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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. - PowerPoint PPT Presentation
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Privatization, Free Trade and the Erosion of
Government Authority
Jennifer GerbasiPresented to
Economic Policy Institute Washington, D.C.April 2003
OverviewMarket Structuring Role of Local GovernmentDemocratic Deficit Created by Free Trade AgreementsImplications for Privatization
Cornell University, 305 West Sibley Hall, Ithaca, NY 14853607/255-6647 * jcg28@cornell.edu
Market Structuring Role
The Subtext Government needs to actively shape the market
Government sets the proconditions and presuppositions of markets Define property rightsCreate a framework for bargainingBalance public and private interestsRespect 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 keyMonitoring, reliability, qualityAccess, process transparency, public participation
Government is the primary actor in privatization
Free Trade Regime Goals
Inhibit government manipulation of the marketPerceived barriers to the flow of money and goodsRely on market disciplines to make businesses
efficientRegulations, guidelines and rules are viewed as
non-tariff 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 AmericasExtends the above to all 34 north, central and south
American countries excluding Cuba.
FTAs Erode State and Local Government
AuthorityReplacing 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 nationComment 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 impactedOther uses of the propertyRationally 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/CourtsIrrelevant
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 MTBEIt is used to make gas burn cleaner MTBE is carcinogenicThere are substitutes
Government Reaction:Courts award $50 million to municipalities for
ground water contaminationCalifornia banned its use as of 2003
Resulting NAFTA Challenge
Canadian manufacturer claims:Loss of Profit/Market ShareDiscrimination in favor of domestic productsOther countries find no leakagesCalifornia 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 StructuringRole 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
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
Metalclad v. Mexico
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 Nations2. 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.
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