Transcript No Slide Title

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
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Market Structuring Role
The 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
Market Structuring Role
Specific 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
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 nontariff barriers to trade and unnecessary
Increase Foreign Direct Investment (FDI)
Rise above the politics of place
Free Trade Regime
Mechanisms
Eliminate local requirements for contracting
Limit purchasing criteria to quality and quantity
Eliminate practices that favor public provision
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.
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

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

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.
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

Preemption of
Legislative Authority
Harmonization
Precautionary Principle
The choice of mechanism or law must be the
“least trade restrictive”

US Laws/Courts
Irrelevant
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
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
Methanex v. US
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
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
UPS v. Canada
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.
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
Traditional Government
Services Liberalized by GATS
Business
Construction
Distribution
Educational
Environmental
Health
Tourism
Recreational
Cultural
Transport
Market Structuring
Role 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
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
Metalclad v. Mexico
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
Resulting Challenge
Metalclad claimed:
Expropriation of investment
Unfair treatment
Award:
The full cost of the completed building $16.8 million US
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
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

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.