Financial regulation is having a walk-on role in the raging trade debate between Obama and progressive legislators.
Sen. Elizabeth Warren (D-Mass.) is claiming that the Fast Track trade legislation could be used to undermine the Dodd-Frank Wall Street reforms. Her erstwhile partner in passing that bill – President Obama – virulently disagrees:
She is absolutely wrong… Think about the logic of that, right? The notion that I had this massive fight with Wall Street to make sure that we don’t repeat what happened in 2007, 2008 [the recession], and then I sign a [trade] provision what would unravel it? … I’d have to be pretty stupid.
The claim continues to be litigated in the secondary opinion market, with Bloomberg’s Mike Dornan backing up Warren…
Warren says she’s concerned that Republicans could include provisions in a future trade deal undercutting Dodd-Frank. They could then pass it with a simple majority in the U.S. Senate because the fast-track bill would prevent Democrats from blocking the legislation through a filibuster. Normally, it takes 60 votes to break a filibuster… On Warren’s side: One of the nation’s preeminent constitutional law scholars, Laurence Tribe of Harvard University, who counts Obama as a former student. “Any act of Congress or duly ratified treaty overrides any contrary prior federal legislation,” he said in an e-mail.
… and Matt Yglesias at Vox casting doubt on her claims…
Warren is right about this, but it’s also irrelevant. A Republican president looking to gut Dodd-Frank isn’t going to need anything as labyrinthine as a trade pact with Europe to wreck Obama’s signature financial regulation initiative.
For one thing, House Republicans keep passing bills to repeal parts of Dodd-Frank. They don’t pass because the Obama administration opposes them. But with the Cruz administration’s support, huge swaths of the bill would simply be repealed the old-fashioned way.
Beyond that, there is a lot of regulatory discretion in Dodd-Frank. The new president will appoint new personnel to run the SEC, CFTC, and CFPB and the Treasury Department. Later, the new president will appoint a new Fed chair and colleagues on the board. If these people want to go easier on the banks than Obama, that is exactly what is going to happen. Unlike in the case of environmental or civil rights regulations, there are no private causes of action that a regular citizen can take if she feels bank supervision is excessively lax.
Long story short, while it is easy to image a scenario in which a Republican president undermines bank regulation in 2017 it is difficult to imagine a scenario in which possession of Trade Promotion Authority is the linchpin of the scheme.
As someone who spent nearly a decade researching Fast Track and financial services trade issues, I am excited to see these issues break into the mainstream debate. Too often, reporters and politicians simplify the trade debate into a tariff reduction story. But tariffs are low, and most of modern trade deals are about behind-the-border regulation of the kind Warren is talking about.
But some of these interventions are conflating various issues, and confusing the debate as a result.
The first issue is Fast Track, which is a device to limit certain legislative procedures when it comes to votes on trade deals. It does not directly change substantive US laws.Whether it is a good or bad device depends on your point of view – not only about trade questions, but the nuts and bolts of legislative politics. If you dislike trade deals and believe that you could (and can only) prevail through having the full range of legislative tools like prolonged floor debate at your disposal, then Fast Track is troubling. Alternatively, you might look at Nancy Pelosi’s neutering of Fast Track for the US-Colombia trade deal in 2008 as proof that Congress can still reject trade deals it doesn’t like even with Fast Track. Finally, you might be skeptical that a progressive position could prevail with or without Fast Track in the current political climate. As Robert Draper writes:
The Democrats lost their majority in the Senate last November; to regain it, they will need to pick up five additional seats (or four if there’s a Democratic vice president who can cast the tiebreaking vote), and nonpartisan analysts do not rate their chances as good. The party’s situation in the House is far more dire. Only 188 of the lower chamber’s 435 seats are held by Democrats. Owing in part to the aggressiveness of Republican-controlled State Legislatures that redrew numerous congressional districts following the 2010 census, few believe that the Democratic Party is likely to retake power until after the next census in 2020, and even then, the respected political analyst Charles Cook rates the chances of the Democrats’ winning the House majority by 2022 as a long shot at best.
Second, there is the issue of the implementing legislation for trade agreements that would benefit from the Fast Track procedure. It has not been past US practice to change a great many domestic laws through this mechanism. The Colombia trade deal legislation, for instance (which eventually passed in 2011), just changed a few tariff and customs laws. The comments that I cited above by Warren, Obama, Dornan and Yglesias seem to fixate on this vehicle. While it is technically possible to use trade pact implementing legislation to gut Dodd-Frank, Yglesias is right that it is unlikely. Indeed, there would less bizarre channels for a President Walker or Cruz to achieve that objective.
The real issue is not that Dodd-Frank would be formally modified through Fast Track or a trade vote, but rather that the trade agreement would allow investors to directly challenge Dodd-Frank outside of the US court system for cash compensation. This could happen under a president named Obama, Cruz or even Warren. Marcus Stanley nails this point perfectly, in response to (the all but unnoticed) news that Canada believes that Dodd-Frank violates US trade obligations:
“The administration can say whatever it wants about its interpretation of these trade agreements,” said Marcus Stanley, policy director at Americans for Financial Reform, a Wall Street watchdog group. “The problem is, under the terms of these agreements, they are not going to be interpreting them. Private tribunals of trade lawyers are going to be interpreting them…
I think the average person would find this type of lawsuit pretty troubling.* They would certainly be a headache (but also a payday) for the lawyers that have to defend the US. Nonetheless – as a social science matter – we lack data on what the ultimate consequence of these lawsuits really are.
First, the remedy in these investor claims is almost always cash – not policy change. This could be considered an “efficient breach” design. Under this theory, governments that think the benefits of a policy outweigh the cost of litigation are free to go ahead with the measure, or to, in other words, breach-and-pay. (Alternatively, they could also not show up to hearings and refuse to pay awards.)
But it is possible that – over time – governments might structure their policies to avoid claims for damages. This is hard to systematically demonstrate. First, in my own research, I have found that treaty rulings are too different from one another to offer a meaningful guide to policy-making.
Second, countries might vary in their behavioral/policy response to lawsuits. Some governments (I am thinking Ecuador and Argentina) have actually used investor lawsuits as a populist rallying cry to gain support for their agenda. Others (I am thinking Russia) do what they want with or without investor lawsuits. Others (I am thinking the US) are sued so much in their own courts that any lawsuit impact on policymaking would be at the margin. It seems like what we are really worried about is that category of countries whose leaders are so feckless that they fold their principles in the face of litigation. Also, there are probably policy initiatives where government policymakers estimate the benefits only slightly above the costs. In such a case, an investor lawsuit might tip the scales against the action.
Regardless of where one stands on these empirical issues, there are reasons for policymakers to thoroughly debate whether to offer investment treaty protections. First, investment treaty rulings are a form of indirect diplomacy. What those judges decide is an extension of our foreign policy, so we need to make sure it is consistent with our values and other objectives. Second, the rulings set norms (even if unbinding) for what economic policy should look like. We don’t want the US Council of Economic Advisers spouting off trickle-down nonsense in their reports – not because they change policy, but because they change the debate. Similarly, we don’t want economic and regulatory debates being shaped by lawyers and judges that lack subject matter expertise.
*As a technical matter, these “lawsuits” are called “arbitrations”, the “judges” are called “arbitrators”, the “courts” are “ad hoc tribunals”. It gets a little tedious to use the parallel nomenclature, however, so I will just use the more familiar lingo.
Todd N. Tucker, PhD 