[CTC] Bank Provisions in Pacific Trade Pact Draw Fire

[Arthur Stamoulis]

http://www.wsj.com/articles/bank-provisions-in-pacific-trade-pact-draw-fire-1445972593

Bank Provisions in Pacific Trade Pact Draw Fire
Trans-Pacific Partnership gives financial firms new protection not in previous American free-trade agreements
 
Wall Street Journal
By William Mauldin
October 27, 2015 at 5:21pm
 
The sweeping Pacific trade agreement completed this month <http://www.wsj.com/articles/u-s-reaches-trade-deal-with-11-pacific-nations-1444046867> gives banks an added international legal protection that congressional critics warn could lead to more challenges to Wall Street regulations.
U.S. officials play down the new protection for financial firms, saying the Trans-Pacific Partnership <http://blogs.wsj.com/briefly/2015/10/05/trans-pacific-partnership-at-a-glance-2/> also contains several new legal provisions that limit the ability of banks to challenge American financial rules.
Still, the TPP gives banks a protection that was excluded from previous American free-trade agreements, with language that allows financial institutions a bit more room to sue foreign governments through special arbitration if they can show they weren’t treated in line with basic international standards.

Defenders of the TPP, including U.S. officials, say the language ensures U.S. banks get the full protection of international law, and could help them challenge arbitrary or discriminatory regulations in countries in the trade bloc. The provision, which guarantees banks a “minimum standard of treatment,” is part of a broader overhaul the Obama administration oversaw of international arbitration to prevent corporations from abusing the system in the TPP, known as investor-state dispute settlement.

But critics of Mr. Obama’s trade policy <http://www.wsj.com/articles/senate-democrats-block-debate-on-obamas-fast-track-bill-1431457100>, led by Sen. Elizabeth Warren (D., Mass.), say banks will look for loopholes in the system’s safeguards and will likely use the minimum standard of treatment language to bring a slew challenges outside the U.S. court system.
The banking provisions in the deal “could undermine our financial rules and increase the chances of another crisis,” Ms. Warren said in a statement to The Wall Street Journal. “Given that the TPP apparently includes such provisions, the Obama administration should explain why, contrary to its clear statements of intent last year, it will use the TPP to promote big bank profits over American sovereignty and the stability of our financial system.”

The text of the TPP hasn’t yet been released.  

“What’s new in TPP are strong, groundbreaking safeguards and a narrowly defined set of the most basic, fundamental rule of law protections that have long been part of our international agreements,” U.S. trade representative Mike Froman said in a statement. “The reality is that TPP explicitly protects prudential financial regulation.”

The fight over the TPP’s legal provisions is one of the most bitter controversies souring Mr. Obama’s ambitious trade policy, which is supported by most Republicans but opposed by the vast majority of Democratic lawmakers.

The TPP is designed to lower trade barriers among the U.S., Japan, Canada, Mexico and eight other countries around the Pacific Rim, if approved by Congress and other countries’ parliaments.

For decades, the U.S. and other countries have included provisions in such trade agreements that allow investors—usually large multinational companies—to challenge foreign governments in special arbitration tribunals instead of the local court system. The U.S. has never lost a challenge through such arbitration.

But U.S. lawmakers—including many Democrats and some conservative Republicans—warn the treaties and cases involving the arbitration are multiplying, expanding a parallel legal system that could diminish the role of U.S. courts in settling sensitive regulatory disputes.

The North American Free Trade Agreement, or Nafta, and the recent trade agreement with South Korea omitted the minimum standard of treatment from the list of standards available to banks. Still, the provision has been included in bilateral investment treaties, typically signed with developing countries, and the Obama administration blessed the standard in a review of investor-state arbitration.

“It gives you a baseline of protection against manifestly arbitrary conduct and acts of bad faith,” said Michael Smart, a former trade adviser on the National Security Council and consultant at Rock Creek Global Advisors LLC.

But some lawyers worry the clause could lead to repeated challenges that widen the scope of what international lawyers view as ”arbitrary,” perhaps beyond the bar set by U.S. federal courts, which can overturn arbitrary or capricious financial rules.

“Really anything can be challenged under a minimum standard of treatment claim,” said Lise Johnson, head of investment law and policy at Columbia University’s sustainable investment center. “You allow the tribunal to determine whether they think the measure is arbitrary.”

To reduce the threat to financial rules, U.S. officials built in new safeguards in the TPP to help weed out frivolous cases and put the burden on the bank to prove that a foreign government deprived it of the minimum standard of treatment or other protections.

Other protections include barring companies from claiming that a foreign tax breaches the minimum standard of treatment and establishing a system that allows governments—not just arbitrators—to weigh in on challenges to financial regulations designed to protect the stability and integrity of the financial system.


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