Shadow Government

One of the Biggest Objections to the TPP Just Went Up In Smoke

Philip Morris just lost the case against the Australian government that had opponents of the deal wringing their hands.


In chaos theory, there’s something called the “butterfly effect,” whereby a small change in a far part of the world (the flapping of a butterfly’s wings) can have a major impact in another (changing the path of a hurricane). Something like that just happened in international trade.

In trade, the linkage is between prospects for the massive Trans Pacific Partnership (TPP) agreement — at the center of U.S. President Barack Obama’s commercial and foreign policies — and an obscure arbitration case before a court in Singapore.

While the TPP was being negotiated back in 2011, Australia decided to take a stand against cigarette smoking. Its parliament passed a law specifying the kind of packaging that producers could use; it had to be plain and feature very prominent health warnings with graphic images.

This did not sit well with tobacco companies, of course. They felt they had been wronged. Philip Morris decided to do something about it. It requested arbitration under Australia’s 1993 bilateral investment treaty with Hong Kong. It sought billions of dollars in damages on the grounds that it would suffer substantial losses from its investment in Australia because of the new legislation.

This helped launch the storm. Health activists and others were mortified that a tobacco company could penalize a government billions of dollars for adopting such regulations. It seemed to tilt the playing field entirely in favor of nefarious corporate interests. It cast doubt on the whole system of investor protection in trade agreements.

As investment has become a steadily more important part of international trade, such protections have proliferated. A key provision in the TPP and other major U.S. agreements is called “Investor State Dispute Settlement” (ISDS). It is meant to provide investors with some recourse if a host government wrongs them. It is particularly valued by businesses in countries where the judicial system is weak or corrupt. That was never the claim about Australia, but it is far easier to keep this provision in all agreements than to declare on a case-by-case basis that the partner country has a rickety legal system.

Proponents imagine a scenario where a foreign investor is subject to “hold up” once it has sunk money in a country. A venal government could demand payoffs under the threat of punitive and spurious regulation. ISDS might be the investor’s only recourse.

But scenarios like the Philip Morris lawsuit drew widespread alarm. Sen. Elizabeth Warren (D-Mass.) based her opposition to TPP on the ISDS clause. It is a major reason why German public opinion has turned against the proposed U.S.-EU deal (the Transatlantic Trade and Investment Partnership, TTIP). It is intolerable to think that the power to regulate in favor of a cleaner environment, better health, or worker’s rights could be discarded through such a pro-corporate clause.

The one caveat was that Philip Morris had not won its case. It had only filed it. The protests were based on the supposition that Philip Morris would carry the day. But it didn’t. The Permanent Court of Arbitration in Singapore just threw out the case, saying it did not have jurisdiction. Australia won. Philip Morris lost.

So everyone can relax, right? Of course not.

Given the furor over the pending cigarette case, the TPP countries agreed on an ISDS clause in October that excluded tobacco from its protections. That drew strong complaints from Sen. Thom Tillis (R-N.C.), who vowed to oppose the agreement on the grounds that it was unfair to single out an industry for exclusion this way. “Once you carve out someone from dispute settlement agreements, then who’s next?” Sen. Richard Burr (R-N.C.) and Senate Majority Leader Mitch McConnell (R-Ky.) were reportedly unhappy about this as well.

In the House, the chairman of the Ways and Means subcommittee on trade, Rep. Dave Reichert (R-Wash.) estimated that 15 Republicans who had previously supported the president on trade would oppose the TPP because of its tobacco treatment.

It’s never possible to please everyone with a trade agreement. The problem, though, is that there are large (heavily Democratic) groups in the House and Senate who are philosophically opposed to the TPP. Those who base their opposition on ISDS do not seem to have been won over by the tobacco exclusion. Since the trade votes of June revealed very narrow margins in favor of the president’s agenda, the loss of a few votes can be critical. And it’s never wise to alienate the Senate majority leader. The tobacco carve-out is not the only obstacle to TPP passage, but it’s a significant one.

The tobacco case that kicked off the furor has been snuffed out. The butterfly was just crushed. But the hurricane’s path may be set anyway.


Phil Levy is the chief economist at Flexport and a former senior economist for trade on the Council of Economic Advisers in the George W. Bush administration. Twitter: @philipilevy

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