Free Trade Agreements and Sovereignty

Public distrust over free trade agreements have risen over the past few years as they become more common. Recently, public opinion worldwide has been critical of the announced Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). If approved, the two agreements would tie together not only the economies, but also regulations and standards, of the United States and eleven other Pacific nations (through the TPP), and the U.S. and the European Union (through the TTIP). As these agreements proliferate, understanding their implications for national sovereignty would allow the people worldwide to know what actions can be taken.

A free trade agreement (FTA) is an accord signed by two or more countries to facilitate trade between each other. The traditional FTA focuses on the reduction of trade barriers, such as import quotas and tariffs, which lowers the prices of imports, expands commercial ties and economic growth. This has made them popular, with the number of FTAs expanding rapidly since the 1990s, providing countries with another tool for development.

However, as economies became more complex, so have FTAs. Now days, an FTA can cover not just the business sector, but also other areas that might seem unrelated to commerce, such as the environment & labor. The extension of FTAs into more domestic sectors brings it into conflict with sovereignty, the centuries-old concept that gives governments the ultimate jurisdiction over its recognized territorial boundaries.

Free Trade Agreements vs. Custom Unions

When FTAs are discussed, many cite the European Union (EU) as the ultimate goal of each FTA: a supranational entity with its own system of governance that restricts the sovereignty of its Member States. However, the EU is not just an FTA, but also a custom and political union. These are important distinctions as each level of agreement (FTA, custom union & monetary union) leads to more limits on national sovereignty. An FTA solely eliminates tariffs and quotas, while each party maintains external tariffs. On the other hand, a custom union not only eliminates tariffs and quotas, but creates a common external tariff for the signatories. Finally, there is the creation of a common market, which removes restriction on the movement of labor and capital between members, and, in the case of the EU, even puts in place a monetary union (the Eurozone, the Member States using the euro).

The table below provides cases for each level of integration and categories the restriction it places on national sovereignty. Low restriction means a country remains sovereign in all respect except for the goals within the signed agreement; medium means a government loses more sovereignty power, usually a government’s right to restrict the movement of people and capital; and high means nations lose substantial sovereignty, including regulatory power within their territory.


Traditionally, FTAs do not impose heavy restrictions on sovereignty as they focus on lowering trade barriers. This is partially due to the fact that signatories are countries with similar levels of development, and companies are confidence of each country’s judicial system. Good examples of these are the Australia-Japan and Australia-United States FTAs, treaties which keep the country’s judicial system as the ultimate panel for foreign investors.

However, as developed countries signed more FTAs with developing countries, companies have demanded more safeguards, increasing a treaty’s jurisdiction and eroding sovereignty. The United States’ extensive FTAs with developing economies have made such investor safeguards a key demand of their negotiation strategy, with such mechanism being part of its FTAs with North America (NAFTA), Central America (DR-CAFTA), Peru, Colombia and Panama.

Sovereignty Restriction under Free Trade Agreements: NAFTA & Investor-State Dispute Settlement

As previously mentioned, recent FTAs have expanded into non-commercial areas and to developing countries. Companies, in turn, demand more safeguards to limit investment risks. These mechanisms are known as investor-state dispute settlement (ISDS). ISDS allow companies to sue national governments in an international panel, which if successful, leads to countries paying compensation to companies. ISDS are common in FTAs signed between developed and developing countries, as companies (primarily from the developed state) are afraid to invest in the developing country, especially if the country has a history of expropriation. ISDS intrudes on a nation’s sovereignty as companies are able to influence national laws through international treaties, keeping the developing countries from diverging from the agreement. The North American Free Trade Agreement (NAFTA) created ISDS precisely for this reason.

NAFTA’s Chapter XI gives its members and private investors an ISDS in which they can challenge “protectionist” laws. This means that all NAFTA signatories, but in particularly Mexico, are held accountable by each other, as well as by private investors. If any expropriation takes place, it must be nondiscriminatory and there must be fair compensation. What is a protectionist law, however, is not defined by NAFTA, leaving the interpretation of the treaty and the “discriminatory” law in the hands of the ISDS and each party’s defense team. NAFTA’s ISDS has been used on all three North American countries by private firms.

Since 1994, Mexico has accepted rulings by independent arbitration against its policies. One example is the Metalclad v.Mexico case. Metalclad, a landfill management firm, challenged Mexico under Chapter XI when one of the country’s municipalities refused to grant the company a permit to build a toxic waste dump area, and the governor of the state soon declared the zone a preservation site. The court ruled that Mexico’s actions were an indirect expropriation of the firm. Despite Mexico’s counter-challenge, the ruling was upheld and Mexico paid the company $15.6 million. Another example is the Karpa v. Mexico case, in which Karpa, a cigarette exporter firm, challenged Mexico’s denial of export tax rebate, and won the case. Mexico’s failure to prove that it was not discriminating hindered its case, and the government was forced to pay $1.5 million in compensation.

Canada and the United States have also been subjects of ISDS cases. In Ethyl Corporation vs. Canada, Ethyl, a U.S. chemical company, challenged Canadian environmental regulation on MMT, a gasoline additive. Canada banned the import of MMT, which Ottawa considered harmful. Ethyl challenged the ruling under Chapter XI and won the case. Ethyl’s victory meant Canada had to pay $13 million in compensation. Finally, there have been multiple cases against the United States, but Washington has yet to lose a one. Overall, Canada and Mexico have paid around $140 million and $204 million, respectively, due to challenges brought against them through NAFTA’s Chapter XI.

The case of NAFTA shows how developing countries are the main focused of ISDS cases. Mexico was the primary target of ISDS, as American and Canadian firms challenged local, state and federal laws that could be seen as discriminatory and protectionist. Mexico’s more developed partners also faced cases against them, and only Canada has lose cases, but at a much lower price than Mexico. However, despite the restrictions NAFTA imposed on its sovereignty, Mexico remains fully sovereign in many other aspects of its economic and political policies, aspects that are not seen across the Atlantic.

Sovereignty Restrictions under Custom Unions: EU & Supranational Laws

Under custom unions, especially political ones, institutional rules are the primary source of sovereign constrain. The European Union is a prime example of this kind of restriction. Under the multiple treaties signed by its Member States, the European Commission (EC) and European Parliament, draft and approve European laws that need to be ratified by national legislatures and become supreme law. To enforce these laws, the European Court of Justice (ECJ) was established, and it rules on matters of EU law.

The interaction between the EU and its Member States is a reciprocal relationship, with both sides influencing each other. In general, EU directives draw on the experience of Member States, creating guidelines that Member States are encouraged follow. An example of this is the EU’s Integrated Pollution Prevention and Control directive, which established the EU’s pollution targets. The framework requires Member States to reduce pollution in relation to the best technology suited for their geographical and environmental situation. In other words, each Member State can take different paths to achieve the EU’s goal, allowing countries such as Sweden to take big steps in reducing pollution, while giving nations such as Spain the ability to lag behind.

Similarly, some Member States transform their national policy into European directives, allowing them to solve problems that cannot be solved at a national level. Germany has predominantly been able to transform their national laws into European directives. An example of this is the harmonization of environmental standards, such as air pollution, in which German vehicle manufacturers and the German government were able to shape and create strong EU rules similar to Germany’s. Similarly, the EU’s anti-GMO laws were primarily driven by France’s desire to safeguard its culture of small farmers. This multi-level governance is uniquely European, giving all actors in the EU – local, regional, national and supranational, independent power and interdependence.

However, when Member States refuse to follow EU directives, especially in the economic realm where European institutions are the most powerful, the EC can begin infringement procedures against Member States through the ECJ, which if it rules in favor of the EC, will give the Member State time to comply or propose a penalty payment.

For example, on December 2014, the ECJ ordered Italy to pay €40 million due to Rome’s failure to comply with EU waste directives. On top of the €40 million, Italy was required, until it fully complied with the waste directives, to pay a penalty of roughly €43 million for each six month delay. Similarly, France was penalized in 2005 with a sum lump of €20 million and an extra €58 million for each six month delay for Paris’ failure to comply with EU fishing rules. These large financial penalties put pressure on EU members to comply with directives, as the excessive amount puts pressure on Member States, especially for smaller EU members, such as Malta and Estonia that do not have the financial capacity as large Member States, such as France and Germany. In fact, according to the European Commission, most infringements in 2013 were caused by Italy and Spain, large EU economies.


Thus within the European Union, national sovereignty is heavily restricted as Member States must follow EU directives. Yet, countries can also influence EU policy, creating a reciprocal relationship. Despite this, economic and foreign policies are restricted as EU directives guide the policies of its 28 Member States. In other words, although each country has their own foreign ministry, they will most likely follow a common foreign policy agreed by all Member States through the European Foreign and Security Policy lead by the Union’s High Representative. Finally, sovereignty of smaller economies are more constrained than of their larger partners as the financial penalties would have a larger impact on their budgets.

What Can be Done – Democratic Participation Key

Given the different types of agreements, different methods of actions are necessary. For FTAs, engaging the national government is sufficient, while for more complex unions such as the EU would mean interacting with both national and supranational institutions. However, a common trend for most trade agreements is that signatory members are primarily democracies. This in turn, gives citizens of those countries the ability to influence governmental decisions through engagement with their governments.

Politicians in democratic governments react to public opinion, given citizens the chance to show their opinion and change the terms of the treaty. A good example is American opinion of the TPP. On June 12, 2015, the U.S. House of Representative voted against giving President Barack Obama trade promotion authority (more commonly known as fast track), which would have given the president the authority to negotiate the TPP and Congress would approve or disapprove the agreement without adding amendments or filibuster. The decision by Democratic and Republican representatives to oppose President Obama is primarily due to American opposition against the treaty. A May 2015 Pew Research Center poll showed that 46% of Americans believe free trade agreements lead to job loses, while only 17% said they lead to higher wages. Political ideology did not make much of a difference in the survey, with Democrats and Republicans supporting FTAs, 58% and 53%, respectively. American politicians, with elections coming up in November, are sensitive to U.S. public opinion.

A similar situation took place in Europe on June 6, 2015, when the European Parliament postponed a vote to support the EC’s negotiations of TTIP with the U.S. EU leaders in Brussels suspended the vote after over 200 amendments were proposed from MEPs (Members of the European Parliament) on the vote. Although Europeans in general support an agreement with the U.S., concerns over ISDS and regulatory standards remain at large. An April 2014 Pew Research Center poll shows that 53% of Americans and 55% of Germans support TTIP, but differences remain in critical areas. 51% of Germans oppose standardizing rules for products and services, while only 18% of Americans oppose it. These figures, combine with the increase anti-American views after the NSA scandal, prompted the challenge within the European Parliament.

What these cases show is the power that public opinion has on the political agenda of free trade. The best way citizens can influence their government’s trade policy is by contacting their government representatives and making their voice hear. Through this mechanism, national sovereignty can be retained and keep public opinion as the cornerstone of politics. Although simplistic in nature, taking the time and contacting their governments is the best move by individual citizens. In fact, most members of the public do not engage with their elected leaders, ensuring that lobbyists and corporate interest have a larger influence on policy than the public.


Free trade agreements have been growing since the 1990s, and they continue to be key components of government economic and foreign policy. With this in mind, the public’s best chance to influence these types of trade and retain as much sovereign as possible is by lobbying their own governments. This is a powerful tool that most people in democratic society take for granted, yet when levied effectively, governments react. The U.S. government states that the TPP and TTIP agreements will shape global rules and policies for years to come. Participation within the democratic system will allow the public to ensure that these agreements keep sovereignty within their national borders.


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