Yves Smith writes the blog Naked Capitalism. She is the head of Aurora Advisors, a management consulting firm, and the author of “Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.”

Nafta has been effective at helping major corporations at the expense of ordinary American citizens. Most critics have focused on Nafta-related job losses. But they miss the true significance of this and subsequent mislabeled “trade” agreements.

Arbitration panels designed to protect transnational investments have precedence over domestic courts and the rights of Americans.

Most of Nafta’s text was devoted to investments, specifically the granting investors rights relative to what Nafta defined as investments. The premise of these provisions in Nafta and similar treaties was that some of the signatory nations had legal systems that might authorize the expropriation of assets, like factories, so foreign investors need recourse to safe venues to obtain compensation. Provisions of this type have been included in subsequent American free trade agreements and are expected to be increased considerably in the pending Trans-Pacific Partnership.



These investor provisions restrict the rights of governments to regulate these investors and their investments. For instance, investors can sue by arguing that if a government changes policies, regulations, or modifies the terms of a contract, such that the investor has suffered a loss of potential profits. A review of cases filed shows they’ve attacked operations at every level of government.

The mechanism for enforcing these sweeping investor rights is “investor-state” arbitration panels, which operate outside of and have been given precedence over domestic court systems. The result has been to give foreign investors greater rights than those of home country citizens and businesses.



Not only is this system hermetic and unaccountable, it is also cronyistic. Public Citizen ascertained that only 15 arbitrators have handled 55 percent of the disputes under various pacts. Even worse, the panelists work both sides of the street, and bring cases before these tribunes; indeed, in one case, the arbitrator was ruling on a case lodged by a client. Thus it’s in the arbitrators’ interest to issue aggressive rulings to facilitate more cases being filed.



Not surprisingly, the result has been more frequent, aggressive and larger cases over time. For instance, under Nafta, Lone Pine Resources is suing the Quebec government for $250 million for placing a moratorium on fracking in the St. Lawrence River basin. Similarly, Canadian drug maker Apotex has filed a case seeking $520 million of damages because the F.D.A. limited exports to the U.S. as a result of poor marks on inspections of manufacturing facilities. If it wins, Apotex would get to dump the costs of its deficient practices on American taxpayers.



The pending Trans-Pacific Partnership and its European cousin, the Trans-Atlantic Trade and Investment Partnership, would considerably strengthen various investor rights, such as intellectual property rights, and would also include financial services among the industries having recourse to these panels. This would serve to exempt foreign companies from most national regulations. These investor provisions have nothing to do with the case for “free trade,” yet slipping them into so-called free trade deals has led economists and the media to give them a free pass.



Join Opinion on Facebook and follow updates on twitter.com/roomfordebate.

