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Brexit fallout

I have a blog on Brexit fallout over at the Roosevelt Institute site.

Here’s a teaser…

The Brexit vote demonstrated the limits of U.S. pressure.

While the U.S. has a long history of intervening in votes in developing countries, recent years have seen a more widespread abandonment of neutrality. In 2014, the U.S. weighed in against the Scottish independence vote. This year, President Obama traveled to England to push Remain, and the U.S. Trade Representative threatened an increase in trade barriers against the UK if Leave succeeded.

It didn’t work this time. The failure of the Remain campaign has now triggered political blowback on both sides of the Atlantic and both sides of the aisle.

Head over to the Roosevelt site to read the full thing.

Who Should Save Puerto Rico?

Today’s Supreme Court ruling offered two options: Congress or the Court.

Puerto Rico is in the middle of a debt crisis, driven in part by unsustainable debts of its public utilities.

The island is an unusual legal bind. In the 50 states, federal law allows municipalities and public utilities to enter into agreements with state governments to access bankruptcy processes. This happened famously in Detroit, where Michigan Gov. Rick Snyder imposed supervision on the city government in exchange for getting the bankruptcy go-ahead. In contrast, Puerto Rico lacks the greenlighting power of Michigan, but is provided no other way to access federal bankruptcy protection. Puerto Rico’s government tried to work around this by passing a territorial law in 2014 creating a parallel bankruptcy process.

Creditors challenged Puerto Rico’s new law, and the case made its way up to SCOTUS, where a majority and minority split on their approach.

The question was whether federal law is to be interpreted as dis-empowering Puerto Rico without offering an alternative. If yes, then Congress left a gap in the law that it must work to fix before Puerto Ricans can get relief. If not, then the Court must take it on itself to find a solution most consistent with the social purpose of bankruptcy protections.

Clarence Thomas (joined by a liberal-conservative Court majority of Roberts, Kennedy, Breyer, and Kagan) said yes:

Puerto Rico’s municipalities cannot satisfy the requirements of Chapter 9’s gateway provision until Congress intervenes… our constitutional structure does not permit this Court to “rewrite the statute that Congress has enacted.” … That statute precludes Puerto Rico from authorizing its municipalities to seek relief under Chapter 9. But it does not remove Puerto Rico from the scope of Chapter 9’s preemption provision. Federal law, therefore, pre-empts the [Puerto Rican 2014] Recovery Act.

Sonia Sotomayor (joined by Ginsburg) said no. The only justice of Puerto Rican descent on the Court, she wrote that what mattered most is the consequences on the ground:

When debtors face untenable debt loads, bankruptcy is the primary tool the law uses to forge workable long-term solutions. By requiring a debtor and creditors to negotiate together and forcing both sides to make concessions within the limits set by law, bankruptcy gives the debtor a “fresh start,” discourages creditors from racing each other to sue the debtor, prohibits a small number of holdout creditors from blocking a compromise, protects important creditor rights such as the prioritization of debts, and allows all parties to find equitable and efficient solutions to fiscal problems…

These concerns are starkly presented in the context of municipal entities like public utilities. While a business corporation can use bankruptcy to reorganize, and, if that fails, fold up shop and liquidate all of its assets, governments cannot shut down power plants, water, hospitals, sewers, and trains and leave citizens to fend for themselves. A “fresh start” can help not only the unfortunate individual debtor but also—and perhaps especially—the unfortunate municipality and its people…

For Sotomayor, leaving Puerto Rico in a legal vise was untenable and finding that the island had the ability to help itself was the correct interpretation:

Continue reading “Who Should Save Puerto Rico?”

More on populism

My friend Ben McKean has a great post in the Monkey Cage on populism in the election.

His angle: that political theorist Ernesto Laclau has something to tell us about it.

Readers may recall that I speculated about this linkage a few weeks ago. If you want a treatment backed up by some actual knowledge about political theory, go check out Ben’s post.

Here’s a teaser:

Laclau draws much of his argument from difficult theorists like Jacques Derrida and Jacques Lacan, but his central insight is simple: Engaging in politics can give people new identities. A great deal of political science assumes that citizens come to politics with political preferences already in place, and treats politics as conflict between pre-existing interest or identity groups.

Laclau argues that this underestimates the power of politics to change how we understand who we are. Populism does this by linking demands together so that they form what Laclau calls an “empty signifier” — a popular demand whose policy content is less important than the opportunity it provides to identify with “the people” as a whole.

Laclau’s idea of the empty signifier helps explain several features of populism that would otherwise be puzzling. He emphasizes the importance of identity over policy — which makes it easier to understand how someone could be enthusiastic about both Trump and Sanders when the candidates support very different policies. Podemos and Syriza, therefore, believe that if they offer the right vision of “the people,” voters will be enthusiastic about their platforms.

How to Disappear a Panel Report

The World Trade Organization ruled against Panama’s pro-tax haven advocacy in a decision dropped earlier this month.

As I wrote about here, here, here, here, here, here, and here, a 2015 WTO panel had ruled partially in favor of Panama’s challenge of Argentine anti-tax haven policies.

Those posts show that there was a lot of wacky aspects to the case and the panel’s reasoning.

First, Panama was actually benefiting from the aspects of of Argentine law deemed WTO-illegal. The only harm was to tax havens other than Panama. This raised the largely untested question of whether a WTO member can bring legal challenges to relieve damages felt only by other members. It also raised the issue of the WTO compatibility of Argentina’s generous diplomacy-motivated exemptions from its law for certain tax havens (like Panama) that had signaled a willingness to cooperate.

Second, the panel seemed to mix up which provisions of the WTO’s General Agreement on Trade in Services (GATS) represent trade expansion obligations and which provisions provide defenses against those obligations. Their interpretations would have raised the bar considerably for how effective a trade-limiting policy would need to be to survive a GATS compatibility examination.

Finally, the panel seemed to break a “gentlemens’ agreement”that financial stability policies are to be left outside of WTO remit.

Had these decisions been allowed to stand, countries could argue that anti-tax haven policy needs to be 100% effective if it’s going to interfere with trade. Since no policy is 100% perfect, this is an invitation to litigation.

In a decision released on April 14, the WTO’s Appellate Body indicated it was having none of the panel’s approach. The section consisting of Ujal Singh Bhatia (India), Yuejiao Zhang (China), and Seung Wha Chang (Korea) ruled that Panama had not made its case that Argentina violated its WTO obligations.

By ruling against all of the panel’s major findings, they showed how to make a panel report disappear.

Continue reading “How to Disappear a Panel Report”

Industrial Policy Under #ISDS

Industrial policy – once a key government policy – has been on the wane in recent years.

I think of industrial policy as state-led efforts to: 1) create local jobs and production; and 2) help remedy market failures that keep local producers from moving into new activities or up supply chains. Albert Hirschman’s The Strategy of Economic Development is the key reference in the field. In that 1958 book, he lays out a theory of unbalanced growth, whereby investment that would not otherwise be brought to developed countries. How? Policymakers determine which which sectors and industries complement one another, and give incentives for them to grow together. For example, a forward linkage from Industry B helps support Industry C further along a supply chain, while a backward linkage encourages Industry A that supplies Industry B.

While industrial policy is often associated with countries farther down the development ladder, there is a case for using it in rich countries to promote new green industries.

Why is industrial policy not a major part of the policy conversation these days?

Some of the reason is that economists generally sneer at it.

And some of the reason is structural, as Eduardo Porter opines in today’s NYT:

Manufacturing jobs are on the decline in factories around the world.

“The observation is uncontroversial,” said Joseph Stiglitz, the Nobel-winning economist at Columbia University. “Global employment in manufacturing is going down because productivity increases are exceeding increases in demand for manufactured products by a significant amount.”

The consequences of this dynamic are often misunderstood, not least by politicians offering slogans to fix them.

No matter how high the tariffs Mr. Trump wants to raise to encircle the American economy, he will not be able to produce a manufacturing renaissance at home. Neither would changing tax rules to limit corporate flight from the United States, as Mrs. Clinton proposes.

“The likelihood that we will get a manufacturing recovery is close to nil,” Professor Stiglitz said. “We are more likely to have a smaller share of a shrinking pie.”…

The shrinking of manufacturing employment is global. In other words, strategies to restore manufacturing jobs in one country will amount to destroying them in another, in a worldwide zero-sum game.

Finally, some have worried that policymakers themselves have put up roadblocks to an industrial policy renaissance. Agreements like the North American Free Trade Agreement (NAFTA) have rules that would seem to make it more difficult to use industrial policy, including through lawsuits under investor-state dispute settlement (ISDS).

For folks that worry about that possibility, T. Boone Pickens’ failed NAFTA challenge against Canada’s green jobs policy should come as a relief, as I wrote yesterday.

Continue reading “Industrial Policy Under #ISDS”

Slim Pickens in #NAFTA Case

A claim for $700 million over Canada’s wind energy policies was dismissed by a trio of arbitrators in a decision unearthed last week by IAReporter.

Alexandra Stevenson reports on the origins of the dispute:

T. Boone Pickens made billions drilling for oil and gas and squaring off in bare-knuckled corporate takeover bouts.

Now the 87-year-old tycoon is embroiled in what may be the last big battle of his career. Only this one is aimed thousands of miles north of his Texas home. And it is over wind power.

As part of his attempt to show he could move to green energy, Pickens moved north. Stevenson writes:

When Ontario enacted a Green Energy Act in 2009, both [Pickens’ company] Mesa Power and [Florida company] NextEra saw an opportunity. As part of its policy change, the government created a program to provide incentives for companies to invest in renewable energy projects. Companies that were awarded contracts would be paid premium guaranteed prices set by the government. In one auction, more than 500 applications were submitted, exceeding the government’s expectations, according to statements filed with the court.

“It was a very, very attractive price,” said Cole Robertson, who was vice president of finance for Mesa Power at the time, noting that the government’s set price in 2011 was double that in Texas at time.

Mesa Power submitted several project proposals through the program. But when the first rankings came out in late 2010, its executives disputed the assessments, arguing that Mesa Power’s projects should have been higher.

Pickens maintains that NextEra and other companies were treated favorably at his expense:

The province of Ontario granted NextEra $3.8 billion in energy contracts. Mesa Power contends that $18,600 in donations that NextEra made to the ruling Liberal Party in Ontario before elections in 2011 had undue influence on the auction…

Mesa Power’s notice of arbitration also includes allegations of favoritism toward two Korean companies, Samsung C&T and Korea Electric Power Corporation, that entered a separate energy deal with the government…

Pickens brought a claim under NAFTA, claiming $700 million in damages from Canada’s alleged failure to provide fair and equitable treatment, national treatment, most-favored nation treatment. He also insisted that Ontario requirements to source a certain percentage of the product locally was a violation of NAFTA rules on performance requirements.

In March, an investor-state dispute settlement (ISDS) tribunal composed under NAFTA issued its decision. It was composed of Gabrielle Kaufmann-Kohler (a Swiss arbitrator chairing the case), Toby Landau (a British arbitrator picked by Canada), and Charles Brower (a U.S. arbitrator picked by Mesa).

Their award has only been available for reading in the last few days. The three arbitrators agreed that Canada had excluded government procurement from most NAFTA investment rules, and so the bulk of the claims must fail. Moreover, they ordered Pickens’ company to pick up much of Canada’s arbitration and legal costs.

The tribunal split, however, on the obligation to provide fair and equitable treatment (FET), from which procurement was not excluded. Kaufmann-Kohler and Landau argued that FET is a demanding standard for investors to prove, and only ensnares particularly egregious behavior. Investor appointee Brower saw things differently. In a dissenting opinion, he wrote that Ontario – after inviting bids – basically made it impossible for Mesa to succeed.

I’ll have more to say about the specifics of the FET claim in a future post, but the decision makes clear that “precision rules.” When governments are very clear about what sectors they want to exclude from a trade agreement, arbitrators (even investor appointees) have a hard time going against that. These carve outs are so effective that they can excuse substantial restrictions with markets and trade flows (such as Ontario’s requirement that renewable producers source a percentage of their purchases locally.) But when governments leave pockets of treaty imprecision like FET, it is easier for arbitrators to see matters through their own personal lens.

This introduces highly variable tribunal decision-making. Indeed, the only reason Pickens’ largely quixotic claim makes any sense is as a bet on FET. He might have gotten a different set of arbitrators that would have been more receptive. Unfortunately for him, he bet wrong.

Clinton and Sanders Go Deep on #ISDS

Hillary Clinton and Bernie Sanders just unloaded more detail on investor-state dispute settlement (ISDS).

The Pennsylvania Fair Trade Coalition, an advocacy group, sent out questionnaires asking both candidates the following:

Would you support or oppose future trade agreements, including the TPP [Trans-Pacific Partnership] and the pending Transatlantic Trade and Investment Partnership (TTIP), if they included “investor-state” dispute resolution, a mechanism that allows foreign corporations to challenge U.S. federal, state and local laws, regulations, court decisions and government actions in private extrajudicial tribunals that circumvent the U.S. judicial system to obtain unlimited sums of taxpayer compensation for those that investors claim violate their new TPP rights and undermine investors’ expectations?

Clinton’s answer:

As I have said, I have 3 tests for any new trade agreements: do they (1) create American jobs, (2) raise wages, and (3) improve our national security? If the agreements won’t create good-paying jobs here at home and make our country stronger, I simply won’t support them. With respect to the flawed ISDS provisions in TPP – which I even wrote about in my book – I think we need to have a new paradigm for trade agreements that doesn’t give special rights to corporations that workers and NGOs don’t get.

Sanders’  answer:

The TPP creates a special dispute resolution process that allows corporations to challenge any domestic laws that could adversely impact their “expected future profits.” These challenges would be heard before UN and World Bank tribunals which could require taxpayer compensation to corporations. This process undermines our sovereignty and subverts democratically passed laws including those dealing with labor, health, and the environment.

As president, I will not approve any trade agreement that gives foreign corporations the right to undermine American democracy through the disastrous Investor State Dispute Settlement system.

Both candidates were given the opportunity to circle the options “support” or “oppose.” Clinton did neither, while Sanders wrote “oppose.” Neither answer specifically addresses ISDS in TTIP with Europe, where countries are working feverishly to come up with alternative dispute settlement arrangements.

The candidates’ responses cover views on a number of dimensions of trade policy, and Clinton circled back around to ISDS later in the questionnaire. For example,the PFTC asked: “Would you support or oppose future trade agreements, including the TPP and TIIP, if they fail to mention the term “climate change” and fail to include clear carve-outs protecting future climate policies from attack under the agreement?” Clinton’s response echoed her previous answer:

As president I will ensure that our trade policy supports, rather than undermines, our policies to reduce emissions at home and encourage climate action abroad. I know there is concern among environmental groups that the ISDS provisions in the TPP could be used to undermine U.S. efforts to cut carbon pollution and take action on climate change. With respect to the flawed ISDS provisions in TPP – which I even wrote about in my book-I think we need to have a new paradigm for trade agreements that doesn’t give special rights to corporations that workers and NGOs don’t get.

In sum, it seems that Sanders is unequivocally against any investor state dispute settlement, seeing it by its nature as subverting democracy. In contrast, Clinton seems more concerned by the perceived double standard: investors get access to procedural and substantive protections not available to a wider set of interests.

Sanders’ unequivocal responses on trade will probably play well in import-sensitive states like Pennsylvania.

But if the folks at FiveThirtyEight are to be believed, unless Sanders can pull off double digit margins of victory there and in remaining states like California, Clinton is on track to win the Democratic nomination.

If she does, might we see investor-state dispute settlement morph into everybody-state dispute settlement? In other words, will human rights groups and non-investing individuals get new transnational legal forums to advance their interests? This could turn ISDS into something more resembling a cross-regional European Court of Human Rights, which allows suits by investors and non-investors over violations of property rights and broader human rights. There would be a lot of specifics to iron out, including what rights of non-investors get protected, and how exactly they can go about launching cases.

Idealistic international lawyers, get ready for lots of fun drafting problems!

For Sanders’ full response, click here. For an OCR readable version of Clinton’s response, click here.

#ISDS Meets Its Maker?

Dutch courts have set aside the record-breaking $50 billion Yukos award against Russia. The case was brought under the Energy Charter Treaty, a regional pact that allows investor-state dispute settlement (ISDS).

As Global Arbitration Review reports:

In a decision released early this morning, The Hague District Court accepted Russia’s reading of Article 45 of the Energy Charter Treaty on provisional application and held the state – which never ratified the treaty – was only bound by those provisions reconcilable with Russian law, including the 1993 Russian Constitution. The constitution requires that where Russia signs up to treaties that supplement or amend existing law, new laws must be passed to reflect the treaty provisions.

The court said that based on its signature of the ECT alone, Russia was not bound by the treaty’s Article 26 and its unconditional offer to arbitrate any disputes. The shareholders’ notice of arbitration on Russia accordingly did not constitute a valid arbitration agreement and the tribunal composed of Yves Fortier QC, Charles Poncet and Stephen Schwebel was not competent to hear the case.

As under traditional private sector arbitration, national courts supervise ISDS. Because both arbitration systems outsource key judicial functions to non-state adjudicators, it is up to state judges to decide whether arbitration decisions should stand or not. Typically, the national courts will defer to the arbitrators on the merits of the decision, but will more closely scrutinize whether the parties both agreed to the arbitration in the first place. In legal terms, they ask whether there is consent that paved the way for the arbitral tribunal to have jurisdiction over the case.

Dutch arbitrator Albert Jan van den Berg was counsel for Russia in the case, and had this to say to GAR:

Albert Jan van den Berg, partner at Hanotiau & van den Berg in Brussels, was lead counsel to Russia in the Hague court proceedings, assisted by Dutch firm Hauthoff Buruma. He says that given a long list of errors in the awards, he is “grateful” that the Dutch courts have intervened to reverse them.

Elaborating, van den Berg says the case should never have been brought under the ECT as it was “a Russian tax dispute between Russian nationals and the Russian Federation concerning Russian tax assessments against a Russian company that Russian oligarchs owned and controlled.”

“If the Yukos awards had been held valid and enforceable, the integrity and credibility of investment arbitration would have been seriously jeopardised,” he says.

It seems van den Berg is on a one-man mission to save ISDS from itself. As arbitrator, he has criticized colleagues for being overly partisan in their rulings. In his other hat as counsel (more relevant to today’s decision), he has shown willingness to consort with national court supervisors when arbitrators go too far.

His crusade will be hampered by investment treaties’ design, however. GAR quotes Yukos counsel Yas Banifatemi as saying: “The claimants will continue moving forward with their worldwide efforts to enforce the Russian Federation’s international obligations, as recognised by the arbitral tribunal. Under the 1958 New York Convention, enforcement courts will be at liberty to assess the award for themselves, irrespective of what the Dutch courts have to say on the matter.” In other words, the investors don’t need Dutch courts. They can also go to U.S, U.K., and other courts in a search for attachable assets. Moreover, the claimants will still be able to appeal to higher Dutch courts.

The  combination of ad hoc arbitration with cross-national enforcement opportunities means that – when investors lose in one forum – they can shift to another.

Most national courts have shown minimal willingness to review arbitration decisions. I only know of three instances in treaty-based investment arbitration. In 2015, a Paris court set aside an award against Madagascar because of a failure to take party submissions on damages into account. In 2013, Swedish courts set aside an award against Russia when the investor failed to collect on it. Only in one case – Metalclad v. Mexico (2001) – did a Canadian court revisit the merits of the decision. This is an outlier, and one dismissed by arbitrators ever since.

What about the U.S.?  Before Antonin Scalia’s death, a Supreme Court majority of 7-2 declined to review an ISDS decision against Argentina. Presumably, that comes down to 6-2 with his passing – still a comfortable majority.

The question I would have is whether the particular facts of this case might make national courts more sympathetic to  Russia’s plight. Particularly, will they conclude that the proper venue for citizens to sue their own government is in home country courts?

Continue reading “#ISDS Meets Its Maker?”

Referendums on Integration

When voters get to decide, do they support economic integration? The recent Dutch rejection of an EU treaty suggests maybe not.

Dan Bilefsky reports that this follows on a long line of voter skepticism:

In past decades, when faced with plebiscites on whether to embrace further European integration, voters across the Continent had a habit of slamming on the brakes — though in several instances they later changed their minds.

So Britain’s vote on June 23 on whether to exit the European Union, a process often referred to as “Brexit,” could have huge ramifications.

Those who favor leaving say that Britain would have stronger control over its borders if it left the union, and that it could negotiate trade deals on its own. Their opponents warn that leaving the world’s largest trading bloc will have dire economic consequences.

Most economists say that leaving the European Union will have a negative impact in the short term, but that the longer-term consequences are less clear.

Simon Tilford, deputy director of the Center for European Reform, a research organization in London, noted that referendums in Europe had often fallen prey to oversimplification, base appeals to emotions and scaremongering on both sides. “Lots of people will not consider the issues carefully, but will instead allow their frustrations with immigration and globalization, or fears over loss of sovereignty, to influence how they vote,” he said.

Despite Tilford’s take, Bilefsky notes how voters in some cases seemed more strategic in their voting patterns. In Denmark and Ireland, for example, voters rejected treaties in the first go around. This forced renegotiation, whereby their governments got concessions. When a do-over referendum was called, the voters approved the new treaty.

Regardless of the wisdom of foreign-policy-by-referendum, these events provide an opportunity to directly assess how the public thinks about issues usually discussed behind closed doors of foreign ministries. The data is superior in some respects to survey questionnaires, whereby a pollster asks people to rank their generic feelings about concepts like “free trade.” In those contexts, the respondent may not have thought deeply about the issue, may not want to share their real views, or know that their response won’t directly effect real world outcomes. In short, the question may not be that salient to them, and their response thus not very revealing.

Robert Urbatsch conducted a study of a 2007 referendum in Costa Rica on the Central America Free Trade Agreement (CAFTA), and describes some of the issues (methodological and otherwise) involved:

The vote on CAFTA garnered public and media attention as the first referendum
in Costa Rican history, and the free trade agreement was itself politically
contentious. The opposition had forced the government to submit the treaty to popular vote after months of constitutional maneuvering and street protests. Moreover, polling showed a close and tightening contest throughout the months leading up to the vote. In the event, the referendum passed with 51+6 percent of the vote; 59+2 percent of the electorate cast ballots. This compares with 65+4 percent turnout in the closely contested 2006 presidential election, typically the biggest event
in the Costa Rican electoral cycle.

Hence the 2007 Costa Rican vote was, unusually, a vote focused squarely on
high-salience international economic policy issues. It occurred, helpfully, in Latin
America, an especially fruitful area for research in mass attitudes toward markets
and international cooperation. Moreover, unlike in popular votes on the European
Union, the question at issue had few confounding issues of political unification
or regulatory change. The referendum accordingly offers rare insight into the
willingness of the public to accept or reject international economic liberalization
in a practical setting. The very rarity of this sort of vote of course raises questions
about generalizability: the circumstances that allowed such a vote are not likely to
have been random, and the results obviously do not speak to how trade policy
arises in most circumstances. The referendum nevertheless provides an internally
consistent way of looking at economic preferences. Where its results correspond
to or diverge from prior findings, it can help to establish their robustness to nonsurvey methodologies.

In his empirical section, he finds some surprising results. While theory would predict that workers in vulnerable import-competing sectors would be more likely to vote against CAFTA, Urbatsch found that education workers (which is thought to be non-trade sensitive)  were more opposed. Areas with pensioners were less likely to support, while indigenous voters were very likely to support CAFTA. Finally, opposition to the trade deal did not map neatly onto a left-right spectrum – something we’re seeing in the U.S. election this year as well.

As Urbatsch notes, there’s also reason to believe that the unique circumstances of the CAFTA vote affected the outcome. In a paper I wrote with Costa Rican economist Henry Mora at the time, we examined how the Bush administration intervened in the referendum. U.S. officials’ false suggestion that non-CAFTA trade preferences would expire may have helped sway public opinion.

In contrast to the CAFTA referendum, the Brexit referendum won’t be similarly tidy as an indicator of voter preferences. The campaigns for and against are throwing a wide range of issues on the table. As a result, voters may be channeling concerns about everything from trade, to immigration, to generic feelings about Europe, to even fishing practices. Nonetheless, it provides a rare opportunity for the average person to weigh in on the heights of statecraft. Whether the statecrafters will appreciate the input is a different matter.