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.

Fun and games with transfer pricing

ProGrowthLiberal in his comments on my last post and in his own post at EconoSpeak highlights the fact that drug-maker AbbVie already makes most of its profits outside the United States, about 87% in fact over 2011-2013 by his calculation. For PGL, then, AbbVie is not the best example of an inversion because the horse is already out of the barn in terms of escaped profits.

I see things a little differently on this, but the case is also highly illustrative of a principle we have discussed before, transfer pricing. Let's take a look at AbbVie's Form 10-K Annual Report, downloadable here, to see what I mean.

Pre-tax profits ($millions)    2013    2012    2011    3-year total

U.S.                                  -581      625     626     670
Foreign                             5913    5100    3042     14,055

Total                                 5332    5725    3668     14,725

Source: AbbVie Annual Report, p. 92

I actually calculate the foreign percentage for these three years as 95%, given that AbbVie claims to have lost money in the United States in 2013. In any event, this is a very strange division of the company's profits given where its sales were made.

Net sales ($billions)    2013    2012    2011

U.S.                           10.2     10.4     9.7
Foreign                        8.6       7.9     7.7

Total                          18.8     18.4    17.4

Source: AbbVie Annual Report, p. 40. Totals may not sum due to rounding.

As you can see, in each of the three years, over half of the company's sales were made in United States, but the company reports that only 5% of its profits are in this country. This is pretty funny math, if you like dark humor. Especially since Humira, AbbVie's biggest-selling drug by far, was developed in the United States. So with the patents in the U.S., and most of the sales in the U.S., the profits have to be in the U.S., right?

In reality, of course they are, but not in the Alice's Wonderland world of transfer pricing. In this byzantine world, the patent for Humira is almost certainly owned by a subsidiary in Ireland, where royalty payments are tax-free. How else could the company show a loss in the United States in 2013 when 54% of its sales are here? Despite this, the company reports paying about 39% of its worldwide income taxes ($226 million of $580 million worldwide, see p. 92), although we have seen that what companies report in taxes on their 10-K annual report is largely fiction

So what can we do? The answers remain simple, though as politically difficult as ever. First, require companies to publish what they pay, country-by-country. No more hiding behind consolidated accounts. Second, enact unitary taxation, using apportionment formulas to make transfer pricing irrelevant. Third, end the deferral of U.S. corporate income tax on foreign profits. Finally, despite what "everyone," including the President, says, don't reduce the corporate income tax rate. We've gone long enough with tax policies that exacerbate inequality; there's no reason to continue down that road when we have the world's largest economy.

Oh, and my tiny disagreement with ProGrowthLiberal: It seems to me that if a company is already draining giant chunks of its profits abroad, then allowing an inversion ratifies losing a bigger amount of tax money than it would for a company like Walgreen's that has not moved its profits offshore yet. But I imagine the IRS could still go after AbbVie post-inversion if it wanted to question its pre-inversion transfer prices, so this is a minor point indeed.

Cross-posted at Angry Bear.

Trans Pacific Partnership Bad for the Middle Class: Just How Bad is the Question

What you don't know can hurt you. I think that's a clear lesson of some so-called trade agreements the United States has signed over the last 20 years, and illustrated further by the few that have been defeated, most notably the Multilateral Agreement on Investment, negotiated by the Organization for Economic Cooperation and Development from1995 to 1998, but then abandoned in the face of ever growing protests.

Haven't heard of the Trans Pacific Partnership? That's no surprise: while the negotiations are not really being conducted in secret (the Office of the US Trade Representative provides periodic updates here UPDATE 3/3/21: here is a working link for US negotiating goals), the level of disclosure from the USTR office rarely ventures beyond bland statements like this:

On November 12, 2011, the Leaders of the nine Trans-Pacific Partnership Countries - Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, and the United States - announced the achievement of the broad outlines of an ambitious, 21st-century Trans-Pacific Partnership (TPP) agreement that will enhance trade and investment among the TPP partner countries, promote innovation, economic growth, and development, and support the creation and retention of jobs.

The USTR website continues by claiming that the agreement will be "increasing American exports, supporting American jobs." This is all too similar to the Clinton administration's reporting on NAFTA, which would point out all the gains from increased exports while omitting any mention of increased imports (Journal of Commerce, Nov. 18, 1994, via Nexis, subscription required) which quickly turned a small trade surplus with Mexico into a huge trade deficit.

How do we evaluate the TPP? We have to see it as having at least three major elements: a trade agreement, an investment agreement, and an intellectual property agreement.

From the trade agreement alone, we can conclude that it is a bad deal for the middle class. As I explained last year, the Stolper-Samuelson Theorem in economics tells us that more trade is actually bad for labor in this country, because by global standards, the U.S. is labor-scarce (low population density), meaning that we expect trade to lead to more intense competition in labor-intensive goods, putting downward pressure on wages. Alas, that isn't the end of it.

There is a lot of controversy about the investment side of the agreement. As discussed by my fellow contributor at Angry Bear (I repost many of my posts there), Daniel Becker, the investment chapter was leaked and published by the Citizens Trade Campaign. Before I discuss the TPP investment provisions, a little context on investment agreements first.

According to the United Nations Conference on Trade and Development (UNCTAD),at the end of 2011 there were 3190 international investment agreements, of which 2860 were between two countries, usually known as bilateral investment treaties or BITs. Investment agreements can also be part of larger agreements, such as the investment chapter of NAFTA, the WTO's Agreement on Trade-Related Investment Measures (TRIMS), and various regional trade agreements. Since the TRIMS agreement, in force since 1995, applies to all WTO members, it is a global benchmark; thus, people will refer to agreements with stronger provisions as "TRIMS+."

The purpose of investment agreements is to protect foreign investors, which are by definition multinational corporations (MNCs). At the same time, they place no corresponding duties on investors, only on the host government. Most significantly, these agreements remove dispute settlement from the host country's court system to binding arbitration in an outside body, most commonly the World Bank's International Center for the Settlement of Investment Disputes (ICSID). As with domestic arbitration clauses, this removal from the courts favors the business interests involved. So the investment agreement element of the TPP will tend to be bad for host governments (the U.S. is host to more foreign investment than any other potential TPP country) and by extension the middle class.

But "how bad" is the question. This depends on what restrictions the agreement puts on governments. Originally, MNCs wanted to be protected against having their property nationalized ("expropriated") by the host, but more recent agreements such as NAFTA's investment chapter (Chapter 11; text here) have opened the way to defining "expropriation" in ways that include regulatory actions that may reduce the value of the investment, even if they are non-discriminatory among firms and taken in the public interest. This is why I say above that investment agreements are bad for the middle class, because it normally benefits from public interest regulation.

For these reasons, there is in fact significant pushback regarding the content of investment agreements. Three good sources for this are UNCTAD, the Vale Columbia Center on Sustainable International Investment, and the International Institute for Sustainable Development.

So what's in the TPP investment chapter? As far as I can tell, nothing that isn't already in NAFTA, other U.S. free trade agreements, or a U.S. bilateral investment treaty. The problem is, that's bad enough. Under NAFTA, for example, Metalclad won a dispute against Mexico over a local government's refusal to grant it a permit to open a hazardous waste facility, and was awarded $16.7 million. Ethyl Corporation successfully challenged a Canadian ban on the import of gasoline additive MMT, leading Canada to withdraw the ban and pay the company $13 million in compensation. To have unelected bodies that (in the words of Citizens Trade Campaign) "would not meet standards of transparency, consistency or due process common to TPP countries’ domestic legal systems" overturning democratically adopted laws or regulations is profoundly undemocratic.

At the same time, I think Becker reads a little too much into some of the language. He quotes section 12-6bis (Becker's emphasis):

Notwithstanding Article 12.9.5(b) (Non-Conforming Measures, subsidies and grants carveout), each Party shall accord to investors of another Party, and to covered investments, non-discriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife.

 He goes on to speculate that this could give rise to compensation claims due to interpreting protests against the Keystone pipeline, or even strikes, as "civil strife." However, the exact same language is in NAFTA's investment chapter, and there have been no such claims in its entire history. Moreover, this is what we would expect since the language only pertains to government behavior ("it adopts"), not private behavior.

So, that's two strikes against the agreement. The third strike is intellectual property, something Matt Yglesias caught over a year ago. As I analyzed then, the TPP "would ban government health services from negotiating prices with pharmaceutical companies." Given that many countries already do this and the U.S. ought to do it to help rein in health costs, if these provisions stay in the final agreement it will be a very bad development.

Hooray for baseball season, but that's three strikes against the TPP. This is a bad deal that will put further downward pressure on real wages which have gone 40 years since reaching their peak, that will undermine governments' ability to regulate, and will strengthen a small group of pharmaceutical, software, entertainment, and publishing companies at the expense of the rest of us.

3/3/21: Thanks to reader Lisa G. for updating a dead link.

Cross-posted at Angry Bear.

Surprise! Facebook Avoids its European Taxes

If you are as cynical as I am, I know you are not surprised that Facebook paid Irish taxes (via Tax Justice Network) of about $4.64 million on its entire non-US profits of $1.344 billion for 2011.* This 0.3% tax rate is a bit below the normal, already low, Irish corporate income tax of 12.5%.

As with Apple, Facebook funnels its foreign profits into its Irish subsidiary. As the Guardian article explains:

Facebook is structured so that companies buying advertisements on the website in the UK, or anywhere outside of the US, have to pay Facebook Ireland.

As a result, Facebook manages to slash its taxes in other countries, paying, for example,  $380,800 in British tax on estimated 2011 UK profits of $280 million, or a little over 0.1%. What is shocking is that Facebook paid so much Irish tax since it managed to convert its $1.3 billion gross profit into a net loss of $24 million.

As you've no doubt figured out, it's that "Double Irish" ploy again. Facebook operates a second subsidiary that is incorporated in Ireland but controlled in the Cayman Islands. This subsidiary owns Facebook Ireland, but the setup allows the two companies to be considered as one for U.S. tax purposes, but separate for Irish tax purposes. The Caymans-operated subsidiary owns the rights to use Facebook's intellectual property outside the U.S., for which Facebook Ireland pays hefty royalties to use. This lets Facebook Ireland transfer the profits from low-tax Ireland to no-tax Cayman Islands. For more on the arcane mechanics, see Joseph Darby's article "International Tax Planning," downloadable at Wikipedia.

This makes no sense of course, but is, in David Cay Johnston's inimitable phrase, Perfectly Legal. But it shouldn't be. And in the UK, Chancellor of the Exchequer George Osborne has announced 

a £154m [$246.4 million] blitz on tax avoidance and evasion, with HMRC [the British equivalent of the IRS] hiring an extra 2,500 tax inspectors to target high earners who aggressively exploit loopholes to avoid or evade tax.

The U.S. should do the same.

* Dollar figures converted from pound sterling figures in the Guardian at an exchange rate of $1.60 per pound.

Drug Shortages Highlight Failures of For-Profit Health Care

Rick Ungar (via @Captain Clarion and @AggressiveProgresive) has a great catch and analysis at Forbes, "Proof of the Failure of Free Markets in Medicine." He discusses the shortage of the cancer drug methotrexate, which has an 80-90% success rate in treating the most common (and once always fatal) form of leukemia, acute lymphoblastic leukemia (ALL). The medication, now off patent, is apparently no longer profitable enough for the five U.S. makers of this drug, and methotrexate is one of a number of life-saving medicines in short supply. There are approximately 3000 new cases of ALL each year diagnosed in young children.

As Ungar argues, it is implausible that all five current manufacturers of methotrexate are simultaneously having production delays:

What are the odds that 100 percent of these companies are, somehow, each experiencing manufacturing delays?  Does anyone imagine that these manufacturing delays were occurring back when these companies were making big bucks on the product, achieved by the huge mark-ups that accompany receipt of the patent protection that bars others from competing?

The Huffington Post's Linda A. Johnson reports that the five companies are Ben Venue Laboratories Inc., APP Pharmaceuticals LLC, Hospira Inc., Sandoz Inc., and Mylan Inc. She also notes that Ben Venue was the sole U.S. producer of the breast cancer drug doxil, which with methotrexate was affected by a November shutdown of a company plant in Ohio after regulators found recurrent drug safety problems.

When production of these drugs falters, people die. As Ungar puts it, "This means that kids are dying —and will continue dying— because the money just isn’t what it used to be for the five manufacturers who have long supplied the critical medicine."

If we think that's wrong, it's necessary to address the problems of the patent system, which leads to high profits (and medicines unaffordable in developing countries, according to Susan Sell) during the patent's life but abandonment of vital medications after the end of the patent. Instead, we are at present having to fight off attempts to expand protection of patents and other intellectual property: the for-now neutralized SOPA and PIPA, as well as the Anti Counterfeiting Trade Agreement and the Trans-Pacific Partnership. Ungar suggests that the patent system be modified to take into account whether companies stopped making needed drugs after previous patents expired. This could be helpful, but the deeper question is whether patent protections are too strong already and need to reduced.

The Case Against SOPA and PIPA in Plain English

If you read the Internet much at all, you have probably heard (or seen) that Wikipedia and many other websites are blacked out today in protest of the Stop Online Piracy Act (SOPA) and the Protect Intellectual Property Act (PIPA). James Kwak at the Baseline Scenario today posted an easy-to-understand explanation of some of the main problems with this legislation.

The main issue is that these bills would give copyright holders the power to impose draconian penalties on websites for apparent violations of copyright -- with no due process. How draconian? Just by sending a letter, they could force PayPal or credit card companies to cut off payments to websites.

Moreover, websites could be held accountable not just for their own content, but for comments on their website (and any links in them), for the contents of websites they link to, and for comments on the websites they link to (and links in them). Can you say "burdensome regulation"? So I would have to monitor all the comment sections of every website I link to, most of which are much bigger than this one, in order to be sure there were no copyright violations in them. Under current law, all I'm required to do is take down copyright violations that occur on this website after notification by the copyright holder. Big difference!

As I discussed in late October, there has been a strenuous effort by intellectual property rights (copyrights, patents, trademarks, etc.) holders to enshrine and expand their powers through the use of trade law over the last 20 years. SOPA and PIPA should be seen as another manifestation of that effort. George Washington University political scientist Susan Sell has written some of the most important work on this subject (see her book Private Power, Public Law) and, lately, Matt Yglesias has frequently written about intellectual property bullying by the United States.

These laws would tilt the playing field on intellectual property even further than the current unfair reach of IP laws. I'll just conclude with the device Kwak starts his post with, Google's home page today:

Tell Congress: Please don't censor the web!