The corporate architecture of impunity

Transnational corporations, Lex Mercatoria, market authoritarianism and popular resistance.

On 24 April 2013, the eight-storey Rana Plaza building in Dhaka collapsed, killing 1 129 people, most of them female textile factory workers producing garments for international fashion brands. The building had been deteriorating rapidly as it had been designed for shops and offices, not to hold the five factories that operated there. Yet, despite the workers’ protests, the factory managers refused to halt production, with the connivance of the municipal government.

As in many other cases, the factories’ main clients were transnational corporations (TNCs). The Rana Plaza factories form part of supply chains producing clothes for well-known brands such as Benetton, El Corte Inglés, Loblaw, Primark and Walmart. Their parent companies publicly proclaimed a commitment to ensure that their suppliers respect workers’ health and safety standards. But that did nothing to prevent the building from collapsing, nor did it guarantee any sanctions or punishments for the individuals or companies that benefited from the profits derived from lowering labour and safety standards.

The case of the Rana Plaza is one of many that reveals the reality of TNCs and human rights: first, TNCs frequently violate human rights through the business activities that take place all along their global production chains; and second the vast majority of these violations have ended either in impunity or, in the best-case scenario, with compensation negotiated out of court, which lets the guilty parties off the hook.  

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A 2016 report by the Office of the United Nations High Commissioner for Human Rights (UNHCHR) affirmed this: 

“Human rights impacts caused by business activities give rise to causes of action in many jurisdictions, yet private claims often fail to proceed to judgment and, where a legal remedy is obtained, it frequently does not meet the international standard of ‘adequate, effective and prompt reparation for harm suffered’.”

Another UNHCHR report details 22 cases of gross human rights abuses committed by corporations. None of the cases ended with a judgment finding any corporation guilty of having committed a violation of human rights. A high percentage ended with the victims accepting an out-of-court settlement. 

Rana Plaza is a case in point. The Rana Plaza Coordination Committee set up in October 2013 to determine the losses and ensure that adequate assistance was provided to victims and their families. It raised $30 million to compensate the more than 2 800 victims but financial compensation was the sole remedy offered. The guilty parties remain unpunished, and the victims have not even received full and adequate compensation.

We are therefore facing an angulo muerto (“legal dead end”), whereby national and international law not only fails victims and allows the TNCs to go scot free, but even encourages human rights violations within certain large transnational businesses.

Transnational corporations: structure, strategies and human rights dumping

The Portuguese scholar, Boaventura de Sousa Santos, argues that we are living through a phase of “disorganised capitalism”, characterised by the collapse of many previously common forms of organisation. 

The principle of “free markets” and entrenched corporate power has reached such unprecedented intensity that it has diluted the sovereignty and powers of the state, particularly its capacity to respect, promote and protect human rights. The very structure of TNCs allows them to elude and evade the power of any given the state to apply sanctions beyond the reach of its own jurisdiction, while TNCs’ capacity to move production forces states, especially the weakest, in a permanent race to the bottom as they compete to attract foreign investment. 

To understand this process, we need to examine the history and emergence of TNCs. These “new” players, many of which date back many years, were initially referred to as “multinational corporations”. From the 1970s, they began to be called “transnational corporations” – which is more appropriate because multinational suggests a merging of capital from several countries when in reality these businesses are usually a single entity that conducts its business in several countries but is usually owned by capital based in one country.

Deterritorialisation – displacing risks and responsibilities downwards and profits upwards 

While capital remains concentrated, production has become decentralised and delocalised. TNCs are thus able to locate the various production stages in different factories or workplaces, often spread across different countries. They have few links to the local territory, life or market and choose locations due to the local incentives offered by jurisdictions and communities that compete with each other.

The way TNCs work in different countries is through supply chains. This may take the form of foreign direct investment (FDI) by multinational enterprises (MNEs) in wholly owned subsidiaries or in joint ventures in which the MNE has direct responsibility for the employment relationship. It may also include the increasingly predominant model of international sourcing whereby the TNC contracts or subcontracts suppliers and firms for specific goods, inputs and services.

We are looking at large, flexible, mobile businesses that engage intensively in subcontracting and outsourcing throughout their supply chains, taking advantage of differences in labour conditions to use the strategy of dumping of social, environmental and human rights in general – to reduce social or environmental costs and thus increase their profits. In this model, production structured along lengthy supply chains displaces downwards costs, risks, obligations and responsibilities, while concentrating the main benefits in the parent company. 

In most cases production is outsourced to a large number of small and medium enterprises (SMEs), usually located in free trade zones (FTZs) or export processing zones (EPZs). The parent or brand companies manage “non-productive” activities such as research, innovation, marketing and logistics. These offshoring and decentralisation strategies, the direction of which is clearly North-South but is beginning to spread horizontally, are clearly reflected in the Transnationality Index of the United Nations Conference on Trade and Development (UNCTAD). This shows that on average, the world’s top 100 MNCs each have more than 500 affiliates based across over 50 countries.

Source: UNTAD analysis of complex ownership of TNCs based on Orbis data,  November 2015
(Source: UNTAD analysis of complex ownership of TNCs based on Orbis data, November 2015)

Corporate capture of the state

The social and environmental dumping strategies TNCs use to maximise profits from their supply chains go hand in hand with a “promiscuous relationship between the state and businesses”, also known as “corporate capture”. Oxfam International describes this as “the exercise of abusive influence by an elite, for its own interests and priorities and in detriment to the common interest, over the cycle of public policies and state entities [or others that are regional or international in scope], with potential effects on [economic, political or social] inequality and the correct exercise of democracy”.

One clear example of capture is in Ecuador. When Lenín Moreno took power in 2017, he brought representatives from the Chamber of Commerce and large export firms into ministerial portfolios such as the economy and finance, foreign trade and labour. His regulations since show a clear determination to defend major corporate interests, including overturning a tax aimed at preventing land speculation, reducing debts owed by employers to the Ecuadorian Social Security Institute, fewer workplace inspections, and new labour laws to facilitate temporary contracts and flexible working hours.

In the process, Ecuador lost revenue equivalent to 1.2% of gross domestic product (GDP) in 2019, or $1.31 billion, increased income poverty from 21% in December 2017 to 25% today, and the Gini coefficient rose from 0.462 in June 2017 to 0.478 in June 2019, indicating an increase in inequality.

Ecuador is part of a global race to the bottom, meaning a gradual and widespread reduction in standards on rights and their protection. 

Transnational corporations and Lex Mercatoria: corporate capture as the current neoliberal strategy

The structure of corporations and their offshoring strategies, combined with corporate capture, has allowed the rise of a global legal order known as Lex Mercatoria. This can be defined as a new global economic and legal order that comprises a broad set of norms in international law, along with an extensive web of national legislation, aimed primarily at promoting trade and protecting the interests of foreign investors.

This order was consolidated during the so-called “Washington Consensus”, implemented in Latin America in the 1980s using guidelines laid down by the International Monetary Fund (IMF). It then spread to the European Union (EU) through what can now be called the “Brussels Consensus”, implemented at the height of the so-called “euro crisis”. 

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This new “global law” has several facets. First, it includes the norms we have just mentioned: the guidelines, adjustment policies and conditional loans from the IFIs and their rules on state development.

Second, it includes trade and investment agreements, such as lowering tariffs, the gradual liberalisation of services, opening up markets to new products (agro-toxins, for example), the downward harmonisation of regulatory standards and giving foreign investors extraordinary privileges in claims against the state. These have been integral to the mega-regional free trade agreements (FTAs), such as the Trans-Pacific Partnership (TPP), the trade agreement between Canada and the EU (CETA), and all the others recently negotiated by the EU. They not only succeed in changing domestic legislation in favour of corporations, but also have a “chilling effect” (even when not passed) as countries fear to promote policies that might deter FDI or prompt legal actions (through investor-state dispute (ISDS) mechanisms). 

In many ways, trade and investment agreements serve as a “padlock”, armour-plating corporations to prevent possible future privatisation and business regulations. In fact, governments that dared to do so in the “post-neoliberal cycle” in Latin America (2000-2015) were subjected to a total of 267 ISDS claims by foreign investors, equivalent to 28% of all known claims worldwide to date. 

Both pillars of Lex Mercatoria continue to grow. For instance, since 2015 the EU has finalised and adopted trade agreements with Ecuador, Canada and Japan, the Economic Partnership Agreement (EPA) with the Southern African Development Community (SADC), provisional EPAs with Ghana and Côte d’Ivoire, and the Deep and Comprehensive Free Trade Agreement (DCFTA) with Ukraine.

Lex Mercatoria, market authoritarianism and popular protest

The key defining feature of Lex Mercatoria is one of “market authoritarianism” – implacable and difficult to grasp, dictated by a diffuse supra-sovereign state, and able to impose its will through legal and political mechanisms tailored to its interests. This form of authoritarianism has dramatically shaped contemporary global societies, their democratic orientation and human rights. But it has also faced legal strategies, popular resistance and demands for alternatives throughout the world. 

One such national legal strategy against the impunity of TNC is the Loi sur le devoir de vigilance des sociétés-mères et sociétés donneuses d’ordre, adopted by the French National Assembly on 21 February 2017. At the international level, the most important fight at legal level is the so called “Binding Treaty” process. While the process brings together different old social struggles, it was officially launched in June 2014 when the United Nations Human Rights Council of Resolution 26/9 established an open-ended intergovernmental working group with a mission to elaborate an international legally binding instrument to regulate transnational corporations in relation to human rights. 

Beyond legal paths of resistance, there have been many popular forms of protest against Lex Mercatoria, from “Occupy Wall Street”, Spain’s 15M (2011), the “Arab Spring” (2012-2013), the gilets jaunes in France (2018 onwards) to the recent popular resistance movements in Argentina (2017), Ecuador or Chile (2019). 

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Returning to the case of Ecuador, a direct connection can be traced between the IMF’s demands, its agreement with the government of Lenín Moreno, and the massive popular protests that erupted in 2019. Despite extensive repression, the government was eventually forced by the mobilisations of social movements, mostly the indigenous movement, to back down on a measure considered “fundamental” for the country. 

Ecuador’s example underlines the incompatibility of today’s neoliberalism with the wellbeing of the population as a whole, and with democracy itself. It suggests that the social and environmental dispossession demanded by the mechanisms to defend corporate interests can no longer be implemented by democratic means, nor withstand popular will, whether direct (elections) or mediated (parliaments). 

The future is uncertain. Attempts to impose Lex Mercatoria will continue but there will also be social victories along the way, along with the increasingly widespread conviction that we are facing a profound and epoch-making alternative: “democracy or markets”. 

This article was first published in TNI Longreads.

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