Rethinking the trade and investment agenda in turbulent times

‘What an Alternative and Progressive Trade Strategy Should Look Like’,

Fale Pasifika, 19-20 October 2018.
Professor Jane Kelsey, introductory comments

These days I feel depressed, cautiously optimistic, and frustrated at the same time.

Depressed because the harm caused by four decades of capitalism unleashed, fostered by a neoliberal regime expanded and locked in through free trade and investment agreements.

Poverty, inequality, precarious jobs, decaying infrastructure, social dis-ease surround us Governments and international institutions admit that reality at almost every international meeting I go to. They acknowledge there is a crisis of legitimacy in the current regime, and pepper their speeches with the buzzwords of social inclusion, empowering women and indigenous peoples, reversing inequality and embrace the economic, social and environmental pillars of the sustainable development goals – although they rarely go as far
as mentioning climate change.

Yet I am cautiously optimistic about the prospects of change, because the forces of creative disruption are breaking the mould, with the caveat that the outcome is not always progressive. We can debate the pros and cons of the UK’s Brexit and Trump’s withdrawal from TPPA, the rewriting of NAFTA, Trump’s tariffs on traditional allies and China alike, but there is no denying or reversing the jolt that has given to the system.

Separately from that, the World Trade Organization (WTO) has been paralysed for some years by the refusal of rich countries, including our own, to deliver to poorer countries the rebalancing they were promised in return for agreeing in 1994 to US-driven rules on services and intellectual property. Ironically, Republicans and Democrats both told me in Washington recently that the WTO’s rules and dispute processes are stacked against them.

While the US throws its toys out of the WTO cot, other mostly affluent countries, including New Zealand, are proposing reforms they hope will pacify the US’s concerns and lure it back. They are also pushing an aggressive new agenda on digital commerce, investment and constraints on domestic regulation, that will heighten internal factures and external antipathy to the WTO. The WTO is set to become an even more contested zone.

China is also a circuit breaker, for good and bad. The hegemony of the US and secondarily the EU is under threat. The US originally expected to draw China into the orbit of US-designed rules at the WTO, and cement China’s subservience. Instead, China has become an economic powerhouse with an independent modus operandi. Both Democrats and Republicans complained to me that China is breaking the rules, and justified imposing trade sanctions as a matter of national security. China has responded by appealing to the rules-based system!

While the US-China trade war is important, it’s a symptom of a larger transition, as China offers an alternative paradigm. Funding and contracts under China’s One Belt One Road initiative, the Ali-Baba-dominated digital ecosystem, the Asian Infrastructure Development Bank and bilateral state-to-state relationships are attractive alternative to many, mainly developing countries. There are costs, with China directly or indirectly controlling the infrastructure it funds, much of which rely on fossil fuel. Faced with growing criticism, China has also become increasingly keen on protecting its investors through agreements, including with investor-state enforcement.

These fractures in the current regime stepped up a pace this month, with the revised North American Free Trade Agreement (NAFTA) allowing the US to kick Mexico or Canada out of the deal if they negotiate an FTA with China. If that becomes the established US position, we will have a new cold war via FTAs, with countries pushed to choose between the US or China. I’m sure Terence will have more to say about these developments.

On a more progressive note, the escalating backlash against bilateral investment treaties and investment agreements in FTAs has brought real change. These rules protect foreign corporations from the adverse impacts of new laws and decisions, allowing them to recover their investment and lost future profits from taxpayers even when they are at fault, through private, unaccountable offshore investor-state tribunals – ISDS.

States have terminated stand-alone investment agreements, are developing new genuinely progressive models, and have refused to include ISDS in new agreements – indeed, that is formally NZ’s position, although the government has yet to deliver on it and has played no role in promoting its critique of ISDS internationally. This week the UN Human Rights Council is meeting to discuss a Binding Treaty to hold TNCs accountable for human rights violations, as a direct challenge to put indigenous and other human rights ahead of corporate profits. The Trump administration has even stripped ISDS out of the NAFTA in relation to US and Canada and severely limited it with Mexico. That is highly significant as
NAFTA was the first FTA to include ISDS. the exception of oil and gas contracts with Mexico demonstrates the ongoing power of the corporate lobby and the blindness to climate change.

Affluent countries, neoliberal international institutions, and the arbitration industry are fighting a rear-guard action to defend privileges of foreign investors, including the EU’s proposal to establish a permanent multilateral investment court, but not change the rules it would enforce. The outcome would be the equivalent of the Multilateral Agreement on Investment (MAI) that we defeated in 1998.

Other innovations in NAFTA appeal to the working-class voters Trump stole from the Democrats, with promises to bring jobs back home that were offshored to lower wage countries, notably Mexico. For example, products can only benefit from lower tariffs if they have a minimum content made in the three countries, and 40% of that is by workers paid USD16 per hour. That has laid bare the Democrats’ failure to develop their own progressive alternative and poses a quandary for those demanding real change.

Which brings me to why I am so hugely frustrated. An unprecedented turbulence has subsumed the ‘free trade and investment’ regime that was born 30 years ago. It faces an existential crisis. UNCTAD’s recent 2018 Trade and Development Report recalls the dominant “free trade narrative” of a rules-based system that has broken free from local political oversight and can promote a level playing field and prosperity for all. In reality,UNCTAD says, we live in a hyperglobalised world…

where money and power have become inseparable and where capital – whether tangible or intangible, long-term or short-term, industrial or financial – ha extricated itself from regulatory oversight and interference. …
Resisting isolationism effectively requires recognizing that many of the rules adopted to promote “free trade” have failed to move the system in a more inclusive, participatory and development-friendly direction…

The tragedy of our times is that just as bolder international cooperation is needed to address those causes, more than three decades of relentless banging of the free trade drum has drowned out the sense of trust, fairness and justice on which such cooperation depends’. (xii-xiv)

There is a serious void in international leadership towards such a values-based paradigm. I don’t want to downplay the significance of Bernie Sanders and Jeremy Corbyn, the two elderly white men who are incongruously have led progressive politics in two of the power-house states that would need to embrace real change.

But the more powerful fall-out from globalisation has been the decline of democracy and rise of populist authoritarianism. Trump is now burning down the neoliberal model with his trade war, NAFTA, WTO – a model previously drawn up by US in its self-interest – and creating a global legitimacy for authoritarianism, with other strongmen. Capitalising on populism of fear, not populism of the positive, he appeals to those who feel alienated and disempowered while elevating the super-rich and powerful to new heights.

Labelling the current dynamics as unilateral protectionism is simplistic and dangerousThe Pavlovian response is to call for multilateralism based on profits, not on values. That is a critical distinction. The patrons and beneficiaries of the existing system are mobilising to restabilise it. The New Zealand government, past and present, are active players in that project.

Incremental reforms will not work, for several reasons. They are nowhere near the necessary speed, and will settle for the least common denominator. They purport to address critical issues that have become lightning rods, like ISDS, and the social harms by gender, labour, environment, and indigenous rights, by cosmetic clip-ons that change nothing. Digging us deeper into the regime is not a fix. Instead, it will extend the time needed for larger scale paradigmatic reform.

Consider two of the most pressing challenges to that system. You can’t shoehorn climatechange into the existing regime. Equally, digital technologies are bringing a fundamental transformation to which old models of trade, investment, even intellectual property no longer apply. You can’t address the opportunities and challenges this poses by tinkering. We need to move from the economic reality of the past to a future based on a different
paradigm.

We have to fill the vacuum of leadership before others do. We have seen radical change before – in the post-depression era of Keynesian welfarism and the neoliberalism of the 1970s. If progressive ideas are not yet in vogue then we need to create intellectual framework and build movements to generate a momentum for ideas, communicate them, create political will, and make sure our ideas are on the table. Otherwise the void will be filled by the ‘corporations-first’ model of recent decades, or an America-first model competing for ascendancy with an equally self-interested China.

We have the capacity to do that, but it is part of a larger political and social project. We need to re-empower governments because they have outsourced so much of what needs to be done and make sure that policy and regulatory space is not closed off by even more deals. But it is not enough to reassert the role of the state. States are not benign. Their alignment with capital and political and economic elites has to be constantly contested.
National regulations can be even worse than the international agreements. Silenced voices – Maori, women, precarious workers, including migrants – which have been systematically disempowered by the state, by corporations and by agreements, need to be genuinely empowered in reformulated economic models and governance processes.

There are also limits to what states can do to address global aspirations and abuses, such as the catastrophic threat of climate change and the private global oligopoly of GAFA and Ali Baba. By default and design, responses to these challenges are being framed by the rules of neoliberal trade and investment treaties. We need global aspirations, based on different visions, values, politics and institutions.

To end with my favourite line from Gramsci: We are in an interregnum. The old regime of international economic agreements is dying. We are surrounded by morbid symptoms of its demise. The new is yet to be born. We don’t know what it will look like. It could be more of the corporate-led agenda that the neoliberalism and financialised capitalism. It could be a battle between the world’s most powerful authoritarian regimes. Or it could be remade
according to fundamental principles of social justice and survival of the planet. The third seems a no-brainer to me.

What might this involve?

I don’t want to pre-empt the discussion at this hui or the ideas you might produce at the end – and Jim Stanford is about to present some ideas of his own. Let me identify a handful of progressive alternatives that are already underway.

The UNCTAD Trade and Development Report cited earlier urges states to revisit the original post-war Havana Charter on which the GATT was based and update it for the digital age. Born of post-war Keynesianism, the Havana Charter recognised the links between labour market conditions, inequality and trade, as well as anticompetitive business practices, monopolistic control and limited access to market. Returning free trade rules to their roots and shedding the non-trade ephemera would be a start.

The UN Human Rights Council is meeting this week to advance its mandate to develop a legally binding international instrument on transnational corporations and human rights. There is an internal battle between the state and NGOs supporting the treaty, mainly from countries that have been targets of investment disputes, and OECD countries led by the EU seeking to sabotage it. New Zealand has not YET participated in this process. If we are looking at real rebalancing by putting people and planet before corporate interests, New
Zeland needs to become involved – on the right side.

Still at the UN, rapporteur for indigenous peoples Victoria Tauli-Corpuz has strongly criticised the adverse effects of free trade agreements and investment agreements, especially ISDS. Maori attended a regional workshop she hosted in Peru and another in Bangkok. The new Minister of Crown Maori Relations has a mandate to take the lead on resetting Crown/Māori relationships on hard issues and find opportunities for active partnerships between the Crown and Māori. He could work with the Rapporteur and counterparts internationally, and identify and develop tikanga based processes and options in Aotearoa that are consistent with the UN Declaration on the Rights of Indigenous Peoples, The Declaration of Independence and te Tiriti o Waitangi. The panel this afternoon will explore that further, and before lunch Wayne Garnons-Williams will share some insights from the
First Nations in Canada during the rewrite of NAFTA.

Then there are many initiatives to address the democratic deficit and enable citizens to hold their governments to account. Measures promoted and adopted in various countries include ongoing disclosure and debate on mandates and negotiating proposals and texts; guaranteeing elected politicians the right to oversee mandates and negotiations; ensuring full, balanced and independent cost-benefit and impact analyses during the course of
negotiations; requiring referenda or super-majorities for their adoption; and including sunset provisions that limit the life span of such deals.

The World Health Organisation and peak international and national health bodies have developed the methodology for full health impact assessments of proposed agreements during the course of negotiations, as part of broader human rights impact assessments, with the presumption that negotiations that fail that ssessment should be abandoned.

How might we address the legacy problem of existing agreements? Countries around the world are terminating bilateral investment treaties. A conference I was at in New York earlier this month explored and debated various alternatives. South Africa has substituted a domestic law, where foreign and local investors are treated the same, whereby their rights and obligations are subject to the post-apartheid constitution, and disputes are heard before the domestic courts. India has a new model agreement which, while not as socially progressive as the draft, includes real protections for social rights and the right to regulate, and gives priority to the domestic courts. Brazil’s Congress had never approved investment agreements, and it has developed a new model that emphasises long-term investment relationships and uses mediation rather than investor enforcement. A decade ago this kind of talk was incendiary. Today we are not discussing whether, but how.

There is active talk about developing a multilateral agreement through which signatory states could extinguish prior agreements, rather than having to unpick them one by one. Countries that feel vulnerable if they take unilateral steps to terminate could benefit from the protection of a critical mass, especially if some larger and stronger countries also want to reconsider their obligations. One precedent for this is the multilateral Mauritius Agreement on Transparency in Investor-State Arbitration 2014, that changes provisions of existing agreements among signatory countries. The EU is adapting that to terminate bilateral investment treaties between EU member states.

A parallel example is the anti tax-avoidance Base Erosion and Profit Shifting or BEPS process in the OECD. The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS would result in mass change in double taxation treaties to make them consistent with the agreed BEPS actions. Among other things, the Convention modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation.

There is no reason why a similar approach could not apply to free trade agreements that are legally easier, but politically more difficult, to exit.

These are all practical, achievable ideas if there is the political will, and the momentum and ideas to create that will. Let’s advance that discussion over the next 2 days, and beyond.