James Leroy Wilson's blog

Sunday, May 17, 2015

Why even have "trade agreements?"

A major sticking point in the proposed Trans-Pacific Partnership (TPP) trade agreement is the supposed special legal privileges given to multi-national corporations.

The mechanism is called the Investor-State Dispute Settlement (ISDB), and it allows corporations to sue governments.

At first glance, ISDB seems like a bad idea. Obviously, corporations shouldn't have special legal privileges to circumvent a nation’s laws.

On second glance, however, maybe they should…

As the Cato Institute’s Daniel J. Ikenson points out, countries can still legislate, but can’t discriminate when doing so...
The states can ban cigarettes, for example, but not cigarettes “from Indonesia.”
And what if you’re an Indonesian manufacturer of cigarettes, and your product is banned not because they’re cigarettes, but because they’re from Indonesia?

Aren’t trade agreements supposed to prevent that from happening?

One can say that the grievance should be at the State level; that the dispute should be between the Indonesian government and the government that bans its cigarettes.

But here’s the problem…
  • The two countries signed a trade agreement.
  • One country discriminates against the Indonesian cigarette maker in spite of the agreement.
  • Indonesia has the right to file a grievance, but might not do so for totally unrelated diplomatic, security, or other reasons
That means, the Indonesian cigarette manufacturer has a legitimate grievance under the trade agreement, but no legal recourse because of politics. The government may be on the side of the cigarette manufacturer, but its interests are not the same. The government’s interests is power and revenue, whereas the manufacturer’s first interest is its own profitability.  

ISDB gives legitimate victims, such as this Indonesian cigarette-maker, a recourse.

That seems reasonable, but as Ikenson persuasively points out, it’s probably an unnecessary hurdle to pass the TPP.

But that raises the question…

If an aggrieved party, such as our hypothetical Indonesian cigarette-maker, doesn’t have legal recourse under a trade agreement, what’s the purpose of the trade agreement at all?
  • Without a trade agreement, do business in a foreign country at your own risk
  • EVEN WITH a trade agreement, do business in a foreign country at your own risk
How is one preferable to the other?

Every country would, of course, be better off with freer trade. But it shouldn’t take an “agreement” to make that happen.

This underscores why trade agreements are unnecessary. If businesses will be at their own risk in other countries regardless, the only purpose of trade agreements is only to make trade more regulated and less free.

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