Trading Away Our Sovereignty

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 Second, many “free trade” advocates who support the TPP, subscribe to a simplistic and outdated ideology that creates a false dichotomy between free trade and protectionism.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.