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Due primarily to Elizabeth Warren's joint role as a leading critic of the Trans-Pacific Partnership and a critic from the left of the Obama administration's approach to bank regulation, it's natural that the financial services chapter of TPP has been at the center of much discussion.
TPP critics have repeatedly raised the specter of a trade deal broadly undermining American financial regulation. The Obama administration responded to this concern by including a number of pieces of treaty language — including a backstop to the much-debated investor-state dispute settlement (ISDS) process — but it's left critics entirely unmollified. The issue essentially amounts to a complete breakdown of political trust, with critics basically rejecting the idea that any sort of safeguard is adequate.
Many progressives, including Warren, have been waging a years-long effort to shrink, break up, or otherwise destroy America's largest financial services companies. The team negotiating the TPP, by contrast, is trying to secure access to lucrative foreign markets for American financial services companies. From the point of view of the Obama administration, the financial services chapter offers a significant upside in the form of more high-value exports and a very limited downside due to the protections for domestic financial regulation. To the administration's critics, bolstering financial services exports isn't an upside at all — so there's really no level of downside risk that's worth bearing.
Everyone agrees the TPP is good for American banks
The core thing the Trans-Pacific Partnership does is try to ensure that US-based financial services companies — many of which are big, globally competitive, and diversified in terms of the kinds of services they can offer — will be able to compete for market share in TPP partner countries. The agreement to openness is, of course, mutual, but in practice nobody expects much to change in terms of foreign banks operating in the United States.
On the one hand, the US financial sector is already very open — New York City is the global hub of finance, after all — and lots of foreign-owned financial firms are already active in the United States. On the other hand, there are numerous small carve-outs for the United States listed in an annex, guaranteeing that existing elements of US financial regulation will be exempt from TPP's broad claims. All of this is a big win for the American financial services sector.
As the Obama administration puts it, "Rules for trade and investment in the financial services sector in the TPP will ensure that American businesses and workers can serve all these varied markets, promoting economic growth and job development in the United States and throughout the Asia-Pacific region." US-based banks are going to make money selling financial services in Asia, and some of that money will flow into the pockets of people who work in the financial services sector in the United States. That's why the US Coalition for TPP includes the American Insurance Association, Citigroup, Goldman Sachs, and Morgan Stanley.
From the White House's viewpoint, this is a good thing. TPP will support high-value exports in a sector where things like cheap Chinese labor are unlikely to carry the day. But if your passion in life is trying to tear down the firms that sit at the commanding heights of the American banking system, it's not such a good thing at all.
The administration believes it's addressed the problems with ISDS
TPP critics are making a more specific argument as well. The critique offered by David Dayen at the Intercept relying largely on experts at Public Citizen is that under TPP, "financial institutions would be able to appeal any national rules they didn’t like to independent, international tribunals staffed by friendly corporate lawyers." In other words, they fear the application of ISDS to financial services and especially the clause featuring "the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world."
The Obama administration glosses over this as a rather banal set of "claims for denial of justice or failure to provide police protection" — for example, TD Bank could sue if the FBI decided it no longer cared to investigate robberies of Canadian-owned banks. Critics charge that the concept of due process could be an elastic entitlement to compensation for "regulatory takings" that deprive banks of profits by changing rules.
The USTR's office points to statutory language guaranteeing the right to regulate financial institutions in pretty much any way governments like as long as it's nondiscriminatory, but experts I've spoken to allege that ISDS panels routinely ignore this kind of language, and the arbitration process is inherently corrupt due to huge conflicts of interest. The administration's general counter to this is that in reality the US government basically never loses ISDS claims. And with regard to financial services, the administration has what it sees as a trump card ISDS critics aren't really wrestling with: a provision that allows a government to kick a dispute out of the ISDS process entirely and settle it instead on a state-to-state basis between financial regulators.
This seems persuasive if you are willing to accept the good faith of the Obama administration and grant the general premise that it makes sense to have multilateral trade agreements that address non-tariff issues. TPP skeptics are, in general, not willing to do either of those things, and no amount of statutory language can really change that.
Critics may be overthinking this
It's impossible to conclusively prove that no future ISDS panel will, by taking a broad view of regulatory takings, go rogue and start shredding national-level financial regulations in a way that TPP member state governments are unwilling to push back on. But the people selling this story seem to be reaching for slightly outlandish explanations of two issues for which there are more straightforward answers:
- Why do banks like TPP so much?
- How do banks plan to undermine financial regulation?
The main reason banks love TPP is exactly the reason the USTR's office says the financial services chapter is so great: TPP will make it easier for them to serve Asian markets and make money.
Meanwhile, the financial service industry's main plan for rolling back Dodd-Frank doesn't rely on anything so esoteric as an ISDS tribunal. Marco Rubio has vowed to repeal Dodd-Frank. So has House Speaker Paul Ryan. So has Donald Trump. So has Ted Cruz. So has Jeb Bush. This plan of action — hope Republican Party politicians win elections and pass laws relaxing financial regulations — is a perfectly good one, and it far and away constitutes the clearest path forward for banks looking for a friendlier regulatory climate.
