THE FUTURE OF FINANCE BLOG

Trading Away Our Sovereignty

May 29, 2015

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This post was previously published on the Huffington Post’s Business page.

“Free Trade” was in the news this Memorial Day weekend. President Obama is pushing hard for “fast track” approval of his Trans-Pacific Partnership (“TPP”) Agreement, calling for a simple up or down vote without the possibility of amendments or floor debate.

The New York Times reported that Senate Majority Leader Mitch McConnell has forged a “rare alliance” with the president to push the trade legislation. Senate Finance Committee Chairman Orin Hatch has been quoted as saying, “it shows that when the president is right, we will support him.” (Never mind that Hatch has also been quoted as saying: “I don’t know fully what’s in TPP myself.”)

Dear Mr. President: With all due respect, how do you spell RED FLAG!

Myths and confusion abound both around the meaning of so-called free trade and what the TPP is really about. Here is what I know.

First, the TPP is a very big deal. It will impact the lives of billions of people, and our very sovereignty as a nation, as explained below. If ratified, it would create the largest “free trade zone” in the world, encompassing 12 Pacific Rim nations that represent some 40 percent of global GDP, dwarfing the impact of NAFTA. It will no doubt set precedents for the Trans-Atlantic Trade and Investment Partnership (TTIP), also being negotiated at this time.

Second, many “free trade” advocates who support the TPP, subscribe to a simplistic and outdated ideology that creates a false dichotomy between free trade and protectionism. For example, the pro-“free trade” argument advanced in a recent New York Times Op-Ed by William Daley — of the famous Chicago political family it must be said — a former JPMorgan Chase executive who oversaw the bank’s lobbying efforts and was (briefly) President Obama’s Chief of Staff, is typically misconceived: “Many on the political left and right oppose the liberalization of trade policy,” he notes, “just as they did during the NAFTA debate, arguing instead for protectionist measures.” Daley goes on to declare: “There is no path to middle-class prosperity without tearing down walls to American exports” and proclaims, “our products face very high barriers to entry overseas in the form of tariffs, quotas, and outright discrimination.”

That is the “free trade” myth, but it is simply not the least bit true. Import replacement, beginning with a sustainable, renewables-based energy infrastructure, would be a much more effective path to middle-class prosperity. And that is just for starters. Furthermore, the TPP is not about tearing down (largely nonexistent or immaterial) tariffs and quotas that commentators with not-so-hidden agendas like Daley say get in the way of free trade. What is clear about the TPP, as explained below, is that the investor protections in the agreement will most certainly benefit global companies and foreign hedge funds like the one Daley just signed up with as head salesman.

Third, while the geopolitical intention of the TPP to influence the new economic order in the Pacific Rim in the face of China’s rise as an economic power is understandable, the practical ramifications for jobs in the U.S., and for labor and environmental standards globally, are highly complex. Our experience with modern trade has been mixed at best.

When considering the arguments of free trade proponents on both the left and the right, we should remember that Classical Economist David Ricardo’s theory of “comparative advantage,” based on the assumption that everyone wins from more trade, was built explicitly on a critical assumption that capital did not and would not cross national boundaries. While correct in the 19th century when he developed the theory, that assumption no longer holds today, invalidating the very theory upon which the free trade myth exists. With capital flowing quite freely across national boundaries what results is not comparative advantage but instead the often brutal reality of competitive advantage. Modern trade most certainly creates winners andlosers (see the American rust belt for the tragic details), igniting a form of commercial dynamism that transforms entire ways of life, often faster than human cultures can adapt.

In the real world, the practical ramifications of so-called “free trade” are neither inherently good nor bad. They are complicated, and the devil is in the details. And the details are in the agreements. And “fast track” means they do not want us to see them.

Finally, the Investor-State Dispute Settlement mechanism (ISDS) embedded in the TPP (and many trade agreements) is a threat to our national sovereignty. Initially designed as a means to protect investments from nationalization, ISDS enables foreign companies (or foreign hedge funds like the one Daley now works for) to sue host country governments over laws that might infringe upon their “right” to profit through ad hoc arbitration proceedings that can circumvent the rule of law established though the democratic process.

A new report released by Columbia University’s Lise Johnson, Lisa Sachs, and Jeffrey Sachs explains the flawed structure and unacceptable risks of the ISDS mechanism and concludes that it should be removed from trade agreements altogether. As I have written previously, ISDS would, for example, create unquantifiable legal exposure for tax payers should the U.S. decide to commit to new climate agreements, if those agreements might be construed to harm foreign corporate interests (which they most certainly will if we are serious about dealing with climate change).

We live in a rapidly changing world that will demand new laws in response to changing contexts in areas ranging from bio- and other technologies, to labor and environmental practices, and from freedom of information, to financial engineering. By embedding ISDS in both the TPP and the TTIP, the U.S. would expose itself to lawsuits from thousands of companies, hedge funds, and banks, on a scale that is impossible to fully comprehend. As the Columbia report makes clear, market incentives, and mechanisms such as political risk insurance already offer a solution to the original problem of nationalization risk.

Why, Mr. President, and Mr. McConnell, and Mr. Hatch, and Mr. Daley (and Mr. Cruz for that matter and your Tea Party friends) are you prepared to trade away our sovereignty, freedom, and democracy to foreign multinationals and hedge funds? The irony here, our having just celebrated Memorial Day weekend, should not be missed.

Comment<Back
  • Michael J. Caslin III

    Great work John.

    How about a 60 day action plan- something each of us can try do do- even one thing each day to build our own “rare alliance” and once and for all begin to seize the “competitive advantage” that our nation needs?!

    • John Fullerton

      open to suggestions! I’m afraid navigating the US Congress is above my pay grade… But I do hope our work on Regenerative Capitalism can represent the conceptual framework for a “new story” that can transcend the bitter politics our nation has been reduced to, that both sides can get behind in such a “rare alliance” that is sincere. But the ground game on “trade” is a tactical battle from here on out, one grounded in a false narrative.

    • Mark Phillips

      Hi Michael (and others in this thread),

      As I write this the BALLE conference is currently under way in Phoenix, Arizona. To me, what BALLE stands for represents an appropriate and viable response to something like the TPP. A year ago I never would have said that a grass roots level response is necessary for opposing trade deals that are planetary in scope, but now I feel with some certainty that they are essential. BALLE did a Q&A with David Korten that I highly recommend checking out. Here’s a link, but I’ve included a selection below (hope you don’t mind the copy and pasting, John): https://bealocalist.org/balle2015-qa-david-korten

      Question from Balle: “Why is being an active proponent of local economies important towards fixing the overall destructive, inequitable economic system?”

      “David: Our plight as a species is summed up by the title of my first major trade book When Corporations Rule the World. We will be launching an updated 20th anniversary edition at the 2015 BALLE conference. We live under a system of rule by what I describe in the new edition as money-seeking corporate robots that are systematically destroying the lives of people and the rest of nature to make money for those who already have far more than they could ever put to any beneficial purpose. The system functions beyond human control. Global financiers and the CEOs of oligopolistic transnational corporations appear to be in charge. They are in fact are only well-compensated servants of a rogue system that drives toward inevitable economic, social, environmental, and governance collapse. We appropriately call it a suicide economy, as it is destroying the foundation of its own existence. A new economy featuring economic democracy—broad participation in community based ownership by real people with strong community roots—is essential to human viability.”

      David’s answer gets at what Marjorie Kelly devoted an entire book to with “Owning Our Future: The Emerging Ownership Revolution.” Basically, there are generative and extractive forms of ownership. Cooperatives and other forms of democratically governed and equitably owned enterprise are generative in that their ownership is rooted in the local community and generates wealth for these local stakeholders. Alternatively, extractive enterprise (corporations, etc) prey upon local communities and ecosystems to extract wealth (both social and ecological) to absentee owners (the irony for me is that we, too, are often the ‘absentee owners’ if you have money invested in public companies!). (And sorry if I’m over-explaining here, but I feel like this information is so important that it is worth shouting from the roof tops.)

      So, from my point of view a 60 day action plan for our nation exists in the (long term) creation of community level alternatives to the dominant capitalist paradigm. Sure, policy could help us, and will be necessary, but I would rather build healthy relationships with my neighbors than gnash my teeth at the amorphous juggernaut of global trade policies.

  • http://www.ethicalmarkets.com Hazel Henderson

    Hi John : Thanks for your leadership on the trade issue and for your Regenerative Capitalism paper !
    We are going to post a link to this on http://www.ethicalmarkets.com on our Reforming Global Finance and Beyond GDP pages. hope you got out latest private investment total of $6.22 trillion in green sectors worldwide since 2007 at http://www.greentransitionscoreboard.com

    • John Fullerton

      If six trillion has been invested in the transition to a more “green” economy, that is a stunning number indeed! Hidden in plain sight. Thanks for shining a light on the good news hazel…

  • Fran Korten

    Great commentary, John. Thanks for stating so clearly the great flaws in the whole trade debate. The TPP is not really about trade, it’s about corporate rights.

    • John Fullerton

      Well Fran, your last sentence is far more succinct than my blog!
      thanks

  • http://TedHowardNZ.com/ Ted Howard

    Agree with you in a sense John, and your analysis is essentially surface level.

    If you look deeper, at the systemic incentive at work, then the picture is quite startling.

    Calling this a “free trade” agreement is one of the finest examples of Orwellian Newspeak I have ever seen.

    Rather than freedom, the agreement is a set of restrictions on freedom that are used as legal tools to create and or maintain scarcity that technology would otherwise remove.
    That scarcity, by definition, is the absence of goods and services that could otherwise be freely enjoyed by a large fraction of society that will be deprived of that enjoyment by this agreement.

    What is at root cause?

    At the root of this issue is a fundamental conflict with the exponentially expanding of technology and automation to deliver universal abundance of a growing set of goods and services, existing against our dominant social organising paradigm of markets and money – which are based in scarcity.

    Anything which is universally abundant has no value in a market (doubt that, consider oxygen in the air – arguably the single most valuable commodity to any individual human, yet of no market value due to its universal abundance).

    The biggest issue of social justice for our age is the conflict that now exists between the ability of technology to deliver an ever expanding set of goods and services at zero marginal cost of production (universal abundance), placed against our dominant measure of value (money) which is based in scarcity.

    The TPP is a set of agreements to prevent the delivery of universal abundance by creating a set of artificial barriers to the delivery of that abundance, mainly under the guise of intellectual property laws, copyright, patent and various other related realms.

    Throughout most of human history, when we really did have genuine scarcity of most goods and services, markets and money were genuinely beneficial to most people.

    Now that we have the technical capacity to automate any process, and to capture solar energy for human use far more efficiently than going through biological systems, we have the technical ability to deliver universal abundance of a large and growing set of goods and services. But delivering universal abundance of anything drives the price to zero and thence the profit to zero – so makes no sense from a financial perspective, however much sense it makes from a humanitarian and justice perspective.

    In this sense, the TPP is just a natural response from the perspective of money, from those who view everything about our existence in terms of money – as if it had any real value in today’s world.

    Technology is delivering tools faster than our social and conceptual can keep up (on average over the population).

    The TPP makes sense from a corporate view of the world – in terms of money.

    From the perspective of those at the bottom of the distribution curve, it is simply a tool of domination and dis-empowerment.

    • John Fullerton

      Thanks howard for taking us to a deeper inquiry about the system – and no offense taken about the “surface level” comment! :) The role of technology to enable exponentially expanding abundance is put in stark relieve by the new Gilead “super drug” for Hep C that “costs” $1,000 per pill (daily dose I believe). Wonder why the pharmaceutical companies are pushing for “free trade” so hard? But this can of worms demands a much deeper level of thinking as you suggest, than this humble blog intended. Thanks for the nudge!

      • http://TedHowardNZ.com/ Ted Howard

        Thanks John

        You have my great respect, as one of the few economists who actively thinks beyond the dogma (up there with Milton Friedman).

        On the medical side – high dose vitamin C can assist the body’s own immune system to cure most things most of the time, but no profit in that for big pharama, so they bury it. Robert Cathcart (Medical Hypotheses, 18:61-77, 1985) publish some very interesting data a long time ago. The greatest chemist ever (as measured by other chemists – Linus Pauling) spent the latter years of his life investigating the many roles of Vitamin C.

        I have used it to cure myself of “incurable cancer” – and collected my life insurance along the way (I was that “terminal” – now 5 years on – see https://tedhowardnz.wordpress.com/cancer-treatment/).

        • John Fullerton

          Interesting. I’ll go pop some C now! and glad to hear of your “regeneration”! link you provided is bad, love to read your story.
          to good health!

          • http://TedHowardNZ.com/ Ted Howard

            Hi John – your site software grabbed the bracket and included it – have edited it to remove the trailing bracket. The link to a page at the top of that link to a talk I gave at a local health expo has link to the pdf of the power point I used at that talk – which is quite comprehensive.

  • John Fullerton

    Yup. Nothing to do with trade, and certainly nothing to do with “Free”!
    I would hope Obama is smart enough to understand, but ideology is a powerful blinder. As Einstein said and I like to repeat, “theory is what determines what we can see”

    • http://TedHowardNZ.com/ Ted Howard

      I suspect Einstein didn’t quite capture that idea as well as he could have.

      I suspect that theory is one aspect of the issue of the probability of seeing something, and the ability to maintain a low threshold for novelty, while also having some rigour to one’s testing of ideas, is the most powerful approach. Attachment to any paradigm of set of dogma is a limiting condition.

      It seems clear that all understanding is (and must logically be) heuristically based, and all heuristics are more useful in some environments that others. Learning the limits of heuristic sets, and having an ability to transcend them when necessary is a required characteristic of one who would explore the every more complex sets of paradigms and strategies that are available in the further reaches of those “spaces”.

  • TerryAMcNeil

    Just another BIG step backwards for America and more importantly its people, as just at face value there are numerous serious and extremely negative consequences to this policy action and content.

    Obvious points and concerns –

    Exacerbation of the erosion of American jobs, indigenous industrial base and middle class.. With this erosion of national competitive advantage other is an increase national, state and individual security risks and deep economic plight.

    Continued dilution of democracy, constitutional powers and rights including those embedded in state and local authorities.

    Excessive immigration and population leakage , putting increased pressure on social structures, wages, pensions and healthcare system creating more massive debt financing plus extreme social tensions, Then of course there are those fiscal budgets for states and cities.

    Increased concentration of power with international oligarchs, banks and related military industrial complex whose goals and objectives are oriented solely towards self-interest; with no concern whatsoever for enlarging greater national principles of , by, for and for the people.

    More erosion and diversion in the physical and conceptual resources needed to resolve imminent key pending issues that could be catastrophic to the country, economy and world-wide survival interests – including but not limited to ; climate change, resource depletion, degradation of bio-sphere and its diversity, wildlife extinction, toxoplasmosis containment, carbon exponents, ocean acidification and on…

    Importation of disease, crime, social and civil from politically.socially ,culturally and economically destabilized regions and countries – who will be attracted to move the worst or best? These create great excessive hidden and future costs for federal, state and local fiscal budgets

    All of this, is just for starters off the top – there is just no way in the universe that you could “realistically” dream up positive reasons and rhetoric that creates a subjective benefit that outweighs the long list of negative consequences associated with expanding free-trade agreements to the southern hemisphere . They are all lies, probably based on immediate geopolitical or geoeconomic self-interests in mind. Not the people’s long term goals.

    To say the least; in my opinion, the world has changed dramatically over the past fifty years , and such economic free trade policies are not only intellectually deprived _ noo clear and valid metric), but they are foolhardy and archaic approaches that place longer-term national and individual security and economic interests in unprecedented jeopardy.

    So sad, and this is just the “very short and prompt story “on this extremely misguided and incoherent free trade legislation.

    Very Best to Everyone!

    T McNeil

    First Financial Insights Inc.

    http://firstfinancialinsights.blogspot.ca/2015/06/realeconomik-existential-insights.html

    http://firstfinancialinsights.blogspot.ca/2015/05/humanitys-insanity-impossible-growth.html

    http://pwa2100.blogspot.ca/

    http://pwa2000.blogspot.ca/2015/06/stop-trade-immigration-flood-deal.html