initiative might be handled either by keeping them separate or by folding both into a new forum.

3. Should participation in the agreement be universal or limited to a core group of like-minded countries? Universal participation would result in greater coverage of the agreement but might produce a tendency for the negotiations to become politicized and for the agreements to reflect the least common denominator. A “core group” of countries would probably be able to arrive at a stronger agreement, but a number of host countries would be excluded. Under either option agreement would have to be reached on the basis for decision-making, with the two principal models being the OECD procedures under which each country has an equal voice and all decisions must be unanimous, or the IMF, which has weighted representation.

4. If we decide to use an existing forum, which should we choose? If we propose the establishment of a new organization, what form should it take? The OECD has a staff with experience in the investment area, but its membership is limited and its procedures are slow. The United Nations also has some expertise in investment matters and wide membership, but it is highly political. The GATT has a heterogeneous membership and existing mechanisms and procedures which we might use as a model; however, it has not dealt extensively with investment issues.

5. Should we fall back from the bilateral treaty vehicle, rather than rely exclusively on lengthy multilateral negotiations? The United States and other developing countries have a number of FCN treaties and other countries have actively pursued narrower bilateral investment treaties. The major advantage is that they can be concluded with a minimum of difficulty; their fundamental disadvantage is that the public visibility of the effort will be low. Two options we have within the bilateral framework would be to negotiate narrow treaties with LDCs or to negotiate comprehensive treaties which would have the contents of and lay the groundwork for the GATT for Investment.

Bergsten’s memo shows a much deeper engagement with the investment agenda compared with previous administrations. In the mid 1960s, Johnson’s team tried to downplay the significance of investors suing states. Similarly, Nixon’s staff in 1970 were not chomping at the bit to establish any new institution. A year later, there seemed to be a bit more urgency, but even by 1976, the Ford administration was doing so little on investment policy that private sector service groups were pleading for a policy. (The Trade Act of 1974 set the political precedent for the importance of trade and investment, as I described in Chapter 5 here.)

Up until the release of these new documents, we’ve had to rely on secondary sources to understand pre-Reagan policy ideas on investment (such as legal scholar Kenneth Vandevelde‘s description of his recollections from serving under Carter). The new documents not only give us a datestamp, but also a sense of the language and rationale that that helped change a critical policy landscape.