The Administration’s Dishonest Response to Elizabeth Warren’s Attack on Secret Investor Arbitration Panels in Trade Deals

Elizabeth Warren is clearly getting on the Administration’s nerves.

The Massachusetts senator has come out forcefully against the misleadingly named trade deals, the TransPacific Partnership and its ugly sister, the TransAtlantic Trade and Investment Partnership. Mind you, these treaties are not about trade. Trade is already substantially liberalized and in keeping, only five of the 29 chapters of the TransPacific Partnership deal with tariffs.

What these pacts are primarily intended to do is strengthen intellectual property laws to help US software and entertainment companies, along with Big Pharma, increase their hefty profits, and to aid multinational by permitting the greatly increased use of secret, conflict-ridden arbitration panels that allow foreign investors to sue governments over laws that they contend reduced potential future profits. I am not making that up.

Warren focused on the so-called investor-state dispute settlement process in a Washington Post op-ed last week. We’ve discussed these panels in gory detail in previous posts.

That article led the White House to issue a “lady doth protest too much” rebuttal that we’ll shred shortly. But let’s first review the state of play.

The Administration had no luck in the last Congress getting so-called “fast track” authorization for the TPP due to widespread opposition. It wasn’t just that Majority Leader Harry Reid refused to table it in the Senate. John Boehner made it clear that he couldn’t get the votes in Republican-controlled House to pass it either. Over 200 representatives, including some Republicans, signed letters or otherwise voiced reservations about the trade deals, and another 30 to 40 were believed to be against it. Although the Administration has tried to claim otherwise, the opposition goes well beyond the small cohort of “progressives”.

Part of the reason for the Congressional revolt is that the Administration has made it impossible for Congress to review the drafts properly. But another is that even some conservatives are willing to come out against these agreements as pork for big multinationals. For instance, the right wing think tank Cato supported the Warren op-ed:

An important pillar of trade agreements is the concept of “national treatment,” which says that imports and foreign companies will be afforded treatment no different from that afforded domestic products and companies. The principle is a commitment to nondiscrimination. But ISDS turns national treatment on its head, giving privileges to foreign companies that are not available to domestic companies. If a U.S. natural gas company believes that the value of its assets has suffered on account of a new subsidy for solar panel producers, judicial recourse is available in the U.S. court system only. But for foreign companies, ISDS provides an additional adjudicatory option.

As a practical matter, investment is a risky proposition. Foreign investment is even more so. But that doesn’t mean special institutions should be created to protect MNCs from the consequences of their business decisions. Multinational companies are savvy and sophisticated enough to evaluate risk and determine whether the expected returns cover that risk. Among the risk factors is the strength of the rule of law in the prospective investment jurisdiction. MNCs may want assurances, but why should they be entitled to them? ISDS amounts to a subsidy to mitigate the risk of outsourcing. While outsourcing shouldn’t be denigrated, punished, or taxed – companies should be free to allocate their resources as they see fit – neither should it be subsidized.

The trade deals are coming up again for a fast track vote, perhaps as soon as this week. Warren’s focus on the investor panels has the potential to raise awareness of how dangerous they are and stir more voters to press their Congressmen to nix fast track authority. Here is the guts of her case against these tribunals:

ISDS would allow foreign companies to challenge U.S. laws — and potentially to pick up huge payouts from taxpayers — without ever stepping foot in a U.S. court. Here’s how it would work. Imagine that the United States bans a toxic chemical that is often added to gasoline because of its health and environmental consequences. If a foreign company that makes the toxic chemical opposes the law, it would normally have to challenge it in a U.S. court. But with ISDS, the company could skip the U.S. courts and go before an international panel of arbitrators. If the company won, the ruling couldn’t be challenged in U.S. courts, and the arbitration panel could require American taxpayers to cough up millions — and even billions — of dollars in damages.

If that seems shocking, buckle your seat belt. ISDS could lead to gigantic fines, but it wouldn’t employ independent judges. Instead, highly paid corporate lawyers would go back and forth between representing corporations one day and sitting in judgment the next. Maybe that makes sense in an arbitration between two corporations, but not in cases between corporations and governments. If you’re a lawyer looking to maintain or attract high-paying corporate clients, how likely are you to rule against those corporations when it’s your turn in the judge’s seat?

If the tilt toward giant corporations wasn’t clear enough, consider who would get to use this special court: only international investors, which are, by and large, big corporations. So if a Vietnamese company with U.S. operations wanted to challenge an increase in the U.S. minimum wage, it could use ISDS. But if an American labor union believed Vietnam was allowing Vietnamese companies to pay slave wages in violation of trade commitments, the union would have to make its case in the Vietnamese courts.

And what was the White House’s response? It was dishonest at a high level and in detail.

On a high level, it asserts that subordinating the jurisdiction of US courts to secret, undemocratically accountable arbitration panels and given them the power to fine the US government for its laws and regulations is not a loss of sovereignity. Help me.

Last week, Lambert flagged that the Administration can’t even get its story straight. The text states:

The reality is that ISDS does not and cannot require countries to change any law or regulation.

Looking more broadly, TPP will result in higher levels of labor and environmental protections in most TPP countries than they have today.

Not only are those two statements inconsistent, but extensive work by Public Citizen demonstrates that the claims are misleading.

Narrowly speaking, suing ex post facto to make a government pay a foreign investor for his future lost profits does not “require” a country to revamp its rules. But who are you kidding? The ISDS mechanism vitiates enforcement.

In addition, the claim that the TPP will strengthen environmental protection is spurious. Wikileaks published a draft of the environment chapter. From Professor Jane Kelsey of New Zealand’s analysis:

The most egregious threat to the environment is the investment chapter, in particular the prior consent by all countries except Australia to investor-state dispute settlement (ISDS). The vast majority of investment arbitrations under similar agreements involve natural resources, especially mining, and have resulted in billions of dollars of damages against governments for measures designed to protect the environment from harm caused by foreign corporations. The US is also demanding that contracts between investors and states that involve natural resources also have access to ISDS.

Moreover, notice how the White House claims is “ISDS does not and cannot require countries to change any law or regulation. ” as opposed to “the TPP does not and cannot”? That word choice was deliberate. Other provisions in the agreement explicitly require all signatories to conform their laws to the TPP. From Public Citizen’s analysis:

What is different with TAFTA [pending Trans Atlantic Free Trade Agreement] (and TPP) is the extent of “behind the border” agenda

• Typical boilerplate: “Each Member shall ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the annexed Agreements.” …

• These rules are enforced by binding dispute resolution via foreign tribunals with ruling enforced by trade indefinite sanctions; No due process; No outside appeal. Countries must gut laws ruled against. Trade sanctions imposed…U.S. taxpayers must compensate foreign corporations.

• Permanence – no changes w/o consensus of all signatory countries. So, no room for progress, responses to emerging problems

• Starkly different from past of international trade between countries. This is diplomatic legislating of behind the border policies – but with trade negotiators not legislators or those who will live with results making the decisions.

• 3 private sector attorneys, unaccountable to any electorate, many of whom rotate between being “judges” & bringing cases for corps. against govts…Creates inherent conflicts of interest….

• Tribunals operate behind closed doors – lack basic due process

• Absolute tribunal discretion to set damages, compound interest, allocate costs

• No limit to amount of money tribunals can order govts to pay corps/investors
• Compound interest starting date if violation new norm ( compound interest ordered by tribunal doubles Occidental v. Ecuador $1.7B award to $3B plus

• Rulings not bound by precedent. No outside appeal. Annulment for limited errors.

In detail, the White House arguments were just as disingenuous. The text starts out by saying that arbitration is widely used and therefore the public should see it as safe and uncontroversial. Bollocks. Arbitration in the US is most often used in take-it-or-leave it contracts like brokerage and credit card agreements and cell phone contracts. And arbitration is hardly squeaky-clean even in the US; see the lawsuits and controversies faced by the National Arbitration Forum, for instance.

Moreover, the rebuttal attempts to depict these corporate star chambers as consistent with constitutional Fifth Amendment protections:

But when government takes its citizen’s property from them – be it a person’s home or their business – the government is required to provide compensation. This is a core principle reflected in the U.S. Constitution and recognized under international law and the legal systems of many countries.

So since this premise is so well accepted (and Warren reminds us that the TPP signatories all have grown-up legal systems), pray tell why do we need a special system of de facto above the legal system panels for the biggest, richest companies who are in a better position than just about anyone to press for their legal rights? The idea that a special legal venue that is for well-heeled multinationals has anything to do with the rights of ordinary citizens is an insult to the reader’s intelligence.

It’s ludicrous to compare run-of-the-mill US arbitration panels to ISDS forums. For example, in the US, arbitration clauses can be circumvented for reasons including failure of contract formation, unconscionability, and public policy. There’s no way out of ISDS. And recall Warren’s mention of conflicts of interest? It’s even worse than she intimated. Public Citizen examined how go between working for the companies and serving on the panels. A small and tight-knit group has disproportionate influence (click to enlarge):

Screen shot 2013-11-13 at 6.23.31 AM

Consider the implications of the fact that the 15, and the larger community of panel “regulars,” work both sides of the street. They draw cases that go before the trade panel, as well as hear them. Thus it’s in their interest to issue aggressive rulings in order to facilitate more cases being filed. Yet the White House has the temerity to describe repeatedly ISDS as “neutral arbitration”!

Voters are also supposed to take comfort from the fact that only 50 ISDS cases have been filed against the US and the US has won them all. That figure is meaningless without knowing the total filed, and irrelevant given, as Public Citizen stresses, investor rights are believed to be greatly strengthened in the TPP and TTIP, thus greatly increasing the role of these panels. Look at how this self-reinforcing system has been producing more case even before its gets its hoped-for turbo-charging through the pending trade deals:

Screen shot 2013-11-13 at 6.27.38 AM

And these cases are typically high stakes for the targeted country. Naked Capitalism readers have often referred to the Philip Morris suit against Australia for its requirement of plain packaging for cigarettes with prominent health warnings. The Administration statement also tries hair-splitting over another case that galvanized opinion in Germany against these trade forums, also described briefly in Elizabeth Warren’s Washington Post article, that of Swedish power company Vattenfal suing the German government over lost potential future profits due to the phase-out of nuclear power in Germany. Vattenfal is a serial trade pact litigant against Germany. In 2011, it sued for expected €1 billion plus losses in the case mentioned by Warren. In 2009, Vattenfall sued the German federal government over stricter environmental regulations on its coal-fired power plant in Hamburg-Moorburg, seeking €1.4 billion plus interest in damages. The parties settled out of court in August 2010.

So how did the Administration try to brush that off? By saying basically that the case didn’t require Germany to change the law, just to pay investors “for abrogating existing commitments”. Since when do companies have a right to a stable business environment? Written law, case law, the competitive environment, consumer appetites, and input prices change all the time. The Administration is, with a straight face, trying to defend the notion that running a business should be made free of risk. And it brushes aside the point we raised earlier, that vitiating enforcement is tantamount to vitiating regulation.

The Administration also tries to minimize the area where the regulatory race to the bottom created by the pending trade deals is almost certain to work against the US: in the financial regulatory realm. As weak as US reforms have been, the US is nevertheless generally seen as having done more to re-regulate than European countries. Moreover, even to the extent UK and European regulators have strengthened their rules, they’ve taken approaches that differ somewhat from those of the US, such as using contingent capital (aka “bail ins”) while we have had stronger requirements for higher capital levels.

Now the White House missive does point out that “prudential measures” for financial firms are exempted from the ISDS process. But that notion is vague and untested. And some areas where the US has been very aggressive in taking action against foreign firms, such as money laundering, are clearly not about the safety of the financial system.

And finally, for the Administration to insinuate that the TPP will result in greater transparency is dubious, given that it’s made it well-nigh impossible for anyone in Congress to do a proper review of the text. While the US Trade Representative technically allows access, in practice, that right is empty. The Congressman himself must read the text; no sending staffers or bringing experts allowed, and only staffers from the committees with direct oversight of trade bills (the Senate Finance Committee and the House Ways and Means Committee) are allowed to join their bosses. The USTR insists that the Congressman specify what chapter he wants to review in advance. The USTR then insists that the negotiator of those chapters be present. Since those negotiators travel, it usually takes three or four weeks to find a convenient time.

No note-taking is allowed. The text is full of bracketed sections where if language is disputed, the revisions suggested by other countries are in the brackets, with the country initials listed but then redacted, making it difficult to read (as in you can’t even read this dense text straight through; the flow of the document is interrupted by the various suggested changes). Having people from the USTR staring over your shoulder is distracting. And it’s an open question as to whether asking them questions is prudent, since it gives the USTR insight into what the Congressman is concerned about.

Perhaps these Congressmen have exceptional powers of concentration. But I read cases and legally dense material with some regularity, and I find my concentration starts going after an hour to an hour and a half. And I also find it difficult to get much more than a general sense of a contract of any length in one pass. You need to go over it again and again to see how the various sections tie together to even have an approximate grasp of what it means. There’s simply no way that any Congressman has anything more than a very fuzzy idea of what is in the TPP and the TTIP.

They very fact that the Administration is going to such absurd lengths to prevent informed Congressional review should be sufficient reason in and of itself to turn down the Administration’s request for fast-track authority.

Call your Senators and Representative (find phone numbers here and here) and tell them to vote against fast track authority. If they are Democrats, stress that Elizabeth Warren is right, that the investor panels are a danger to America’s legal protections, and the Administration’s rebuttal is contradictory and belied by information already in the public domain. If they are Republicans, refer to the Cato analysis, that this is an unjustified de facto subsidy to multinational corporations that are better able to watch out for themselves than any other type of business. Encourage friends and family members to do the same. And tweet and circulate this post to help get the word out.

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  1. der

    Funny the graph shows a rising tide of Investor cases beginning around the time of The 3 Marketeers aka “The Committee to Save the World” great de-regulation push. And wasn’t it Wall Streets defense that they can’t be responsible for their Timberwolf investor’s stupidity and lack of due diligence before putting it all into “one shitty deal” after another? So now the taxpayer-investors, and their representatives, want the time to look over the fine print to be met again by BobAlanLarry shouting “global economic meltdown! 13 bankers!”

    Led by greedy fools. World depression and deflation on the horizon.

  2. Mother May I

    You may look at our double-secret document. Eyes only, no notes, with a minder looking over your shoulder, at the time and place of our choosing.

    Nice to see lawmakers telling the corporate suits to stuff their rules, and their grand plans. Looks like there’s a limit to the humiliation that Congress will take.

    Maybe someone will think for two seconds and ask why they put up with that same nonsense from the spooks.

    1. susan the other

      yes, a small bit of hope for our political system – if we go TPP/TTIP all democratic politix is dead and we still will not contain China’s government run industries… our dear leaders are not facing up to reality – they are making it even worse.

  3. Ulysses

    Awesome post! Plan A, to slip Fast-Track through with barely anyone even noticing, has not worked out for the kleptocrats, even with the strong assistance of the MSM in deliberately not reporting on the issue. Now they have moved to Plan B, which is to muddy the waters– enough to dampen down the concerns of less-informed people to a level of vague disquiet that won’t threaten disruption.

    Activists in Oregon won’t go quietly into that dark night! Here’s how they are applying pressure to Sen. Wyden:

    1. hunkerdown

      I suspect this is Sen. Wyden doing his face-heel turn before cashing out.

      You simply can’t trust anyone that you can’t escort off the premises immediately. There’s a reason all these richies torture the help: the millions of times it works that don’t make the national news.

  4. mark

    That figure is meaningless without knowing the total filed, and irrelevant

    Elizabeth May, leader of the Green Party of Canada, in writing about the Investor state provisions of NAFTA said

    “It must be stressed that the nature of the full environmental impacts of Chapter 11 of NAFTA has never been assessed. The chilling effect of the Ethyl Corporations and S.D. Myers was profound. I am aware of a letter warning Alan Rock when he was Health Minister that removing the registration of pesticides for use in lawns for cosmetic purposes could give rise to Chapter 11 suits, so the move was not made. We have no way of assessing the “chilling effect” of the Chapter 11 cases that Canada has lost. In my opinion, there is a compelling case that the Ethyl and S.D. Myers case have resulted in failures of the Canadian government to regulate and/or ban toxic substances that they would have in the pre-Chapter 11 era.”

  5. ScottW

    Excellent column. Called Rep. Capuano (MA-D), Sens. Markey/Warren offices. Capuano & Markey aides act like they don’t know what is going on. Each tried to get me off the phone in less than 2 mins. with Markey’s aide putting me on hold and never coming back. I used to call my senators in NC on Iraq, etc., and never got treated like that even though they often disagreed with what I was saying.

    If TPP passes, how many billions will Obama amass for his soon to be created foundation?

  6. steelhead23

    So, we have the story of large multinational corporations hiding wealth and profits offshore to avoid those “onerous” corporate taxes – and here the president tries to hand them extralegal authority to sue We the People should we have the temerity to reduce their harms. Well, isn’t that special. Thank God the majority in Congress hate the president more than they love their sponsors. Heaven help us if that dynamic breaks down.

    1. susan the other

      It is almost as if Obama decided to just screw them all, that means us too, and be a very “oh gosh” innocent president saying all sorts of stuff that is easily proven to be treasonous at best… and then just let the chips fall.

  7. ex-PFC Chuck

    In view of the proposition that there is no such thing as a dumb question I offer the following:
    Are the TransAtlantic Trade and Investment Partnership (TTIP) and the Trans Atlantic Free Trade Agreement (TAFTA) the same thing under different names? Or are they two separate proposed treaties?

    1. BadBentham

      Well, the goal since the early 90s is the TAFTA, while TTIP is the currently negotiated treaty to realize it. In a way, its predecessor was the MAI, -Multilateral Agreement on Investment-, negotiated 95-98 in the OECD, which failed , e.g. , due to resistance from France .

  8. TedWa

    Let’s not overlook that both trade agreements are give-aways to Monsanto where they can sue countries that don’t want GMO’s. These treaties are ugly on every level. I and a lot of people called Sen. Wyden last week and read Friday that he’s backed down and no longer supports fast-track. Getting reading to call my state Senators. My guess is they actually think these treaties are about trade. Obama’s weasel word responses are so ludicrous in the way they twist meanings and shadow events. Imagine taking a course on the Constitution from this guy ! Almost always disingenuously acting and speaking, he only knows what he’s paid to know by the banksters. When the administration is talking about increased transparency there is no doubt in my mind that they mean we will be shown who the real rulers are. Will report back on the responses received from my state Senators.

    1. Praedor

      That has been one of my arguments to European acquaintances in particular: if TTIP is passed, all your countries that have banned GMOs will see those bans overridden and GMOs will be forced upon you. Same with neonicotinoids. You ban bee-killing pesticides and TTIP will basically allow the chemical companies to override your laws via a panel of corporate lawyers and force the pesticides on you anyway…or you will be taxed to pay for the “lost profits” as if investors are guaranteed profits no matter what.

      I can’t believe Germany settled with the Swiss energy company over a ruling in a lawyer-run arbitration panel. Say “NO”. What is the company going to do, invade? Arrest Merkel? Screw the corporations.

  9. rich caldwell

    A very nice job, and our one hope must be that public interest in this grows in response to many voices speaking in unison. The cynicism on display by WH and USTR is hard to even accept as real, but real it is. Rinse and repeat!

  10. Expat

    Amazing misstatements of law in the rebuttal. Just where in the Constitution is “compensation” required? I submit that the US Constitution requires only “due process” of law. Under Holder, this doesn’t even mean you get a hearing, much less compensation. The idiotic notion that investors are compensated for the risk they take is another fraud of neoliberalism that turns Smithian notions of capitalist reward for risk on its head. Those greedy “takings” people who, like other rentiers, tried to bleed the system for personal gain have infiltrated the Obama administration at the highest levels. Guess what, a risk means you might fail. And failing to anticipate the impulse of normal human beings for a better environment, a decent social welfare system, fair treatment of workers, customers, children, old people, etc., should only be rewarded in Pluto’s realm, not here on Earth.

    1. RUKidding

      For corporations, it’s all about privatize the profits, socialize the losses to/for them. The little people can go eff themselves and get used to it. Socialism is only for the fabulously wealthy and well connected.

      It is, uh, interesting how the greedy .001% has sold the notion that externalities should be bourn by the populace at large, as well as any risks. But, then, it’s winner take all for those who do well. Screw everyone else. This is sold to a hapless populace as fake “Libertarian-y” pull yourself up by your bootstraps, you must be hard working enough to do everything by yourself.

      Well, not so much. The global corporate fascists do nothing by themselves, and they spend a lot of money making sure that “governments” comply with their demands. We’ve already discussed endlessly how these humans are narcissistic sociopaths/psycopaths, who only care about themselves… but what they think will happen for them with the environment collapses is beyond my comprehension. I guess it fits into that old “joke” bumper sticker: “He who dies with the most toys WINS!”

    2. Yves Smith Post author

      The Fifth Amendment. The takings clause, which leads to having to compensate parties when property is taken using eminent domain.

  11. DanB

    Whatever Warren’s motivation(s) -principle, opportunism, a little bit of both- this move will up the pressure on Hillary to take a clear stand. Possibly Warren realizes that it’s now or never -due to her age- for a run for the presidency; and this is an issue that could give her traction within the party. Also, why is not the very fact that heavy restrictions are placed upon congress re: viewing these “treaties” not itself a constitutional issue?

    1. Kunst

      You know, it’s not guaranteed that Hillary will run, or that she will be a viable candidate. There are a fistful of Republican presidential candidates. What do the Democrats have besides Hillary?

  12. Another Gordon

    The trade deals create the possibility of an abuse I haven’t seen mentioned elsewhere, namely holding a country to ransom by proposing a business plan that would be unacceptable from the outset then cashing in when, inevitably, it’s stopped.

    For instance much of south east England is moderately prospective for fracking but it’s also the most populous part of the country and many residents are well connected with government etc. and opposition is strong. So, propose to frack under some particularly prosperous town (ideally one whose MP is a government minister) provided only that the geology is vaguely suitable then stand back and enjoy the fun, cashing in when your plan is turned down. Nice.

  13. susan the other

    If we are going into a new era, a global cooperation era, then our dear leaders are doing it all wrong. It is not just a question of foregoing long-fought struggles to protect the environment and national laws, it a a question of balance, commonly referred to as sustainability, which phrase still glosses over the reality we face. It is a question of respecting and protecting the environment. If trade becomes the bludgeon of power centers, the earth itself will be sacrificed. Don’t kid yourself. So when Obama blames China for stealing our jobs and other bullshit designed as red herrings so we fail to see that our own corporations did all the fucking outsourcing – and then he adds that “China’s” unfair (government sponsored, aka “not free trade” baloney) is putting our workers at a “disadvantage” can make you downright nauseous. – Oh dear god please deliver me as soon as you can from this unmitigated, childish confrontation.

  14. skippy

    I enjoy the term – Neoliberal Constitutionalism – in Lieu of TTP et al.


  15. Pepsi

    I hope that people are starting to wise up to the neoliberal race to the bottom. When I was a kid I thought ‘protectionist’ was a another word for nazi, because of the way it was deployed on the news. You can only call black white for so long before people start to catch on.

  16. Faye Carr

    Embarrassed to say this (I’m with ex-pfc chuck) to get this onto the public radar in a big enough way, somebody much smarter thn me is going to have to come up with a way to simplify the language.

    I get the horror show of it all, but am completely helpless when trying to explain it. Not to mention having to parse out all the weasel words and statements.

  17. J Palmer

    I just called my Congressperson Katherine Clark (massachusetts) and she is still firmly against fast tracking the TPP, for transparency and will remain so despite pressure mounting pressure to vote for fast tracking.
    Is it possible that this whole Netanyahu media circus is a distraction so that a fast track vote can be mounted? nah, couldn’t possibly be.

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