Exxon, VW and the TPP

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There have been recent developments in three important stories. First, the full text of the Trans-Pacific Partnership (TPP) has been released. Second, the New York Attorney General has opened an investigation following revelations that Exxon Mobil’s scientists were warning it about the dangers of global warming as early as the 1970s. Third, Volkswagen is reportedly considering offering monetary compensation to purchasers of its diesel cars that the company programmed to give falsely low results on emissions tests.

To see why these stories are connected it is important to understand that the TPP (like its sister agreement, the Transatlantic Trade and Investment Partnership, currently being negotiated between the EU and US) is not really about tariffs, which are already very low between the negotiating countries. Instead, one of the important chapters is on “technical barriers to trade.” As described in the executive summary provided by the US Trade Representative (USTR), the chapter:

ensures that technical standards-setting, conformity assessment procedures, and technical regulations are fair and transparently developed, with opportunities for meaningful input and “bottom-up” participation in standards-setting.

There is a lot packed into this, but two key concepts are “conformity assessment procedures” and “bottom-up.” The USTR explains that

TPP parties will provide “national treatment” to one another’s conformity assessment bodies—that is, testing and certification performed by another Party’s qualified conformity assessment body will be accepted as confirmation that its products, services, or systems meet requirements of the other Party. This will make it easier for U.S. exporters to have their goods tested or certified only once before accessing other TPP markets, reducing costs and burdens for U.S. businesses.

This means that if one country’s testers determine that product meets regulatory standards, all other countries will have to accept that determination. In other words, a corporation can shop around for a country with lax product testers, have their products determined to be in conformity, and then avoid testing in all other signatory countries.  Of course, countries with regulators that are eager to please business interests or, equivalently, are easily captured by those interests, will win that competition for business. There is even the possibility of product testers in one country approving products barely used in that country, so they don’t have to worry about the costs of poor regulatory enforcement.

This race-to-the-bottom dynamic  sounds bad enough, but is made worse by bottom-up participation. Again, from the USTR’s own explanation:

U.S. private standard-setting bodies operate from ‘the bottom up,’ with participation by businesses, engineering and scientific associations, academics, government agencies, and the broader public.

To translate, private companies work with other private companies to set the tests they will have to meet. The USTR describes this as a way “to work with companies across a sector to develop appropriate standards that are consensus-based.” It’s nice that “the broader public” get to participate too, but the idea that you or I are playing any role in this process is absurd. It’s a basic axiom of public choice theory that the public will, in practice, be inaudible beneath the din of powerful, wealthy, special interests. “Bottom up” is a euphemism obscuring the role played by powerful institutions that are designing the regulations to which they will be “accountable.”

Volkswagen was able to deceive the public and its consumers for years about its car’s carbon emissions because it could ensure that it faced an emissions test that it had designed a way to cheat. The company’s job would have been even easier if it only had to persuade one country’s regulators to adopt the test that suited it, and easier still if that test had been carried out by a private company which would presumably have to compete with companies in other countries for the business. It’s hard to imagine what that competition could possibly consist of other than a drive for cheaper tests that are easier to pass (limited only by the need to maintain the camouflage of legitimacy).

The great thing about a competitive market, at least in theory, is that participants compete by offering continually less expensive or more desirable products. But there is no reason to believe that that competition would be limited to offering better products. The illusion of “better” is sufficient.

Corporations seek potential profits with the same certainty and moral limits as water does when seeking its own level.  If it is profitable to lie and cheat — even if such conduct contributes to the destruction of the planet — then corporations competing for that profit will tend to lie and cheat. Sure, some business people may have scruples and moral limits, but others will not.  The former will have to compete with the latter if they hope to stay in the game.  Any moral duties limiting one’s ability to compete will be modified by duties to maximize shareholder value.  When torn by such mixed incentives, people are masters at creating and exploiting any moral ambiguities to do the wrong thing.  When the law and competitive forces themselves create those ambiguities and rationalizations, the hard work is done.

This is the lesson of Exxon and VW. We shouldn’t trust the claims of corporate spokespeople, nor should we trust them to regulate themselves. As Hanson and Kysar wrote in 1999,

[M]anipulation of consumers by manufacturers is not simply a possibility in light of the behavioral research but. . . an inevitable result of the competitive market. Cognitive biases present profit-maximizing opportunities that manufacturers must take advantage of in order to stay apace with competition. . . . [N]ot only can manufacturers achieve these effects, but the hidden hand of market forces requires that they do so in order to remain competitive.

As Akerlof and Schiller more recently wrote in Phishing for Phools (quoted by Chris Dillow here):

Competitive markets by their very nature spawn deception and trickery, as a result of the same profit motives that give us our prosperity.

There may be some good reasons to have corporations (see Coase). But it is in their nature to prioritize profits over truth and morality. For profit, corporations almost always exaggerate and overstate the cost of compliance with environmental regulations, because that’s the rational thing for them to do. For profit, the tobacco industry lied for decades about the health effects of smoking while half a million Americans were dying every year:

In 2006, US District Court Judge Gladys Kessler ruled that the tobacco industry’s campaign to “maximize industry profits by preserving and expanding the market for cigarettes through a scheme to deceive the public” about the health hazards of smoking amounted to a racketeering enterprise.

None of this is meant to imply that corporations should be abolished; the point is that it is time to rethink the role of corporations in policymaking. The TPP is a perfect example. The deal was negotiated in secret, with the public not given access, and even members of congress only allowed to see certain sections without staff present and without being allowed to take notes. The text has only been available through leaks until it was just released, with the negotiations completed. However, hundreds of corporate advisors had access throughout the negotiations, in a prime example of what “bottom-up” participation by business really means. It’s regulatory capture in prototypical form. Corporations used the access they were granted to preserve their future access by cementing “bottom up” participation, and by ensuring that the TPP is riddled with provisions, such as investor state dispute resolution, that benefit them at the expense of the public, workers, and the environment.

Even if Coase is right that we need corporations, Stigler is right that they capture our regulation. And Hanson and Yosifon are right that it goes much deeper than our simple vision of a regulatory agency, so instead of the solution to capture that corporations proposed (deregulation), we need to find a way to continue to regulate them while rejecting the ideology that leads us to show them so much deference.

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