Tuesday, 19 May 2015

In defence of TPP - the arbitration clause

One of the big issues in a trade relationship involving multiple countries is what happens if a country unilaterally decides to ban a product, or raise import duties astronomically, or take a similar form of unilateral action that dramatically affects the viability of a foreign investor's project. This might go against something that the government itself contractually agreed with the investor. What does the investor do.

The investor can take the government of that country to court, but in many countries of the world  there is no hope of winning, or it would take years in court. After all a government can simply change laws retrospectively (as India often does) and the courts can do little else but enforce them. It is precisely for this reason that the United States for many years has been insisting on independent forums for resolving Investor-State Disputes (ISDs). The US position has been that the legal system of every country outside the US cannot be trusted and therefore there must be an independent mechanism for resolving disputes. In current bilateral trade agreements with 5 of the 12 countries in TPP, the US already has ISD clauses.  In recent years the US has an ISD mechanism in every trade agreement it has signed, bar the US-Australia one. In fact the biggest opponent of the ISD clause has been Australia, rather than the US. In a blatant double facedness, Australia has ISD clauses in trade agreements with developing countries, but refuses with developed countries.

The principle is not new either in the commercial arena or in governmental ones. Every commercial contract has arbitration clauses - parties submit to the jurisdiction of arbitrators rather than courts. This is both cost effective as well as time saving and is universally used in commercial contracts. There are well established global rules governing arbitration - the "capitals" of arbitration being London, New York and Singapore. If each commercial dispute came to the courts, the judicial system in every country in the world will come to a grinding halt - it is partly for this reason that courts themselves encourage arbitration.

It is therefore rich for US politicians, and especially Elizabeth Warren to argue against the ISD clause on grounds of loss of sovereignty. Firstly it is the US itself over successive Republican and Democrat administrations that has championed this principle. Secondly it the US which is usually the gainer in such matters - for example it prevents countries from outrightly nationalising companies and industries, as say for example, Argentina is wont to do. 

Two cases are often used to illustrate how "greedy companies are milking countries" - the Veolia Egypt case and the Philip Morris Uruguay case.

Veolia , a French firm was executing a project to reduce greenhouse gases in Alexandria in Egypt. The firm executed a contract with the government whereby the government would compensate the company for cost increases because of governmental action. Egypt then raised the minimum wages in the country and Veolia then took the Alexandria authorities to arbitration for compensation for rising costs. The matter is in dispute and has not yet been decided. This is a contractual matter and the spin that Warren & Co are mouthing that this is a corporation suppressing minimum wages in a poor country is pure balderdash.

The Philip Morris case is more nuanced. Uruguay passed laws requiring that 80% of the pack contain graphic images and the risks of smoking. It raised taxes, banned advertising, and sponsorships. Philip Morris took this to arbitration on the grounds that this makes it virtually impossible to do business. The matter is yet to be decided. Uruguay is a signatory to an ISD arbitration and hence this came up before the arbitration panel rather than the courts in Uruguay. There  is no evidence that just because it has gone to arbitration  the ruling would be "unfair" or "unjust".

As a consequence of this case, in the TPP negotiations, the US has sought to prevent misuse of the arbitration clause by recognizing each country’s “inherent right” to regulate for health and safety. This will probably get incorporated into the final deal so that unilateral action by governments on grounds of health or safety  cannot be legally challenged.

As far as the US is concerned, the TPP provisions are no different from the existing situation it already has in some 50 odd agreements.  So why all this noise from Warren ? The noise is not because she has a better mechanism for dealing with an investor government dispute. It is in reality because she is against globalisation & trade. That is a different argument and battle.


gils said...

enakku romba onnum purila intha post..but with what little I understand my kostin is..globalization lead to liberalization of closed economies is the general theory illaya? ipdi thani thaniya arrangement vacha wouldn't it lead to protectionist mode? does this have the blessings of China..the exporter for the world? if they decide to start a silky sea route one barring US of A..then where is the concept of global economy and liberalization? back to square one?

Ramesh said...

You are absolutely right. Bilateral deals have limited value. A global deal is best. This is what WTO tried to do, but can you imagine the problems in getting 180 odd countries to agree to anything. The worst culprit blocking the deal last time around was India.

The US knew that there was little chance of getting a deal including China because the US Congress would oppose it tooth and nail. In the current TPP, they can't even get the Congress to agree on a deal with Japan, Canada, Australia, New Zealand - all similar minded economies. This is the problem with people like Elizabeth Warren. Uncontrolled authority to throw a spanner in the works with zero responsibility for getting anything done. This is the governance system the US has chosen - they will live to regret it in the future.

gils said...

aana what is wrong with current system?? nalla irukara products vikka poguthu..nalla ilatti emaanthanvan thalaila katta poranga..? whether with or without trade deal ithana nadakum?

Sriram Khé said...

Crap, my comments vanished when I clicked on the option to use my Google account ... am pissed off ... will come back later and retype my thoughts :(

Sriram Khé said...

Ok ... am back ... will try to re-create my points as much as I can ...

Elizabeth Warren is serving as a punching bag for you. Well, for a lot of people. It goes with the territory, so to speak.

But, Warren is not the only one who is concerned about this arbitration outside the established judicial system. So is your other favorite "loony left" punching bag--Paul Krugman.

However, it is not merely them. There is a long list with impressive credentials, and the list includes Laurence Tribe and Joseph Stiglitz among others.

To me, the fundamental point where I disagree with your take is this: a corporation does not have any inalienable right to conduct business anywhere. The people of a country have the inalienable rights to determine the rules for commerce. Whether or not those rules are sane does not matter (e.g., Venezuela) if the people decide that the rules will be retroactive, then it shall be that way (e.g., India) ... If investors want to stay away from those countries, then they can always choose to stay away.

I am waiting for your post on why the secrecy is needed and why the TPP details should not be transparent ... that will be the juiciest of all ;)

Ramesh said...

Not really Gils. Without inter country agreements, there cannot be trade at all. For example if the US refused to give any H1B visas, what will happen to our IT industry. On the same plane if they completely lifted the cap on H1B and reduced the cost to $1 per application, what would happen to our IT industry.

Ramesh said...

Oh its not just corporations. It anybody who is bound by a contract. Let us take a situation where you are contracted by the Chinese government to spend a year teaching in Tsingua. 3 months into your contract, the government unilaterally cancels your contract, fires you, expropriates your Chinese assets and expels you. Would you not like to get some legal redress ? As a foreign national, you stand no chance in Chinese courts - hence to protect your interests, you agree in the original contract to arbitration. In fact if you ever did such a such an arrangement (actually why not - a year in China would be great experience), it is very likely that even the Chinese offer of a contract would contain an arbitration clause. It is normal in all contracts.

None of the names you mention impress me one bit. If somebody has a loony left idea I will call it out, even if its the Queen :)

gils said...

//: a corporation does not have any inalienable right to conduct business anywhere. The people of a country have the inalienable rights to determine the rules for commerce. //

corporation consists of people from the country right? was the question meant for what kind of people? when i read this thread i get a feeling that govenment and corporations are considered as separate beings other than the citizens of the country..they may and have been reacting like that over the ages across countries..but aren't they from us? if the majority of people trust a few and hand them over the reigns of power..should they believe in their decisions as well? overa kelvi kekreno?

Ramesh said...

Loving your questions gilsu. Please keep asking and offering your point of view. That's the whole purpose of this debate, isn't it.

I'll let the good Prof answer your specific query.

Sriram Khé said...

Without getting into a debate on the crappy idea that corporations are people too (when was the last time a corporation was executed?) I will point out why the inalienable rights of people triumph over the corporation that wants to conduct business anywhere it pleases ...

The corporation that we think of is highly mobile. It is not geographically restricted at all. Here today, gone tomorrow, which is what we see in the global economy. (I am not referring to a kaayalaan kadai kind of locally-owned business.)

People are tied down to their places. Despite the fact that we live in a vastly mobile world for people, unlike the paper corporations, real people have real feelings. Thus, for instance, Ramesh goes back to India after his years of exposure to different places around the world. The overwhelming majority on the planet rarely ever get to see a little bit of the world, and would not even dream of living in far off lands. There is nothing wrong in that--we are humans.

This relative mobility of corporations versus the relative immobility of humans sets up a very unequal partnership. A partnership in which the real persons need the political power to define the rules for how corporations can do business.

gils said...

If corporates are not people n mere policies written on paper...arent so the commandments from high up the hill..considering the way they are being interpreted n followed mind tends to agree to ur point. For relief sake should one correct the written prose or the people who follow?? Corporate Kay..sorry.. Kadavulukkay velicham :)

gils said...

If union carbide was public listed n was penalized..the money they pay to victims who could possibly be their shareholders..how to interpret this wrt tpp? Meiyaalumay doubtu...not a rhetoric kostin

Ramesh said...

Not entirely clear about the direction of the question, but I'll try and respond.

Trade deals like TPP only set principles - actual transactions are determined by the respective contracts that each deal has. In the case of Union Carbide, it was a listed company when the Bhopal tragedy happened. For such events which are criminal disasters , the law of the land , in this case, India, will apply (this is why in the nuclear deal with the US, they have been trying to negotiate a cap on liability in case of disasters). They have to pay all affected parties as determined by the court - whether they be general public or shareholders, or whatever. A trade deal like the TPP will not have any impact on this, unless in the original deal a cap on the liability was greed, in which case the cap will apply.

gils said...

that union carbide was in reference to that cigarette company suing case..Companies like walmart has its support base and opposition within US..apdi irukara oru controversial companya..just because you've a pact, if its forced onto countries like India..isnt it akin to remaking a hit movie in a regional language to other languages..thinking of minimum guarantee run? the concept of hyper market that worked in some places in a country..could necessarily benefit the same percent if not more set of population elsewhere?

Sandhya Sriram said...

my god, what an interesting argument. i havent yet got to the other posts on this topic, but this is quite exciting so far.

I cant disagree with what Sriram says below:

a corporation does not have any inalienable right to conduct business anywhere. The people of a country have the inalienable rights to determine the rules for commerce. Whether or not those rules are sane does not matter (e.g., Venezuela) if the people decide that the rules will be retroactive, then it shall be that way (e.g., India) ... If investors want to stay away from those countries, then they can always choose to stay away.

after all business is a game of risk and return. We cant say - no risk and high return.

having said that, i do agree that the arbitration clause bring a sense of confidence and finality to positions. but it is also in a way against the fundamental right of a citizen of a country to go to his own judiciary and raise a concern. where i have a problem is that the TPP cannot undo that right.

what could work is probably a bit like the advance pricing authority in India. the assessee can go to the APA authority though it is not binding on the assessee. it is used as a guidance. the assessee, can still go the normal route with the TP officer though he would hardly do that.

Ramesh said...

Yes, no corporation has the right inalienable rights and be insulated from risks. Agree. But equally they should not be affected by unilateral government action that goes against what they have been contractually agreed to. This is the problem.

The matters covered by arbitration in the TPP would be purely contractual and civil. Health, Safety, Criminal acts would be outside the purview of arbitration. That's fair position, I submit.

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