Political lobbying undercuts value of trade agreements

Modern trade and investment agreements face a difficult task in balancing out their primary goal of achieving economic liberalization with a competing goal of preserving the ability of governments to engage in domestic policy making.

In recent years, a wide range of trade and investment complaints have been brought, in international tribunals, against domestic regulations, with allegations that what appears on its face to be a measure taken for a legitimate purpose is, in fact, a trade or investment restriction in disguise.

Finding the right balance between the two has been a challenge for the adjudicators who decide these complaints and for the treaty drafters confronted with the controversial aftermath of these decisions.

While there may not be any easy answers to these problems, and someone will always be left unsatisfied with the result, one thing is clear: When political lobbying enters the picture, the outcome will be significantly worse.

As an illustration, let us consider the “tobacco carveout” in the Trans Pacific Partnership, which solves virtually none of the balancing problems that have arisen, while at the same time starting us down a slippery slope that threatens to distract negotiators for decades to come.

Tobacco litigation has long been controversial in the trade regime, and recently two investor-state disputes under investment treaties have brought the issues to new levels of contention. In this regard, Philip Morris challenged tobacco control measures of Australia and Uruguay that, while their effectiveness could be questioned, are difficult to characterize as protectionist, in the sense that there is not an obvious protectionist motive behind these measures.

In response, anti-tobacco groups called for a total exclusion of tobacco from trade agreements, including from tariff reductions. While they did not achieve this in the Trans Pacific Partnership, they were able to get a carveout of tobacco control measures from Trans Pacific Partnership investor-state claims.

The problem with this narrow approach is that it ignores the larger problem and creates new difficulties going forward.

The core of the conflict between trade and investment obligations, on the one hand, and space for domestic policymaking, on the other, is the scope of the obligations. If the international obligation says that domestic regulations must not be protectionist, there is unlikely to be much impact on a government’s ability to regulate.

All regulation is permitted as long as it is not protectionist. By contrast, if the obligation says that domestic regulations may not be arbitrary, as some investment rules appear to do, a wide range of domestic measures may violate international obligations, if for no other reason than careless drafting, not to mention politically influential lobbying.

Of course, even if the obligations are stated so broadly, they can be reined in with an exception that makes clear that measures for legitimate policies are permitted. Such exceptions are a standard part of most trade agreements.

So why not just have an exception of this kind that applies to investor-state dispute settlement (ISDS) in the Trans Pacific Partnership? Why carve out tobacco rather than create a general exception for public health and other policies? Most likely, the answer is politics.

Business groups who support investment obligations prefer to have an open-ended obligation, without any exceptions. This gives them more flexibility to bring claims. On the other side, anti-tobacco groups might have been happy with the broader exception, but they did not have the political influence to get it.

So, rather than try to balance out the different policy goals, the TPP carveout simply balances out the political lobbying. Two groups with strong passion about their issue were each able to get most of what they wanted.

Politically, this compromise works; in terms of policy, however, it makes little sense, and the end result of a tobacco carveout is unfortunate. The overbroad obligations (and lack of a general exception) stay, which is a bad approach to the economic liberalization versus domestic policy balance, and keeps the controversial cases coming.

In addition, the carveout could create a new set of problems for future trade negotiators: Having declared tobacco to be a particularly harmful product, deserving of a special exclusion, what other products might also fall into this category? 40 years ago it might have been butter. How about today? Should we carve out trans fats? Sugar? Bacon?

The Trans Pacific Partnership was a missed opportunity to develop a sensible balance for trade and investment agreements. The tobacco carveout solves nothing — the chances of Philip Morris winning its claims are uncertain anyway — and ignores the larger problem.

Interest groups should have their say, of course. But ultimately we need to look past parochial interests and come up with real solutions.

Simon Lester is a trade policy analyst with the Cato Institute. Send comments to awoods@tribtown.com.