What should be in free trade agreements?

From https://johnhcochrane.blogspot.com/2018/08/free-trade-or-managed-mercantilism.html

Edward Prescott on the benefits of the common market

@PaulKrugman explains #TPPANoWay

From https://nyti.ms/1GlFJXO

@paulkrugman on what the #TPPA was and wasn’t #TPPANoWAY

@Paul Krugman (2018) explains labour standards in trade agreements to @SenWarren @BernieSanders @AOC

From https://nyti.ms/2FKTPcS

@paulkrugman at his best on #TPPANoWay

From https://nyti.ms/1Oj2eUC

@NZGreens @nzlabour @jamespshaw #TPA a brief history of trade policy

Is investor state dispute settlement a form of overseas development assistance?

Would objections to the Investor State Dispute Settlement provisions in the proposed Trans-Pacific Partnership wilt away if the adjudicating body was the International Court of Justice? The left-wing opponents of investor state dispute settlement genuflect at the very mention of the International Court of Justice and international law generally (unless it is international economic law).

Disputes over the provisions of European union treaties are adjudicated by the European Court of Justice. The judgements of that court brought by individuals against member states so annoy the British that it is a leading reason for many British wanting to leave the European Union and replace the Human Rights Act 1998 with a British Bill Of Rights policed by British courts rather than by the European Court of Justice and European human rights law.

It is routine for any treaty to have some provision for arbitration of disputes. This includes trade and investment treaties.

The World Trade Organisation treaty includes a dispute settlement provision with arbitrators based in Geneva. Some of the more than 400 cases heard have been motivated by discrimination against imports on the basis of a breached environmental protection policies of the importing country.

A number of countries want to ban imports that are produced in ways that upset them. Others want to include labour and environmental standards in trade agreements to impose developed country standards on developing countries in what is a new form of colonialism.

I have previously said that investor State Dispute Settlement provisions have no place in trade and investment treaties between democracies. I must now admit there are good reasons to have arbitration clauses in treaties between democracies.

The puzzle is why refer these trade and investment disputes to a little-known arbitration body adjunct to the World Bank rather than the far more prestigious International Court of Justice.

Perhaps the reason is both sides want an arbitrator who is not too strong and not too credible. It would look very bad if the International Court of Justice was to rule against you.

William Landes and Richard Posner contended that judicial independence maximises the value of legislative deals with interest groups by enhancing the durability of those deals.

Why no International Court of Commercial Law? When deciding what type in judiciary to enforce international trade bargains, the signatories may prefer a less credible adjudication and enforcement mechanism in case they want to opt out of it or chip around the decision.

The jurisdiction of the International Court of Justice is to settle, in accordance with international law, legal disputes submitted to it by special agreement and matters specifically provided for in treaties and conventions in force.

UN member states are the parties to any litigation but that doesn’t stop them raising cases on behalf of individuals. That said, organizations, private enterprises, and individuals cannot have their cases taken to the International Court, such as to appeal a national supreme court’s ruling. Only the states can bring the cases and become the defendants of the cases.

The International Court of Justice is different from the European Court of Justice because individuals cannot easily bring complaints before it. One of the causes of action before  the European Court of Adjusters is under European competition law over member states providing financial aid to industries.

Democratic countries with high levels of economic and  social integration, such as the  European union, do find it in advantage to set up a European wide Court to adjudicate disputes over rights under European law.

Why then would a democracy sign up to an investment protection treaty with a developing country? One reason is overseas development assistance.

Developing countries with corrupt and incompetent courts, politicians and bureaucracies sign international treaties as a way of assuring foreign investors and trading partners of some degree of security of their property rights and their ability to enforce contracts with suppliers and buyers.

By folding these assurances into trade treaties, the developing country has a stronger incentive to honour its promises. There will be domestic constituencies wanting to retain reciprocal export market access who will lobby for the honouring of the promises of legal protection to investors and businesses in their home country.

New Zealand signing up to the Trans-Pacific Partnership is an example of this form of overseas development assistance. Exporters and investors from the developing country who export and invest in New Zealand have another reason to support more secure property rights and better enforcement of contracts in their home country as a way of securing their treaty rights to export and invest in New Zealand.

The Left of the political spectrum should be keen on this form of overseas development considering their general belief in greatly increasing the amount spent on overseas development assistance. Rather than pay cash to the development country, the payment is in kind as reciprocal legal promises.

Trade treaties that include investor state dispute settlement are forms of governance assistance to developing countries. The reciprocal exchange of promises about investor protection and the enforcement of contracts and property rights improves the quality of governance in the developing country.

The countries most likely to be subject to investor state dispute settlement are those with weaker governance. Even in the European Union, the member states most likely to be sued are former communist countries. The most common course of action was the cancellation of a licence or permit.

Investor state dispute settlement clauses are no different from any other international treaty include environmental and human rights treaties. All these treaties require countries to give up part of their sovereignty.

Democracies give up their sovereignty in investor state dispute settlement in the hope that developing country partners to the treaty will improve the development potential of their country through better governance and more secure property rights.

That is an overseas development aid objective the Left of the political spectrum should support, but it does not. The Left of the political spectrum is happy to use trade agreements to impose developed country labour and environmental standards on poor countries desperate for access to rich country markets, but is not willing to give up anything in return.

Senator Warren made a good case against Investor-State Dispute Settlement in the TPP

In the Washington Post a few months ago, Senator Elizabeth Warren made a balanced case against investor state dispute settlement, not only in the Trans-Pacific Partnership. But in any trade agreement.

Apart from a few rushes of blood in rhetoric to appeal to her base, she made reasoned arguments, good use of history, and put up constructive alternatives to what she was criticising. Furthermore, she put forward arguments that appealed to every point in the political spectrum. The Left over Left critics of investor state disputes settlement clauses in trade agreements in New Zealand never do that.

She echoed arguments I have made the at investor state disputes settlement clauses have no place in trade agreements between liberal democracies.


Liberal democracies have independent courts and honest politics where everyone gets a fair go. That means sometimes you’re on the losing side of politics, but you as free to persuade the majority that they are mistaken. That is democracy in action: sometimes you win, sometimes you lose and there is an election in a few years where you can get another go.

New Zealand has a Closer Economic Relations Agreement with Australia. One provision is a requirement that in most cases New Zealanders are treated the same as Australians under Australian law.

To explain this, some years ago, a New Zealand television production company successfully sued the Australian television regulator to have New Zealand made television shows recognised as Australian content under the 50% Australian content regulations for free-to-air television in Australia.

Note the New Zealand business sued in the Federal Court of Australia and won. They had their day in court.

Senator Warren makes the point that if a business in the USA is unhappy with a regulation, they can challenge by normal democratic and legal means, which investor state disputes settlement undermines:

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.

Senator Warren also provides a good history of the emergence of investor state disputes settlement and the relevance of that history to contemporary developments:

But after World War II, some investors worried about plunking down their money in developing countries, where the legal systems were not as dependable. They were concerned that a corporation might build a plant one day only to watch a dictator confiscate it the next. To encourage foreign investment in countries with weak legal systems, the United States and other nations began to include ISDS in trade agreements.

Investor state disputes settlement were indeed created to protect businesses that did not have robust democracies and legal systems. Would be international investors in one of these countries were promised international redress if there was a coup, a takeover of their investments or some other unforeseen negative impact because sovereign risk.

She then asked why are these provisions in trade agreements with liberal democracies where they have no relevance:

Those justifications don’t make sense anymore, if they ever did. Countries in the TPP are hardly emerging economies with weak legal systems. Australia and Japan have well-developed, well-respected legal systems, and multinational corporations navigate those systems every day, but ISDS would pre-empt their courts too.

Senator Warren also makes a good point that investor state disputes settlement undermines competition between legal jurisdictions and the rewards for having a sound legal system:

…to the extent there are countries that are riskier politically, market competition can solve the problem. Countries that respect property rights and the rule of law — such as the United States — should be more competitive, and if a company wants to invest in a country with a weak legal system, then it should buy political-risk insurance.

Political risk is is an entrepreneurial opportunity for the insurance market. The World Bank’s Multilateral Investment Guarantee Agency provides insurance to those investing in developing countries against expropriation (including indirect expropriation), as well as acts of war and terrorism. Export Finance schemes of many governments offer political risk Insurance. Anyone who travels in the less safe countries of the world routinely buys travel insurance.

The World Bank puts out an annual index on ease of doing business in every country of the world so foreign investors can’t say they won’t warned of the risks they were taking for the profits they sought.


Investor state disputes that were indeed referred to international arbitration used to be rare. Now they are more common as Senator Warren explains:

From 1959 to 2002, there were fewer than 100 ISDS claims worldwide. But in 2012 alone, there were 58 cases.

Recent cases include a French company that sued Egypt because Egypt raised its minimum wage, a Swedish company that sued Germany because Germany decided to phase out nuclear power after Japan’s Fukushima disaster, and a Dutch company that sued the Czech Republic because the Czechs didn’t bail out a bank that the company partially owned. U.S. corporations have also gotten in on the action: Philip Morris is trying to use ISDS to stop Uruguay from implementing new tobacco regulations intended to cut smoking rates.

In a response to Senator Warren’s op-ed, Gary Clyde Hufbauer said:

…only 13 ISDS cases have been brought to judgment against the United States.  The United States has not lost a single case.

Why? Because the United States does not expropriate private property without compensation, and the United States does not enact arbitrary or discriminatory laws against foreign firms. Contrary to what the Senator implies, American taxpayers have not had to cough up millions and even billions of dollars in damages. They have not had to cough up anything.

The best part of Senator Warren’s op-ed is when she appeals to all points of the political spectrum based on arguments that do indeed appealed to them:

Conservatives who believe in U.S. sovereignty should be outraged that ISDS would shift power from American courts, whose authority is derived from our Constitution, to unaccountable international tribunals. Libertarians should be offended that ISDS effectively would offer a free taxpayer subsidy to countries with weak legal systems. And progressives should oppose ISDS because it would allow big multinationals to weaken labour and environmental rules.

Senator Warren did make a good case against investor state disputes settlement, particularly between liberal democracies. Foreign investors should take their chances in domestic politics and the courts like the rest of us. They’ve invested in a liberal democracy with independent courts, honest politicians and a commitment to a market economy.

Investor state disputes settlement clauses in trade agreements allow foreign investors to sue the host country for laws, policies, or court decisions they find objectionable. This gives foreign investors more rights than local investors; more influence than local citizens. That is contrary to equality before the law, which is the essence of liberalism.

The point that the Twitter Left rarely makes against investor state disputes settlement, and Senator Warren goes a way towards making is the shield offered by investor state disputes settlement clauses against predatory, corrupt governments in underdeveloped countries, many of which were socialist kleptocracies, has become a sword against regulations that arise in any liberal democracy that were sought and obtained through normal democratic means.

The Australian Productivity Commission held a public inquiry into regional and bilateral trade agreements in 2010. The commission specifically addressed investor state disputes settlement in its subsequent report:

1. There does not appear to be an underlying economic problem that necessitates the inclusion of ISDS provisions within agreements. Available evidence does not suggest that ISDS provisions have a significant impact on investment flows.

2. Experience in other countries demonstrates that there are considerable policy and financial risks arising from ISDS provisions.

The Productivity Commission concluded that investor state dispute settlement provisions are just not worth bargaining coin:

Nor, in the Commission’s assessment, is it advisable in trade negotiations for Australia to expend bargaining coin to seek such rights over foreign governments, as a means of managing investment risks inherent in investing in foreign countries. Other options are available to investors.

The Australian Productivity Commission was quite right to question the advantages of setting up a preferential legal system for anyone:

…a bilateral arrangement with Australia to provide a ‘preferential legal system’ for Australian investors is unlikely to generate the same benefits for that country than if its legal system was developed on a domestic non-preferential basis.

To the extent that secure legal systems facilitate investment in a similar way that customs and port procedures facilitate goods trade, there may be a role for developed nations to assist through legal capacity building to develop stable and transparent legal and judicial frameworks.

When the Left over Left usually argues against investor state disputes settlement provisions they get so carried away with the conspiratorial rhetoric that they overlook a much better argument.

Investor state disputes settlement provisions are bad deal from liberal democracies. Liberal democracies with the rule of law, a market economy and private property rights offer ample protections to any foreign investor.

In trade agreements with less democratic countries, the need for reciprocal promises may not be worth the price when there are other options for investment protection, such as political risk insurance.

The question must be asked as to who lobbies for these agreements considering how much is opposition they provoke, and how useful they are as a mobilisation tool for the Twitter Left in their relentless campaign against lower prices and higher living standards.

Paul Krugman on the nonsense thinking behind trade negotiations

HT: Alan Moran

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