Economy Kushay's Matter Bank

[AK] Deregulation of Businesses From Trade Deals

This note will discuss three example of terms that are made in international free trade deals and the arguments for and against it.

Disclaimer: This note is biased on the arguments against. It is based on a Jacobin article.

1. Investor to State Dispute Settlement (ISDS)

ISDS terms in trade deals will allow a state government to sue another state government (or companies to sue a state government) for regulations that is perceived as harming free trade or “directly or indirectly expropriating a company of their assets”. The regulations are including, but not limited to, favoring local products over imported ones, obliging companies to have a minimum wage, banning environmentally harmful business practices like fracking, etc.

The first example would be when the Mexican government was sued by US Metalclad Corporation for closing down their treatment plant in Mexico after there is a verified suspicion that the treatment plant does harm to the local water supply. US Metalclad Corporation won the case, and the Mexican government was forced to pay US$ 16.7M in compensation.

In another example, the Canadian government was sued by US Ethyl corporation for prohibiting a certain gasoline additive that have been scientifically proven to be harmful to the environment because US Ethyl Corporation uses such additive in the products that they sell. Another point stated by US Ethyl Corporation is that even the very debate in parliament determining whether the government should ban it is inherently harmful to them because it damages the company’s reputation and thus decreases the “expectation of profits” from their investment. The Canadian government eventually withdrew the prohibition and paid the company US$ 13M to settle the case. This is a prime example of how litigation from companies can lead to an explicit government policy change.

Proponents of ISDS argues that ISDS will protect investor’s rights by ensuring that their expectation of gaining profit from their investment will not be harmed by government policies, and in doing so creating a “stable environment for investment”. Opponents, on the other hand, argues that ISDS mechanisms makes governments, that most of the time pass policies for public good, to be dictated by profit-seeking, elite-centric corporations that is mostly there to benefit the 1%.

2. State Owned Enterprises Provision (SOE Provision)

The SOE Provision requires State Owned Enterprises, that usually serves a double function of gaining profit and doing social goods to reform itself into a private corporation model. Some of the mechanisms are as follows:

a. The SOE’s board of director is drawn from the private sector, with the minister of SOE serving as the appoint or of the CEO of the corporation.

b. The CEO employment package is based on COMMERCIAL performance (company growth, how much profit does the company obtain, etc.). The CEO can be ousted if the commercial performance is unsatisfactory.

c. SOE’s employees is treated as private (not public) workers.

Arguments supporting SOE Provision are classic capitalist arguments. Proponents argues that SOE Provisions creates a more consumer-based approach by state institutions, incentives companies to compete in an equal playing field (and eventually creates better products), and increased transparency of budget allocation (big government control over SOEs might allow political backdoor deals in the SOE).

Opponents argues that SOE Provision institutionalizes corporate’s influence on government by transforming an institution that was formerly of regulatory, policy, and commercial functions to an institution that is PURELY of commercial functions. SOEs can’t do something that does public good but will produce little profits. Three examples:

a. Maintaining post offices open even though post offices are not that profitable but still serves public good.

b. Training local labors (that only has SOEs as their training opportunity) as opposed to importing labors or automation which is less costly.

c. Pandering to community’s request to limit business practices for social/cultural/environmental reasons.

3. Public Procurement Provision

Governments has a lot of projects to be done (building bridges, power plants, etc.). In obtaining the materials necessary for the project, government usually signs procurement contract with firms (either domestic or transnational) to provide such materials. Public Procurement Provision limits government’s ability to favor domestic firms over transnational firms (or to favor any firm for any reason) because of the “fair competition” principle. The one who wins should be the one who can bid the cheapest. However, in doing so, the ability of government to spend taxpayer’s money for public goods is again diminished because the one that can push price lowest are most likely transnational firms and not domestic firms which has a much significant portion of grassroot society in it. Moreover, government preference to products that doesn’t come from sweatshops or preference to renewable energy is also invalidated with the Public Procurement Provision, so the “upholding public value” part of government spending is also non-existent with this provision.

All of these things makes it important to note that “trade deals” oftentimes aren’t trade deals per se, but rather “investment deals” that is specifically designed for massive deregulation.

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