June 18, 2015

A week of fundamental critique on trade negotiations

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Last week the European Parliament postponed the vote on a resolution on the EU-US trade agreement (TTIP). The vote was postponed because many social democratic members oppose investor-to-state dispute settlement (ISDS). The US House voted a fast-track package down. This week various authors criticised fundamental aspects of ongoing trade negotiations.

The geopolitical argument: China

Lawrence Summers and George Soros pointed out that the use of anti-China language is dangerous.

Summers, professor at and past president of Harvard University, former treasury secretary, and former economic adviser to President Obama wrote:

“Political necessity has in recent weeks led advocates to increasingly aggressive formulations about how the TPP enables us to gain advantage at the expense of China. We may come to regret this provocation.”

Soros, in an article titled “A Partnership with China to Avoid World War“:

“A strategic partnership between the US and China could prevent the evolution of two power blocks that may be drawn into military conflict. (…) Rivalry between the US and China is inevitable but it needs to be kept within bounds that would preclude the use of military force.”

A new paradigm

US House Democratic Leader Nancy Pelosi wrote we need a new paradigm.

“However, all too often, the benefits of globalization have overwhelmingly flowed to the most affluent and powerful, while the costs have been shouldered by ordinary citizens in both developed and developing nations.”

Summers:

“But being pressed down everywhere are middle classes who lack the wherewithal to take advantage of new global markets and do not want to compete with low-cost foreign labor. Our challenge now is less to increase globalization than to make the globalization we have work for our citizens.”

Climate change

Pelosi:

“The climate crisis presents a challenge to the survival of our planet, but it also presents an opportunity to create a clean energy economy.”

In a debate Ferdi De Ville (Gent University) said the most pressing issues at the moment are climate change and inequality. The EU-US agreement may hamper solving these issues.

Diplomatic capital

Summers:

“If a small fraction of the U.S. political capital that has been devoted to the Trans-Pacific Partnership had instead gone to support reform of the International Monetary Fund and adequate funding for international financial institutions and the United Nations, these objectives could have been attained — and with greater benefits than the TPP will deliver.”

Ferdi de Ville noted we had nine rounds of negotiations on TTIP with 200 negotiators. Imagine, he said, that we had nine rounds of negotiations with 200 negotiators trying to solve climate change and tax evasion.

Beyond free trade

Summers:

“First, the era of agreements that achieve freer trade in the classic sense is essentially over. (…) What we call trade agreements are in fact agreements on the protection of investments and the achievement of regulatory harmonization and establishment of standards in areas such as intellectual property.”

Asynchronous power

Summers:

“I suspect that a rebalancing of U.S. efforts toward supporting multilateral institutions that provide financial support for other countries, and away from intense negotiations that demand that those countries change their domestic policies, would help enhance U.S. prestige and influence in the world.”

The old paradigm?

Pelosi:

“To do so, we must recognize that workers’ rights, consumer and intellectual protections, and environmental safeguards must be just as enforceable as the protection of the economic interests of investors.”

I find this statement rather problematic. It suggests we all agree that the economic interests of investors should be protected at the supranational level – actually, this seems the most controversial aspect of trade agreements. There are no voters at the supranational level.

Canadian professor Gus Van Harten explains in a new book how Canada ratified an investment treaty with China which gives China better rights than Canada. In Sold Down the Yangtze Van Harten explains the ominous power lying at the heart of investor-to-state dispute settlement.

Furthermore, supranational rules for the protection of intellectual property rights (like patents and copyright) are very controversial as well. The European Parliament overwhelmingly rejected the Anti-Counterfeiting Trade Agreement (ACTA). See also the IP out of TAFTA statement.

Market fundamentalism

Should we ever allow a scientific theory to undermine democracy?

Soros:

“[B]y allowing financial capital to move around freely the Washington Consensus also allowed capital to escape taxation and regulation. That was a triumph for market fundamentalism.

Unfortunately, the scientific foundations of this approach proved to be ill conceived. Unregulated financial markets are inherently unstable: instead of a general equilibrium that assures the optimum allocation of resources, they produce financial crises.”

Democracy

Soros:

“The crash of 2008 was also indirectly responsible for the euro crisis. The euro was an incomplete currency: it had a common central bank but it did not have a common treasury. The architects of the euro were aware of this defect but believed that when the deficiency became apparent the political will could be summoned to correct it. After all, that is how the European Union was brought into existence—taking one step at a time, knowing full well that it was insufficient but that when the need arose it would lead to further steps.”

The unification of Europe has a unique character: steps necessitating further steps. This worked for the creation of the common market. It does not work for political integration. The architects of European integration failed to formulate a credible end game.

Soros:

“Subsequently, the financial crisis has morphed into a series of political crises. The differences between creditor countries and debtor countries have transformed the European Union from a voluntary association of equals into a relationship between creditors, such as Germany, and debtors, such as Greece, that is neither voluntary nor equal and arouses increasing political tensions.”

Deep integration without equivalent political integration led to a series of political crises.

Modern trade agreements are deep integration agreements. This raises the question: how far can we integrate markets through international agreements without risking political crises? The architects of trade policy fail to formulate a credible end game.

We need to strengthen democracy, not undermine it any further.