Secretive TPP threatens health, regulation, and democracy

I'm pleased today to have a guest post from Professor Susan K. Sell, one of the leading authorities on the incorporation of intellectual property rights into trade negotiations.

The Obama administration currently is pressing Congress for Trade Promotion Authority (“Fast Track”) to help it conclude the Trans-Pacific Partnership (TPP) negotiations. The President sees TPP as a central pillar in his “pivot to Asia”.  However, both the process and the substance of TPP are badly flawed and the office of the United States Trade Representative (USTR) needs to be more accountable to the American people.

The TPP negotiations are five years old yet the only substantive information citizens have gotten about them has come from Wikileaks.  Provisions in the TPP will have far reaching effects on public health, labor, the environment, data privacy, and Internet use.  Congress and the public have been shut out, and the USTR has relied on its 600 or so “cleared advisors” that represent global corporations.  The USTR has insisted upon utmost secrecy, and a look at the chapters on intellectual property and investor-state dispute settlement raise alarm bells that the public needs to be aware of.   It is likely that the USTR knows that if it released the texts that the public would reject the agreement. If TPP is so good for Americans why not let them know what is in it?

The USTR touts the TPP as a trade agreement for the 21^st century, but it is less about trade and more about regulatory harmonization.  The chapter on intellectual property aims to increase intellectual property protection far beyond what is required in the Agreement on Trade-Related Intellectual Property (TRIPs) in the World Trade Organization. The plurilateral forum is the US’s way of getting what it knows it would be unable to achieve in a more transparent multilateral venue.  Ironically, Obama’s signature legacy – the Affordable Care Act to reduce the costs of medical care – directly will be threatened by the TPP. Health care costs will sharply increase if the intellectual property provisions of TPP go through. Big Pharma and medical device makers have played a significant role of crafting the provisions which include: making surgical and diagnostic procedures patentable; requiring states to get patent owners’ consent before approving generic drugs for market; limiting parallel importation; requiring that pharmaceutical companies be involved in domestic drug pricing decisions; limiting compulsory licensing; incorporating 12 year terms of data exclusivity for biologic drugs; and seizing trans-shipments of drugs. Other provisions would permit patentability for second uses of known drugs, and for reformulations of drugs that do not enhance therapeutic efficacy (e.g., tablet to a gel cap).  The end result will be to increase the costs of medical care and reduce access to a more affordable alternative. USTR’s “cleared advisors” will gain the rents that they seek.

While the intellectual property chapter aims for upward regulatory harmonization (at the expense of public health), the Investor-State Dispute settlement provisions aim for downward regulatory harmonization. Investor-State Dispute Settlement provisions give private investors the right to sue governments directly for regulatory changes that reduce the expected value of the investment. ISDS bypasses domestic courts and a tribunal of three private lawyers decides cases. There is no right to appeal ISDS rulings.

Several well known ISDS cases highlight the dangers these provisions pose to sovereignty, democracy, and public health. Under ISDS in NAFTA, pharmaceutical giant Eli Lilly is suing the Canadian government for $500 million. Canadian law features a policy of post-grant opposition under which a party can challenge a patent that the state has granted. Under this mechanism the Federal Court of Canada invalidated patents on two Eli Lilly drugs, ruling that they did not meet the criterion of patentability. Eli Lilly appealed this ruling all the way up to the Supreme Court of Canada and lost on both appeals. Now the company is using the ISDS channel to override the Canadian Supreme Court and secure a taxpayer payout of $500 million.

This important case is a bellwether; if Eli Lilly is successful then it will spread and embolden foreign investors aggressively to challenge and trump domestic public health laws. Under ISDS clauses in bilateral agreements, Philip Morris is suing Uruguay and Australia for their public policy efforts to curb tobacco use such as plain packaging of cigarettes. The firm is demanding compensation for these countries’ efforts to regulate its lethal products. Under ISDS foreign investors can sue over labor policies such as increasing minimum wages, and environmental policies such as fracking bans if such regulatory changes reduce the expected value of their investments.

President Obama will need Trade Promotion Authority to finalize the TPP. Some in Congress oppose it. Populist politicians like Senator Elizabeth Warren decry the special access that members of Wall Street and global corporations have had to the process while democratically elected representatives, citizens, and consumers have been shut out. On the right, Tea Party conservatives object to Obama’s Executive branch overreach.  Congress should reject Trade Promotion Authority and make USTR accountable to citizens and elected representatives through good transparency policies. USTR must not be allowed to negotiate in secrecy and appear to be thoroughly captured by the so-called 1%. Congress should not trade away our democracy.

Susan K. Sell is Professor of Political Science and International Affairs at George Washington University.  She is author of Private Power, Public Law: the Globalization of Intellectual Property Rights, and co-editor of Who Governs the Globe?

Third Way trade agreements study leaves out a lot

Third Way (h/t TPM), a Democratic pro-trade think tank, has released a new study, "Are Modern Trade Deals Working?" It examines the various "free trade" deals the U.S. has signed since 2000 to conclude that 13 of 17 have led to an improvement in our goods (not including services; see more below) trade balance with the countries involved, giving a net improvement over the 17 agreements studied of $30.2 billion per year.

Long-time readers of this blog may remember that I did a similar analysis (though in less detail than the Third Way study) in 2012. Unlike the Third Way report, my post included all U.S. free trade agreements (rather than starting in 2001 like Third Way) as well as the effect of the 2000 agreement for Permanent Normalized Trade Relations (PNTR) with China. So, compared to the Third Way study, my post includes the FTAs with Israel, Canada, and Mexico, but did not consider the Panama FTA, which had not yet come into effect when I posted. My conclusion was essentially the same as Third Way's, that the effects of the agreements on our trade in goods were usually positive, but of small size (the effect of the Israel FTA was also small). Because the Third Way study begins in 2001, however, it omits the impacts of NAFTA and PNTR with China. However, as my post showed, they are the most important by far.

This fact is not lost on opponents of the Trans Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Lori Wallach of Public Citizen Global Trade Watch told the Associated Press that "studies such as Third Way's make a big deal out of modest trade improvements with countries like Panama, and gloss over huge trade deficits with major trading partners such as South Korea, Mexico and Canada." She's right.

In 1993, the year before NAFTA went into effect, the United States had a surplus with Mexico on trade in goods of $1.7 billion. In 1995, it went to a deficit of $15.8 billion, and in 2014 the goods trade deficit was $53.8 billion, down from 2007's peak of $74.8 billion. This was in sharp contrast with the analysis of Gary Hufbauer and Jeffrey Schott, who predicted trade surpluses on the order of $9-12 billion through the 2000s, even as they admitted that the peso was overvalued (it collapsed in value in the December 1994 "Tequila crisis").

Meanwhile, the balance of trade in goods with Canada went from a deficit of $10.8 billion in 1993 to $34.0 billion in 2014. Note that the U.S. had a peak deficit of $78.3 billion in 2008, which collapsed to  $21.6 billion in 2009.

In 2000, the year PNTR was adopted, the United States had an $83.9 billion goods trade deficit with China. In May of that year, the International Trade Commission (h/t David Cay Johnston) released a report estimating that the trade balance would worsen by a further $4.3 billion. According to the article, the U.S. Trade Representative and the White House both criticized this study strongly. And in fact, the 2001 deficit fell to $83.1 billion. However, in 2002 it was $103.1 billion, an increase more than four times the ITC prediction, and by 2014 it had grown to $342.6 billion.

By including trade in goods but not trade in services, Third Way is admirably the stacking the deck against its own position. It points out that the U.S. has a global surplus in trade in services of $232 billion in 2014, including a $45 billion surplus with Canada and Mexico. However, it doesn't mention that the U.S. goods trade deficit was $737 billion in 2014, or that the country's overall 2014 trade deficit was $505 billion, up from $477 billion in 2013.

The ultimate question is whether TPP and TTIP are going to be more like the U.S.-Australia Free Trade Agreement, or more like NAFTA and PNTR. Considering that the TPP includes all the NAFTA countries, Australia, Chile, Japan, and six others, comprising "nearly 40 percent of global GDP," I think it's safe to assume that it will have a much bigger impact than the FTAs with Australia or Chile, for instance. Similarly, since the European Union has an economy about the same size as the U.S. economy, I believe the TTIP will also have big consequences.

Moreover, we have to remember that these are much more than trade agreements. Both of them have increased protections for investors, patents, trademarks, and other intellectual property, and in both of them the U.S. is advocating the inclusion of investor-state dispute settlement so companies can sue governments through arbitration rather than courts, something that has proven more favorable for companies vis-a-vis both governments and consumers. So, in addition to the negative effects on U.S. workers that we would expect on the basis of the Stolper-Samuelson Theorem, all signatory countries are likely to suffer from higher prices for medicine and assaults on their regulations through investor-state dispute settlement.

Thus, while the Third Way study is right as far as it goes, what it leaves out is far more significant and worrisome.

U.S. 76, EU 6 UPDATED

No, it's not a sports score. It's the number of $100 million incentive packages offered in each place beginning in 2010. This is based on my first paper to use the September 2014 February 2015 update of Good Jobs First's Megadeals database (you can download the entire update in spreadsheet form).

I've said before that U.S. investment incentive use is totally out of control. The new paper confirms this beyond my worst nightmares. Think about it: The United States and the European Union have comparably large economies, yet U.S. state and local governments have put together an average of 15 $100 million packages per year in 2010-2014, compared to 1.2 per year in the EU. Yes, more than ten times as many per year in the U.S.!

The U.S. incentive packages are bigger, too. The largest of the six EU packages (Global Foundries in Dresden, Germany, in 2011) comes to about $285 million at an exchange rate of $1.35 per euro (and the euro is down to less than $1.15 now). Boeing, Sempra Energy, Intel, Cerner Corporation, Cheniere Energy, Shell, Tesla, and Chrysler all received packages worth over $1 billion. Moreover, Boeing's incentives were accompanied by substantial retirement and other benefit concessions from its workers.

How does this happen? Governments in the European Union and the United States both face the same need to attract investment, but the EU has a binding legal framework that restricts what Member States can do. Every subsidy program or large individual subsidy must be notified in advance to the European Commission, and only implemented if the Commission approves. Every region in the EU has a maximum subsidy level it can give, with a limit of 0 for the richest regions and only 50% (subsidy/investment) for the poorest regions, mostly in the former Communist countries. Finally, investments larger than €50 million have their maximum allowable subsidy cut sharply, by 50% on the amount between €50 million and €100 million, and by 66% for the amount over €100 million.

Because of the lack of a framework in the United States, state and local governments spend almost $50 billion per year just to attract investment, and up to a further $20 billion in subsidies not even requiring investment, according to my estimates. This is more than enough to rehire every state and local employee who lost their job since the recession. All other things equal, subsidies make the economy less productive, and these subsidies transfer money from average taxpayers to the far richer subsidy recipients. In other words, they slow economic growth and contribute to economic inequality.

Changing this is a huge job. The first step is simply knowing what the stakes are, achieving transparency in how much governments give to business. Things are improving on the transparency front, but we still have a long way to go. Then we've actually got to change the rules...

UPDATE: Greg LeRoy of Good Jobs First sent me an updated version of the spreadsheet, which has 76 incentive packages greater than $100 million that it has discovered since 1/1/2010. The updated spreadsheet is now available at the Megadeals link above.