WASHINGTON -- President Barack Obama and Sen. Elizabeth Warren (D-Mass.) have been locked in a public feud over whether free trade agreements can be used to undermine the 2010 Wall Street reform law. On Wednesday, the Canadian government sided with Warren.
Canadian Finance Minister Joe Oliver gave a speech in New York arguing that the Volcker Rule -- a key tenet of the 2010 banking law -- violates the North American Free Trade Agreement. The move underscores Warren's warning that such deals, including the Trans-Pacific Partnership that Obama is currently negotiating, jeopardize financial reform.
The Volcker Rule bars banks operating in the U.S. from speculating in securities markets for their own profit -- a risky activity that can put taxpayers on the hook for big bailouts if the bank bets turn sour. But there are exceptions to the rule. For instance, banks are allowed to hold U.S. government debt in their own accounts.
But those same banks aren't allowed to trade in Canadian government debt. Oliver thinks that's a NAFTA violation. Although he didn't lay out his argument in detail on Wednesday, NAFTA, like the TPP, generally bans countries from discriminating against each other's financial services. NAFTA prohibits policies that limit cross-border trade in financial services and requires the U.S. to treat Canadian companies the same way that it treats U.S. companies.
The U.S. Treasury Department vociferously rejected Oliver's claim in a statement provided to HuffPost.
"The Volcker Rule is clearly not a violation of NAFTA or any other trade agreement, all of which explicitly safeguard the ability of the United States to protect the integrity and stability of our financial system," a Treasury spokesperson said. "The Volcker Rule is a key prudential financial regulation that prohibits risky proprietary trading while protecting taxpayers and the depth, liquidity, and stability of U.S. capital markets. NAFTA does not weaken our ability to implement Wall Street Reform now or in the future, and neither would any trade agreement we're negotiating."
It's true that NAFTA contains an exemption for "prudential" regulation, and financial reform watchdogs strongly agree with the Treasury Department's interpretation. But it's not an airtight case.
Sorting out whether the Volcker Rule qualifies for that exemption is the sort of thing that a court would traditionally determine under U.S. law, and U.S. courts typically give significant deference to the views of the executive branch. U.S. courts, however, don't have jurisdiction over NAFTA or any other free trade pact. International tribunals do.
"The administration can say whatever it wants about its interpretation of these trade agreements," said Marcus Stanley, policy director at Americans for Financial Reform, a Wall Street watchdog group. "The problem is, under the terms of these agreements, they are not going to be interpreting them. Private tribunals of trade lawyers are going to be interpreting them, and there are going to be plenty of openings, as this shows, to make claims that critical prudential regulations conflict with trade agreements. And eventually one of those is going to win out."
Treasury has known about Oliver's objection to the Volcker Rule for more than a year. As far back as 2011, a lobbying group representing Canadian banks claimed that the Volcker Rule runs afoul of NAFTA in arguments presented to U.S. regulators. But none of this turmoil prevented Obama from flatly rejecting Warren's contention that trade agreements, particularly the TPP, can be used to attack financial standards.
"The notion that corporate America is going to be able to use this provision to eliminate our financial regulations and our food safety regulations and our consumer regulations -- that's just bunk," Obama told reporters in an April conference call. "It's not true."
In the same discussion, the president also suggested that Warren's trade warnings were "dishonest" and constituted "misinformation."
Canada may not opt to pursue a NAFTA case against the U.S. over the Volcker Rule. If it doesn't, Canadian banks won't have the right to sue on their own because NAFTA bars individual companies from suing sovereign nations over most financial services violations.
But the TPP would be different, according to congressional briefings by the U.S. Trade Representative, which are reflected in a December letter from Warren to Ambassador Michael Froman, the top Obama trade official. The TPP wouldn't just empower foreign governments to sue the U.S. over bank regulations; it would allow individual companies and investors to bring such cases.
Under the "investor-state dispute settlement" process, an international tribunal cannot overrule a law or regulation, but it can assess financial penalties to encourage countries to change said law or regulation. In the past, under other trade deals, the mere existence of such cases has sometimes pressured governments into abandoning non-financial services regulations.
Moreover, the TPP would reportedly allow foreign banks to sue the U.S. government for failing to provide them with a "minimum standard of treatment." The term is vaguely defined, but international tribunals have interpreted it very broadly to make corporations eligible to receive damages for lost profits caused by policy changes that occurred after they invested in a country. Rep. Maxine Waters (D-Calif.) raised similar concerns in her own December letter to Froman over the Transatlantic Trade and Investment Partnership, a pending trade deal with Europe.
Obama's "bunk" comments referenced investor-state dispute settlement. In the same call, he insisted that progressives should see the TPP as a major step forward from NAFTA.
But some of the world's largest and most powerful banks are headquartered in Europe (covered under the TTIP) and Japan (part of the TPP talks).
"If our trading partners are already invoking existing U.S. trade pacts to issue clear threats against Wall Street reform, why would we undertake an unprecedented expansion of this trade model's threat to financial stability by fast-tracking TPP and TTIP?" asked Ben Beachy, research director at Public Citizen's Global Trade Watch.
Financial watchdogs worry that future administrations will not share Obama's commitment to the Volcker Rule and other safeguards, making them more willing to cave in the face of trade pact pressure.
"If we have a future president who interprets this differently, we're going to be in a lot of trouble," said Stanley.