Regulatory Harmonization: A Critical New Front in the

Battle for Sensible Safeguards

Lori WallachPublic Citizen’s Global Trade Watch

Coalition for Sensible SafeguardsApril 2013

“Transatlantic Trade and Investment Partnership” = TAFTA

• February 11, 2013: Final Report of the U.S.-EU High Level Working Group on Jobs and Growth announces decision to launch. http://www.ustr.gov/sites/default/files/02132013%20FINAL%20HLWG%20REPORT.pdf

• Official Notice of Intent to launch negotiations sent to Congress on March 20. Formal negotiations can start 90 days later, on June 18.

• Press reports mention initial meetings starting as soon as May. (Work on terms of reference, etc. will probably be done through U.S.-EU High Level Working Group mechanisms. This is a process that requires our attention…)

• Announced timeline is two years to completion.

Focus of TAFTA Negotiations

• U.S.-EU trade tariffs are low. Negotiation will focus on "regulatory issues and non-tariff trade barriers". What does that mean?

• For a preview of likely TAFTA agenda, see TPP – the Trans-Pacific Partnership Agreement: 29 chapters, 5 cover traditional trade matters. The others largely cover “behind the border” regulatory issues.

• TAFTA is a longstanding project of the Trans-Atlantic Business Dialogue (TABD) recently renamed Transatlantic Business Council (TBC). TABD convened in 1995 by U.S. Dept of Commerce and Euro Commission as official dialogue between U.S. & EU business leaders & U.S. cabinet secretaries and EU commissioners.

• Goal of TABD has been elimination of “trade irritants” and “regulatory convergence”

• Some TBC members: Accenture, AIG, AT&T, Audi AG, BASF, BDO, British American Tobacco, British Petroleum, BT, Cisco Systems, Deloitte, Deutsche Bank, Ernst & Young, Experian, First Data, Ford Motor Co., GE, Grant Thornton, IBM, Intel,, Johnson Controls, Johnson & Johnson, KPMG, Lilly, Merck & Co., Microsoft, Oracle, Pfizer, Philips Electronics, Phillip Morris Intl., PwC, Qualcomm, SAP, Siemens, Statoil,, Texas Instruments, Thyssen Krupp, TOTAL, Verisign, Verizon, Xerox

TAFTA Code Word Key• “Trade Irritant” see also “non-tariff barrier”

Domestic regulatory policies that limit U.S. and EU businesses access to the other market. Some examples that will be discussed in TAFTA: Elements of U.S. financial reregulation, such as Volcker Rule U.S. system of state-by-state insurance regulation Food: EU bans on ractopamine and chlorine rinses; EU GMO

labeling/segregation; EU ban on artificial beef growth hormone EU chemical policy REACH Aspects of EU climate directive EU consumer privacy safe harbors policy

• “Legacy issue”Trade irritants that have not been settled, see above…

• “Behind the border”Non-tariff policies that have traditionally been under the jurisdiction of national and state legislatures and regulatory bodies

• “Regulatory convergence” Standardizing regulatory policies and standard-setting procedures

WWII-1990s: Bretton Woods” Era

The Bretton Woods Era

GATT 1947

• Trade in goods• Tariffs and

quotas

IMF

• Gold standard• Short-term trade floats

World Bank

• Finance rebuilding of

Europe & Japan

The Hijacking of U.S. “Trade” Agreements…

(early ‘90s to present day)

(early 1990s to present day)

Corporate Globalization Era

WTO (binding dispute

settlement)

NAFTA, CAFTA,

“Free Trade”Agreements

GATT

“Trade” Agreements become delivery mechanisms for package of “neoliberal” policies Cut, weaken or harmonize to global

norms food, product, other standards relating to consumer and enviro protections, inspection, labeling standards Mutual Recognition/Free Passage, International Standards, Equivalence, Regulatory Convergence

Privatize, deregulate services In U.S., issue is deregulation. Among sectors covered: banking, securities, insurance, transportation, services incidental to energy, hospitals, education. See http://www.citizen.org/trade/forms/gats_search.cfm for searchable database.

Extensive intellectual property rights20 year monopoly patents covering wide range of subject matter: drugs/testing data, climate/energy technologies. Extended copyright protections. Signatories required to put CRIMINAL sanctions for TRIPS/FTA IP violations in their domestic law to be in compliance with pacts.

Deregulate investment No approvals of foreign ownership, conditions

New foreign investor privilegesRight to compensation for “regulatory takings”, guaranteed minimum standard of treatment (regulatory freeze). Private corporations/investors elevated to equal status with signatory government to privately enforce new rights via suits before international tribunals of private-sector lawyers empowered to order governments to pay unlimited compensation to investors.

Financial liberalizationNo capital controls, speculation taxes or limits on free flows

‘Commodification of the commons’ Establish tradable units of natural resources, water, human genes, biodiversity

Food traded like any other good Supply management, price stability measures banned

Gov’t procurement preferences, labor, green specs limited

It’s not really about “trade”, but a system of enforceable global governance that is not designed for modification by those who will live the results

What is different with TAFTA and TPP is the extent of “behind the border” agenda

Typical boilerplate: “Each Member shall ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the annexed Agreements.” –Art. XVI-4, Agt. Establishing the WTO (Annexed agreement refers to 16 major “Uruguay Round” agreements. Only a minority of them focus on trade per se.)

These rules are enforced by binding dispute resolution via foreign tribunals with ruling enforced by indefinite trade sanctions; No due process; No outside appeal. Countries must gut laws ruled against or trade sanctions imposed. In FTAs, including planned for TAFTA, also private investor enforcement - U.S. taxpayers must compensate foreign corporations.

Permanence – no changes w/o consensus of all signatory countries.

Starkly different from past of international trade between countries.

Some WTO Attacks Against Domestic Laws

In 91% of cases, law judged to be a WTO violation The WTO Has Ruled Against:

Thai cigarette regulations; U.S. ban on candy, sweet ciggies designed to target kids

India’s constitutional ban against monopoly patenting of life forms and medicines

European genetically modified organism (GMO) regulatory policies

European ban on artificial growth hormones

U.S. Clean Air Act Regs on gasoline cleanliness weakened after successful WTO challenge

U.S. Endangered Species Act regs. on sea turtle protection from shrimp fishing

U.S. Marine Mammal Protection Act - the law is weakened to allow sales of tuna caught using non-dolphin-safe nets – NOW DOLPHIN-SAFE LABEL HAS BEEN RULED AGAINST

Australian and Japanese invasive species protections; United States also weakens invasive species regulations to avoid a WTO challenge

U.S. country-of-origin meat labels

Investor Privileges & Investor-State Dispute Resolution

November 2012: Eli Lilly & Company initiates investor-state dispute resolution (ISDR) proceedings under NAFTA.

Eli Lilly demands $100M compensation from Canadian government (aka Canadian taxpayers) for claimed violations of NAFTA investor protections after Canadian courts invalidate a 1996 patent on an ADHD drug Strattera because the medicine failed to meet promises made to obtain the patent, which would have run until 2016.

$100M compensation demand is over Strattera patent revocation. BUT, most of Eli Lilly’s ISDR “Notice of Intent” is a broader attack Canada’s standard for granting patents – specifically the “utility” standard Canada uses called the “promise doctrine.” Notice also mentions other meds for which Eli Lilly is considering similar NAFTA ISDR claims

This is the first attempt by a patent-holding pharmaceutical corp. to use U.S. “trade” agreement investor privileges as a tool to push for greater monopoly patent protections - which increase cost of medicines for consumers and governments.

• Case is not in Canadian court or even under the NAFTA IP agreement. Claims and compensation demand are about violating investor rights established in NAFTA’s investor rights chapter, despite the case being all about patents.

• Expansive substantive investor rights extend beyond domestic property rights defined by domestic laws, courts and beyond non-discrimination. Foreign firms provided greater substantive and procedural rights than domestic firms and investors.

• Foreign firms empowered to bring governments before tribunals of private sector lawyers to demand unlimited taxpayer compensation related to NON-DISCRIMINATORY health, safety, enviro, land use, etc. policies.

Eli Lilly’s specific claims: A denial of a medicine patent violates investment rules because it is:• an Expropriation of the property rights granted to Eli Lilly by NAFTA invest chap• a violation of the Minimum Standard of Treatment guaranteed for foreign

investors by NAFTA invest chap (Eli Lilly is a US corporation that wholly owns Eli Lilly Canada)

• Discrimination (in favor of generic firms!) in violation of NAFTA

The case will be heard by an investor-state dispute resolution (ISDR) tribunal

- 3 private sector attorneys, unaccountable to any electorate, many of whom rotate between being “judges” & bringing cases for corps against govts. (See Profiting from Injustice http://corporateeurope.org/publications/profiting-from-injustice)

• Allowing lawyers to rotate between roles as arbitrators and advocates for investors would be unethical for judges.

• Creates inherent conflicts of interest – and limited conflict of interest rules set at ICSID, eg. are vague, not systematically enforced. Indeed, specific conflicts of interest permitted: Vivendi v. Argentina tribunal

- Tribunals operate behind closed doors - lack basic due process

- Unlike domestic judges, tribunalists paid by hour. Governments usually ordered by tribunal to pay for share of tribunal costs, even if case dismissed

• Incentive for cases to go on forever• Costs chill gov’t action. Filing alone is serious threat: Average cost is $8M;

one case now underway legal costs to gov’t more than $50M to a US firm

Absolute tribunal discretion to set damages, compound interest, allocate costs • No limit to amount of money tribunals can order govts to pay corps/investors• Compound interest starting from date of violation is new norm (compound

interest ordered by tribunal doubles Occidental v. Ecuador $1.7B award to $3B plus

Rulings not bound by precedent. No outside appeal. Annulment for limited errors.

Nationality-shopping: Philip Morris International plain packaging cases • PMI moved head office of Australian subsidiary to Hong Kong shortly before it

ISDR attacked Australia under HK-Aus Bilateral Investment Treaty (BIT)• Claimed to be Swiss-based firm to launch ISDR attack against Uruguay under

Uruguay-Swiss BIT. • Described itself as a US firm in 2010 USTR submission pro-ISDR in the TPP.

When foreign investor wins, government must pay amount of taxpayer money decided by the tribunal as compensation for the offending policy. Investor-state challenges have been launched against wide array of consumer, health and safety policies, environmental and land-use laws, regulatory permits, financial regs & other public interest polices that investors allege undermine “expected future profits.” 

• Under U.S. FTAs and BITs, private investors have already pocketed over $3B in taxpayer money via ISDR cases, while more than $15B remains in pending claims.

• Canada already has paid more than $140 million to foreign investors after NAFTA investor-state attacks on energy, timber and toxics policies.

• More info: “Table of Foreign Investor-State Cases and Claims under NAFTA and Other U.S. Trade Deals,” Public Citizen memo, June 2012. Available at: http://www.citizen.org/documents/investor-state-chart.pdf

Investor-State Dispute Resolution (ISDR) Tribunals–part 2

How can a foreign corporation like Eli Lilly drag a sovereign gov’t to a foreign tribunal comprised of private-sector attorneys to demand taxpayer compensation over a county’s medicine patent policy?  • FTA investment chapters formally submit gov’ts to jurisdiction of investment arbitration

tribunals operating under rules of World Bank’s ICSID (International Centre for Settlement of Investment Disputes) and or UN’s UNCITRAL (United Nations Commission on International Trade Law) for investor-state enforcement.

• Foreign corporations elevated to the level of sovereign governments - uniquely empowered to skirt domestic laws/courts and privately enforce the terms of a public treaty by directly challenging governments’ policies before foreign tribunals.

• ISDR ostensibly established to provide foreign investors a venue to obtain compensation when factory/ land was expropriated by a gov’t that did not have a reliable domestic court system. So, why is it being included in TAFTA?

• Instead, now ISDR has birthed an entire industry of specialized lawyers and tribunalists (many serving both roles) and specialized equity funds that finance what is lucrative business of raiding government treasuries.

• The number of ISDR cases has soared over last decade. Last year cumulative number

of launched investor-state cases was nine times cumulative investor-state caseload in 2000, even though treaties with investor-state provisions have existed since the 1950s.

Volume of Investor-State Cases Explode since 2000

Source: ICSID case list, available at: http://icsid.worldbank.org/

US has had relatively few cases filed against us, because our agreements are with countries that do not have major investment here. All of the cases in which U.S. laws have been attacked involve Canada, the only capital exporting country we have ISDR with… A TAFTA with ISDR is extremely dangerous for all varieties of domestic regulatory policy.

Some NAFTA and CAFTA Investor-State Cases

Over $400 million in public funds paid to investors w/o Mobil case

Metalclad v. Mexico - toxic waste & land use

Ethyl v. Canada – Chemical ban/public health

Pope & Talbot v. Canada – timber policy

Loewen v. U.S. - U.S. civil court judgment

Exxon-Mobil v. Canada - Canadian offshore oil/gas exploration

Plus: ISDR attacks on water systems, land use, mining policy and more

Some NAFTA, CAFTA, FTA Environmental Cases

INVESTOR WINS AT TRIBUNAL, IS PAID Exxon-Mobil/ Murphy Oil v. Canada: non-discriminatory provincial extractive

industry R&D fee = performance requirement Metalclad v. Mexico: toxic waste treatment facility, state-level zoning, permits =

regulatory takings violation S.D. Myers v, Canada: MEA enforcement. Federal-level Basel Convention

enforcement/PCB toxic trade ban = discrimination, MST violation Pope & Talbot v. Canada: timber policy, grumpy provincial gov’t official = MST

violation

INVESTOR PAID IN SETTLEMENT - CHILLING Ethyl v. Canada: Canada reverses nation-wide chemical ban, corp. paid $13 M for

lost profits while ban was in effect – US states ban same chemical, MMT a gasoline additive

Abitibi-Bowater v. Canada: Water and timber rights. Firm closes, lays off employees. Canadian province withdraws timber, water concessions that were conditioned on continued operation/use. National government settles case – corp. paid $122 million

USE OF ISDR FOR LOBBYING, THREAT TO OBTAIN REGULATORY ACTION, INACTION Renco v. Peru: REOPENING POLLUTING SMELTER - filing used to leverage new

permit grant Pac Rim v. El Salvador: MINING - years of ISDR in very politicized case stall out

passage of ban on mineral mining; tribunal voids CAFTA claim, continues same claims based on domestic law

Commerce Group v. El Salv. MINING - years of ISDR stall out passage of ban on mineral mining; tribunal voids CAFTA claim, corp. allowed to file annulment year after deadline ran out

Also, Chevron Ecuador Amazon contamination case under Bilateral Investment Treaty…

U.S. LOSES ON MERITS, DODGES PAYMENT Loewen v. U.S.: U.S. civil court judgment considered covered gov’t action in

contract fight of 2 private firms. Canadian firm reorganized as US corp., loses foreign status before collecting

He who writes the rules, rules…“Fast Track” negotiation and approval system delegates away Congress’s exclusive constitutional authority over trade policy. Established in 70s when trade agreements where about trade, but alarming mismatch between current scope and process

U.S. trade advisory system empowers 600 corporate advisors to set U.S. agenda, have access to negotiating texts, negotiators.

Negotiations conducted by USTR, which sees its “constituency” as U.S. industry seeking access, rights in other countries

The focus of entire system is on facilitating commerce, not on meeting human needs for food security, access to essential services and medicines, etc. or strong consumer or environmental protections. Indeed, some rules explicitly constrain governments’ policy space to meet such goals.

Specific Instruments of Regulatory Roll Back

• Investor privileges allow attack if “regulatory environment” - even just changes to existing regs - do not conform with investors’ expectations

• Sector-specific rules to which existing, future domestic policies must conform. Failure to do so leads to challenge in trade tribunals, sanctions

• Obligations to eliminate regulatory differences:

- Harmonize to a common standard/ accept int’l standards

- Determine other countries’ regulatory systems as equivalent

- Agree on mutual recognition (often of conformity assessment)

• “Regulatory Convergence” which is code for governments using similar cost-benefit analyses of proposed regulations, conducting regular review of existing regulations

• Notification must list non-conforming policies, advance notice to partner-gov’t trade agencies of prospective regs or policies or changes with right to comment. Domestically, this obligation gets written into law as a requirement to make a policy the “least trade restrictive” or to take into consideration trade compliance

Sector-specific rules to which existing, future domestic policies must conform – not just “equal treatment” of domestic and foreign goods, servicesEXAMPLES FROM PAST AGREEMENTS:

• Domestic policies for patent durations, patentability, data exclusivity, least trade restrictive, copyrights, and enforcement of IP must meet agt. terms (This is where backdoor SOPA issue, eliminating policy space to stop drug patent evergreening, access to climate technology comes in)

• Certain forms of service-sector regulation simply forbidden unless an exception is taken - even if domestic and foreign services and firms treated the same: regulatory bans, needs-testing, size limits. EU pushing new disciplines on non-market access domestic regulation relating to licensing, technical standards and professional qualifications and a “necessity” test.

• Only food or product safety standards conforming to international standards or those that are less trade restrictive (ie weaker) than int’l standards are presumed not to create unnecessary obstacles to trade. Domestic standards that do not conform to int’l standards must satisfy a battery of tests: are they based on risk assessment? “sound science? Requirement is a ceiling, with no floor.

PRECAUTIONARY PRINCIPLE-BASED STANDARDS NOT ALLOWED

WTO General Agreement on Trade in Services Article XVI - Market Access …2. In sectors where market-access commitments are undertaken, the measures which a Member shall not maintain or adopt either on the basis of a regional subdivision or on the basis of its entire territory, unless otherwise specified in its Schedule, are defined as: (a) limitations on the number of service suppliers whether in the form of numerical quotas, monopolies, exclusive service suppliers or the requirements of an economic needs test; (b) limitations on the total value of service transactions or assets in the form of numerical quotas or the requirement of an economic needs test; (c) limitations on the total number of service operations or on the total quantity of service output expressed in terms of designated numerical units in the form of quotas or the requirement of an economic needs test;… (e) measures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service; and…

WTO Agreement on Sanitary and Phytosanitary Standards Article 3 Harmonization

1. To harmonize sanitary and phytosanitary measures on as wide a basis as possible, Members shall base their sanitary or phytosanitary measures on international standards, guidelines or recommendations, where they exist, except as otherwise provided for in this Agreement, and in particular in paragraph 3.

2. Sanitary or phytosanitary measures which conform to international standards, guidelines or recommendations shall be deemed to be necessary to protect human, animal or plant life or health, and presumed to be consistent with the relevant provisions of this Agreement and of GATT 1994.

3. Members may introduce or maintain sanitary or phytosanitary measures which result in a higher level of sanitary or phytosanitary protection than would be achieved by measures based on the relevant international standards, guidelines or recommendations, if there is a scientific justification, or as a consequence of the level of sanitary or phytosanitary protection a Member determines to be appropriate in accordance with the relevant provisions of paragraphs 1 through 8 of Article 5.(2) [RISK ASSESSMENT, SCIENTIFIC JUSTIFICATION, ETC] Notwithstanding the above, all measures which result in a level of sanitary or phytosanitary protection different from that which would be achieved by measures based on international standards, guidelines or recommendations shall not be inconsistent with any other provision of this Agreement.

Obligations to eliminate regulatory differences

• HarmonizationCommittees set up in agreement to negotiate common uniform standards that will be adopted by the countries domestically. Committees are comprised of government agency officials meeting behind closed doors. In NAFTA and WTO, most stages in this process have not been done according to APA. Alternatively, countries can agree to accept an existing int’l standard and adopt it domestically.

• EquivalenceGovernments are required to determine whether significantly different—and possibly less protective—regulatory systems and standards in other countries provide “equivalent” levels of protection as domestic regulatory systems. Domestic law stays the same, but imports are allowed if they meat the exporting country’s standards. Whole regulatory system is deemed equivalent, so we rely on other country’s enforcement. 

• Mutual Recognition (often of conformity assessment)Agreement to allow other countries’ agencies, or private sector firms under contract, determine if products meet the others’ standards.

WTO Agreement on Sanitary and Phytosanitary Standards Article 4  Equivalence

1. Members shall accept the sanitary or phytosanitary measures of other Members as equivalent, even if these measures differ from their own or from those used by other Members trading in the same product, if the exporting Member objectively demonstrates to the importing Member that its measures achieve the importing Member's appropriate level of sanitary or phytosanitary protection. For this purpose, reasonable access shall be given, upon request, to the importing Member for inspection, testing and other relevant procedures.

Failure to determine equivalence can result in a challenge…

International Standard-Setting Bodies

• International standards developed in industry-only standard-setting institutions that are closed to government or public participation or outside scrutiny or input have the same status as standards developed by wholly governmental institutions or quasi-governmental standard-setting institutions.

• Two such standard-setting institutions identified in WTO, NAFTA are the Codex Alimentarius in Rome and the ISO in Geneva.

• Scores of other such bodies – see HARMONIZATION HANDBOOK: Accountable Governance in the Era of Globalization: the WTO, NAFTA, and International Harmonization of Standards http://www.citizen.org/documents/BCKGRNDforpdf.PDF

My personal “favorite”: CHIC, which is the cosmetic industry group called Cosmetics Harmonization & International Cooperation

So, if elements of this mess already exist, what is different with these negotiations?

1. WTO, NAFTA etc. were “state of the art” corporate wish-list agreements 20 years ago, since then both U.S. and EU FTAs have gone much further:- WTO, our current terms with EU, had “bottom up” rules for services,

procurement, no investor-state, etc. - IP, investor rights terms much less onerous- Mandatory harmonization of standards in later agreements

2. Huge amount of investment, trade between U.S. and EU. So, rules shaping this relationship will have enormous real consequences here – and globally

3. The core focus is on behind-the-border deregulation/regulatory “convergence” with projected gain premised on “efficiencies” obtained from eliminating regulatory differences.

- Openly does away with notion of consumer preferences, differences in policy that are a natural outcome of democratic decision-making

- Based on anti-regulatory notions of economic gains from deregulation

And, it’s not just EU residents that stand to lose…

• Downward pressure on those U.S. standards that are more protective of consumers, the environment and undermining of inclusive, open policymaking procedures we have battled for here.

• Massive international pre-emption of state policy space… federal government obligated to enforce obligations on states, so effect is “diplomatically legislating” preemption we successfully stopped in past

• Even if outcome were harmonization down to lower U.S. standards, this would foreclose the policy space here needed to improve our standards. Freeze us in place…

• Enormous threat of investor-state enforcement given EU is a major capital exporter to U.S. , ie many European firms are established here

What can be done…

1. Demands for transparency

2. Terms of reference for negotiations on specific issues (what should be altogether excluded, what should be design of chapters on issues that will be covered.)

3. Opportunities to submit formal comments

4. U.S. initial “offers” on text

5. Coordinating internationally – to monitor and advocate

6. Congressional counter pressure via Senate hearings, sign-on letters of those who have supported FTAs in past

7. Ensuring there is no delegation of congressional authority unless or until terms are set in an agreeable way

Lori Wallach lwallach@citizen.orgDirector, Public Citizen's Global Trade Watch

215 Pennsylvania Ave SE Washington, DC 20003 USA

202-454-5107   fax (1)202-547-7392 

Website: www.tradewatch.org Our blog:  www.EyesOnTrade.org