Free Trade Agreements Must Protect Rule of Law Equally

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Posted by Alexander Hendrie on Friday, January 22nd, 2016, 12:19 PM PERMALINK

Within the thousands upon thousands of pages of the Trans-Pacific Partnership trade agreement exists an important provision known as investor-state dispute settlement (ISDS). ISDS was created as a “neutral, international arbitration procedure,” and was designed to act as a safeguard to ensure that countries do not skirt their responsibilities toward free, open trade.

This procedure helps ensure rule of law is protected and enforced in the agreement by allowing companies investing in a foreign country to seek redress before an impartial court.

Unfortunately, as the TPP is written, this important protection is not available to all. Based on “public health,” the Obama administration demanded tobacco companies be excluded from receiving due process rights under ISDS.

In reality, the exclusion has nothing to do with public health at all – it could also exclude electronic cigarette and vapor products, which are increasingly used as smoking cessation tools for traditional cigarette users. Instead, the “carve-out,” as it is known, has more to do with the administration’s opposition to the tobacco industry.

The administration’s insistence on including this provision in TPP probably comes at the expense of other provisions that actual benefit American industries and jobs, given they would have prioritized this over issues that actual benefit Americans.

Effectively this carve-out sets the precedent that nation-states have the authority to exempt entire industries from access to legal redress that should be guaranteed to all. While the industry may be unpopular amongst some, it is perfectly legal and so there is little justification for this carve-out.

Perhaps worse, this carve-out is exceptionally vague, and therefore open to abuse. Within the text, there is no qualifying standard that countries must meet to exclude the tobacco industry. Instead the provision is largely self-executing, meaning a country can impose protectionist regulations as long as they are somewhat related to production or consumption of the product.

Ideally, free trade should be about eliminating barriers to free global commerce by removing discriminatory tariffs, trade quotas, and regulations.

Regrettably, the carve-out is not the only provision that takes the TPP in the wrong direction. For one, there are very real concerns that weak IP protections for biopharmaceuticals will impose harsh new costs that reduce medical innovation and access to important new medicines. In addition, the exclusion of the financial services industry from rules protecting data may drastically reduce their ability to safeguard vital, sensitive data, while imposing unnecessary costs on American business. Finally, the U.S. exportation of labor regulations within the TPP could very well increase the costs of trade, and again hurt U.S. jobs and business.

Even with these problems, the agreement is not all doom and gloom. The TPP contains as many as 18,000 tax cuts on American exports, and over the next decade the agreement cuts $15 billion in tariffs – taxes on trade – which will significantly reduce government interference in international commerce. Real income benefits to the U.S. economy could be as high as $77 billion a year, according to an estimate by the Peterson Institute for International Economics. 

For free trade to work, there simply cannot be discrimination that denies investors due process protections based solely on the political ideology of one country, or the unpopularity of a product. The ISDS tobacco carve-out has no place in a true free trade agreement.

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