Privatization, Free Trade and the Erosion of Government Authority

1
Privatization, Free Trade and the Erosion of
Government Authority

• Jennifer Gerbasi
• Presented to
• Economic Policy Institute Washington, D.C.
• April 2003
• Overview
• Market Structuring Role of Local Government
• Democratic Deficit Created by Free Trade
  Agreements
• Implications for Privatization

Cornell University, 305 West Sibley Hall, Ithaca,
NY 14853 607/255-6647 jcg28_at_cornell.edu
2
Market Structuring RoleThe Subtext

• Government needs to actively shape the market
• Government sets the proconditions and
  presuppositions of markets
• Define property rights
• Create a framework for bargaining
• Balance public and private interests
• Respect a process for dispute resolution

3
Market Structuring RoleSpecific to Privatization

• Privatization requires government intervention
  into the administration of markets undermines
  market independence
• Ensure competition, and attention to public
  values
• The contract negotiation by the government is key
• Monitoring, reliability, quality
• Access, process transparency, public
  participation
• Government is the primary actor in privatization

4
Free Trade Regime Goals

• Inhibit government manipulation of the market
• Perceived barriers to the flow of money and goods
• Rely on market disciplines to make businesses
  efficient
• Regulations, guidelines and rules are viewed as
  non-tariff barriers to trade and unnecessary
• Increase Foreign Direct Investment (FDI)
• Rise above the politics of place

5
Free Trade Regime Mechanisms

• Eliminate local requirements for contracting
• Limit purchasing criteria to quality and quantity
• Eliminate practices that favor public provision

6
Recent Trade Agreements

• North American Free Trade Agreement (1994)
• New Investor Rights - Chapter 11
• World Trade Organization (1995)
• Binding/Financial Penalties
• General Agreement on Trade in Services (1996)
• Liberalizes Services
• Free Trade Area of the Americas
• Extends the above to all 34 north, central and
  south American countries excluding Cuba.

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FTAs Erode State and Local Government Authority

• Replacing democratic voice and participation with
  enhanced investor rights
• Change in property rights limits the framework
  for bargaining and security in contract
  negotiations
• Limiting the expression of collective preference
  through state and local legislation
• Undermining judicial authority by substituting
  private tribunals for the public courts

8
Investor rights
?

• Foreign Investors are on par with nations
• Investors
• Enforce treaty obligations in investor-state
  disputes that traditionally were nation-nation
• Do not need the approval of their home nation
• Comment on Proposed Legislation
• Defined
• An investor is any person or entity with a
  financial interest in the property including
  individual shareholders and lenders

9
Investor Property Rights
?

• Under free trade agreements property includes
• market share
• market access
• future profits
• Compensation could be awarded when a regulation
  interferes substantially with the enjoyment of
  property
• Not considered property in the US.

10
Partial Takings

• US companies would not get compensation if
• Owners equally impacted
• Other uses of the property
• Rationally related to a legitimate public purpose
  
• Compensated only for
• physical occupation or
• Close to 100 of the property value was lost
• Mexico customarily subjugates private rights to
  the public good

11
Preemption of Legislative Authority
?

• Harmonization
• Precautionary Principle
• The choice of mechanism or law must be the least
  trade restrictive

12
US Laws/CourtsIrrelevant
?

• Foreign investors can challenge US laws in
  secretive international tribunals
• The federal government is a party
• The state or locality is not privy
• The investor and country choose
• the law (usually international)
• No deference is given to precedence in
• the national courts or previous tribunals

13
Democratic Deficit

• No effective mechanism for citizen input/debate
• Citizen voice shared by foreign investors
• Investor needs placed above public values and
  accountability
• Government action can be
• interpreted as a barrier to trade
• Tribunals preempt legislation and court system

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Methanex v. US
Example 1

• Facts
• California well water was contaminated
• Studies showed it was MTBE
• It is used to make gas burn cleaner
• MTBE is carcinogenic
• There are substitutes
• Government Reaction
• Courts award 50 million to municipalities for
  ground water contamination
• California banned its use as of 2003

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Resulting NAFTA Challenge

• Canadian manufacturer claims
• Loss of Profit/Market Share
• Discrimination in favor of domestic products
• Other countries find no leakages
• California should enforce LUST laws more
  stringently rather than ban MTBE
• Damages requested
• 970 million US

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UPS v. Canada
Example 2

• Facts
• The Canadian Royal Post delivers parcels on
  letter routes.
• The government owned corporation parallels the US
  Postal Service
• Government Action
• No new action. Traditional role.

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Resulting Challenge

• UPS, a United States corporation, claims
• This constitutes an unfair cross-subsidy
• Public is competing unfairly with the private
  firm
• Damages Requested
• Equal access to letter carriers or
• Cash awards equal in value to the subsidy

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Traditional Government Services Liberalized by
GATS

• Business
• Construction
• Distribution
• Educational
• Environmental

• Health
• Tourism
• Recreational
• Cultural
• Transport

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Market StructuringRole Threatened

• Subsidies to government services must be extended
  to foreign investors
• Zoning may be challenged
• Licensing may be harmonized
• No residency requirements
• No performance requirements
• Bonds may be prohibited
• Tax revenues may be affected

20
Free Trade Agreements Create a Governance Deficit

• Need a balance between governance and economic
  development goals.
• Market solutions to public goods require
  government intervention
• Free trade agreements strip state and local
  governments of that authority

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Metalclad v. Mexico
Example 3

• Facts
• Metalclad got Federal and Regional government
  approvals to build a toxic waste processing plant
• The EIS said the ground water would be affected
• Government response
• The local government denied permit
• The area was designated a nature preserve

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Resulting Challenge

• Metalclad claimed
• Expropriation of investment
• Unfair treatment
• Award
• The full cost of the completed building -
• 16.8 million US

Decided
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Free Trade Agreements Erode Local and State
Government Authority.

• If you are worried over state sovereignty, my
  advice to you is Get over it.
• US Trade Representative Negotiator David Price

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FTAs Erode State and Local Government Authority

• 1. Foreign Investors on par with Nations
• 2. Redefinition of takings to include regulatory
  takings and provide compensation for loss of
  potential profits and market share.
• 3. Substitution of private tribunals for public
  courts
• 4. Preemption of sub-national legislative
  authority

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• The Loewen Group, Inc. v. United States challenge
  is an example of this threat. Loewen, a Canadian
  funeral home, has been granted standing by a
  NAFTA tribunal to sue the United States for
  requiring a bond before the appeals process.
  Loewen was found guilty of illegal competitive
  tactics and was fined 400 million punitive
  damages award in the Mississippi Supreme Court.
  Mississippi requires that appellants post a bond
  (equal to 125) for the award that would be due
  if the appeal fails. Loewen settled the case for
  175 million. Still dissatisfied with the
  outcome, in 1998 Loewen turned to the NAFTA
  process for relief. Loewen is claiming that the
  actions of the awarding jury and the court have
  been influenced by their status as a foreign
  company, and therefore are challenging the
  damages award. If Loewen is successful, there
  will be broad implications for all U.S. courts.
  If the NAFTA tribunal protects Loewen by
  declaring the Mississippi law invalid, then the
  impact of NAFTA will be that
• International Institute for Sustainable
  Development, 2001. Public Rights, Public
  Problems A guide to NAFTA's controversial
  chapter on investor rights. World Wildlife Fund,
  Canada.
• investors will not be required to exhaust
  remedies before going to arbitration,
• investors can go through the court system and
  then challenge it if not satisfied,
• the court decisions will not be given weight by
  the tribunal or considered in their
  deliberations,
• no civil dispute with a foreign investor can be
  considered settled until a tribunal has also
  considered it.
• The U.S. court system could be circumvented
  entirely. These are not changes to the treaty,
  but a lenient interpretation that mirrors the
  lack of deference integral to the treaty. The
  way the treaty is written the arbitration panels
  are under no requirement to give the court or the
  state laws deference. A single foreign
  shareholder, without the consent of the company
  or country of origin, could claim an investment
  loss and challenge the legitimacy of the American
  court system. The courts would lose their
  ability to interpret the law for foreign cases.
  There would be two standards for disputes, one
  for foreigners set by NAFTA, and the traditional
  U.S. law for domestic companies and investors.