Free Trade vs Democracy: A Primer on the Trans-Pacific Partnership

Cliff DuRand
Wednesday, February 1, 2017

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In a global economy in which multinational corporations are no longer bound to any single country, they have gained a new kind of power over national governments that, by their nature, are confined by borders. Companies have created a new kind of marketplace in which governments compete with one another for investment, essentially undercutting in a fundamental way some of the familiar, potent, and until recently enduring foundations of sovereignty.”

–David Rothkopf, former partner of Henry Kissinger and a Treasury Department official in the Clinton administration. Rothkopf, Superclass: The Global Power Elite and the World They Are Making (Farrar, Straus & Giroux, 2008), p. 117. Cited by Jeff Faux in The Servant Economy, p. 82.

For the last couple decades US foreign policy has become increasingly about trade policy. The US has become the world advocate of “free trade,” promoting it through trade agreements like NAFTA and other bi-lateral agreements as well as through global governance institutions it has sponsored such as IMF, World Bank and WTO. The US has promoted free trade for much the same reason Great Britain promoted it in the 19th century, viz. the economically strongest country in the world benefits from free trade. It is the weaker countries that seek tariff protection for their infant industries, protection from competition with cheaper and higher quality imports. That protection is what enabled the US to industrialize in the last half of the 19th century. But then when the US became economically strong enough to compete regionally and eventually globally, it became an advocate of free trade and demanded that others abandon protectionism.

The justification for free trade rests on the theory of comparative advantage. This is the view that if countries trade free of government impediments, the market will tend to direct each to export that which they can produce most efficiently and import what can be produced more efficiently and thus more cheaply elsewhere. The invisible hand of the market will guide each to specialize in producing what they have a comparative advantage in. Thus a rational production and trading system will emerge that maximizes efficiency.

Free trade agreements like NAFTA were sold to the US public by appealing to consumer’s interest in having access to cheaper goods imported from Mexico. What was deliberately soft pedaled was their interest as workers in having jobs. Organized labor opposed NAFTA, fearing it would pit US workers in competition with low wage Mexican workers. Independent presidential candidate Ross Perot warned of “a giant sucking sound” as jobs would be off-shored to Mexico. But the Clinton administration said US exports to Mexico would create new jobs. And so, ignoring opposition from its traditional base in the unions, new Democrat Clinton pushed ratification of NAFTA through the Senate as his first priority. Perot proved to be correct as US companies shifted production to low wage Mexico – until even lower wage Chinese workers were brought into play when China joined WTO. But Clinton was also right as cheaper consumer goods from abroad filled the shelves of Wal-Mart with bargains welcomed by US workers who found their wages reduced. Free trade proved to be a mixed blessing.

But there is one important point about free trade that is often overlooked. We are not talking just about the free, frictionless movement of goods and services across borders, unrestricted by tariffs, quotas and regulations. We are also talking about the free movement of capital as corporations are freed to invest abroad. In fact, it is that mobility of investment capital that is of utmost importance, with profound economic consequences as well as consequences for democracy. It is the latter that I want to focus on today.

Unable to find sufficiently profitable venues for investment in the overdeveloped US economy, large corporations have increasingly moved abroad. They sought not just new outlets to sell their commodities, but low wage workforces that would decrease their production costs and thus boost their profits. Frequently that would involve locating different stages of the productive process in different countries so as to take optimal advantage of local conditions. The assembly lines of US industry were disaggregated and disbursed across the globe.

What emerged were global assembly lines. Such global production chains have become a signature feature of contemporary capitalism. Components may be manufactured in Singapore, transported to China for subassembly and then shipped to Mexico for final assembly before sale in the United States. What we have here is a global assembly line presided over by transnational corporations. Although such assembly lines are geographically dispersed, they overcome the limitations of the fixed assembly lines of the Fordist era in that they no longer have to rely on a fixed labor force that can organize itself to effectively claim a share of the surplus they create. Instead, the global assembly line gives capital the flexibility to seek out the lowest wage workforce and friendliest business environment available anywhere in the world. This has been made possible by the development of a global computerized network of instant communications via satellite. That and the computerization of banking have made money transfers and the movement of capital both easy and instantaneous. The communications network also allows the decentralization of technological development and design. Technicians can work at points distant from the processes of production to which they address themselves. And the entire process can be coordinated by management located anywhere on the globe. The limitations of space and time have been overcome by digital communications and cheap energy for transporting goods to their ultimate consumers.

For such globalized production to be possible, capital must be mobile, flowing freely across national borders. And at the same time products have to be able to move with minimum friction across those borders, unhampered by tariffs or quotas or nonuniform standards. In other words, there must be free trade in order for transnational capital to optimize accumulation. [the previous two paragraphs are quoted from Recreating Democracy in a Globalized State, p. 14]

But transnational corporations need more than just unfettered access to low wage, compliant workforces. They also need legal protection of their investments. They need protection from expropriation of their assets, laws and governments that can ensure their property is secure. And so a vital part of free trade agreements is protection of what are called investor rights. But this involves more than just protection from out and out expropriation, as often happens with revolutions. It also involves protection from governmental actions that might reduce the value of their property or potential profits by environmental and health regulations, labor laws or other such measures even though they might be for the public good. What in US law is called “regulatory takings” are seen as tantamount to expropriation.

When such governmental actions do occur, free trade treaties give the foreign corporation the recourse to sue. But that suit is not adjudicated in a national court, but by a transnational body of experts operating in secret. States are expected to enforce its decisions on their own nation’s taxpayers and consumers. This is a privileging of investor rights (i.e. the interests of transnational corporations) over the democratic rights of a nation. Let me give you some concrete examples.

The first arose under Chapter 11 of NAFTA. Several years ago oil companies started adding the chemical MTBE to gasoline to make it burn cleaner so as to cut down on air pollution. But it turned out that MTBE began to show up in ground water and it was discovered that it causes cancer. Now the water supply of many California cities is contaminated, as is also Lake Tahoe, once one of the purest bodies of water in the world. So the State of California decided to ban MTBE. But as it happened, this chemical is manufactured by a Canadian company called Methanex. Methanex proceeded to sue California for $970 million for the loss of anticipated profits. Under the free trade rules of NAFTA, Methanex claimed the state had interfered in its market and thus it was entitled to be compensated for its loss. Here we see government being discouraged from protecting the public health and well being unless it is willing to pay a private corporation for not harming it. Such an outcome would likely have enraged public opinion in the US So after much delay, the NAFTA court ruled that since the Canadian company made only a component in MTBE, it thus did not have a substantial enough interest for its claim. The court took the politically safer route by dodging the substantive issue.

Here’s another example. In 1996 the State of Massachusetts passed a law preventing state agencies from buying goods or services from companies that do business with Myanmar, a.k.a. Burma. This was because of the repressive military junta that rules that country after annulling the election of Nobel Prize winner Aung San Suu Kyi as president. However, this selective purchasing law was challenged as in violation of WTO rules that require governments to not intervene into economic markets. As a spokesman for the EU said, “we don’t believe this kind of action is fair to the trade and investment community.”37 Under the banner of “free trade” the citizens of Massachusetts are forbidden from making democratic decisions about how to spend their collective money. Morality is required to leave the market alone. Under this principle, the sanctions against apartheid South Africa would have been forbidden and Nelson Mandela might still be in prison today. [the previous two paragraphs are quoted from Recreating Democracy in a Globalized State, p. 87]

There are many other examples. In 2011 the Canadian province of Quebec placed a moratorium on the controversial practice of fracking in order to study the environmental risks involved. A corporation chartered in Delaware had mining permits in the Saint Lawrence valley that were suspended. Although the company, Lone Pine Resources, Inc., was headquartered in Calgary, it was a foreign corporation. Thus under NAFTA’s Chapter 11, it is suing the Canadian government $250 million for lost profits. Such “investor-to-state” cases are litigated in special arbitration bodies of the World Bank and the United Nations, which are closed to public participation, observation and input. They have the power to award unlimited amounts of taxpayer dollars to corporations whose rights to make a profit they judge have been violated. By latest count, some 450 investor-to-state cases have been filed against 89 governments by transnational corporations who have been awarded $700 million to date.

And that is just the beginning. Now there is a new free trade agreement being secretly negotiated called the Trans-Pacific Partnership, TPP. It has been described as NAFTA on steroids by those who have seen some of its leaked provisions. Negotiations began under the Bush administration and the Obama administration is continuing them in hopes to complete the agreement this year. The discussions include trade representatives of U.S. and Australia, Brunei, Canada, Chile, Mexico, New Zealand, Peru, Singapore, Malaysia and Vietnam. Countries like Japan and China may join later. But the public, Members of Congress, journalists, and civil society are excluded. Not even Congressional committees have been able to see the draft text, but 600 corporate advisors have!

Some sections have been leaked. And what they reveal is “an agreement that actually formalizes the priority of corporate power over government,” according to Lori Wallach of Public Citizen’s Global Trade Watch . Only 5 of the 29 chapters have to do with trade. Wallach says the rest of the draft “include[s] new rights for the big pharmaceutical companies to expand, to raise medical prices, expand monopoly patents, limits on Internet freedom, penalties for inadvertent noncommercial copying, sending something to a friend. There are the same rules that promote off-shoring of jobs that were in NAFTA that are more robust that literally give privileges and protections if you leave. There is a ban on “buy American” and “buy local” or “green” or sweat-free procurement. There are limits on domestic financial stability regulations. There are limits on imported food safety standards and product standards. There are limits on how we can regulate energy towards a more green future – all of these things are what they call “Behind the Borders” agenda. And the operating clause of TPP is: “Each country shall ensure the conformity of its domestic laws, regulations and administrative procedures with these agreements.” That’s to say, that we’re told to conform all of our domestics laws – including all the important public interest laws fought so hard by people around the country – for these corporate dictates and it’s strongly enforceable. If we do not conform our laws, another country can challenge us and impose trade sanctions until we do, but this one is even privately enforceable by the corporations themselves.” [ ]

So you can see, free trade is about more than trade. It is about privileging corporations over the democratic rights of citizens and the sovereignty of nations. As the former Director-General of the WTO, Renato Ruggiero, said in 1995, “We are no longer writing the rules of interaction among separate national economies. We are writing the constitution of a single global economy.” [quoted by Jeff Faux, The Global Class War (John Wiley, 2006), p. 155.] What is being created is a global governance order in which corporation are the citizens, not flesh and blood humans like you and me. With free trade, corporations are making an end run around democracy.

For nearly 40 years now, since the mid 1970s, we have experienced a growing offensive by the corporations to roll back the popular gains of the New Deal era and the 1960s. Democracy has been the target of a class war to restore the class power of capital. And there has been weak resistance, at best, by the popular classes. But the stakes have become increasingly clear to more and more. Indeed, on the issue of free trade, there is now a broad public sentiment against this aspect of the corporate offensive. A major NBC News-Wall Street Journal poll from September of 2010 revealed that “the impact of trade and outsourcing is one of the only issues on which Americans of different classes, occupations and political persuasions agree,” with 86% saying that outsourcing jobs by U.S. companies to poor countries was “a top cause of our economic woes,” with 69% thinking that “free trade agreements between the United States and other countries cost the U.S. jobs.” Only 17% of Americans in 2010 felt that “free trade agreements” benefit the U.S., compared to 28% in 2007. [reported by Andrew Gavin Marshall ]

When TPP comes before the Senate for ratification sometime this year, we will have a major opportunity to rally this broad sentiment against free trade and strike a blow for democracy. Remember, if we fail, as a treaty the TPP will become the highest law of the land and the corporatocracy will have trumped the US Constitution once again.

Cliff DuRand is a Research Associate at the Center for Global Justice. He is co-author and co-editor of Recreating Democracy in a Globalized State (Clarity Press, 2012).


Public Citizen’s Global Trade Watch

on TPP

Citizens Trade Campaign

A coalition of labor, environmental, religious, family farm, and consumer organizations united in the pursuit of socially and environmentally just trade policies.

It’s Our Economy

It’s Our Economy seeks to educate, organize and mobilize Americans to shift the power from concentrated capital to the people.

More on TPP:

* Guaranteed compensation for loss of “expected future profits” from health, labor or environmental regulations.

* Corporate performance requirements banned.

* Capital mobility to be guaranteed, preventing capital controls in event of a financial crisis.

* Intellectual property rights include copyright and patent laws.

E.g. pharmaceuticals to be given 14 year long government-granted monopolies, excluding generic drugs.

E.g. Internet freedom called into question: commercial and non-commercial copyright infringement resulting in termination of Internet access after three violations.