In this article, Gerbasi and Warner examine global free trade agreements as complex methods of privatization. In the recent push for trade liberalization, lopsided terms in many bi- and multi-national free trade agreements have allowed private foreign investment to sidestep the American public legal system, replacing it with more favorable private international dispute resolution forums. Such actions undermine the bargaining capacity and regulatory authority of state and local governments at a fundamental level, effectively granting superior rights to individual foreign investors over that of U.S. citizens. The goal of trade agreements is not to regulate industry, but rather to limit governmental capacity to restrict the global flow of goods and services, including investments and financial transactions.

The effective delivery of public goods in a quasi-market requires a governance framework that includes the capacity to regulate private action, clear property rights, open dispute resolution, as well as promote diversity of choice and citizen access. To ensure effectiveness, accountability, and legitimacy in this market setting, the tools of governance must be employed to manage the complex interactions amongst the myriad public and private actors. But existing local and state legislation (such as zoning or environmental statutes) may be swept aside if deemed to be in conflict with rules established under trade agreements. These exemptions fundamentally undermine the critical assumption of zero transaction costs put forth by Coase (who argued that voluntary/private markets could adequately provide public goods). More troubling, they also infringe on the legitimacy of domestic courts, as well as the democratic process. Thus, in an increasingly globalized economy, states are competing on a playing field that views democratic checks and balances as nontariff barriers to trade.

The U.S. Constitutions empowerment of state sovereignty has traditionally cast the state as an umpire, seeking to balance the needs of private interests with the public good. Yet major free trade agreements such as NAFTA explicitly privilege foreign private interests with benefits such as government takings liability, choice of the least restrictive regulatory review, and the ability to substitute private adjudication for public courts. Thus, foreign investors may simply choose another umpire.

More favorable outcomes under rules such as NAFTAs Chapter 11 have led firms to file claims in international dispute resolution forums, avoiding the U.S. legal system altogether. Private international arbitration does not include public access to witnesses or testimony, submits no deference to the law of the host nation or subnational government, has a narrow appeals process, and is under no obligation to follow legal precedent. Trade rules are the main criteria. For example, a Canadian methanol-production firm challenged Californias ban of a groundwater contaminant, charging that this treatment violated the firms right to be governed by the least burdensome trade method available under NAFTAs Chapter 11. The $970 million claim dragged out over six years and covered various allegations of business damages. Although the NAFTA Arbitration Tribunal eventually ruled against the company, exposure to this level of takings liability could conceivably bankrupt a local government and unquestionably diverts resources from important public works.

In closing, our authors assert that complex contracts require hierarchical control to balance competing interests through market governance. Current free trade agreement imbalances push externalities away from private actors, creating a governance deficit in transaction costs and democratic capacity. This myopic approach to free trade undermines the ability of state and local governments to fully engage in actually managing the delivery of public goods.