Matthias Goldmann is Junior Professor of International Public Law and Financial Law at the Goethe University in Frankfurt. This guest post is Part 1 of a special series on TTIP that we’ll be running in the coming weeks.
The ongoing debate about the Transatlantic Trade and Investment Partnership (TTIP) has shed new light on the effects of trade on economic and social equality. While it is well understood in theory that free trade is likely to generate aggregate welfare benefits, in practice the allocation of these benefits seems to be highly unequal. In developed economies, free trade might lead to the outsourcing of jobs of low-skilled workers to places with lower labor costs. In developing economies, trade might generate low-skilled jobs, but with international competition preventing wages from rising. Entrepreneurs and trading companies rather than workers seem to collect a large share of the benefits of international trade. As I will argue, this threatens the economic, social and cultural rights (ESC rights) of low-skilled workers. Free trade agreements (FTAs) are therefore only acceptable to the extent that participating governments take measures to mitigate their impact on low-skilled workers. To generate revenue for such measures, states should devise strategies to combat international tax evasion and tax competition.
The job risks for low-skilled workers in both developed and developing economies pose a threat to their ESC rights. These rights are recognized by various international treaties, especially the International Covenant on Economic, Social and Cultural Rights. In developed economies, low-skilled workers might experience an infringement of their ESC rights as their enjoyment hinges to a large extent on paid labor. Education, access to health services, access to adequate nutrition, retirement benefits, or the possibility to participate in social and cultural activities presuppose, to varying extents, a job income. While there are variations from one country to another, the modern welfare state is generally built around paid labor. In developing economies, FTAs might entrench low wages and unsafe labor conditions, or lead to job losses through competition from even poorer countries, thereby depriving large segments of society of meaningful human development.
It is not per se illegal for a measure like an FTA to reduce the enjoyment of ESC rights for some segments of society. But from a human rights perspective the mere expectation that it might produce aggregate benefits is not sufficient, either. Rather, the reductions in ESC rights enjoyment need to be non-discriminatory, proportionate, and never undercut a minimum level of enjoyment of each right. As FTAs tend to affect low-skilled workers more than other segments of society, they discriminate against them. When concluding FTAs, states therefore need to put in place adequate remedies in order to ensure the human rights enjoyment of those segments that are expected to lose from free trade.
Human rights law does not prescribe any specific remedies. Several options come to mind. First, states might provide incentives for businesses that can be reasonably expected to generate enough jobs, including jobs for low-skilled workers. Second, states might create a public labor market for low-skilled workers. Third, states might disconnect the enjoyment of crucial services from labor. One option to do so would be the introduction of a basic income. Another option would be the free provision of public services – an idea that has particular appeal since TTIP seems likely to require the privatization of certain public services, or prohibit their de-privatization. Whichever way a state wishing to sign a trade agreement chooses, the baseline for all these options is that they will be costly. States therefore need to ensure that they adequately tax the benefits expected from increased trade in order to generate revenue for the remedial measures.
However, globalization and free trade undermine exactly that capacity. The liberalization of trade relations during the last decades was not confined to trade in goods and services, but also comprised the movement of capital. As a consequence, multinational enterprises may now shift their profits to jurisdictions in which they have to pay less taxes – often without unfolding any meaningful economic activity on the ground. Enterprises or individuals might also develop complex patterns of financial flows involving numerous shell companies in offshore jurisdictions, which allow them to hide some of their wealth or revenue from tax authorities. Such strategies have led decision-makers in developed economies to reduce the tax rates on capital income and on high work incomes, hoping to prevent such practices from spreading further. At the turn of the millennium, the OECD launched a project against harmful tax competition. However, it did not go anywhere as some of its members benefitted from such practices. This made it very difficult to agree on a definition of “harmful” practices. During the last decade, the OECD has therefore shifted towards significantly less controversial activities. It facilitated the conclusion of many bilateral agreements on the exchange of tax-relevant information. However, the Panama Papers revealed the massive loopholes in these agreements. Some states just do not collect the relevant information, for example on the economic beneficiaries of a shell company. One cannot exchange information that does not exist.
This, however, points towards a promising strategy for states seeking to reconcile FTAs with their human rights obligations: they need to combine trade agreements with tax agreements which effectively combat tax evasion and tax competition. Recently, the OECD published proposals for the amendment of existing treaties on the avoidance of double taxation that are expected to have this effect. This would allow states to tap on the profits generated by free trade. Certainly, such treaty amendments need to take into consideration the situation of tax havens, which often enough do not have other sufficiently attractive business opportunities. To ensure truly fair trading conditions for them would be a first step in the right direction. In fact, it’s the original purpose of trade agreements.