Krugman Joins the TPP Naysayers

May 26, 2015 4:30 PM

Using his megaphone as a New York Times columnist, on May 22nd Paul Krugman joined Senators Elizabeth Warren (D-MA) and Sherrod Brown (D-OH) to scorn the Trans-Pacific Partnership (TPP). Leaving aside Krugman’s pungent rhetoric, he voiced three substantive criticisms of the pact:

  • It won’t have much payoff for the United States because US tariffs on imports of goods are already low;
  • The investor-state dispute settlement (ISDS) provisions are a giveaway to multinational corporations (MNCs); and
  • The intellectual property rights (IPR) provisions in TPP will enrich pharmaceutical firms while denying life-saving drugs to poor people.

Each of these criticisms deserves a short response.

Payoff to the United States

The United States is nowhere near the free trader described by Krugman. Tariff barriers to US imports of selected agricultural products (e.g., dairy and sugar) are high, and nontariff barriers to imports of services (e.g., medical and maritime) are severe. The same is true of barriers to US exports to the 11 TPP markets abroad. Of course, the TPP will not eliminate all of these barriers in one fell swoop, but it will make a good start. Over the next decade, the TPP could additionally serve as a gateway to productive deals with other Asian countries like Indonesia, the Philippines, and Thailand.

Krugman’s casual dismissal of the notion that stronger intellectual property rights could enhance America’s gains from trade ignores the enormous international trade in ideas captured, imperfectly, in our trade statistics. America’s revenues from its licensing of intellectual property to foreign customers exceeded its payments for foreign intellectual property by more than $90 billion in 2013 and constituted a larger trade surplus than America enjoyed in aircraft, agricultural goods, or any other category of merchandise. Stronger IP protection abroad could significantly enhance this surplus, bringing greater balance to America’s economic interaction with the rest of the world.

The late 20th century history of trade and investment liberalization was a story of enormous gains to US households in the form of lower prices and better paying jobs, to the tune of several thousand dollars per household per year. There’s no reason to abandon successful trade and investment liberalization policies in the 21st century. To be sure, losers must be compensated, through Trade Adjustment Assistance (TAA) and other means. But since national gains outweigh individual losses by at least 20 to 1, transitional adjustment costs are no reason to reject TPP.

Investor-State Dispute Settlement

Channeling Senator Warren, Krugman attacks ISDS as a corporate giveaway. But ISDS provisions—designed to thwart unjust expropriation and unfair treatment, and bypass corrupt, incompetent or biased national courts—have become standard fare in thousands of investment treaties and free trade agreements (FTAs) over the past half century, and none has become a path to corporate riches. In fact, of the hundreds of cases that have gone to arbitration, corporations lose more than half the time, and when they win, the payments just cover damages incurred (no punitive awards or triple damages).

Given this record, Krugman is at a loss to cite an outrageous ISDS award against the United States—because there are none. In fact, the United States has prevailed in all 13 ISDS cases brought against it by foreign firms. Instead, Krugman speculates that future cases might seek compensation for foreign corporate losses arguably incurred on account of environmental, safety, or financial regulation. This speculation is flatly contradicted by language in past US agreements that explicitly recognizes the proper role of fair regulation. Similar language is sure to appear in the TPP.

ISDS provisions could stand improvement, to be sure. They should require transparency by arbitration panels at all stages, and they should provide an appeals mechanism to correct improper decisions. But potential improvements are not a reason to reject ISDS, much less to jettison the TPP.

Intellectual Property Rights

Krugman cites the well-publicized opposition of Doctors Without Borders to the pharmaceutical patent provisions in TPP and suggests that “the deal would make medicines unaffordable in developing countries.” But in fact the impact of TPP on drug prices and availability will be far more modest than this sweeping criticism suggests, and the agreement retains important safeguards to ensure access to life-saving medicines.

Most drugs available for the treatment of disease around the world are already off patent. Even in the United States, generics account for more than 84 percent of all prescriptions. TPP will have no impact whatsoever on access to the vast majority of existing drugs for which patents have already expired. For drugs that are still protected by patents, TPP members will retain a far-reaching ability to influence the prices at which these drugs are sold within their jurisdictions. In Canada, Australia, and Japan, which are all participating in the TPP negotiations, public agencies negotiate with international drug companies to lower the prices of patent-protected drugs sold locally. Nothing in TPP will prevent these agencies from continuing to do so, and nothing in TPP would prevent any other member state at any level of development from adopting similar policies.

The provisions in the TPP will, in some cases, modestly extend the term of patent protection enjoyed by innovative new medicines, thereby delaying generic entry. But current international law allows patent rights to be overridden in the event of a public health emergency, and the TPP does nothing to limit that possibility. If an epidemic breaks out in any TPP member state, and no effective generic treatment exists, any TPP member state would have broad leeway under international law to ensure access to this life-saving medication by invoking its right to force any patent holder, foreign or domestic, to license the technology to low-cost producers, ensuring broad access at reasonable prices.

Most of the provisions Krugman criticizes have been incorporated into earlier US FTAs, going back all the way to the US-Jordan FTA, in force since 2001. These provisions have not led to a devastating collapse of drug access or a precipitous decline in public health in our FTA partner countries before, and it won’t happen now.

Trust in Facts, not Fearmongering

Krugman titled his anti-TPP broadside “Trade and Trust.” He suggests that TPP represents a new departure for US trade policy, whose outcome will be far less beneficial than previous steps taken toward free trade and insinuates that prior trust in the benefits of trade should not extend to this new undertaking.

To argue this way is simply misleading. Neither the ISDS provisions nor the drug patent provisions in TPP are new, and nothing in our recent policy record suggests that either is dangerous. Krugman’s anti-TPP stance is flatly contradicted by the strong support the initiative has received from 14 former chairs of the Council of Economic Advisers, who hail from every administration both Republican and Democratic, since Gerald Ford’s, and constitute an eminent group of Krugman’s academic peers.

President Obama has shown enormous courage in championing the TPP, and Republicans in Congress deserve credit for working with him to make it a reality. The facts clearly support their efforts. Let’s hope they succeed.

Lee G. Branstetter is a nonresident senior fellow at the Peterson Institute for International Economics and Professor of Economics and Public Policy at Carnegie Mellon University. Gary Clyde Hufbauer is Reginald Jones Senior Fellow at the Peterson Institute for International Economics.

Comments

bernard lakey

Hard to agree with this analysis by Branstetter & Hufbauer. ISDS provisions create an independent court above the national and international structures with rulings that are inconsistent and extreme. While only 13 cases against USA there are many cases initiated by USA companies (and other's) that have attacked the independence of governments in many other countries, particularly developing countries. The greed shown by arbitration tribunals in awarding compensation is the reason that Indonesia is withdrawing from BIT's (one example.) While the rest of the world has had to live with this corporate greed, USA is now opening up its doors to the same action. One might think that this is a good balancing action however, for so many citizens in many countries it is just a play of one MNC taking public funds for what can only be considered dishonest arguments. This article simply glosses over cases like Churchill Mining v Indonesia (1 billion awarded) or the case of Phillip Morris Asia loosing in the high court of Australia but then having another go via the Hong Kong - Australia FTA. And where Philip Morris went country shopping to find a IIA where it could initiate arbitration since the USA - Australia FTA did not include ISDS chapter. French company Veol1a has initiated arbitration against Egypt because Egypt raise the minimum wage, a non discriminatory action that is supposed to be excluded from the jurisdiction of ISDS chapter but the tribunal have decided they can decide. The TPP and the inclusion of ISDS is simply for the benefit of MNC, a disaster for democracy. Free trade does not need ISDS.

lbranstetter

Paul Krugman and other American critics of TPP have suggested that its ISDS provisions pose a threat to U.S. sovereignty in general and socially beneficial U.S. environmental, financial, and health regulations in particular. Our blog post pointed out that there is, in fact, no instance -- not a single case -- in which the U.S. government has lost a case filed against it by a foreign corporation using the ISDS provisions of any existing treaty. Mr. Lakey's response to our post appears to suggest that governments other than that of the United States have been forced to weaken or remove socially beneficial policies or regulations as a consequence of ISDS-initiated arbitration, but he also cites no cases where a final judgment has clearly resulted in such an outcome. The case of Churchmill Mining vs. the Government of Indonesia is not yet resolved, as Mr. Lakey suggests is the case. Interested readers can view a recent post of the ICSID on that case here:
www.italaw.com/sites/default/files/case-documents/italaw4096.pdf. The tribunal allowed Churchill Mining to proceed with its $1billion plus claim against the Government of Indonesia, but the final outcome will not be known for some time. And in this case, Churchill Mining is not seeking to roll back environmental or social legislation -- it is instead seeking compensation for the cancellation of licenses to mine coal in Indonesia. Despite enormous progress on the part of Indonesia's fledgling democratic institutions, the country still has enormous problems with governmental corruption and dysfunction, as recent evidence from impartial organizations like Transparency International indicate. In the 2014 survey, Indonesia is identified as a far more corrupt country than many of its East and Southeast Asian trading partners. Providing foreign investors with an alternative mechanism for seeking legal redress in a country with a well-known and longstanding corruption problem does not seem to us to be unwarranted. The other cases Mr. Lakey cites are ones in which various corporations have sought to challenge regulations, but he cannot identify cases where the Australian or the Egyptian government has actually been forced to weaken or abolish clearly socially beneficial regulations with respect to tobacco use or the minimum wage or anything else. Mr. Lakey's conclusion that ISDS provisions are a "disaster for democracy" seems unwarranted, and the "evidence" he cites in favor of this assertion is quite weak. Once again, trade opponents are crying "wolf" when there is not even so much as a tame Chihuahua in the room.

bernard Lakey

The first issue is the level of funds that tribunals award against the state. The fact that ISDS chapter is one sided - only the investor can initiate action and awards are only issued in favour of the company, never in favour of the state. There are over 600 known arbitration cases and one does not know the number of confidential cases. these cases strip billions in funds from mostly developing countries, leaving these countries with very reduced capital.
Our writers forget to mention the MFN rule or the FET rule and how tribunals have drawn a very wide bow to make the investors claims substantiated. Bolivia, Venezuela and Ecuador have with drawn from ICSID, South Africa is withdrawing from treaties that include ISDS mechanisms. The authors should explain what arbitration decisions have been made against these countries that has forced them to with draw from something the authors are promoting as perfect.
ISDS chapter is a disaster for democracy, creating a unaccountable judge & jury system. You need to read the Philip Morris Asia notice of arbitration. The second last paragraph states that "Australia is to cease and discontinue all steps towards enacting plain packaging legislation and issuing the graphic health warnings regulations" I think any reasonable person would agree that this is a direct attack on government health policy and public health measures.

Add new comment