Free trade treaties often enable corporations to sue governments to prevent regulations designed to protect the environment.
By John Feffer
The global economy hit a new milestone in 2022 by surpassing $100 trillion. This expansion, which has experienced only the occasional setback such as the 2020 COVID shutdowns, has been accelerated by trade. The world trade volume experienced 4,300 percent growth from 1950 to 2021, an average 4 percent increase every year. This linked growth of the global economy and international trade took off in the 1980s as governments embraced the project of globalization, which prioritized the reduction of barriers to trade such as tariffs.
The mechanism by which globalization spread throughout the world, the key strand of its DNA, has been the “free trade” treaty.
“We’ve had 30 years of free trade agreements and bilateral investment treaties,” points out Luciana Ghiotto, a researcher at CONICET-Argentina and associate researcher with the Transnational Institute. “They’ve created this enormous legal architecture, what one friend of ours calls the ‘corporate architecture of impunity,’ which has spread like grass and gives legal security and certainty to capital. It has nothing to do with the protection of human rights or environmental rights.”
Indeed, among the many problems associated with the expansion of world trade has been environmental degradation in the form of land, air, and water pollution. More recently, however, attention has turned to the more specific problem of carbon emissions, which are largely responsible for climate change. According to the World Trade Organization, the production and transport of goods for export and import account for 20-30 percent of global carbon emissions.
Embedded in many of the treaties governing trade and investment are clauses that give corporations the right to sue governments over regulations, particularly those addressing the environment and climate change, that adversely affect the expected profit margins of those businesses. These investor-state dispute settlement (ISDS) provisions have a “chilling effect on the regulatory system because governments, worried that they will be sued, decide to delay reforms related to climate change,” points out Manuel Perez Rocha, an associate fellow of the Institute for Policy Studies in Washington. “There have been several cases around the world where companies were able to defeat regulatory changes that favor the climate.”
Trade rules that privilege corporations over the environment are particularly influential in the realm of agriculture, which is an extractive industry no less powerful than mining.
“The global system of trade and investment contributes to the monopoly control by just a few transnational corporations over fossil-fuel-guzzling agrobusiness, whose products are often transported thousands of miles before they reach a dinner table,” relates Jen Moore, an associate fellow at the Institute for Policy Studies. “At the same time. the system has been decisive in making the lives of millions of small-scale farmers more precarious, undermining their role as a better alternative to mass monoculture operations.”
Carbon emissions are not the only byproduct of the agrobusiness that global trade sustains. “There’s also methane emissions,” adds Karen Hansen-Kuhn, program director at the Institute for Agriculture & Trade Policy. “A lot of methane comes from meat production. Nitrous oxide, which is 265 times more potent than carbon and stays in the atmosphere over 100 years, results from chemical fertilizers.”
Throughout the modern era, states throughout the world protected their domestic economies through tariffs on foreign goods and restrictions on foreign investment. Behind these protective walls, states helped local farmers and businesses compete against cheaper imports and deep-pocketed investors.
But states that depended increasingly on exports of cheap industrial goods and surplus food—aided by transnational companies eager to boost their profits—lobbied for the reduction of these barriers. Arguments for “free trade,” traditionally linked to the presumed benefits of globalization, emerged within the most powerful economies in the nineteenth century, but it was more recently, in the 1970s, that states and international institutions dramatically revived this discourse under the banner of “neoliberalism.”
“When we talk about the circulation of capital, we’re talking about trade,” explains Luciana Ghiotto. “That is, import and export for states and the circulation of thousands of vessels and planes for the transport of commodities all around the world. One of the aims of capital is to make that circulation faster, simpler, and easier. Who would not want to make trade easier or faster? Well, the state.”
Faster and more efficient trade, while more profitable for corporations, also has meant a number of negative consequences for states such as job loss among domestic producers. Because of the wide array of free trade agreements and bilateral investment treaties now in force—and the power invested in international bodies to enforce these agreements—states have lost many of the tools they once used to protect or develop national industries.
The spread of the free-trade orthodoxy has had a major impact on the energy industry, which has in turn pushed up carbon emissions. Ghiotto points to the efforts of fossil-fuel corporations to protect their investments in Russia after the collapse of the Soviet Union as a primary motivation to negotiate an Energy Charter Treaty (ECT) in the early 1990s, which guaranteed a free trade in global energy markets. The ECT was originally signed by 53 European and Central Asian countries. Today, another 30 countries from Burundi to Pakistan are in the queue for membership.
Energy companies have taken states to dispute settlement in 124 cases, with around 50 against Spain alone because of its reforms in the renewable energy sector. Companies “have used the ECT as a legal umbrella in order to increase business and profits, or simply to protect their investments against state regulation,” Ghiotto adds. Italy, for instance, instituted a ban on offshore drilling only to be hit by a suit from the UK energy company Rockhopper. In November 2022, the ECT arbitration panel ordered the Italian government to pay the company 190 million Euros plus interest.
“Investors in the mining and oil sector have launched 22 percent of the claims against Latin American states,” she reports. “There was the big case of Chevron against Ecuador. But there have been others. For instance, Ecuador had to pay a $374 million penalty to the French oil company Parenco after the state changed some clauses regarding the amount of taxes the company had to pay in order to give back some of the revenues to the Ecuadorian people.”
Civil society organizations have been pushing for a legally binding treaty at the UN level to make business responsible for human rights violations and environmental crimes connected to their operations.
“Since the UN is made up of states, the more industrialized countries who can invest in the world are opposed to such a binding treaty,” Luciana Ghiotto points out. “In the United States, Canada, and Japan, we’ve seen debates about holding companies responsible for human rights violations throughout the production chain. It’s a relatively new political process. But it’s an example of civil society organizations putting a question of human rights and environmental rights at the center of discussion.”
Efforts at the international level are very complicated, Manuel Perez Rocha concedes: “For instance, the World Bank has the International Centre for the Settlement of Investment Disputes (ICSID) through which corporations can sue states.” He recommends a more regional approach. “We have proposed a dispute resolution center for Latin America that countries could use after pulling out of ICSID. “Unfortunately, most progressive countries have not embraced this,” he reports.
One of the challenges to persuading governments to embrace these alternatives is corruption. “There’s a tremendous circle of corruption,” he adds. “We’re talking here about the revolving door where public officials who negotiate these treaties then become private lawyers or counsellors or board members of the corporations who are lobbying for their adoption. This corruption helps explain why governments sign these treaties even if they’re going to be sued.”
He points as well to the issue of access to critical minerals needed in the green energy transition. “The Biden administration is trying to combat fossil fuels at the cost of communities that live around the deposits of critical minerals like lithium and cobalt,” Perez Rocha explains. “There are a lot of concerns among native populations about how to make this transition to a so-called clean economy without violating human rights and destroying the environment.”
Trade has been a mechanism to make deals around these minerals. “These efforts at near-shoring and friend-shoring have been ways to control the supply chains around minerals and metals,” notes Jen Moore. “The United States in particular but also Canada have made themselves clear: to be identified as a ‘friend’ is to have an FTA or a bilateral investment treaty.”
John Feffer is director of Foreign Policy in Focus at the Institute for Policy Studies.