Topic: Trade and Immigration

Foreign Investment Disputes in International Courts

In a recent opinion piece, Washington Post columnist Harold Meyerson criticized something called the “investor-state dispute settlement” (ISDS) mechanism, which is included in some trade agreements. My colleague Dan Ikenson responded here; I wrote a letter to the Post, which said:

Harold Meyerson made valid points about the Investor-State Dispute Settlement (ISDS) clause in trade agreements in his Oct. 2 op-ed column, “A flawed trade clause.” However, with all the misinformation that exists on this issue, it is important to be precise. Foreign investors cannot sue “over any rules, regulations or changes in policy that they say harm their financial interests.”

Rather, they can sue if the host government has discriminated against an investor because it is foreign; if an investment has been expropriated, either directly or indirectly; or if the investor has experienced bad treatment of a more general sort (this controversial standard is known as “fair and equitable” treatment).

In a sense, the ISDS provision creates international judicial review of national laws and regulations, with such review available only to foreign investors. That is certainly a controversial proposition, but it is important to keep the debate focused on the facts, rather than on myths that have been put forward.

You only get so much space for these letters, so I thought I’d elaborate here.

ISDS allows foreign investors to challenge any and all domestic government actions before an international tribunal.  That includes local, state, and national measures, by legislators, regulators, or courts.  In terms of the substance of the claims that can be made, they look a lot like certain constitutional doctrines: Equal Protection, Takings, and Due Process.  What you end up with, in effect, is a special international “constitutional” court (of sorts), available only to foreign investors.  (It can’t strike down the domestic laws, of course, but it can award damages for violations.)

Should Intellectual Property Be in Trade Agreements?

After I complained recently that arguments for including intellectual property (IP) in trade agreements needed to specify what level of protection is desirable, Tom Giovanetti responded by asking for my view on a more basic question: Should IP—regardless of the level of protection—be in trade agreements at all? My colleague Bill Watson has previously set out a political argument for removing it, which is that achieving free trade is becoming very difficult when IP issues get inserted into trade negotiations. Let me add to his argument the following: If IP is in, then there is really no boundary to what can be in, and the result is trade agreements that look like “global governance” agreements.

Returning to Tom’s question, I should say at the outset that Tom doesn’t really say explicitly why IP should be in trade agreements. He doesn’t explain how IP rules fit within the general concept of trade liberalization, or what scope he sees for trade agreements. What are his limits for what should be covered in trade agreements? I’m really not sure. Instead, the main focus of Tom’s argument for including IP in trade agreements seems to be that the United States exports lots of IP-related goods, and therefore it is in the nation’s interest to have IP rules in there.

With this argument, it seems to me that Tom is trying to portray strong IP protection as something that helps U.S. industry at the expense of its foreign competition. This doesn’t have a very trade-liberalizing feel. Moreover, looking at the bigger picture, what stronger IP protection does is help U.S. industry at the expense of consumers (U.S. and foreign). In terms of appropriate IP policy, it seems to me, the focus should be on giving incentives to innovate, but not to the detriment of consumers. Some argue that stronger IP protection promotes innovation, but others contest this.

Turning back to trade agreements, Tom’s argument misses a fundamental point: What is the purpose of trade agreements? For decades, this purpose was fairly clear: to provide a framework of mutual restraints on protectonist trade barriers, such as tariffs, quotas, and discriminatory laws and regulations.

At a Minimum, Transatlantic Trade Negotiations Should Ditch Investor-State Provisions

Some exaggeration notwithstanding, Harold Meyerson, with whom the occasion to agree is rare, does a reasonably good job describing some of the pitfalls of the so-called Investor-State Dispute Settlement mechanism in his Washington Post column yesterday.  ISDS has become a source of growing controversy, which threatens to derail the Transatlantic Trade and Investment Partnership negotiations, which are reported to be floundering during the seventh “round” of talks taking place this week in Chevy Chase, Maryland.

“Under ISDS,” Meyerson writes, “foreign investors can sue a nation with which their own country has such treaty arrangements over any rules, regulations or changes in policy that they say harm their financial interests.”  That is more or less correct, but the implication that the threshold for bringing a suit is simple harm to a foreign investor’s financial interests is misleading.  What is being disciplined under ISDS is not harm to financial interests of foreign investors, but harm that comes from discriminatory treatment of foreign investors.  Thus, ISDS avails foreign investors (i.e., U.S. companies invested abroad, foreign companies invested in the U.S.) of access to third-party arbitration tribunals as venues for determining whether and to what extent the plaintiff suffered economic damages on account of host-government actions or policies that fail to meet certain minimum standards of treatment.

Meyerson suggests that ISDS provisions be purged from the TTIP negotiations because they subordinate U.S. courts to unaccountable tribunals, which “invites a massive end-run around national regulations.” Though I firmly believe the U.S. economy is racked with superfluous and otherwise unnecessary regulations, I do believe that a successful foreign challenge of U.S. laws, regulations, or actions in a third-party arbitration tribunal (none has occurred, yet) would subvert accountability, democracy, and the rule of law.  For those and several other reasons, I’m on board with Meyerson’s suggestion to purge ISDS from TTIP, and would extend the purge to all trade agreements.  In fact, I developed eight reasons for purging ISDS from the trade negotiations in this paper earlier this year.

Cargill v. Syngenta: Biotechnology and Trade

On September 12, Cargill, a major commodity trading and processing firm, filed a lawsuit in a Louisiana state court against Syngenta Seeds for selling genetically engineered MIR 162 (also known as “Agrisure Viptera®”) seed corn to farmers. China has not yet approved importation of corn containing MIR 162, so U.S. exports to that country of corn and corn products have come to a halt. Demand for U.S. corn has fallen. Cargill believes its losses exceed $90 million. 

Syngenta’s view?  “Syngenta believes that the lawsuit is without merit and strongly upholds the right of growers to have access to approved new technologies …”. The company’s position is that it has been legally selling seeds containing MIR 162, a trait that provides useful insect resistance, to U.S. farmers since 2010.  Other major corn importers – including Japan, South Korea, Mexico, Colombia and the European Union – have approved importation of corn with the MIR 162 trait. Syngenta has been seeking approval in China since March 2010. MIR 162 has not raised any health or environmental safety issues. 

Cargill’s view is that Syngenta has rendered U.S. corn supplies ineligible for export to China. Corn containing MIR 162 has spread throughout the U.S. marketing system to the extent that it would be expected to be present in any ocean vessel loaded for export:

Who Needs to Be More Flexible in the TPP talks? Hint: It’s Not Japan.

According to news reports, the United States and Japan have again failed to reach a bilateral agreement on lowering import barriers, a necessary prerequisite to completion of the 12-member Trans-Pacific Partnership (TPP) trade agreement. U.S. negotiators and business interests are quick to blame Japan for being reluctant to eliminate tariffs on a handful of highly traded agricultural products. In truth, though, the Japanese government has shown much greater commitment to the TPP and more willingness to take political risk than the United States. If the TPP falls apart, the blame will not lie with the Japanese.

The tariffs in question are what trade negotiators refer to as “sensitivities.” For every country in any trade negotiation, there are some trade barriers that are very difficult to lower because of the domestic political power of the businesses and industries that benefit from them. In Japan’s case these are agricultural tariffs (on rice, wheat, sugar, meat, and dairy) that are the bread and butter of Japan’s politically powerful farmers. Getting rid of sensitive barriers can be done, but it requires greater political will from both local and foreign leaders. Politicians take great risks when they oppose the interests of a powerful lobby.

I’ve noted before that criticisms of Japan’s stance are inappropriately antagonistic in light of how beneficial tariff elimination would be to Japan itself. The Japanese government know this, too. Earlier this week, Japanese Prime Minister Shinzo Abe spoke about how eager his government is to use the TPP talks as a way to enact broad agricultural reforms:

I consider it is indispensable for the future of Japanese agriculture to promote the domestic and international reforms in an integrated way.

To be honest with you, it is indeed an enormous task to suppress the resistance from the people who have been protected by vested interest. However, there is no future for them if they are not exposed to competition.

Rather than sympathize with their Japanese counterparts, however, the U.S. Trade Representative’s office continues to accuse Japan of expecting special treatment when all other TPP members are committed to more ambitious liberalization.

Intellectual Property in Trade Agreements

Tom Giovanetti of the Institute for Policy Innovation, who spoke at a Cato event we held earlier this year, has a new essay arguing that intellectual property protection should be included in trade agreements. He makes several points, but I’m going to focus on just one.  He states:

[N]umerous studies have found a correlation between higher levels of IP protection and stronger economic growth.

  • According to a 2008 OECD [Organization for Economic Cooperation and Development] study, stronger patent rights in developing countries are a significant determinant of levels of foreign direct investment, and also facilitate higher levels of technology transfer.
  • A 2012 OECD study found that a 1 percent change in the strength of a country’s IP framework is associated with a 2.8 percent increase in foreign direct investment inflows and a 0.7 percent increase in domestic R&D [research and development].
  • And a 2013 study found that R&D spending has grown relative to GDP in developing countries after they adopted the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). The study also found that medicines for developing countries had received additional funding, and that the TRIPS agreement had directly contributed to the emergence of native film industries in African countries.

Here’s the problem: If you treat intellectual property as a single concept, and you can either have more or less protection of it, it would be reasonable to conclude that some countries have too little protection and probably need more. But intellectual property covers a lot of ground. To name a few areas, you have copyrights, trademarks, and patents.  You also have the European favorite, “geographical indications.”

If the argument is that having intellectual property protection is better than not having intellectual property protection, in terms of economic growth, that seems like an easy one.  It’s hard to imagine a modern economy working very well without effective trademark enforcement, for example.

But beyond that, things get complicated. How much protection is too much?  The United States is pushing copyright terms that last for the life of the author plus 70 years as part of its trade negotiations. I’ve argued that’s way too long. What is the right amount exactly?  Well, no one seems to be sure, as far as I can tell, but there are plenty of people who say life plus 70 years is excessive.

So, it’s not enough just to say, “we need stronger IP protection in trade agreements.”  If you want to convince anybody, you need to get into the specifics of each kind of protection, and why the stronger level you propose is justified. Otherwise I’m just going to assume you want stronger IP protection of any and all kinds and would go along with the European Union demand that Feta cheese can only be made in Greece.

Immigration’s Real Impact on Wages and Employment

The Center for Immigration Studies (CIS) has been releasing a series of reports claiming that immigrants are benefiting from the slightly recovering job market while natives are not.  Of course, if immigrants were even less likely to gain jobs than Americans, CIS would use that as evidence that immigrants are a drain on the economy.  No matter.  

The implicit assumption in CIS’ publications is that if those millions of immigrants weren’t working in the United States, more native-born Americans would have jobs – a static view of the economy.  CIS’ fixed pie implication is inappropriate to any kind of reasonable economic analysis of the effects of immigration on the labor market.  That is the primary reason why labor economists do not use CIS’ methods when attempting to measure the labor market impacts of immigration.  Even if CIS’ numbers were compiled correctly, they are not measuring anything useful.

A large body of academic economic research has found that immigration has a relatively small effect on U.S-born American wages and their employment prospects.  For wages impact, the estimates are that immigrants either lower the wages of some American workers by about 2 percent or raise them by about 2 percent in a dynamic economy (this, this, and this).  The employment effects vary little but, like wages, the effects are small and clustered around zero.  Nowhere will you find a tradeoff where one additional immigrants means that one American loses a job in the economy.

The CIS papers make no counterfactual dynamic economic estimates of the strength of the labor market without immigrants.

Here are some additional facts you won’t see in CIS’ papers: