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Divide and conquer: The FTAA, US trade strategy and public services in the Americas

Divide and Conquer: The FTAA, U.S. trade strategy and public services in the Americas

Prepared by Scott Sinclair, Canadian Centre for Policy Alternatives,
and Ken Traynor, Canadian Environmental Law Association, for
Public Services International

November 2004

To download the full 46-page report in PDF (1.3MB) click here

The Spanish version is available by email from

Executive Summary

The services and investment rules of the proposed Free Trade Area of the Americas treaty (FTAA) are a grave threat to public services and public interest regulation throughout the Americas. Based on the neo-liberal philosophy that the best government is the smallest government, this treaty would create intense pressure to privatize, deregulate and erode existing public services. It is designed to ʻlock-inʼ neo-liberal policies that have already been adopted and to prevent future governments from reversing privatization or creating new public services. Fortunately, citizens in the hemisphere are quickly becoming aware of how the FTAA and similar treaties subvert efforts to meet their needs.

The services trade agenda
Negotiations for an all-encompassing agreement have run into stiff opposition. Since the FTAA talks began in 1994, a new political landscape has emerged, featuring:

- left-leaning governments in Brazil, Venezuela and, most recently, Uruguay that oppose a very broad treaty;
- economic crises in Argentina and Bolivia that eroded the credibility of governing elites and thrust new, more populist governments into office;
- tenuous Congressional support for free trade policies in the U.S., the agreementʼs main proponent; and
- throughout the region, a deep public discontent with the philosophies and policies embodied in the proposed treaty.

At their Miami meeting in November 2003, the regionʼs trade ministers avoided a public collapse of the negotiations, but only by papering over their underlying differences. They decided to pursue a so-called “two-tier” agreement to be comprised of a common set of mandatory obligations to cover all negotiating areas and another set of stronger obligations that governments could individually agree to adopt. Negotiators have so far failed to make this complicated formula work and have not met the January 1, 2005 deadline for a final agreement.

Facing persistent resistance to a sweeping hemispheric treaty, the U.S. administration has devised new strategies to further its aims. Its emphasis has shifted to bilateral negotiations, such as the recently concluded Central American Free Trade Agreement (CAFTA), which has yet to be approved in either the U.S. or Central American nations. The U.S. now has free trade deals in place with Mexico, Canada, and Chile; signed (but not ratified) treaties with Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic; and negotiations underway with Colombia, Ecuador, Peru, and Panama. The U.S. is using these bilateral negotiations to isolate and build pressure on the FTAA holdout countries - clearly a “divide-and-conquer” strategy.

At the same time, the U.S. is using global negotiations at the World Trade Organization (WTO) to apply pressure to broaden and deepen coverage of the General Agreement on Trade in Services (GATS). These talks, which began in 2000, are the first in a series of mandated rounds of GATS negotiations. In 2001, the GATS talks were rolled into the current WTO negotiations, known as the Doha round.

In the ongoing global GATS negotiations, there have been sweeping demands made to expand GATS coverage. Current GATS requests add up to a set of demands that would see most WTO members making full commitments in nearly every service sector. This high-pressure dynamic is unfolding more or less as the original GATS architects planned. What remains to be seen is how far individual governments will go to meet these sweeping requests. Since it is not unusual for the most significant concessions to occur in the final days, even hours, of intense negotiations, the limited time remaining before this fateful endgame is critical. Union activists, public interest groups, elected representatives and ordinary citizens must make every effort to ensure that their national governments do not agree to make commitments that further undermine public services or public interest regulation.

Key elements of the FTAA services rules and related treaties
Whether bilateral, regional or global, the core features of this new generation of services and investment treaties are similar and each treaty is built on preceding ones. The FTAA is intended to combine the most restrictive rules of both the North American Free Trade Agreement (NAFTA) and the GATS. Likewise, the recent bilateral free trade treaties being negotiated by the U.S. also contain the worst features of both the NAFTA and the GATS.

The scope of recent services trade treaties is immense. Services include a wide range of human activities and the treaties cover all government actions affecting the different ways that a service can be delivered internationally. The basic purpose of the treaties is to restrict governments from interfering with the ability
of foreign companies and investors to profit by supplying services. Much of the flexibility the treaties supposedly provide to governments is a myth. The exceptions, or “reservations,” that are said to exclude public services from challenge provide only limited protection. One of their main functions is political, allowing proponents to deflect public opposition just enough to get the treaty approved.

The latest services and investment treaties include the following key provisions:

-  Rules on “non-discrimination” ensure that governments treat foreign services and suppliers no less favourably than local ones. The National Treatment rule is tougher than generally realized, requiring governments to ensure that foreigners have “equality of competitive opportunity” with domestic services and suppliers.

-  Restrictions on performance requirements attempt to eradicate conditions set by governments that oblige foreign investors to purchase locally, transfer technology, take local partners or train local workers. Such requirements were used historically by the now-industrialized countries to promote economic development. Though such government policies remain effective economic development tools, the treaties aim to prohibit their use in both developing and developed countries.

-  Rules on “expropriation” and compensation protect foreign service companies and other investors against alleged “expropriation” without compensation. The meaning of expropriation in these treaties,
however, is extremely broad, contrasting sharply with national laws in most of the hemisphere (including the U.S.). For example, under NAFTA, investors have successfully argued that land rezoning and environmental protection regulations are compensable expropriation. This opens the door to investor-state claims that government actions to expand public services or to restrict private for-profit provision of health care, education or other social services amount to expropriation and that governments must compensate foreign investors that are negatively affected.

-  Market access rules prohibit governments from restricting corporationsʼ access to domestic markets through the use of “quantitative restrictions.” Examples of beneficial public policies that could conflict with these market access rules include measures limiting the growth of medical services or clinics in rich regions until poorer regions are better served; conservation measures limiting the number of tourist operators in environmentally-sensitive areas; and policies which allow only non-profit organizations or co-operatives to provide a specific service, such as child care or other social services.

-  Public monopolies and state enterprises are prohibited in covered service sectors. A future government
that wants to create or expand a public monopoly (such as public health insurance) in a previously-covered sector must provide compensation to affected foreign service providers and investors. Requiring that foreign commercial service exporters and investors should be compensated when public services are created or expanded creates serious limitations on sovereignty and democratic decision-making.

-  Restrictions on “domestic regulation” are now under negotiation in the GATS. At issue is the development
of “disciplines” on member countriesʼ non-discriminatory regulations - those that treat local and foreign services and service providers even-handedly. The broad subject matter of these proposed restrictions covers a wide range of government regulatory measures. The proposed restrictions aim to apply some form of “necessity test” - requiring governments to demonstrate that their regulations are not more trade-restrictive than necessary and that the measures are needed to achieve a legitimate objective. If agreed to, these controversial new rules could affect the licensing of toxic waste sites, water quality standards, accreditation of schools, hospitals and universities, and many other regulations vital to the public interest.

-  Investor-to-State dispute settlement procedures allow for foreign investors to bypass domestic legal systems. Most modern treaties include government-to-government (also known as state-to-state) enforcement procedures. When governments cannot resolve a trade dispute through diplomacy, the case is heard by an appointed trade panel. These panels meet in private and issue rulings that can include a requirement to reverse a non-conforming public policy measure or face trade sanctions.

In addition to state-to-state dispute settlement, the NAFTA investment chapter, most bilateral investment
treaties, and bilateral free trade deals include a highly controversial investor-to-state dispute settlement procedure. Under this process, investors can bypass established domestic legal systems, using separate treaty rules to challenge government actions directly, without the approval of their home government. While these arbitral tribunals cannot directly overturn domestic laws, they can and have imposed substantial fines for breaches of treaty investment rules

Trade treaties and public services
Recent trade treaties, including the proposed FTAA, are at odds with the underlying principles of public services. These services are built upon non-market values of equity, fairness and solidarity and are rooted in concepts of citizenship, democratic control and accountability. They are intended to be available universally on the basis of need, rather than the ability to pay, and considered as a fundamental human right. In contrast, trade treaties embody commercial imperatives and treat vital basic services such as education, drinking water distribution or health care as ordinary commodities to be bought and sold for profit.

International trade treaties such as the NAFTA, the WTO Uruguay Round agreements, bilateral investment
treaties and the FTAA are a key aspect of neo-liberalism. In candid moments, proponentsʼ statements reveal how trade treaties promote this philosophy. For example, U.S. Trade Representative Robert Zoellick has accurately noted that these treaties:

- support privatization,
- attack public service monopolies, and
- drive deregulatory market reform.

Case studies from Argentina, Costa Rica and Mexico graphically illustrate the problems associated with these aims.

Supporting privatization in Argentina
The FTAA and other current free trade treaties are clearly intended to pry open public services that have not yet been privatized and to consolidate privatization whenever it occurs. Argentinaʼs recent experience demonstrates both the problems with privatization itself and the risks to society when investment treaties attempt to lock in radical free-market social experiments.

During the 1990s, policies enforced and funded by the International Monetary Fund (IMF), World Bank and Inter-American Development Bank (IDB), turned Argentina into a laboratory for private-market experiments
in basic services. Privatizations were commonplace in water distribution, health insurance, social security, postal, energy distribution, and other service sectors. These privatizations led to significant job losses, failed to improve services and were costly for consumers. Understandably, they became intensely unpopular with the public.

In the aftermath of the countryʼs 2001 financial crisis, many private investors in basic services found themselves in financial difficulty and blamed local and national government policies for their problems. Unfortunately, while in the grip of neo-liberal orthodoxy, Argentinaʼs government had signed 38 bilateral investment treaties with, among others, the United States, Canada, France, Germany, Spain and the United Kingdom.

Many foreign companies involved in failed privatizations, including high-profile corporate racketeers such as Enron, are now using the investment provisions of these treaties to try to recoup losses. Foreign investors have now launched over 30 investor-to-state challenges against the government of Argentina. Most of these cases involve contracts or concessions from the public authorities to provide what were formerly public services.

Incredibly, after suffering through the failings of privatized services, Argentinaʼs citizens are now threatened with having to compensate foreign investors for their losses. This double jeopardy should serve as a warning to other countries in the hemisphere not to become entangled in bilateral investment treaties or the even stronger provisions of the proposed FTAA, where legal and financial vulnerability would be even greater.

Attacking government monopolies in Costa Rica
The fate of Costa Ricaʼs highly successful public insurance programs in the recently negotiated U.S.-CAFTA is a poignant example of how strong-arm tactics and high- pressure treaty bargaining have been used to attack public services.

In December 2003, just 48 hours before the CAFTA talksʼ final deadline, U.S. negotiators stunned their Costa Rican counterparts. They tabled, for the first time, a proposal that Costa Rica eliminate its public insurance monopoly and open the sector to U.S. insurance companies. Faced with this eleventh-hour demand,
Costa Rican negotiators walked out of the talks. Within two weeks, however, they returned to the bargaining table. On January 25, 2004 the U.S. and Costa Rica announced a deal that included the phased-in, full opening of Costa Ricaʼs insurance system to U.S. private insurers. In return, the U.S. provided Costa Rica with minimal, face-saving improvements in agricultural market access.

Furthermore, despite official assurances to the contrary, Costa Ricaʼs highly-regarded public health insurance system is only partially excluded from the treaty. If the CAFTA is implemented as planned, the system will deteriorate, becoming more like the dysfunctional and inegalitarian American health insurance model and reversing decades of hard-won social progress.

Imposing deregulation in Mexicoʼs telecommunications sector
The recent GATS case involving Mexicoʼs telecommunications sector illustrates the power of trade treaties to drive deregulatory market reforms even after privatization. It also underlines how powerful countries can use obscure treaty rules to force developing country governments to deregulate, enriching foreign corporations at the expense of local citizens.

In mid-2004, a WTO panel issued its decision on a challenge brought by the U.S. against Mexicoʼs telecommunications regulations. The panel ruled that Mexico was violating its GATS commitments by not providing “cost-oriented and reasonable rates, terms and conditions” to U.S. telecom companies for connecting their long-distance calls to Mexico. The panel also ruled that, contrary to GATS rules, Mexico was not taking appropriate measures to prevent “anti-competitive practices” by Telmex, Mexicoʼs privatized national telephone company.

As a result, U.S.-based long-distance firms can no longer be required to contribute to the development of Mexicoʼs telecommunications infrastructure as a condition for gaining access to the Mexican market. The ruling denies Mexico an important source of revenue that should be used to expand basic telephone service to poor customers and into rural areas, many of which do not have any access to phone services.

All governments that have made or will make GATS Telecommunications Reference Paper commitments
are thus forbidden to include the costs of expanding telecommunications infrastructure or improving
universal access when setting rates for interconnection. This prohibition - which will hit developing countries the hardest - deprives governments of a proven regulatory method and source of revenues for improving their citizensʼ access to basic telecommunications services.

Conclusion: Growing resistance, emerging alternatives
Immediate prospects for concluding the FTAA are slim. The U.S. administration and its corporate allies have not, however, given up on their substantive goal of expanding NAFTA-plus treaty provisions throughout the hemisphere. U.S. priorities have merely shifted from the stalled FTAA to wrapping up bilateral free trade agreements, while pushing their interests through global WTO talks.

This strategy, called “competitive liberalization,” is a crude, but worryingly effective, means for advancing neo-liberal aims in the hemisphere and globally. Bilateral free trade treaties enable the U.S. to strong-arm smaller countries into acceding to its ideological and commercial agenda. Bilateral FTAs also target sympathetic foreign governments that are eager to lock in controversial, domestic free-market reforms.

If uncontested, competitive liberalization might even succeed in unblocking the FTAA and global negotiations
by overcoming opposition to U.S. objectives. The U.S. administration employs bilaterals to set legal precedents that it can then replicate and expand in succeeding negotiations. Moreover, once a government
has signed a bilateral deal based with the U.S., there is little point in it opposing similar provisions and commitments in the FTAA talks or in multilateral negotiations, including the WTO Doha round.

The flip side of the intensified U.S. trade policy agenda, however, is a growing awareness and assertiveness
by many citizens and some governments, reflecting deep discontent with the policy prescriptions embodied in the FTAA model. There is a strong interest among emerging industrial and developing countries in preserving policy space for alternative economic development policies. The trade agreements
threats have, ironically, contributed to a new appreciation of public services and a mixed economy and a better understanding of how they contribute to economic development, increased social justice and environmental sustainability.

Citizens and progressive governments are already resisting the divide-and-conquer strategies at work in trade treaty negotiations. The need to forge international alliances against the corrosive incursions of trade treaties and to unite in strengthening public services, democratic institutions and governmentsʼ ability to regulate in the public interest is increasingly being recognized across the region.

 source: PSI