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The FTA: A regulatory framework transcending the constitution and democracy

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author: Adolfo Jose Acevedo Vogl

The FTA: A Regulatory Framework Transcending the Constitution and Democracy

Adolfo José Acevedo Vogl

Contrary to the widespread notion, fundamental aspects of the FTA with the US include a number of areas that are highly comprehensive and have ramifications and implications that go way beyond simply regulating cross-border trade in goods. In fact, only six of the 22 treaties directly refer to trade-in-goods regulations.

If an FTA was only about regulating cross-border trade, there would be little point in the US concluding an FTA with “minion” states. On the one hand, given our markets are tiny, on a strictly commercial level, they do not constitute a genuine strategic or fundamental interest for the US.

On the other hand, this field does not allow our countries much room to negotiate: at this stage of the game, often there is not much that can be offered in terms of further reduction on customs duties. Today, there has been such a drastic reduction in custom duties across the board. So, with the exception of some privileged products (such as sugar), broadly speaking, access to our markets may essentially be considered as virtually free or open, to North American goods.

On this matter, Nicaragua demonstrates an average tariff level that is the lowest of all American states (including Canada and US). Nicaragua’s tariff level, once adjusted by surplus, establishes a NEGATIVE level of protection for our economy.
This does not mean that the US has absolutely no interest in a treaty tightly delimited to trade issues with such small countries. It simply highlights that the relative political and economic importance of such a treaty would not be very high: most probably, a treaty strictly limited in scope to “border” issues would not cover any issues of access to the North American market for products in the region that compete with products declared "sensitive" for this country, such as peanuts and sugar. Neither does any country in the region, taken by itself, nor the region as a whole, have, commercially speaking, the minimum importance required to allow the US to put on the table even minimum access for these lists, that it has managed to keep out of all its commercial negotiations.

What our countries can “offer” the United States in these negotiations, is not so much access to their very small markets that have now been almost entirely opened up, but spectacular concessions in all sectors, fundamental for the US, that serve to establish milestones and precedents that would encircle, isolate and eventually corner the biggest countries in the hemisphere (notably, Argentina and Brazil), and the Third World (India) that are loathe to cede without putting up a fight.

As well as promoting its own purely commercial interests, the US’s overriding interest in these bilateral negotiations with small countries is to establish precedents in sectors other than trade and to establish in each sector, provisions that go much further than obligations negotiated multilaterally in the WTO, where the balance of power has shifted dramatically in favour of developing countries.

The North American strategy is about quickly spinning a web of bilateral or regional treaties that weaken the common positions of developing countries in multilateral negotiations and isolating the countries that are the most belligerent champions of these positions, while strengthening centrifugal tendencies, prone to accepting pressures applied by big companies from developed countries and the governments of these countries.

The US does not consider access to our markets to be an issue over which it loses sleep; nor does it get overly excited about it; in contrast, from our countries’ perspective, this issue of "market access", (from the dual perspective of winning reduced margins of access for exportable products considered important (which the US continues to shut out of its markets by defining them as its "sensitive products"); and the concern about the impact additional trade opening will provoke in extensive, sensitive sectors of domestic production), is that it disguises the central interest, to the point of frequently neglecting entirely, serious implications that arise from making concessions in other areas in exchange for marginal concessions in trade.

This happens in each country, each knowing full well that gaining access to the North American market for some listings means making "reciprocal concessions" in others. The problem is how to distribute responsibilities and costs between various listings and sectors. Each sector sets in motion its capacity to lobby and to exert pressure to avoid as far as possible, the full costs. Although they cannot avoid assuming part of the costs, they seek to minimize the costs each of them assume, by allocating the lion’s share of the costs to issues that impact society in general rather than individual listings.

Essentially, a fundamental asymmetry is created that supplements the basic asymmetry underlying negotiations between parties so disparate in size and power: the only way that small, poor countries obtain some marginal concessions on access to some listings of special interest to the US, is by making fundamental concessions in all other fields of strategic interest to the US, without pausing to dwell on the consequences, costs and implications this entails (although, in truth, it is not clear that the governments of these countries have had to, or tried to construct a precise idea of the quantum of costs and impacts of all their undertakings, in these fields, for the country and the future).

So developing countries, instead of achieving increasing access (promised to them in the Uruguay Round) to the markets of developed countries, have found themselves involved in negotiating on an unlevel playing field. On this turf, in order to obtain some additional marginal tolls to access these markets, they are forced to accept regulations that are increasingly comprehensive and inflexible on intellectual property, investments, services and government procurements that have severe implications for these countries and their future.

These "norms" - on intellectual property, services, investments and public procurements - completely lack any economic rationale, over and above the commercial interests of a narrow list of powerful groups in advanced industrial countries. Often, bilateral and regional trade agreements are far worse because they impose even more inflexible pre-requisites on developing countries in exchange for some scraps of "market access " of the biggest partners (Rodrik, Dani: "The Global Governance of Trade as if Development Really Mattered", United Nations Development Programme UNDP, 2001).

To appreciate the growing importance of these“new issues” (services, investments, intellectual property rights, government procurement introduced for the first time in the Uruguay Round negotiations - which culminated in 1994), when compared with the “border” issues, the following must be taken into account: first, that the very process of open trade and unilateral lifting of customs carried out by developing countries following the Uruguay Round (often promoted by multilateral financial institutions’ conditionality), has effectively made developed countries focus less on the “market access” issue, when they negotiate with developing countries. This is because, thanks to opening up, developed countries already have very open access to the aforementioned markets; the exceptions are limited, and are produced notably, in the case of some of the biggest, developing countries which have kept some important sectors of their economy relatively protected.

However, perhaps the most important factor that must be taken into account to appreciate the importance these issues have assumed in the US’s bilateral trade negotiations with small countries, is the fundamental structural change in the North American economy. Currently, 80% of jobs in the US and 60% of the GDP generate services, whereas over the recent decade, participation in the traditional manufacturing industry has rapidly declined. The United States controls 16% of global trade in services while a significant chunk of North American firms connected to service delivery obtain an increasingly higher share of their profits from their operations abroad.

This has been expressed in this country’s external trade policy, dominated by economic interests with strong, domestic lobby power.

Regarding services, the US is interested in promoting a direct “commercial presence” of North American firms in service delivery in the internal markets of third countries. The commercial presence of these firms in service delivery has been defined so as to cover any activity classified as services: telecommunications, financial services, professional services, advertising, trade, fast food, bioprospecting, the hotel industry, energy, transport, express delivery services and provision of drinking water, education and health, etc.

So, the so-called liberalization of " international trade in services " consists essentially in a) requiring the opening of all services (including those delivered, thus far, exclusively by the State) in developing countries, to North American investors and b) deregulating these services. This is to ensure that the basis for the delivery of these services is principally maximizing the profits of private commercial firms and to circumvent as far as possible, any public controls and regulations that limit the profit forecasts of businesses, that are premised on criteria for protecting the collective interest, the national interest, public health, the environment, to ensure that the population has access to public services, delivered by private businesses, or other considerations of an economic or social order that each country could establish democratically, exercising the regulatory and legislative power of the National State;

Given the size, financial and competitive capacity at the global level of these businesses, it is expected that they could dominate the target market of developing countries, without much effort. This would include seizing control of even the market for services provided under a public monopoly, displacing with relative ease, local providers or relegating them to operate in less profitable or attractive markets (although of course, the US simply refuses to open discussions on international liberalization or opening its markets to services where developing countries have comparative advantages).

Linked to the foregoing, in addition to eliminating restrictions on the presence, performance and monopolistic control of US investors in these markets, the US is interested in establishing exceptional mechanisms to protect them.

For this reason, the extraordinary principle of protection of these investments is established against "measures equivalent to expropriation". This means establishing supra-constitutional protection against any regulation, measure, law, decree, ordinance, policy, resolution, administrative action, etc, adopted by the country’s public authorities, at any level, that US investors consider somehow reduces their projected profit flows, or increases the level of risk to their investment. It is argued that this would reduce the current net or discounted value of expected flow of profits of the enterprises, the equivalent of the current net value of the investment, so that, by the investment’s value being reduced as a result of these measures, we would be in the presence of a genuine “indirect expropriation” of part of the investment. This should be compensated by the estimated amount of the value of the loss.

In passing, it must be recalled that, the pursuit of protecting a collective interest or superior public interest, means that all public regulation imposes some costs or reduces potential benefits that private agents could receive in a totally unregulated environment. For example, it is clear that prohibiting the sale of alcohol to minors reduces distributors’ potential trade profits. However, nobody denies the public interest justification for this. In contrast, regulations that require businesses to reduce or eliminate contaminating emissions, which represent high costs for the rest of society, do impose certain costs on firms; but such firms apply enormous pressure to abolish these regulations.

On the other hand, US’s so-called "industries in decline" export to developing countries investments in intensive sectors. Such investments take the form of manpower in the “old manufacturing economy” that operate on the basis of maquila operations in the form of enclaves in "free zones". But our countries are rapidly losing their "comparative advantages" of labour costs to "attract " such investments. Currently, many Asian countries offer a labour supply that is far more abundant, and above all, far cheaper, than in Central America countries.

As for goods, the US’s core exports are goods that carry "intellectual property rights": products subject to marks, patents or other monopolistic rights – medications, seeds, video games, films, DVD and software – in respect of which their businesses report enormous profits from monopolies or extraordinary profits, in the form of surcharges placed four, five and up to ten times on the “normal” price or on the marginal cost (or they export technology under licence that pays handsome royalties).

Businesses with these monopoly rights are interested in asserting the “protection” of these “rights” across the world. This would constitute an enormous burden on developing countries (monopoly prices are equal to an increased surcharge on the marginal cost and they may absorb a charge at a much higher rate). The consequences of this, in the field of medicine prices, for example, are devastating for poor countries.

Another concern of North American companies is that they are also supported in the internal market of tenders and purchases by all the different levels of government in developing countries.

It is therefore evident that in the current conditions, the fundamental interest for North American businesses (a far more important issue than the old and increasingly irrelevant “border” regulations), is the full gamut of policies, regulations and the legal framework that each country applies WITHIN its border, and that directly or indirectly affects all these fields, apart from trade in goods.

In this context, what are bilateral treaty negotiations between the US and small countries like?

In this context, negotiations with the US are taking place for the following reason. Small, developing countries are choosing bilateral negotiations with the US, hoping that if they negotiate on their own – at the sidelines of multilateral negotiations or broader regional negotiations – they will win some small preferences in the form of some additional fees (necessarily marginal) to access the North American market; this is, above all, for products of special interest to the governments of these countries, such as sugar and peanuts in the case of Nicaragua.

It may be said in passing, in the case of these products, as is known, they have received smaller fees compared with those initially advanced and subject, of course, to the US applying “safeguards” and possible exemptions.

Also, in our case, it was requested to maintain some preferences for exporting textile products from Taiwanese and North American maquilas. That said, it is interesting to highlight that in the textiles sector, there is a risk that the benefits achieved will fade away. This is because from 2005, fees on textiles will disappear, putting exports coming from Central American countries in open competition with the North American market, with Asian countries, where salary costs are far lower. In the case of Mexico, many textile businesses have begun to migrate to these countries.

These "wins", on the subject of "access to the North American market”, are obtained in exchange for the following: First, and in accordance with US demand for "reciprocity" on agricultural issues (which the US never extends to eliminating its enormous agricultural subsidies): a wholesale transfer of our countries’ agriculture (on which depends 43% of Nicaragua’s total employment (75% of which is generated by family agricultural units that produce without accessing any resources whatsoever)) to compete on an unequal footing with highly subsidized North American production, in the presence, furthermore, of enormous differences in productivity levels between North American agriculture and our agriculture, under different schemes that lead to exactly the same results – from now on, the producers have to expect, from the beginning, fees (increasing over time) on imports, EXEMPT FROM ALL CUSTOMS, together with decreasing customs and prices of imported products that are also decreasing, as a result of enormous exportable surpluses and dumping that developed countries practice.

It is simply not possible to calculate these costs for our country.

But what is more, these "wins" are obtained in exchange for granting the US extreme, unilateral concessions. Such concessions go so much further than what the US could currently hope to obtain for North American Businesses under the WTO framework and the FTAAs in these “other, very comprehensive sectors”. If these concessions were extended to all developing countries, they would result in businesses extracting windfall profits. These are currently the core fields of interest.

In fact, the US “negotiating” strategy consisted in obtaining, first, absolutely everything it wanted in all these "other sectors". It made demands, one after the other, that went far further than what was established in the WTO agreements, by promising in return, marginal charges for access to its markets but naturally, leaving the final negotiation to the end; once they had secured all their interests in these sectors, as a reward, once negotiations really were over, the US granted fees of lesser access than those initially promised and subject to exemptions and safeguards.

As an aside, "safeguards" and other exceptional measures were established initially in trade agreements as a special mechanism to protect sectors that, economically and socially speaking, were heavyweights for these countries. These are sectors or listings that represent at least significant percentages of production and employment, such as basic grains in our countries (that in the case of Nicaragua hold enormous weight) against serious disruptions caused by any excessive increase in imports that compete with products in this sector, as a consequence of trade liberalization, which could produce a serious crisis.

The US for its part establishes "safeguards" for listings that do not even represent 0.1% of its GDP and which represent a far smaller percentage of its global employment, and that could not, in any way, be seriously “threatened” by the genuinely insignificant imports from our countries, much less give rise to a national crisis of the slightest importance. It is a relevant point that in NAFTA’s experience, the only country to have made use of safeguards, is not Mexico (the poorest treaty party, which has suffered enormous costs to its agriculture), but the US, the richest and most powerful treaty party.

But even so, as Stiglitz has remarked, this does not even guarantee, in any case, as the illuminating experience of Mexico amply demonstrates, that poor countries will have de facto access to the North American market, in the important listings: the US has reserved the right for unilateral and arbitrary use of its entire arsenal of technical and health measures and finally its anti-dumping legislation when, pressurized by respective lobbies, it simply decides to shut down the entry of a product over which it has granted quotas.

The implications, however, go much further than the economies. Much further.

Currently, the FTA claims to be an absolute, supra-constitutional framework. The basis for this is that it established principles, norms and rights and orders that aspire to trump the Political Constitution of the Republic. However, the Political Constitution MUST retain its supremacy, if Nicaragua must continue as a State and an independent, democratic Republic.

Under this scheme, trade negotiators have set up new (supra constitutional) law makers. The State has virtually lost its regulatory power and a significant chunk of its sovereign and democratic legislative power. This country remains with its hands absolutely tied, at least for the next half century, without being able to apply or establish virtually any important regulation, in any fundamental sphere of national life, which cannot be challenged as a violation of any principle, law, order or undertaking in a treaty or its "spirit". Also, a Supreme Court of Justice ruling could be challenged. In fact, from the beginning, the entire Constitution is challenged.

I cite Dr. Chávez:
“Art. 182 – the Political Constitution is the fundamental Charter of the Republic and all other laws are subordinate to it. Laws, treaties, orders or provisions that conflict with it or alter its provisions, shall not have any force. Art. 183 – No power of the State, government body or official will have any authority, power or jurisdiction other than that conferred by the political constitution and laws of the Republic.”

Both precepts construct the principle of legality and the principle of constitutionality that governs the public administration as well as state powers. They form the backbone of the entire Nicaraguan legal order. In this sense, to disrupt it, is to break away from the constitutional order and the legal order given that such provisions are binding not only on officials, agents orrepresentatives of the Public Administration but also all other State powers, including judicial powers.

But this constitutional supremacy goes much further, since, the same article 182 set out above states that LAWS AND TREATIES that conflict or modify constitutional provisions WILL HAVE NO VALUE. This makes it plain that even international treaties must be in conformity with the constitution. Therefore, to this extent, this precept is interpreted as declaring that international treaties are only valid if they are constitutionally compliant.

Till now, our Constitution has not permitted competencies that lie exclusively within the domain of the Public Organs of the Nicaraguan State to be transferred to international organizations. This is so even when Nicaragua is signatory to integrationist agreements. Such is the case of the recognition of the Statute of the Central American Court of Justice; the latter does not have jurisdiction over internal matters and therefore its jurisdiction is limited to Central American integration. This restriction on jurisdiction recognizes that our constitutional laws are superior.

The US FTA provides for a dispute resolution mechanism that takes the form of a tribunal with a supra-national and supra-constitutional status. This tribunal therefore enables investors to by-pass our legal framework and competent national courts.

If a business considers that a government has violated its rights and exceptional guarantees granted under the FTA - for example, by applying measures "tantamount to expropriation" - that business can initiate judicial proceedings to obtain the fulfilment of these exceptional rights, enshrined in the treaty. Thus the business bypasses the country’s judicial system and commences the dispute resolution process, intent on claiming monetary compensation. These investor – state FTA claims will be litigated in specialized, international commercial arbitral tribunals, shielded from the public participating in any way, whether as observer or with the right to make representations. These tribunals render decisions that are binding (i.e., they must be complied with) and beyond appeal.

These mechanisms do not offer the minimum guarantees of due process and transparency found in the national courts. Instead, three member panels, made up of professional arbitrators, meet behind closed doors to see businesses attacking policies or government action, to see the defense of the government and to review entire reams of the claims and counter-claims filed. Instead of acting as conciliators, members of these tribunals are converted, à la fois, to the judge and jury. These tribunals have the power to rule that a state party to an FTA, has to pay an unlimited amount of its tax payers’ money as compensation to an enterprise, whose rights under the FTA have been violated, according to the criteria and conclusions of the three arbitrators.

As Dr Chavez reminds us, even our Criminal Procedural Code was modified, under IMF conditionality, to conform to the North American criminal procedural tradition so as to adapt the domestic legal and normative framework to the preferences, uses and customs of North American businesses.

This treaty undertakes, furthermore, to ratify TEN additional treaties, each one with provisions having serious consequences.

Obviously, the claim is to establish a single, universal and absolute framework for rights, competencies, powers, prerogatives, exceptional privileges and orders to protect the interests of North American firms, through bilateral and regional treaties of this type, by-passing multilateral negotiations where the US has encountered severe resistance to this claim as well as whatever constitutional and normative framework of any State.

These norms aspire to have absolute and universal validity, overriding any constitutional framework, overriding any consideration of public interest, social rights, human rights and prevailing over the existence of a Nation State with a basic minimum of sovereignty expressed through deference to the constitution and the democratic right to decide – at least for the next 50 years. Only administrators with a rigid and blinkered semi-colonial outlook will be elected. There will be no democratic right to decide.

This supra-constitutional framework overrides even the most basic human right, the right to health and, a priori, the right to life. An analysis of the most serious impact on the provisions relating to patents on medicines, demonstrates this.
If you think we are exaggerating, consider the following: Joseph Stiglitz, Nobel Prize Winner for Economics, then Chief Economist and First Vice President of the World Bank, was President William Clinton’s Chief of the Council of Economic Advisers, at the time the Uruguay GATT Round (which culminated in 1994) was negotiated under the pressure of large pharmaceutical corporations. The US Government fought to introduce as a key element the strongest protection possible for intellectual property “rights”. This is his testimony on this point:
" the Council of Economic Advisers .. was concerned that in the Geneva trade negotiations, the US Trade Representative was not adequately balancing, but simply reflecting the pressures that pharmaceutical companies were exerting on him.... The Council is also concerned that these new protections could lead to medicines in developing countries being very highly priced, depriving the poor and sick of medicines they were desperately needing ... we are concerned that on signing the Uruguay Round treaty, we would, at the same time, have signed a death-guarantee for thousands of those in developing countries that would be deprived of medicines that could save them ...our concerns were real" (Joseph Stiglitz, "The Roaring Nineties", 2003).

In the WTO, in 2001, some limited leeways were finally introduced with respect to medicines - obligations on intellectual property that countries will have to respect from 2005. These leeways permit developing countries to expedite mandatory licenses to produce generic medication, under conditions that each country can determine for itself. It will be decided in further negotiations, if parallel imports will also be permitted.

By signing up to this Treaty, Central America has excluded itself from these and other future flexibilities that are negotiated. This treaty with the US not only contains provisions that actually makes it impossible to exercise these limited leeways, but also provides a significant number of additional obligations, in this field, (and in all other fields), that end by closing off indefinitely access to generic medicines for impoverished people.
"the risk of a bilateral that you have negotiating power relations (between the US and some small countries) that are even more imbalanced (than in multilateral negotiations). It is not the United States against “developing countries”, but the United States against Morocco, the United States against the small Caribbean countries. One aspect of this that is more telling, is access to life-saving medicines. There is a widespread consensus, I think, of moving into the latest round (of the WTO) which is called "TRIPS minus", a revision of the Agreement on Intellectual Property to rebalance, to the benefit of developing countries. In bilateral agreements, on the other hand, the US has insisted on the quest for a TRIPS-plus", imposing even more restrictions than we have in the United States, restricting generic medicines even more than they are restricted in the US, and this obviously becomes the focal point of opposition but this was not only in one area. The United States simply did the same thing in one area after another, maximizing resentment " (Joseph Stigliz, Questions and Answer Period, Center for Global Development, The Stiglitz Plan: From Doha to the Developing World Saturday, April 26, 2004,

We could paraphrase Stiglitz and say:
"Our concern is that, on signing this treaty – a vehicle for absolute submission to the pressures and demands of the US – we are at the same time signing off a death guarantee for thousands of those that would be deprived of medicines that could save them."...

 source: El TLC como marco regulatorio supraconstitucional y supra-democratico