The Divide

by Jason Hickel

  As if their market size and exclusive meetings weren’t enough to secure them a strong advantage in the halls of the WTO, rich countries have the additional advantage of being able to afford more staff. They can maintain a permanent contingent of negotiators at the WTO headquarters in Geneva to participate in daily, year-round meetings, and send hundreds of people to the bargaining sessions to advocate their interests. Poorer countries that cannot afford to employ so many highly skilled staff end up with their voices ignored. Indeed, many countries cannot even afford to send staff to meetings where decisions are being made that affect them directly. As a result, international trade rules end up being skewed heavily in favour of rich countries.

  Negotiators from the South are not the only ones to recognise the unfairness that is built into the international trade system. So, too, do citizens in the North. Awareness of trade injustice on both sides of the North–South divide propelled the mass protests outside the WTO meetings in Seattle in 1999, which became the symbol of the anti-globalisation movement and set off a wave of similar protests. The pressure from below grew so immense that a second round of WTO negotiations was called to address some of the inequities that protestors had brought to light. But the Doha Development Round – as it came to be known – offered little more than window dressing. Western nations have continued to refuse to back down from their agricultural subsidies and the most damaging provisions of TRIPS. As a result of their intransigence, the talks have stalled since 2008 and show no sign of ever coming back to life.

  Given the stalemate at the WTO, rich countries have devised a workaround. Instead of relying on multilateral negotiations, they have resorted to expanding bilateral free-trade agreements instead – trade deals that are negotiated directly between two or more countries without having to go through any kind of centralised international authority.

  The first major FTA was the North American Free Trade Agreement between Canada, Mexico and the United States, which came into effect in 1994 and cut most tariff barriers to the flow of goods between the three countries. The agreement was highly controversial and widely resisted by voters in all three countries. In Mexico, hundreds of thousands of farmers took to the streets of the capital with their tractors in protest, fearing that they would be unable to compete with subsidised American corn. They were correct. When NAFTA came into effect, American corn flooded into Mexico and undercut local producers. Some 2 million farmers were driven out of business and forced to leave their land. As if to add insult to injury, much of that newly vacated land was then acquired by foreign firms that consolidated large plantations – a scenario not unlike the process of enclosure described in Chapter 3. And just as with enclosure elsewhere in the world, many of the displaced farmers had no choice but to accept low-wage work in the sweatshops that sprang up near the US border as American corporations, enabled by NAFTA, moved south to take advantage of cheaper labour.

  One might think that the subsidised corn from the United States would mean cheaper tortillas in Mexico – the region’s staple food. And surely this would be a good thing for the country’s poor. But, paradoxically, the opposite happened: because NAFTA deregulated retail prices on food, the cost of tortillas shot up by 279 per cent in the first decade, causing hunger and malnutrition to rise.

  It was a dream scenario for US companies: they get new export markets, new access to land, higher retail revenues and cheaper labour. Many large Mexican firms benefited too – indeed, that is why the Mexican government agreed to NAFTA in the first place. But ordinary people suffered tremendously. The incomes of Mexican farmworkers have fallen to one-third of their previous levels, real wages across the board are lower and the minimum wage is worth 24 per cent less. Ten years after NAFTA, there were 19 million more Mexicans living in poverty than before NAFTA. More than half the population now lives below the poverty line. According to a recent report in the New York Times, ‘Twenty-five per cent of the population does not have access to basic food and one-fifth of Mexicans suffer from malnutrition.’ Since NAFTA came into effect, per capita income growth has been only 1.2 per cent on average – less than half what it was during the decades before NAFTA.

  American workers ended up suffering as well. NAFTA led directly to the displacement of 682,900 US jobs by 2010, most of which were high-paying, unionised manufacturing jobs. NAFTA proved to be a powerful force for breaking the remaining power of organised labour in the United States, and contributed directly to wage stagnation.

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  NAFTA had a devastating impact on the living standards of many ordinary Mexicans and Americans. But its power would extend far beyond the borders of either nation. Buried deep in the agreement’s text, a new idea had been inserted in Chapter 11 that would come to shake the principles of democracy and national sovereignty around the world.

  For investors, one of the risks of operating in a foreign land is that your host government might decide to nationalise your assets. During the developmentalist period, global South governments often resorted to this tactic in their attempts to reclaim wealth from foreign control, nationalising land and even businesses owned by Western companies. When this happened to, say, American companies, their only recourse was to persuade the US government to retaliate by sending a blockade or staging a coup – which, as we know, they did on many occasions. It was a messy business, and politically risky: no government really wants to be seen invading another country for the sake of corporate interests. So in 1965 they came up with a way to work such disputes out in the orderly environs of a court: the International Centre for Settlement of Investment Disputes (ICSID), which would be overseen by the World Bank. The idea was that in cases of expropriation, states would be obligated to compensate investors at a fair value for their property. Each dispute would be worked out by three arbitrators – one picked by each side, and a third agreed upon by both.

  By the end of the 1980s, most of the world’s countries were plugged into the international arbitration system. Some, including almost all of Latin America, were forced into it against their will under structural adjustment programmes. But despite early suspicions, even they found that the system worked pretty well. After all, it had the effect of slowing down the onslaught of Western-backed coups, which was a welcome change.

  But when NAFTA came online, the arbitration system took on a disturbing twist. Investors started to file suits not only in cases of expropriation, but also to push back against environmental and social regulations that they claimed reduced their profits – or even, bizarrely, their ‘expected future profits’. There have been a number of cases like this brought under NAFTA’s Chapter 11. One famous early case involved Metalclad, a US corporation that was operating a hazardous waste landfill in Mexico under permits issued by the Mexican federal and state authorities. When the local municipal government concluded that the landfill was polluting the local water supply and threatening the health of nearby residents, they closed it down and declared the area a protected environment. In response, Metalclad sued, claiming the decision amounted to an ‘expropriation’ of the company’s land and facilities. Mexico was forced to pay $15.6 million in damages. In another case, the US-based company Dow AgroSciences sued the government of Canada for banning the use of its pesticides on the basis that they might cause cancer in humans.

  All of these cases follow the same pattern: corporations sue the state for domestic laws that limit their ‘expected future profits’, even when the laws are meant to protect human rights, public health or the environment.

  It is worth pausing to consider the implications of this. Normally, states enjoy what is known as ‘sovereign immunity’ status, which means they cannot be sued. But this principle is suspended in cases of investor–state disputes. ‘Investor protection’ effectively grants corporations the power to circumvent the normal justice system and strike down the laws of sovereign nations. In other words, corporations are empowered to regulate democratic states, rather than the other way around. This is a frontal assault on th
e ideas of sovereignty and democracy, and one that is being conducted, ironically, once again under the banner of freedom. Even when lawsuits are not filed, the mere threat of them can make elected lawmakers think twice before enacting new regulations.

  What is perhaps most troubling about these new investor–state dispute mechanisms, though, is that they are intrinsically imbalanced. Investors have the right to sue states, but states do not have a corresponding right to sue foreign investors. The most a state can hope to win out of a settlement is the nullification of the suit; a state cannot claim damages from foreign corporations. In other words, the system grants special new powers and freedoms to undemocratic corporations while eroding those of sovereign, democratic states.

  There is a fascinating irony at play when it comes to the use of sovereign immunity in these cases. Remember, the World Bank and the IMF invoke sovereign immunity in order to protect themselves from lawsuits by the states and citizens who have suffered so much damage at their hands, even though these institutions have no legitimate claim to sovereignty. To this day, no one has successfully challenged this immunity. It is remarkable, then, that sovereign immunity is upheld to protect private, undemocratic institutions like the World Bank and the IMF from lawsuits by public entities, while it is suspended so that democratic states, which have a legitimate claim to sovereignty, can be sued by private entities. It is not just a contradiction – it is an inversion of the legal order.

  To make matters worse, the dispute hearings themselves are undemocratic. They are conducted in secret tribunals that have none of the checks, balances and transparencies that characterise normal public courts. The judges in these hearings are corporate lawyers from private firms, not public appointees. The citizens and communities that are negatively affected by the investors are not represented in the hearings. And yet, despite all this, the decisions have the power to override the laws of parliaments and the rulings of national courts. One arbitrator from Spain has famously expressed his shock at these arrangements in haunting terms: ‘When I wake up at night and think about arbitration, it never ceases to amaze me that sovereign states have agreed to investment arbitration at all . . . Three private individuals are entrusted with the power to review, without any restriction or appeal procedure, all actions of the government, all decisions of the courts, and all laws and regulations emanating from parliament.’

  NAFTA has served as a blueprint for similar FTAs elsewhere around the world, and there are now dozens of them. CAFTA (Central American Free Trade Agreement), for example, was passed in 2005, and also includes an investor–state arbitration mechanism that has been brought into use on a number of occasions. In El Salvador, citizens recently voted to ban a gold mine planned by Pacific Rim, a Canadian corporation, because it threatened to destroy part of the country’s river system. Pacific Rim is now suing El Salvador for $315 million of potential lost profits. The US–Peru FTA has recently been used by the American company Doe Run to sue the Peruvian government after the government lifted the company’s operating license for failing to remediate pollution at a smelter it was operating in La Oroya. The suit was also apparently part of the company’s attempt to avoid claims brought on behalf of children and others allegedly poisoned by the smelter’s operations. While the company has not prevailed in this claim, the whole ordeal gives an indication of the Alice in Wonderland nature of investor–state disputes.

  There have been a total of more than 500 investor–state disputes filed at the ICSID, and the number is rising fast. During the 1990s there were fewer than ten cases per year. In 2012 there were fifty-nine, up from fifty-one the previous year. The highest award issued so far has been $2.3 billion (later reduced to $980 million) to the American oil company Occidental Petroleum after Ecuador annulled the company’s oil concession, maintaining that proper government consent had not been obtained. Fortunately, this system is finally coming under attack at high levels. Alfred de Zayas, a UN special rapporteur, recently slammed investor–state dispute settlement provisions as a threat to human rights and a violation of international law. In the United States, more than 100 law professors have signed a letter to Congress pointing out that such provisions pose a threat to national sovereignty and the rule of law.

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  The chorus of critique is growing, but it is an uphill battle. As this book goes to press, there are two new FTAs under negotiation: the Transatlantic Trade and Investment Partnership (TTIP), which will govern trade between the US and the European Union, and the Trans-Pacific Partnership (TPP), which will extend NAFTA down into South America and out across the Pacific Ocean. These deals go much further than earlier ones, which seem almost quaint by comparison. The primary aim of the TTIP, for instance, is not to reduce trade tariffs, as these are already at minimal levels, but rather to reduce any ‘barriers’ to corporate profit maximisation: labour laws, digital privacy laws, environmental protections, food safety standards and financial regulations. The TTIP could make it illegal for governments to stop commercial banks from engaging in securities trading, which was one of the main causes of the 2008 financial crisis. It will also prevent governments from limiting the size of banks, and will prohibit the proposed Robin Hood tax on financial transactions – two measures that are considered essential to preventing another financial crisis. And perhaps most worryingly of all, it will restrict governments from limiting the extraction and consumption of fossil fuels. If it is passed, elected politicians will find themselves stripped of the power to defend the interests of their people and the planet against economic crisis and climate change.

  What is also worrying is that we only know about these provisions because of whistle-blowers who have leaked draft chapters of the TTIP to the public. The rest of the agreement remains shrouded in secrecy. Only the negotiators – which include 605 corporate representatives – have full access. The same applies to the TPP. After a number of draft chapters were leaked, the full text was finally published at the end of 2015 – and the results are worse than many expected. The TPP will allow corporations to strike down regulations on food safety, health and the environment, roll back Wall Street reforms and seriously curtail Internet freedoms (it includes much of the text of SOPA, a controversial bill rejected by the US Congress after heavy pressure from civil society). It will also extend the duration of monopoly patents – even for life-saving medicines and seeds.

  These treaties amount to something like a corporate coup d’état on an international scale. They create an avenue for extraterritorial legislation that bypasses national parliaments and any form of democratic discussion, pouring scorn on the idea of elected government. In this sense, the ideology of ‘free trade’ overplays its own hand and exposes itself as farce. The FTAs make it clear that free trade was never meant to be about freedom in the first place. Indeed, the very things that do promote real human freedoms – such as the rights of workers to organise, equal access to decent public services and safeguards for a healthy environment – are cast as somehow anti-democratic, or even totalitarian. These freedoms are reframed as ‘red tape’ or as ‘barriers’, even when, as is almost always the case, they have been won by popular grassroots movements exercising democratic franchise. In this sense, democracy itself is targeted, bizarrely, as anti-democratic, inasmuch as it grants voters control over the economic policies that affect their lives.

  A Virtual Senate

  Under the banner of free trade, the world has been redesigned to facilitate the rapid flow of goods. We can see it happening in real time – our ports grow larger and cargo ships chug across the seas in ever greater numbers, stacked high with containers carrying everything from toothbrushes to pomegranates. Finding anything made or even grown locally is often rare to the point of being special. The global flow of goods is an intimate part of our everyday lives. But there is another flow that liberalisation has unleashed, one that is much less known, for it is almost impossible to see: money. If the flow of goods has eroded democratic sovereignty around the world, the flow of
money takes this process to another level altogether.

  The Bretton Woods system originally designed by Keynes was intended to grant states the power to control the flow of capital across their borders. In other words, states could decide the terms by which foreign investors were allowed to send capital in to set up businesses or buy up shares of local companies. And if those investors wanted to pull their money out, they had to go through a rigorous application process. This was considered crucial to protecting economic stability. When an economy takes a downturn for some reason, an investor’s first impulse is to pull their money out and send it somewhere safer. When this happens on a large scale, it drains the economy of much-needed capital, and only makes the problem worse. Slight downturns can become full-blown crises when investors flee en masse. Keynes’s system allowed countries to impose ‘capital controls’ that prevented this from happening.

  But free-trade reforms have gradually dismantled these capital controls, and investors and lenders have gained the ability to send massive amounts of capital around the world at lightning speed, putting money in and pulling it out wherever and whenever they please. For poor economies with not much capital base, this poses a serious danger, for even a little bit of unexpected capital flight can spin the economy into crisis. But it also has a more insidious effect. Abolishing capital controls has transferred an enormous amount of power to international investors. Think about it: if you are an investor – and assuming all you care about is profit – you’re going to channel your money into countries with what are euphemistically referred to as ‘business-friendly’ measures like low wages, low taxes, cheap resources, and so on. If you happen to be invested in a country whose government suddenly decides to increase wages and taxes, or decides to regulate waste and pollution, thus reducing your profit margin, then you will quickly pull your money out and send it somewhere else. In the past it wasn’t so easy. You would have had to explain yourself to the government, and pay fees to get your money out. But these days there are few if any barriers.