What is "Progressive" Trade Policy?

The TPP Lives (mostly)

Earlier this month, on the sidelines of the APEC Summit in Vietnam, the 11 remaining signatories to the Trans-Pacific Partnership trade pact agreed to move ahead without President Trump's America. Withdrawing from the U.S.-backed TPP was, of course, one of Trump's very first actions upon assuming office this past January. That the TPP lives on signals many things, not the least of which is a decline in the importance of American leadership in the Asia-Pacific Region.

Not Voting Their Interests

It is my belief that America's withdraw from the TPP was a strategic mistake and my hope that sometime after 2020, a new U.S. administration will rejoin the fold.

Nevertheless, the TPP-11 emerged with a curious new mouth-full of a name: The Comprehensive, Progressive, Agreement for Trans-Pacific Partnership (CPTPP).

So, what exactly is "progressive" trade policy, anyway?

What's in a Name?

The name change was evidently made to mollify Canada regarding some previously unexpressed objections to the text (link). Indeed, Canada seems to have engaged in a strange bit of 11th hour gamesmanship for no particular reason other than the name-change. But what's in that name change? Negotiators of the original TPP agreement would certainly balk at Mr. Trudeau's suggestion that it was not "comprehensive" Indeed, at nearly 600pgs of basic text (never mind annexes), the TPP-12 was nearly twice as long as the basic text of the 1994 NAFTA-- easily the biggest, most comprehensive multilateral trade agreement concluded since the WTO. Moreover, most analysts agreed that the TPP-12 contained some major advances in a number of the most controversial areas of contemporary trade policy; notably, labor, investment disputes, and the environment.

Interestingly, the CPTPP signatories announced the suspension of a number of provisions of the TPP-12 text, including some covering express delivery services and intellectual property.

Yet, it's the "progressive" label that intrigues most. While a lot of critics don't see it this way for some reason, trade liberalization is inherently progressive. Indeed, for a good part of human history, the protection of markets by the powerful and privileged at the expense others (foreign or domestic) has been the default. Eliminating barriers to trade has been an unqualified boost to global economic activity, raised the living standards of billions around the globe, undercut the power of monopoly, and unleashed the "creative destruction" of capitalism to re-order the strictures of privilege in many societies.

To be sure, all of this comes with the narrowly focused, and politically potent, adjustment costs predicted by economic theory. Here And our failure to deal with all of that adequately has, in part, paved the way for the Trump wrecking ball. Indeed, the political failure to "purchase" additional social and political license for the "losers" by using some of the broadly based proceeds from the "winners" to compensate them has given great cover to the xenophobic populists that now dominate debates over trade.

Addressing this fundamental problem would be a far more "progressive" approach to trade policy than the semantic changes made to the TPP's title..... But let's explore this further.

The Skeptical Progressive

Birds of a Feather

When Prime Minister Trudeau says Canada's trade policy is "progressive," my spidey-senses tingle. What the Government of Canada actually means by this in practice is rather murky, but the outlines were advanced by Chrystia Freeland, Canada's foreign minister, in a speech given August 14, just before the start of the NAFTA re-negotiations:

... Here, then, are some of Canada’s core objectives.

First, we aim to modernize NAFTA. The agreement is 23 years old. The global, North American, and Canadian economies have been transformed in that time by the technology revolution. NAFTA needs to address this, in a way that ensures we continue to have a vibrant and internationally competitive technology sector and that all sectors of our economy can reap the full benefits of the digital revolution.

Second, NAFTA should be made more progressive. We will be informed here by the ideas in CETA, the most progressive trade deal in history, launched by Conservatives and completed, proudly, by our government.

In particular, we can make NAFTA more progressive first by bringing strong labour safeguards into the core of the agreement; second by integrating enhanced environmental provisions to ensure no NAFTA country weakens environmental protection to attract investment, for example, and that fully supports efforts to address climate change; third by adding a new chapter on gender rights, in keeping with our commitment to gender equality; fourth, in line with our commitment to improving our relationship with Indigenous peoples, by adding an Indigenous chapter; and finally by reforming the Investor-State Dispute Settlement process, to ensure that governments have an unassailable right to regulate in the public interest.

One reason that these progressive elements, particularly on the environment and labour, are so important is that they are how we guarantee that the modernized NAFTA will not only be an exemplary free trade deal, it will also be a fair trade deal. Canadians broadly support free trade. But their enthusiasm wavers when trade agreements put our workers at an unfair disadvantage because of the high standards that we rightly demand. Instead, we must pursue progressive trade agreements that are win-win, helping workers both at home and abroad to enjoy higher wages and better conditions....

Don't worry,.... be happy!

I've underlined the key elements; labour, environment, gender, Indigenous peoples, and ISDS. As we know, the NAFTA negotiations have not gone well. Indeed, the 5th Round of talks in Mexico City just wrapped up with seemingly little progress to report. Several days ago, USTR updated its negotiating objectives for NAFTA 2.0. The Trump administration wants to get rid of dispute settlement altogether, including ISDS (which I've written about elsewhere). Unsurprisingly for the Trump administration, gender and Indigenous peoples didn't make the cut.

Is Trade the Right Forum for These Issues?

These are all important issues, but except for ISDS, I'm not completely sure trade agreements are the right forum for dealing with any of these issues. For those seeking to have these issues raised in prominence, trade agreements are obvious targets for doing so. At bottom, trade agreements are rules-based arrangements designed to foster transparent cooperation on all of the issues covered. Indeed, simply getting new issues attached to trade agreements is a big victory since it indicates their status.

On the other hand, one concern with trying to have trade agreements become vehicles for more and more issues is that we already expect such agreements to do more than they reasonably can. Indeed, one of the biggest problems for the NAFTA has always been that its proponents over-sold what the Agreement could do while critics overstated the negative byproducts.

Adding a whole range of issues (however desirable it might be to address them) to trade expands the scope of agreements that have already become hideously complex and a lightening rod for populist critics. Trade agreements like the NAFTA are actually quite limited in what they do; they liberalize flows of trade, services, investment, and some categories of people. As a comparatively shallow preferences agreement, the NAFTA never contemplated the kind of supranational institutions (pooled sovereignty) that would be needed to deal with the kinds of political and social questions implied by Canada's progressive agenda. None of the proposals put forward for the modernized NAFTA2.0 involves the pooling of sovereignty. Hence, asking NAFTA2.0 to be "progressive" is asking too much of it. 

Labor and Environment

For evidence, look no further than the original NAFTA. In the midst of the 1992 U.S. Presidential campaign, then-candidate Clinton was pressed on the campaign trail to take a position on the nearly complete NAFTA negotiations. In classic Clinton style, he found a way to sit on the fence. He was "for" the NAFTA so long as there were proper protections for labor and the environment.

I've written about this elsewhere, but the punchline is that -- for good or for ill-- President Clinton permanently attached labor and environmental issues to the process of trade liberalization with the creation of the so-called NAFTA Side Agreements. The Commission on Environmental Cooperation (CEC) has become a surprisingly robust organization for the exchange of information about North America's shared ecosystems by scientists, civil society, and interested citizens. It wasn't meant to be such.

Indeed, the CEC was never given any real enforcement power and has instead relied on being able to "shame" member governments into taking action. In many ways, it has become a pleasant, and still relatively unknown, institutional surprise.

The North American Agreement on Labor Cooperation never really got off the ground, in part, because it was never given any institutional teeth. My read of the text of the NAFTA Side Agreements is that the three governments were committed only to paying lip-service to these issues, first, by sticking them in texts outside the NAFTA, and second, by leaving them devoid of institutional teeth. It is noteworthy in this context that nothing like the CEC has ever been part of a U.S. FTA negotiation subsequent to the NAFTA.

In spite of these weaknesses, the Side Agreements permanently planted labor and the environment on the international trade agenda such that there are now provisions on labor and the environment in nearly every global trading agreement. For the most part, however, the language in these agreements is merely designed to ensure states adhere to internationally agreed standards of worker protection (International Labor Organization, for example) and do not manipulate or relax aspects of their domestic labor and environmental regulations for the purposes of gaining advantage in their trading relationships (See text of Chapter 19 of the TPP-12 Agreement).

Interestingly, nothing like the CEC has ever been re-created alongside U.S. FTAs subsequent to the NAFTA.

Smells Like Progressivism, Looks Like Protectionism?

A big reservation I have about the future of labor and the environment in the context of trade is how readily professed concern for these issues can slide into protectionism. Labor and environmental

standards are a major source of political cleavage in the global trading system. Developed country labor and environmental standards are generally well above those maintained in developing states. Developing states argue they are doing their best to raise the bar in these areas, but that raising living standards must take precedence over higher labor and environmental controls. Critics say development and the establishment of high standards can happen simultaneously. Developing countries argue that richer societies can better afford such controls and that it's hypocritical for developed states to push this approach when for many decades their own development evolved on the basis of much lower labor and environmental standards-- today's Pittsburgh is very different in both of these areas than it was in the 1940s.

Moreover, the insistence of high standards for labor and environmental standards as a condition of trade strikes a number of developing states as nothing but veiled protection. It sounds nice and progressive to insist upon and use trade liberalization as a means for ratcheting up standards. But beneath it is less a concern about labor and the environment in developing states than a means of making the products of those countries less competitive in developed states.

Don't Mess with Flipper

Some of the earliest experience with this cleavage came in the late 1980s when the WTO was still the GATT. In 1990, the United States banned imports of tuna caught by Mexican fishers because the methods used to catch the tuna did not include safety measures to prevent dolphins from also being caught. The U.S. measure was subsequently modified to allow tuna imports provided Mexican suppliers could prove no dolphins were harmed. Mexico complained to the GATT arguing that restrictions on imports could only be applied to "products" and that U.S. measures were being applied to the "process" by which tuna were being caught. A similar case was brought against the U.S. by Malaysia, Pakistan, and Thailand in the late 1990s over U.S. restrictions on shrimp harvested without the use of turtle exclusion devices on fishers' nets. At issue again was whether restrictions could be placed on imports under WTO rules on the basis of "process" rather than just "product."

Trade and Climate Change

My concern about the global trading regime becoming a vehicle for dealing with the growing importance of climate change is all about this "product vs. process." I imagine there are voices who would very much like to have the terms of trade agreements reach into various parts of a nation's production chain, deem certain processes unsustainable, or dirty (high CO2 content in production), and use trade sanctions to raise those standards. Yet, what sort of moral high ground would we really be standing on when the effects of new sanctions would fall most heavily on those who can least afford them?

It would be easy to use the lure of U.S. market access, for example, to try and impose rich-country labor and environmental standards on developing countries that wanted to sell their goods to Americans. Yet, I wonder greatly how many rich country labor unionists or environmental advocates really care about what goes on in developing countries apart from the impact it might have on their jobs at home? That's probably too cynical. But I certainly think venturing very far down this road risks deepening the cleavage between rich and poor countries in the global trading regime.

There are already lots of measures available to WTO members to limit trade through safeguard measures, negotiated quotas, for conservation or national security purposes, or health and safety-- all of these measures apply to end "products." I wonder how long we'd credibly be able to claim our policy was "progressive" if we adopted trade rules that effectively threatened countries with trade barriers because of productive "processes" we didn't like?

Moreover, those in glass houses should not be throwing stones. For that, look no further than the asbestos industry. In 2001, France banded the importation of asbestos and products containing it. Canada went to the WTO in an effort to overturn that ban and lost. Canada is also a major fossil fuel exporter and parts of its heavy industry are based upon fossil fuel consumption. Would Canada necessarily be a beneficiary of an evolved set of trade rules that could be used to police "process" issues in the manufacture of dirty goods?

Gender and Indigenous Peoples

This brings me to the final two pillars of Canada's current efforts to pursue "progressive" trade policy. Like labor and the environment, gender and issues involving Indigenous peoples around the world are extremely important. Societies everywhere are better off depending on the degree to which they are able to make advances on each of them. But is the global trade agenda the correct place for this?

In some ways, absolutely! As I noted above, trade liberalization inherently breaks down the power of privileged interests and opens economic opportunity to people for whom it may normally be closed. Trade empowers minorities, women, and the poor.  As noted in a 2015 World Bank publication titled "The Role of Trade in Ending Poverty," trade is responsible for cutting the number of people living in extreme poverty in half since 1990 to just under a billion people.

As part of its pursuit of gender as a focus of "progressive" trade policy, Canada and Chile recently amended their 1995 FTA to include a new chapter on gender. It lays out a number of lofty goals with respect to gender equality and economic empowerment, including a number of ideas for cooperative initiatives.

However, Article N bis-06 is also clear that "A Party shall not avail itself of the dispute resolution mechanism provided for in Chapter N (Institutional Arrangements and Dispute Settlement Procedures) with respect to any matter arising under this Chapter." In other words, like the NAFTA's labor and environmental Side Agreements, the amended Canada-Chile agreement has no institutional teeth. Wouldn't a more genuinely progressive agenda between Chile and Canada entail modernization that went further in eliminating barriers to trade, including those entrenching differential access to international markets for women?

Could the new Gender chapter evolve in the same way as the Commission on Environmental Cooperation and become far more robust than the governments intend? Perhaps, and there are important agenda-setting qualities to having such text formalized in an agreement.

But how far down a road toward making labor rights, the environment, gender, or Aboriginal peoples subject to dispute settlement mechanisms and sanction in the context of trade are we prepared to go? Do we really want the mechanisms of the WTO or of regional agreements like the Canada-Chile FTA to reach behind borders into "processes" of one sort or another to sanction inequities or right past injustices we find upsetting? I think trade can be an important vehicle for raising awareness of all these issues. But I am unsure how deeply we should venture into using trade mechanisms to sanction behavior we think should be more "advanced" when not directly tied to trade?

Should the threat of trade sanctions be used as a way to forcibly improve the production "processes" in developing countries? As Canada's experience with asbestos suggests, rich countries are not without a few skeletons in their closets. Canada is big and pristine looking, but its management of the environment in the harvesting of softwood lumber leave much to be desired. Should trade rules be reconfigured to make failure to enforce part of the "subsidy" provided to lumber companies? What about trade sanctions for gender inequality, the lack of workplace pay-equity laws, or lax enforcement? How would Canada stack up there? And, finally, what about Indigenous peoples? Could trade somehow be used to remedy past wrongs in a number of different countries? Should it be? Could the very same rules Canada puts forward regarding Aboriginal peoples in the context of trade be turned against Canada in ways that compromise reconciliation processes?

I'm inclined to think we ought to just let trade be trade.

In no way do I intend to minimize the importance of these "progressive" issues. Rather, I merely question the utility of adding them to a trade agenda already paralyzed by cleavages between rich and poor countries; it would be nice to first deal with agricultural subsidies. Moreover, the entire global trading regime is teetering under the challenge from populists in both Europe and North America who feel too much sovereignty has already been ceded to unaccountable institutions like the EU or WTO.

I am all for advancing "progressive" policy positions. But trying to attach them to trade policy strikes me as cowardly and empty-- especially without institutional teeth. The cynic in me thinks Trudeau's rhetoric about all of this is largely for domestic consumption. Moreover, before launching moralistic volleys about "progressive" trade policy, the Trudeau Government would do well to think about how those same volleys might be used by others in ways that complicate the ability of Canadians to advance on things like the environment, gender, or Indigenous peoples at a pace of their choosing.

Whither North America Redux....

A sense of doom is beginning to take hold about the future of the NAFTA's "renegotiation," "modernization" or "destruction" (pick your favorite). Last week, at the end of Round 4 of NAFTA 2.0 talks, the three governments announced the 5th round would be postponed for a month (late November) to allow for some stock-taking by all parties.

Fake smiles, failed Round

It's hard to read into this delay much that is positive, if for no other reason than that it will probably push completion of any agreement into the spring of 2018 and closer to presidential elections in Mexico. The proximate reason for "stock-taking" are the positions being taken by the Trump Administration on a range of issues (dispute settlement, procurement, supply management, agriculture, rules of origin, etc) unpalatable to Canada and Mexico-- see my previous pieces on these things as the talks have moved along (here, here and here).

In my search for a silver lining in all of this, I have tried to tell myself that all negotiations look doomed right before a deal is struck. In truth, I predict that before the end of the year Trump will make formal what I believe he's wanted all along; scrap the NAFTA.

One of the most ardent proponents of North American integration, American University's Robert Pastor, died in early 2014. To the end, he vigorously pursued efforts to more firmly connect

Over the last few months, I've thought about what he'd say about what's going on. One of my very first posts to this blog was about North America and was connected to Pastor's passing. I thought I'd re-post it since it's as relevant today as ever.

Originally posted, January 21, 2014

Is North America Over?

New Year’s Day 2014 marked the 20^th anniversary of the implementation of the North American Free Trade Agreement (NAFTA). About a week later, January 8, Robert Pastor, one of the NAFTA’s fiercest defenders, and one of academia’s most tireless advocates of deeper North American integration, died after a 3 ½ year battle with cancer. To the citizen on the street, Robert Pastor is hardly a household name. Yet, among those in academia or public policy for whom North America was a focus, Robert Pastor’s work could not be ignored. Indeed, for much of the past three decades we have all—academics, politicians, and the general public-- implicitly been debating the merits of his policy prescriptions.

Pastor’s death also comes at a time of great uncertainty about the future of North American integration. Government priorities in all three countries have shifted elsewhere. Academic centers focused on North America have been disappearing. There’s little private sector consensus on the merits of further integration. Academic centers focused on North America are in rapid decline. And security has become entrenched as the overarching framework for governing the North American economic space. The last phase-ins of the NAFTA came into force some five years ago and the agreement has largely done what it set out to do. Many of the undergraduates I see every fall know little about the NAFTA. In short, the NAFTA is old news.

Robert Pastor’s final book was entitled The North American Idea (2011) but what’s actually left of that idea?

For proponents of North American integration, the early 1990s were heady times. The Cold War was over. Democracy and liberal capitalism had emerged as the victorious, dominant mode of global governance anchored by the United States as the pre-eminent example of both. Yet, for proponents of this view, euphoria gave way to despair as the 1990s wore on as challenges to liberal capitalism and integrated markets emerged. The NAFTA’s implementation in January 1994 was marred by the Zapatista rebellion in Chiapas, Mexico. The newly created World Trade Organization was infamously rocked by violence at its 1999 ministerial meeting in Seattle (Battle in Seattle). And the proposed Free Trade Area of the Americas, hatched with some fanfare in 1994, was effectively dead by 2002.

Efforts to build upon what the NAFTA had begun mostly fell on deaf ears after 1994. The Clinton Administration, which spent so much of its political capital on getting the NAFTA through the U.S. Congress, seldom mentioned it again during the two terms of his administration. The NAFTA had already become synonymous with all that was wrong with the rapidly expanding global trading regime, Pastor more recently complaining that it became a “piñata for pandering pundits and politicians.” Indeed, critics from both ends of the political spectrum came to see what they wanted in the NAFTA. For some, the Agreement was too shallow and didn’t do enough institutionally to level North America’s asymmetries. For others, the NAFTA dealt with too few issues and left a lengthy list of festering problems off the table. For others still, the NAFTA represented a kind of Trojan Horse, poised to destroy sovereignty, force the export of bulk fresh water, facilitate the construction of twelve lane super-highways, destroy the environment, or unleash waves of low-cost, job-killing labor.

Prior to the September 11 attacks on the United States, virtually every global meeting of economic leaders was guaranteed to illicit protests numbering in the tens of thousands, epitomized by the 1999 Battle in Seattle, anti-FTAA protests in Quebec City in 2001, and tragically capped by the death of a protester at the hands of police at the G8 Summit in Genoa, Italy in July 2001. It had all become a poisonous mix that North America’s political and private sector leadership wanted no part of.

As many others retreated from the debate, Robert Pastor jumped in with two feet, publishing Toward a North American Community in August 2001. There he argued that the central failing of North American integration was that the NAFTA had done too little to institutionalize and strengthen trilateral cooperation. He contrast the absence of institution building in North America with the sclerotic, over-institutionalization of the European Union and argued for a unique approach to North America that landed somewhere in the middle, reflective of the continent’s unique history. Nevertheless, his argument instantly made him the target of intellectual and political foes, among them, CNN’s Lou Dobbs, whose anti-trade, anti-immigration rhetoric was openly xenophobic. Whereas members of the Clinton and Bush administrations refused to challenge Dobbs and others, Pastor took them on, transforming himself into a political piñata as well.

I have heard Robert Pastor referred to as North America’s Jean Monnet; a reference to one of European integration’s greatest intellectual and political champions. The Monnet Plan was designed to jumpstart the integration of Europe through the integration of French and German coal and steel production. Monnet himself was later appointed president of the European Coal and Steel Community’s governing body. Monnet lived to see even more economic integration among western European economies, but died in 1979, well before Europe’s post-Cold War expansion and the creation of the Euro. The European project remains a work in progress, and there were certainly days on which Monnet wondered if his vision of an integrated, prosperous, and peaceful Europe would ever come to pass.

Comparing Pastor to Monnet might be taking matters too far, particularly since many of his ideas (customs unions, common currency) are controversial.  Yet, the comparison is apt in that, like Monnet, Pastor pushed his vision for North America everywhere he went; within academia, the halls of power, the private sector, and the media.

Yet, the timing of Pastor’s Toward a North American Community could not have been worse. The 9/11 terrorist attacks instantly put the economic integration debate on hold, quickly replacing it with security—in many minds, the antithesis of economic openness.

In recent years, Pastor became an outspoken critic of the impact post-9/11 security measures were having on the economic benefits of North American integration. He was dismayed at the absence of political courage by the three governments to pursue a larger vision of an integrated, and secure, North American economic space. In 2005, the three governments launched the Security and Prosperity Partnership aimed at balancing the benefits of economics with the new imperatives of security.

It was the first serious trilateral cooperative effort since the NAFTA. Yet its main achievements were to upset nearly every stakeholder group imaginable, each of the national legislatures, and provide fodder to conspiracy theorists on the political left and right. The SPP generated a long list of issues the three countries could work on, but was never guided by an overarching vision of what North America could become, and quietly went away in 2009, further solidifying border security as the overarching paradigm through which our leaders see the continent. In 1994, scholars spoke of the implications of a borderless North America with passport free travel and integrated labor markets. In 2014, North America’s borders are more prominent than ever, acting as both commercial choke-point and security dragnet.

Much as Winston Churchill warned of an “iron curtain” descending across Europe at the onset of the Cold War, Pastor was aghast at the descent of a “security curtain” over North America and its effect on trilateral cooperation. He was especially critical of the leadership in Ottawa as it sought to sideline Mexico City and deal with Washington bilaterally. Ottawa believed it could cash in on Canada’s “special relationship” win security concessions from Washington that would prevent the “Mexicanization” of the Canada-U.S. border; the U.S.-Mexico and Canada-U.S. borders are actually more similar now than they are different. In fact, Pastor argued that Ottawa’s approach only exacerbated the asymmetries of power among the three countries that Canada had spent much of the last two decades trying to minimize through agreements like the NAFTA. Further, he argued, the leadership in Mexico City was far more open than Ottawa to a collective, perimeter approach with Washington to the mix of economics and security. More troubling still, Ottawa’s approach represented a puzzling misread of the importance of Latin America, and Mexico in particular, in U.S. policy-making that has netted Canada few, if any, benefits.

In his last book, The North American Idea (2011), Pastor argues that the historical experiences of Canada, the United States, and Mexico have far more similarities and points of intersection than is often assumed. In addition, public opinion surveys in all three countries suggest the populations of all three are more open to the idea of a more unified North America than any of the three governments. However, the idea of a unified North America seems more elusive than ever. Security overwhelmingly dominates our approach to border policy, arguably undermining many of the economic benefits of economic integration. Apart from border security issues, North America has faded in the policy priorities of all three national capitals. And the academic and policy research focus on North America is in rapid retreat throughout the continent.

The European project has been over 60 years in the making and remains a work in progress. Jean Monnet did not live to see the advent of passport free travel or a common currency in Europe, and must have despaired over the pace at which is vision was being implemented. Yet, the idea of a more unified Europe remained.

Robert Pastor’s specific prescriptions for North America were not always popular, even among those who basically agreed with him. Yet, he, like Monnet, spent much of his life trying to keep the “idea” of North America alive in whatever form it eventually takes. North America is not Europe, nor will it ever be. However, the “idea” of a more trilaterally oriented North American economic, security, and (I’d argue) ecological space is as important as it’s ever been to the people who live in it. Our policy leadership would be wise to keep this “idea” in mind.

Alternate Nostril Breathing.....

Hillary Clinton has slowly been normalizing her return to public life following 2016's stunning presidential election outcome. Her new book, aptly titled "What Happened," includes many depressing details about the tumult of 2016 and her personal struggles in the year since. In a recent interview with CNN's Anderson Cooper about the book, she also revealed that one of the techniques she had tried as a means centering and calming herself was the practice of alternate nostril breathing.

I have, of course, expressed a growing level of angst about the Trump Administration as its first year in office comes to a close. It seems a little goofy, but since it seemed to work for Mrs. Clinton, I thought I'd give it a go.

It wasn't helpful.

I probably wasn't doing it right; sort of like my experience with yoga a few years back. Just not my cup of tea.

Of late, I have sought more and more comfort from a different source; the Federalist Papers. I've written here before about my admiration for what Madison and Hamilton wrote in New York newspapers more than 220 years ago in the midst of the ratification debate. However, those musings were more of an attempt to understand the political paralysis that frustrates so many observers of American politics. Whether it's foreigners or Americans themselves, the perpetual inability to get things accomplished is most often depicted as a sign of impending doom for the entire system. Yet, as I repeated over and over again, Madison (especially) and Hamilton largely designed it that way.

The whole point of America's infamous "checks and balances" at the federal level, and replicated inside each of the 50 states, is to thwart the concentration of power, to pit "ambition against ambition," and short-circuit the "mischiefs of faction" that Madison worried could undermine everything. It is a system that is incredibly open, with multiple points of entry into different branches and levels of government. It's a system that rewards organization, virtually ensures countervailing forces will organize against you, and necessitates messy compromise. That might seem an odd thing to say in an era of hyper-partisanship and the virtual absence of anything that looks like compromise. Yet, whereas just a few years ago the failure to compromise, the inability to make progress on many issues, and the paralysis in policy-making were-- for some-- signs of the apocalypse, many of those same people probably see more virtue in it all than ever.

The fact is, wherever I look in the Trump Administration these days, I see the Federalist No. 10 and No. 51 in action. In his first year in office, President Trump has crashed spectacularly into the standard problems all presidents encounter. The main difference for Trump is that he's compounding them with a potent combination of navel-gazing narcissism and staggering incompetence.

For normal presidents, the fundamental dilemma facing them is that they have too little authority to satisfy public expectations of their performance. If you read Madison's thinking about this in the Federalist, and quickly peruse Article II of the U.S. Constitution, you'll quickly realize how true this is. On its face, Article II powers are pretty minimal. Indeed, there's a strong argument to be made that Madison and company thought of the U.S. president in largely ceremonial terms. "Commander in Chief" is pretty important, but Congress is in charge of raising and financing the troops under the President's control? There are some foreign affairs duties assigned to the President, but they all come with important limitations; ambassadorial appointments and treaty-making functions all require Senate approval.

I am not arguing that American presidents are weak figures. Indeed, throughout the course of American history, presidents have had a very liberal reading of the meaning of Article II's "Executive power" to do all kinds of things and effectively expand presidential authority and influence. Trump can clearly do a lot of harm; he's got his finger on the nuclear button, is sabre rattling with North Korea, and just today made moves to undo the nuclear deal with Iran.

For a variety of practical reasons, U.S. presidents have assumed responsibility for broad swaths of American foreign policy, including many duties ostensibly reserved for Congress under Article I, Section 8's "enumerated powers." Yet, presidents have to be cautious with the exercise of power. Power isn't static nor is it without limits, particularly within a U.S. system which gives comparatively little nominal or statutory power to the president, and sets up all sorts of other actors looking to undermine presidential power. The kind of power presidents need to get things done must be carefully cultivated and wielded judiciously or risk having it eviscerated away by other parts of Madison's original design.

President Trump swept into office after one of the craziest, most surprising campaigns in American history. In his first couple of weeks in office, President Trump signed all kinds of Executive Orders designed to get the ball rolling on parts of his agenda. Many of them reversed Executive Orders put in place by the Obama Administration. Trump has withdrawn from the Trans Pacific Partnership, threatened to scrap the NAFTA, and hectored the South Koreans into revisiting the U.S.-Korean Free Trade Agreement. He has initiated a travel ban from several Muslim-majority countries, threatened not to implement the 2015 Paris Climate Change Agreement, and threatened to cut the budgets of key executive branch agencies-- State, EPA, Interior-- he doesn't like. All serious and deeply troubling.

Feelin' the Love Last Spring....

Yet, to get anything big done, Trump needs some friends on Capitol Hill; he needs legislation. Unlike parliamentary systems, the only two elected officials in cabinet are the President and Vice-President, neither of which sits in the legislature. In the United States, party discipline is a faint shadow of what it is in parliamentary systems, and the President, while the most prominent member of their political party has virtually no authority over those within their party elected to Congress.

For a time, Republicans on Capitol Hill probably felt they owed part of their own electoral victories to the phenomenon that Trump became on the campaign trail. Yet, many of those same members have always had reservations about Trump, a number probably want Trump's job in 2020.

Getting Congress to go along with White House policy priorities is a bit like herding 535 kittens (100 in the Senate, 435 in the House); it requires a near-constant persuasive offensive on the part of White House staff, and the President himself. Where presidential priorities are concerned, the most effective White House's behave more like a "legislators in chief," frequently drafting legislation that reflects those priorities, and then seeking sponsors on Capitol Hill to shepherding them through committees, amendment, and final votes. All the while, Presidents and their staffs are monitoring the proceedings, paying recalcitrant Members visits, making promises in exchange for their support, or sometimes exerting a little not-so-friendly pressure.

President Obama was terrible at this; probably one of the biggest reasons ObamaCare is where it is today. But Trump is even worse at all of this. His main tactic seems to be using Twitter to critique legislative initiatives on healthcare or taxes he hasn't bothered to read. Moreover, if he wants anything done about immigration, infrastructure, or his ridiculous border wall, he's going to need support from some of the same people he's been excoriating.

For a stark contrast with both of these leaders, just listen to parts of the Lyndon Johnson Tapes. Therein, you will hear a master-manipulator calling recalcitrant Members of Congress about their lack of support for his priorities. President Johnson was alternatively persuasive, abrasive, and crude with is former Hill colleagues, but he was brilliant in the way he wielded carrots and sticks to get his way.

As Trump racks up failures, many of which are own-goals, his influence and "power" over his agenda are beginning to wane. In short, President Trump has failed to cultivate and preserve the limited power he had in his sails on Election Day in 2016. Presidents have always been uniquely positioned to appeal to the entire country, rally support, and pursue their agendas. Who else has a 747 to fly around in? Who else can request national television time to pitch their ideas to voters? Who else in the country can serve as "consoler-in-chief" in times of national crisis (hurricanes, mass shootings, etc)? What about the role of an American president as "leader of the free world?"

None of this happens or resides fully within the control of U.S. presidents unless it's actively maintained, cultivated, and wisely exercised. Trump is quickly squandering what little of this power he had. Waiting in the wings are a long list of actors in the American political system eager to marginalize the White House, undercut its power, and move a different agenda forward while they wait for the next president to be elected in 2020.

Few people imagined someone like Trump ever moving into the White House. But Madison and Hamilton did.

Whether Trump serves just four years or eight (a possibility I do not discount), I'll be leaving the alternate nostril breathing to Mrs. Clinton. At the moment I've got no plans to build a survival bunker in the backyard and hide for the next few years. Instead, my solace, my zen in the middle of all this chaos, will continue to come from the Federalist Papers.

NAFTA 2.0, so far....

With no shortage of global chaos drawing our attention these days, not the least of which is North Korea, you may not have been paying attention to the fact that the second round of NAFTA 2.0 talks

The Three Amigos 2.0?

wrapped up in Mexico City this past weekend. Complex negotiations like the NAFTA 2.0 have a fascinating set of dynamics worthy of study in their own right. You don't just show up in a hotel conference room, sit down with your counterparts, and begin hashing out an agreement. Negotiations are dynamic, sometimes unpredictable situations. All sides can be hyper-prepared with their briefings, position papers, and demands. But once negotiations are formally underway, all bets about the precise outcome are off. Everything from the shape of the bargaining table, to the actual process by which parties negotiate, and, of course, the personalities of the negotiators themselves, is pivotal to the outcome. Indeed, it is frequently the case that negotiations seem doomed just before an agreement is struck.

The Whiplash President

Over the past couple of years, I've generated a lot of hot air about American politics; I've given more than a dozen public talks, done lots of radio shows, and had a few things to say on this blog. I do my best to offer something meaningful along with the odd insight into what's going on. It's getting tougher and tougher.

In fact, it's only August and I'm completely exhausted! Trump exhausts me! When I reflect on what has transpired in just the first 6 months of this Administration, I need to stop and catch my breath. There's a daily diet of outrage, incompetence, and mean-spritedness that leaves me feeling dirty for having watched.

Every other day, I find myself saying "he did what?" As I shake my head over yesterday's development, my head snaps in the other direction as the next one hits. I've developed a number of the signs of whiplash.

However, as the Whiplash President wreaks havoc, I have also frequently felt some combination of despair, frustration, anger, and resignation-- sometimes all within the space of about 15 minutes. I am old enough to have appreciated Cold War tensions (I remember watching The Day After with my parents), worried about domestic terrorism in the mid-1990s, lived in some state of anxiety in Washington after 9/11, and agonized over the 2003 invasion of Iraq.

Yet, I've spent a lot more time worrying about Donald Trump.

The Agenda NAFTA 2.0-- What will Trump Want?

North America is headed toward NAFTA 2.0-- maybe? What that means depends a lot on who you talk to. For some, it's a wholesale renegotiation. Others I've read think it should be a simple "tweak" or "modernization" of a 25yr old agreement. Indeed, optimists think they have a template for the "tweak" on hand in the form of the Trans Pacific Partnership (TPP) text-- the same text President Trump walked away from on his third day in office. The more skeptical voices think the whole process could take quite a bit longer, perhaps even colliding with electoral politics in Mexico and the United States in 2018.
 
Trump's outlook on trade policy (among many other things) has been a chaotic work-in-progress. The President is rightly concerned about trade deficits, but has wrongly identified both the causes of those deficits and the means to fix them (Hint: the problem is rooted in macro economics and trade policy won't fix it). With Trump at the helm, predicting what the U.S. position on NAFTA 2.0 may end up being as exact a science as predicting lightning strikes. Indeed, since Trump was reportedly persuaded by his more adult-leaning advisors to seek a "renegotiation" with Canada and Mexico rather than outright withdraw from the NAFTA, it has occurred to me that the "renegotiation" is really a charade. When the bargaining gets tough, a frustrated Trump, looking for deliverables-- even if doing so hurts many of the voters who elected him-- will do as he did with the TPP and withdraw as he promised on the campaign trail.

"We will end NAFTA forever" if we dont get "total renegotiation", says Trump in pretaped weekly address before he left for #G20 pic.twitter.com/P0AxSY8x4O

— José Díaz-Briseño (@diazbriseno) July 7, 2017

If stopping short of exploding the NAFTA becomes a reality, there are already several places to begin looking for clues as to what Trump may want from NAFTA 2.0.

Transatlantic Investment Protections: Convergence or Sticking Point for the TTIP?

In the spring of 2017, I was fortunate to have been a AICGS/DAAD Fellow at the American Institute for Contemporary German Studies at the Johns Hopkins University in Washington, DC. The purpose of that stay was to dig deeper into the rules governing foreign direct investment. The fruits of some of that research were just published on the AICGS website (linked here).

Below is a longer, more contextualized, version of the same piece.

This paper is about the controversy swirling around foreign direct investment rules generally, and

To TTIP or Not to TTIP?

recent U.S. and European experiences in helping reshape their design. When this research project was proposed in mid-2016, its purpose was to look ahead at how investment protection rules had evolved on both sides of the Atlantic as a window into how investment rules might have evolved in the proposed Transatlantic Trade and Investment Partnership (TTIP).

It’s normally ill advised to begin a paper by offering qualifications to what is about to follow. But the analysis below is being advanced at a unique moment in time that cannot be ignored—there’s a large, populist, elephant in the room.

The conclusions and point of this paper are that the United States and Europe were on a path toward convergence on investment rules that would have made them less contentious within the TTIP negotiations than many assumed. It’s a conclusion that remains valid, but one that has been overtaken by a much larger set of challenges to the politics of the global economy.

Into A Perfect Storm

The electoral tumult of 2016 on both sides of the Atlantic—June’s Brexit vote, and the election of Donald Trump in November—has shaken the foundations of the consensus around broad swaths of the postwar economic and political order. Not since the “Nixon Shock” of August 1971 that effectively ended the Bretton Woods system of fixed exchange rates has there been such an open reconsideration of patterns of global governance, U.S. and European leadership, or even the basic premise behind international cooperation.

International economic cooperation has historically been an easy target for populism. For two

Detroit: Rust Belt Poster Child

hundred years, economists have been making the case in favor of free and open markets. Indeed, David Ricardo’s 1817 articulation of comparative advantage remains one of the most powerful sets of ideas in all of economics. Yet, for two centuries, economists (and their political cousins) have done a lousy job convincing politicians, or those that vote for them, that such ideas are sound.[i] Moreover, one of the most straightforward ways to appreciate the impact of trade liberalization is that there are “broadly distributed winners, but also highly concentrated losers” created. Politicians love to hear about the “winners” but have, for most of the last two hundred years, not done enough to compensate the “losers.” David Ricardo referred to these “losers” as “released workers.” For too much of the postwar period, it has been assumed there would be so many “winners” from liberalization that “released workers” would simply be absorbed into an expanding economy. Some argued for a more robust redistribution of a portion of the gains from the “winners” should be more robustly used to help “compensate” the “losers” – the purchase of a kind of social license by governments to pursue more of the broad-based, positive effects of liberalization.

Unfortunately, there is widespread agreement that the implicit compromise between the “winners and losers” has been neglected for too long. In 2016, the standard xenophobic economic populism collided with the politics of that long-term neglect of the compromise. The results now challenge

broad swaths of the postwar economic and political order—Brexit risks undermining the stability of the European Union, President Trump’s cancellation of the Transpacific Partnership (TPP) and his threat to withdraw from the North American Free Trade Agreement (NAFTA) have America flirting with isolationism.

While no formal action has been taken on the part of the United States or European Union to stop TTIP negotiations (formally begun in 2013), the future of the TTIP is uncertain. A German official described the status of the TTIP this way: “In normal times, the TTIP would probably be in the refrigerator, being chilled until the politics were right to advance it. With Brexit and Trump, it’s in the freezer. Even it’s taken out, it will be a while before it’s thawed.”

Hence, a key assumption of this paper is the need to return to normal levels of controversy over trade liberalization. Not long after the formal launch of TTIP negotiations, it became clear the investment provisions were poised to be a major point of contention in the talks. Investment protections are not a new source of controversy. Indeed, investment rules in the NAFTA were a key source of anti-globalization sentiment in the late 1990s and early 2000s. Yet, the antecedents of contemporary investment rules—bilateral investment treaties (BITs)—have been around for decades and generated virtually no controversy.

The proximate source of controversy over investment was Europe, specifically Germany. In 2009 and again in 2012, the Swedish power company Vattenfall pursued investment arbitration against Germany under the terms of the Energy Charter Treaty alleging the expropriation of property as a result of Berlin’s decision to, in the first instance, phase out certain coal fired power generation (Vattenfall I), and, in the second, shutter it’s nuclear power generation in the wake of Japan’s Fukushima nuclear disaster (Vattenfall II). 

The controversy over investment rules that erupted in Germany, hijacked the EU’s virtually completed free trade negotiations with Canada (CETA) in 2014, forcing Brussels to re-think its approach to investment. It was a re-think that added to the assumption that the United States and Europe were on divergent paths and that investment would be a major sticking point in the TTIP talks. 

BITs, BITs, and More BITs

Although foreign direct investment is widely viewed as an important potential source of economic development, very little FDI flows toward the developing world. According to the United Nations, in 2015 there were nearly US$ 3Trn worth of foreign direct investment flows globally. Unfortunately, the lion’s share of those flows are between wealthy OECD countries, accounting for more than 70 percent of all outflows and more than 50 percent of all inflows (see Table I).

Table I: Global Flows and US, EU Shares

	2015 (in millions $US)
Global Outflows	1, 474, 424
Global Inflows	1, 762, 155
Hi-Income OECD Outflows	1, 098, 527 (74.5% of total)
Hi-Income OECD Inflows	698, 064  (55% of total)
US Outflows	316, 549
EU (28) Outflows	487, 150
US Inflows	379, 894
EU (28) Inflows	439, 457
US + EU(28) Outflows	803, 699 (61% of Global Flows
US + EU(28) Inflows	819, 351 (54% of Global Flows)
LDC Outflows (- China)	701, 090 (47% of global total)
LDC Inflows (-China)	335, 121 (19% of global total)

Source: UNCTADstat

Moreover, if we take away the large flows into and out of China, investment flows into the developing world represent a paltry 19 percent of all global inflows. Economic theory suggests that capital ought to naturally flow from regions in which capital is abundant (rich, industrialized, OECD countries), and therefore inexpensive, to those regions in which it is scarce (poor, developing countries) and therefore expensive. The reasons for this discrepancy are multifold and include things such as poor infrastructure, the lack of market proximity, or access to a skilled labor force.

However, one of the most important historical challenges concerns the rule of law, or lack thereof. Unlike official development assistance (ODA) from governments and institutions, FDI is held by publicly traded firms. A major hole in international law historically has been the lack of “standing” or “personality” for private actors. The challenge for private actors contemplating the commitment of investment capital in parts of the developing world is simple; the potential for discriminatory treatment, including expropriation, by host governments. Private actors can complain to home-country governments about their treatment abroad, but the sovereign state remains paramount.[ii]

Since the late 1950s, states have sought to fill this legal vacuum through the use of bilateral investment treaties (BITs) setting the legal terms under which private capital flows will be treated by host nations. Such legal mechanisms have a utility for all involved; the home government negotiates a secure legal framework for its firms operating overseas, the firm can invest knowing it will not be subject to arbitrary measures based on its national origin (“national treatment”), and the host country establishes a degree of credibility regarding the rule of law as applied to foreign investment that will (in theory) stimulate needed capital inflows.[iii]

According to UNCTAD, there are currently nearly 3000 BITs and more than 350 other treaties with investment provisions, the very first of which was the Germany-Pakistan BIT in 1959.

1994 Was a Very Big Year

For most of the postwar period, BITs generated virtually no controversy. Indeed, in 2015, Germany and the United States had more than 300 BITs between them and developing countries.[iv] However, two things happened in 1994 that would bring investment rules out of relative obscurity, making them a focus of broader opposition to economic liberalization. In January 1994, the North American Free Trade Agreement (NAFTA) entered into force. One of the most consequential elements of the NAFTA was the incorporation of U.S. BIT Model language (Chapter 11), effectively creating the world’s first trilateral BIT. Yet, doing so soon generated some unintended consequences. The NAFTA negotiators assumed that Mexico, with its 20^th Century history of expropriation, was the natural target of investment rules and that the so-called investor-state dispute settlement (ISDS) provisions would, if invoked at all, likely be deployed as a defense against discriminatory treatment by Mexico. Starting in 1997 with Metalclad’s claim that Mexico failed to live up to its contractual obligations over the firm’s investment in a hazardous waste project, it appeared the NAFTA was working as intended.

However, that same year, The Loewen Group, a Canadian funeral services firm, challenged an adverse Mississippi court ruling under the terms of NAFTA Chapter 11, significantly altering the political dynamics of investment protection rules. Never before had such rules been used by a firm from a developed country to challenge treatment of an investment in another developed country.

Such cases under the NAFTA began to pile up. As of 2017, there were 50 Chapter 11 cases alleging discriminatory treatment at the hands of a NAFTA government. Interestingly, only 14 of the 50 have been filed against Mexico; Canada and the United States have had 18 each filed against them. It wasn’t supposed to be this way, yet controversy flowed as the NAFTA experience with Chapter 11 lead critics to conclude investment rules were being used to undermine (not enhance) the rule of law by giving firms a pathway for challenging the state’s sovereign power to regulate through a legal process unavailable to domestic firms. The perception that ISDS provisions in Chapter 11 were being used to attack the state’s regulatory power was compounded in late 1999 when Methanex Corp., a Canadian petrochemical firm, challenged a California regulation banning a fuel additive proven to be toxic to groundwater supplies. For critics, Chapter 11 had provided a set of legal tools for foreign firms to challenge a host of regulatory measures, including those protecting the environment.

Across the Atlantic, the European Energy Charter was expanded, renamed the Energy Charter Treaty in late 1994 and, like the NAFTA, infused with ISDS provisions. Much as Mexico was the assumed target of investment protections in the NAFTA, it was those with checkered histories of property rights protections—such as Russia or former Soviet republics—who were assumed to be the likely defendants in ISDS cases. Indeed, as the charts below depict, ISDS cases within the Energy Charter Treaty unfolded with much the same pattern as the thousands of BITs the world over; private, developed country litigants, developing country defendants.

Yet, in recent years, Energy Charter Treaty ISDS cases have spiked, and increasingly included measures in ostensibly developed countries with stable histories of property rights. A case in point is Spain that had 16 new filings 2015 alone under the Energy Charter Treaty arising from reduced domestic subsidies to the renewable energy sector. Again, like the NAFTA, most of these suits allege state measures have been tantamount to the expropriation of private property; the state moved the regulatory goal posts.

Source: Dr. Dorte Fouquet, Becker Buttner Held Consulting AG, “Current Arbitration Cases Under the Energy Charter Treaty,” Vienna Forum on European Energy Law, April 15, 2016.

Source: International Energy Charter

Table 2: International Energy Charter Case Distribution

Spain 32 Italy 7 Germany 2 Czech Republic 7 Poland 1 Slovakia 1 Russia 6 Ukraine 4 Romania 1 Hungary 5 Slovenia 1 Croatia 2 Bosnia Herzegovina 2

Albania 3 Macedonia 1 Bulgaria 4 Romania 1 Moldova 2 Turkey 6 Georgia 1 Azerbaijan 2 Kazakhstan 5 Uzbekistan 1 Tajikistan 1 Kyrgyzstan 1 Mongolia 2 Total: 101 Cases

An ISDS Earthquake and Tsunami in Germany

The ISDS provisions of the Energy Charter Treaty have recently generated mountains of controversy in Europe, nearly derailing an important trade liberalization negotiation with Canada (CETA) in 2016.[v]  Yet, the controversy initially erupted in Germany, not Spain.

In 2009, the Swedish power company, Vattenfall, invoked the ISDS provisions of the Energy Charter Treaty alleging Germany was unfairly and arbitrarily phasing out certain kinds of coal-fired power generation; generation Vattenfall had only recently invested in. Yet, in 2012, Vattenfall set off alarm bells all over Europe when it again invoked Energy Charter Treaty provisions to challenge Germany’s decision to rapidly phase out all nuclear power generation in the wake of the Fukushima nuclear disaster. The political consequences of the Vattenfall cases could not have been worse. Canada and the EU were actively negotiating a broad-based economic liberalization agreement that included an investment chapter complete with ISDS provisions. European civil society’s objections to the Canada-EU Comprehensive Economic and Trade Agreement (CETA) included typically controversial issues such as agriculture, intellectual property, and culture, but ISDS became a lightning rod of controversy capable of drawing tens of thousands of protesters into the streets of European cities.

Most importantly, the controversy flowing from Vattenfall and into the CETA forced the EU into a rapid rethink about its position on ISDS, ultimately making the CETA a test-bed for reforms. The CETA’s rapidly growing importance for Europe in 2015-2016 was not about trade or investment with Canada, per se, but the looming TTIP negotiations with the Americans.

The Big Investment Fish

As noted above, global investment flows have overwhelmingly been between advanced industrial countries (see Table I), and the lion’s share of that has flowed between the United States and Europe. Moreover, large stocks of existing U.S. and European investment are already present in each other’s jurisdictions. As depicted in Table II, in 2015 nearly 60 percent of all U.S. investment abroad was located in Europe and nearly 70 percent of all overseas European investment is located in the U.S.

Table II: US-EU FDI Flows

	2015 (in millions of $US)
US Direct Investment position abroad, all countries	5,040,648
Direct Investment Position in US, all countries	3,134,199
US Direct Investment position in EU	2,949,235 (59% of US FDI abroad)
EU Direct Investment Position in US	2,162,845 (69% of all FDI in US)

Source: US Bureau of Economic Analysis

With such large volumes of investment across the Atlantic, formalizing investment protection rules has, to some, seemed an obvious goal. Indeed, investment was to have featured prominently in the proposed Transatlantic Trade and Investment Partnership. However, it was not the first time developed countries have tried to agree on a common set of rules. In 1995, the members of the Organization for Economic Cooperation and Development (OECD), essentially a group of developed economies, began talks aimed at concluding a multilateral set of investment rules known as the Multilateral Agreement on Investment (MAI). By early 1998, the talks had collapsed in spectacular fashion. Civil society, alarmed by the early experience with the NAFTA, breathed a sigh of relief and declared victory. The OECD membership, on the other hand, was deeply divided over what the terms of those rules ought to be.[vi] Indeed, the failure of the MAI forms part of the backdrop for what it is assumed investment within the TTIP would be so contentious.

But is it really destined to be so?

Transatlantic Shock and Awe

There are many interesting parallels in the contemporary experiences with investment protections in North America and Europe, starting with the fact that the agreements from which controversy over ISDS has flowed on both continents were implemented in 1994; respectively, the NAFTA and the Energy Charter Treaty. In the case, off-the-shelf investment provisions, complete with ISDS, were simply inserted into new agreements. There had never been cause for excitement over investment when such agreements were between developed and developing countries.

One reason for little controversy is that in the context of most BITs, the FDI that is stimulated continues to flow mostly in one direction; from rich to poor countries. There simply isn’t a lot of FDI flowing from developing countries into developed countries over which an investment dispute could be filed.

Yet, when negotiators inserted stock ISDS provisions into agreements covering flows of investment between developed states, the volume of investment flows among them inherently suggests the potential for disputes. Negotiators for both the NAFTA and Energy Charter Treaty should have seen this coming. They did not.

Instead, governments were taken aback by the incidence of disputes attacking regulatory measures developed states with strong property rights protections, but claiming those measures amounted to expropriation. Similarly interesting has been the response of the United States and Europe to these challenges. Indeed, although the surprise and response on both sides of the Atlantic was separated by nearly two decades, they have been remarkably similar in terms of sparking reforms to investment protections.

In the United States, the 1999 Methanex case under Chapter 11 of the NAFTA rattled nerves inside and outside government. Methanex prompted the three governments to intervene that summer with a ministerial “interpretation” of the meaning of parts of Chapter 11.[vii] Yet, as worrisome NAFTA cases advanced, the Department of State launched a review of the U.S. BIT program in 2004, the first revision of the U.S. BIT Model since it was inserted into the NAFTA in 1994. The 2004 BIT Model formed the template for subsequent U.S. trade and investment agreements until 2009 when yet another revision exercise made further changes, resulting in the 2012 Model BIT.

                                                                                                                    

In Europe, the furor arising from the Vattenfall cases prompted German officials to press the Commission for changes to how the EU pursued investment. In March 2014, German officials signaled that the CETA negotiations could be imperiled without significant changes to the investment chapter.  Largely at the behest of Germany, the Commission surveyed member state governments via the Council of the European Union (government ministers) about whether ISDS should even be a part of future European trade agreements. Hearing that the answer was “yes,” the Commission initiated an online public comment period seeking views on changes to future investment chapters.

A number of those suggestions were inserted at the 11^th hour as a way to save the CETA from being rejected. More importantly, many of those comments made their way into EU proposals on investment to be tabled in the context of the TTIP negotiations with the United States.

Hence, on separate tracks, the United States and Europe responded to the unfolding case histories arising from ISDS and civil society’s pointed criticisms of those provisions. It would be a stretch to suggest that the evolution of ISDS cases in North America and Europe were, by themselves, enough to alarm governments to take action. Civil society critiques were undoubtedly influential in raising the profile of the “threat” to state sovereignty represented by a number of cases. However, the states’ responses amount to a significant set of reforms that have modernized ISDS, reasserted state power, enhanced protections for labor and the environment, and moved both sides of the Atlantic far closer to one another than many analysts have acknowledged.

What follows is a side-by-side comparison of the respective reforms to ISDS on each side of the Atlantic. They are reforms borne of near-misses, controversies, and surprises with ISDS provisions as crafted in 1994, but hitherto never applied to developed country groupings with significant levels of cross-border investment. The United States has been through two reform processes, the most significant of which was in 2004, and most clearly reflected anxieties about emergent patterns of legal argumentation in the NAFTA’s case history. However, the most up-to-date language in the 2012 BIT will be highlighted here. In Europe, controversy over Vattenfall v. Germany galvanized public opposition, threatened the viability of the CETA, and forced the Commission into an accelerated reform process, the results of which represent an emergent EU model investment proposal for TTIP. Highlighted below are elements of the EU approach that found their way into the CETA text as well as formal proposals that go beyond and were aimed at TTIP.

Models of Convergence?

       E.U. Investment Proposal 2015                                 U.S. BIT Model 2012

Right to Regulate

EU ·      Environment (CETA 8.4.2.4) ·      Affirms right to regulate in public interest (CETA 8.9) ·      No “forum shopping” or “mailbox companies”

U.S. ·      Environment: race to bottom inappropriate. State maintains right to regulate (Article 12) o   State-to-State consultation ·      Labor: Race to bottom inappropriate. State maintains right to regulate (Article 13). o   State-to-State consultation ·      Waive rights to all other legal proceedings- No U-Turn, “forum shopping”

Easily one of the most potent public critiques of ISDS provisions is that they afford foreign investors a set of mechanisms for challenging the state’s regulatory power. Moreover, because those mechanisms are unavailable to domestic firms, critics also allege ISDS creates an unconstitutional legal forum with no domestic judicial review. Indeed, in both the NAFTA and Energy Charter Treaty contexts, private firms have alleged regulatory measures adversely affecting revenue streams amount to forms of expropriation. In multiple instances, the measures being challenged were environmental in nature.

Reforms in Europe and the United States have strongly affirmed the state’s right to regulate in the public interest. Moreover, that power is explicitly upheld where labor and environmental regulation is concerned—State Parties may not weaken labor or environmental laws to incentivize FDI flows.  Moreover, reforms now severely limit the capacity to abuse ISDS provisions as part of  “forum shopping” or the establishment of “mailbox companies” to seek damages.

Definitions

EU ·      Expropriation, direct and indirect (CETA 8.12, Annex 8-A) ·      Clearer boundaries on “fair and equitable” and “indirect expropriation”—withdraw of state aid/subsidy is NOT expro.

U.S. ·      “Investment” clearer, more detailed. Includes financial assets. ·      CIL standard for “minimum standard of treatment,” “fair and equitable,” and “full protection and security.” ·      “Expropriation” defined. Clearer about it being allowed for public purpose, with fair compensation. ·       “Essential security” – National security exceptions to expro and transparency (Article 18) ·      Financial Services—State power to regulate cemented. Tough language on capacity to use ISDS to challenge State measures (Article 20)

Another important area for reform of investment rules is simply definitional. In the NAFTA context, firms began exploiting an absence of definitive language over what an “investment” actually was, what were “fair and equitable” or “minimum standards” or treatment, what was the state’s obligation to provide “full protection and security,” and, of course, “expropriation” itself.  Whereas NAFTA Chapter 11 was just 22 pages long, the 2012 BIT Model is over 40, in part, because of far more attention paid to definitions in an effort to limit the use of ISDS to all but clear-cut violations of property rights. Europe has also moved in the direction of definitional clarity setting out much clearer boundaries on many of the same issues.

Transparency

EU ·      CETA 8.36 ·      Documents to be made public; request for consultations, determination of respondent (EU competent authority), Amicus,  open hearings, ·      Proprietary info can be withheld ·      Tribunal rules on issues on proprietary info. ·      Committee on Services and Investment (CETA 8.44) Interpret anything within.

U.S. ·      Transparency—proprietary info can be withheld, but only at discretion of Tribunal. Open public hearings (Article 29) ·      State Parties get to rule on all transparency issues. ·      Non-disputing Parties can make submissions to a proceeding (Article 28). ·      Amicus curaie submissions can be accepted (Article 28).

One of the most basic critiques of ISDS has been the lack transparency. One of the challenges here has been the sensitivity of proprietary information held by private litigants; in short, open arbitration proceedings would expose proprietary information to competing firms. However, the absence of public scrutiny over a process used to challenge state measures has become politically untenable. On both sides of the Atlantic, public access to ISDS proceedings through amicus submissions, public hearings, publication of government pleadings, and a much stronger preference for releasing even proprietary information to the public are helping to improve the perceived legitimacy of ISDS. 

ISDS

EU ·      Arbitration process: o   Replace case-by-case selection of panellists with permanent roster of judges. o   Addresses ethics concerns re: lawyers in one case serving as arbitrators in another.

U.S. ·      Arbitrators selected—1 each, and chair by mutual agreement (Article 27). ·      Conduct of Arbitration, incl. capacity for quick and early dismissal by State (Article 28 (4)) ·      Parties also get to rule on definition of Customary International Law (Annex A) and Expropriation (Annex B).

The ISDS arbitration process itself was thought to be one of the most important sources of disagreement between the U.S. and Europe within the TTIP negotiations. Indeed, some advocates on both sides of the Atlantic have argued ISDS should be scrapped entirely. After all, they argue, why do you need an arbitration mechanism for investments in developed country jurisdictions with virtually no history of nationalization or expropriation for reasons other than the public interest? Moreover, while there is some variability in the domestic property rights regimes among developed states, virtually all have a strong commitment to fair compensation of rights owners in the event of expropriation in the public interest; say for a major public infrastructure project. Hence, it is curious that EU member states were unanimous in their support for including ISDS in future EU trade negotiations.

The major difference remaining between the U.S. and EU in ISDS is with respect to the process by which arbitration proceedings are populated with jurists. The United States continues to favor an ad hoc process of selection of panelists, none of who need necessarily be lawyers, whereas Europe would like to establish a permanent roster of possible panelists comprised entirely of judges.  Proponents of the U.S. approach argue the character of investments may necessitate sector-specific, rather than purely legal, expertise. Moreover, they argue, an ad hoc system is no more susceptible to ethics problems than the permanent roster of judges proposed by the EU.

Institutions

EU ·      WTO-style Appellate system o   Currently only “set aside” or “annulment” of awards possible. o   7 permanent members (2 from each Party, 3 non-nationals) ·      ISDS and Appellate system Stepping stones toward a multilateral system—one permanent international investment court (opt-in membership).

U.S. ·      State-to-State arbitration (Article 37). ·      Openness to “appeals process” (Article 28 (10))

Both the EU and U.S. have put the idea of some kind of “appellate system” on the table for future investment chapters, the EU proposal going furthest in suggesting it be modeled on the WTO’s appellate mechanism. Historical skepticism about such institutions in the U.S., particularly some Congressional factions, might make this difficult no matter how it’s designed. However, the U.S. hand in first designing and using the WTO’s appellate mechanism suggests an appeals process for ISDS cases is possible. Moreover, an appeals process would directly address one of the most pointed critiques of ISDS; that proceedings are both secretive and lack oversight.

Yet, it is over the EU’s proposals for an “international investment court” that the biggest divisions with the U.S. could develop. The traditional U.S. aversion to binding institutions is usually strongest in instances where pooled sovereignty is proposed. The EU’s proposal calls for a multilateral court and roster of judges to rule on investment disputes between member states and their private sector investors. It raises a set of long-standing issues that, in part, contributed to the failure of the Multilateral Agreement on Investment back in 1998.

The substantive differences between the EU proposal and existing multilateral mechanisms for investment arbitration in the World Bank (ICSID) or United Nations (UNCITRAL) is unclear. It’s also unclear whether the EU’s proposal is designed to supplant those institutions, or work in conjunction with them. The United Nations Commission on International Trade Law (UNCITRAL) and the International Center for Settlement of Investment Disputes (ISCID) were created in 1958 and 1968, respectively, and have long track records of facilitating the resolution of investment disputes. Indeed, under the terms of both the NAFTA and the Energy Charter Treaty, ICSID and UNCITRAL are enshrined as locations dispute resolution.

Conclusions

The foregoing isn’t meant to suggest U.S. and EU investment negotiators would join hands and sing Kumbaya with respect to the investment chapter of a revived TTIP. In the context of the contemporary populism roiling global politics, no trade liberalization agreement, particularly one as large as the proposed TTIP, is going to be straightforward.

However, this analysis highlights that the respective experiences with investment protections in the United States and Europe have paralleled one another in many ways, starting with the insertion of previously innocuous, uncontroversial BIT-like provisions into the terms of the NAFTA and Energy Charter Treaty in 1994. In both instances, and for the first time, formal investment protections were being applied to developed country jurisdictions into and out of which there were substantial flows of FDI. Controversy ensued, first in the NAFTA area, as foreign firms creatively availed themselves of ISDS mechanisms, exploited the NAFTA’s linguistic vagaries, and seemingly challenged the state’s power to regulate in the public interest. A decade later, the terms of the Energy Charter Treaty generated a similarly surprising set of cases.

The parallels multiply in examinations of the state responses to the challenge of ISDS. In both the United States and Europe, the apparent shortcomings of early 1990s investment models prompted reforms over the same issues on both sides of the Atlantic. In both cases, the reforms maintain the utility of investment protections, but recalibrate the state’s relationship to the private firms in the context of robust flows of FDI.

 Finally, this paper argued that the respective experiences of the United States and Europe with respect to investment was driving them toward a convergence of views, particularly on issues of transparency and assertion of sovereign regulatory power, that may shift contention within TTIP negotiations away from investment.

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[i] See Irwin, Douglas A. Against the tide: An intellectual history of free trade. Princeton University Press, 1996.

[ii] See Salacuse, Jeswald W. "BIT by BIT: The growth of bilateral investment treaties and their impact on foreign investment in developing countries." The International Lawyer (1990): 655-675; Salacuse, Jeswald W. "The Treatification of International Investment Law." Law & Bus. Rev. Am. 13 (2007): 155; Graham, Edward Montgomery. Fighting the wrong enemy: Antiglobal activists and multinational enterprises. Peterson Institute, 2000.

[iii] See Swenson, Deborah L. "Why do developing countries sign BITs." UC Davis J. Int'l L. & Pol'y 12 (2005): 131.

[iv] Germany, 203; the United States 114. Source: http://investmentpolicyhub.unctad.org/IIA/IiasByCountry#iiaInnerMenu

[v] Formally the Canada-EU Comprehensive Economic and Trade Agreement.

[vi] Graham, Edward Montgomery. Fighting the wrong enemy: Antiglobal activists and multinational enterprises. Peterson Institute, 2000.

[vii] The July 2001 Free Trade Commission Interpretation made minor clarifications in the areas of transparency and the meaning of “fair and equitable treatment,” while being unable to agree on important others, such as “expropriation,” “national treatment.” http://www.iisd.org/pdf/2001/trade_nafta_aug2001.pdf.