The free trade myth
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New Internationalist | 9 July 2019

The free trade myth

by T.J. Coles

So-called free trade deals, like the proposed, post-Brexit US-UK arrangement, are designed to maximize US corporate profits and privatize resources in other nations, including land, water, services, and intellectual property. They have less to do with trade and more to do with lowering standards in third countries so that US corporations can benefit from tax breaks, de-unionized labour and low import tariffs.

‘Free trade’ ideology has many weapons in its arsenal : secrecy over trade agreements, corporate media support in the run-up to implementation and bipartisan political endorsement. And most astonishing are the secret arbitration arrangements called Inter-State Dispute Settlements (ISDSs) which enable corporations to sue governments.

These clauses undermine democracy because they are conducted in secret and threaten government budgets, particularly in poorer countries. They make vulnerable governments more amenable to corporate dominance because the mere threat of a law suit is enough to frighten host nations into submission. According to the UN Conference on Trade and Development (UNCTAD), by 2017 there were 855 known ISDS cases. But given the secrecy of ISDS, the true number may never be known.

Gunboat diplomacy

The Washington-based International Centre for Settlement of Investment Disputes was founded through the World Bank in 1965 as a court of arbitration for states and corporations. There are currently 3,000 international investment agreements worldwide. ISDS clauses are present in most of them and, as the Office of the US Trade Rep explains, amount to a form of protectionism for big business.as the Office of the US Trade Rep. explains.

Agreeing to ISDS clauses in ‘free trade’ legislation is an ‘assurance’ by governments to corporations ‘that the property of investors will not be seized by the government without the payment of just compensation.’

Notice that the onus is placed not on corporations to assure governments that workers, public assets and the environment will not be harmed, but rather, it is placed on governments to ensure that corporate operations run smoothly.

The Office says : ‘Military interventions in the early years of US history – gunboat diplomacy – were often in defense [sic] of private American commercial interests’.

Notice that this version is brutally honest. By the time it got filtered to the Office of the President (then Barack Obama), a parenthesis had been added, to soften the language : ‘early in our history, the US had to deploy “gunboat diplomacy,” or military intervention, to protect private American commercial interests. ISDS is a more peaceful, better way to resolve trade conflicts between countries’.

But just how peaceful are they ? The Office of the Trade Rep. goes on to say that ‘Governments put ISDS in place ... [t]o signal potential investors that the rule of law will be respected.’ In this case, ‘rule of law’ appears to mean the green light for corporations to do as they please, within fairly wide limits.

‘Because of the safeguards in US agreements and because of the high standards of our legal system,’ the Office continues, ‘foreign investors rarely pursue arbitration against the United States and have never been successful when they have done so … [W]e have never once lost an ISDS case’ (as of 2015). Not only this, but ‘in number of instances, panels have awarded the United States attorneys’ fees [sic] after the United States successfully defended frivolous or otherwise non-meritorious claims.’

Business as usual

There is no apparent legal obligation to make the details of ISDSs public. It is therefore difficult to obtain facts and figures on the number of cases that have been brought forward. ‘In many instances, disputes remain confidential. It is therefore difficult to make a complete assessment,’ according to the European Commission (EC).

By the end of 2014, only 37 per cent of rulings in the European Union member states favoured the government, over corporations. Twenty-eight percent were settled (which could mean that governments compromised) and 25 per cent were found in favour of investors. Eight per cent were discontinued.

According to the EC, in 30 per cent of cases, no public information is available at all. Eight percent of known cases involved multinational corporations. This comparatively small percentage is either due to corporations having so much influence over governments that they need only to occasionally threaten governments in court, or that many more cases have been brought against governments in secret.

According to UNCTAD, the majority of ISDS cases concern individuals or corporations challenging governments over alleged violations of contracts, concessions, cancellations, revocations and/or denials of permits and licenses.

UNCTAD reckons that between 61-70 per cent of new cases between 2013 and 2014, including those involving non-US corporations, were claims in the services sector, including : banking, energy (gas and electricity), media, real estate and telecoms.

In addition to understanding how ISDS clauses amount to protectionism for US mega-corporations, it is also worth noting that the majority of ISDS cases appear to involve disputes involve the energy sector. This is significant given the scale of the ecological catastrophe we face because corporations can bully governments into allowing environmentally damaging policies and operations.

‘Free trade’ hegemony

Manuel Pérez-Rocha at the US Institute for Policy Studies writes that ‘countries from Indonesia to Peru are facing investor-state suits. Mexico and Canada have lost or settled five each under [the US-led North American Free Trade Agreement] Nafta, paying hundreds of millions of dollars to foreign companies.’

In 2012, Ecuador was ordered to pay just under $1.77 billion to a subsidiary of the Texas-based Occidental Petroleum for alleged contract cancellations. The case was annulled and Ecuador settled to pay just over $900 million. Venezuela was ordered to pay $1.6 billion to the Texas-based Exxon to compensate for oil nationalization. ‘Nearly 200 disputes are pending,’ says Pérez-Rocha.

According to UNCTAD, 75 per cent of claims are brought by US and European businesses. For example, Sweden’s Vattenfall energy company sued the German government over its decision to phase out nuclear energy. In another case, a single energy policy change resulted in seven ISDS claims being brought against the Czech Republic, plus six in Spain.

Citing a 1999 investment law, Canada’s Pacific Rim Mining sued the government of El Salvador in 2009, following a moratorium on gold mining introduced by the country in the preceding year. ‘For El Salvador, a $301-million loss – just under 2 percent of its GDP – would significantly reduce funds available for health care and education,’ says the Latin American Bureau.

Lessons from Ecuador

Ecuadorian President Sixto Durán-Ballén (1992-96) led the country’s accession to the World Trade Organization and privatized state assets. In 1993, Ecuador signed the Encouragement and Reciprocal Protection of Investments bilateral investment treaty (BIT) with the US. In 1999, within the framework of the BIT, PetroEcuador agreed a deal with the Texas-based Occidental Exploration and Production Company (OEPC), a subsidiary of Occidental Petroleum (Oxy).

The companies agreed to explore for hydrocarbons in Block 15 of the Ecuadorian Amazon, covering about 200,000 hectares. The Participation Contract involved OEPC sharing oil revenues in exchange for exploring and extracting. The Participation Contract states that the deal was to be ‘governed exclusively by Ecuadorian law’.

OEPC wanted to farm out work on Bloc 15 and did so by attempting to sell 40 per cent of its equity stake in Bloc 15 to a Bermuda-based financial company, City Investing Company Limited. But under Ecuadorian law, this move was not permitted.

In 2001, Ecuador’s tax authority changed the practice of refunding Value Added Taxes (VAT) to oil companies, retrospectively claiming VAT refunds. OEPC sought arbitration against Ecuador for a so-called VAT Award. The VAT Tribunal awarded $75m to OEPC. The British High Court, a ‘neutral’ body in which an appeal was fought, rejected Ecuador’s appeal.

In 2004, PetroEcuador terminated the Participation Contract. In 2006, the government of Ecuador issued the Caducidad Decree to OEPC, terminating the Participation Contract, ordering OEPC to turn its assets over to PetroEcuador.

Also in that year, Ecuador issued Law 42, demanding that 50 per cent of windfall revenues now belong to the state. In 2012, the Tribunal issued an award to OEPC, stating that the government has acted in ways ‘tantamount to expropriation’ and in violation of treaty obligations to treat OEPC as favourably as a national corporation. The Tribunal ordered to Ecuador $1.7 billion of taxpayers’ money to OEPC. The case was annulled and OEPC settled for a smaller pay-out.

Before the taxpayer forked out $980 million to OEPC, the government of Ecuador announced an $800-million cut in social spending resulting from the contraction of Ecuador’s oil revenues. Would the government have cut the budget had it not had the threat of a law suit hanging over it ?

Corporate globalization and the ‘free trade’ initiatives upon which it is based undermine democracy, healthcare and the environment. The 20th and 21st century ISDS mechanism, designed to protect US corporate interests the way that ‘gunboats’ protected British colonial interests in the 19th century, is one such method. Democracy is undermined by the secrecy surrounding arbitration and the use of legalistic ‘gunboats’ to threaten our governments into submission.

This article is an excerpt from Privatized Planet (New Internationalist, 2019)

Dr. TJ Coles is an Associate Researcher at the Organisation for Propaganda Studies and the author of several books, including Human Wrongs (Iff Books) and Manufacturing Terrorism (Clairview Books).