Blog: Trade Agreements Can Have a Huge Impact on a Nation’s Life

By Carolyn Burstein
October 16, 2014

Included in every significant U.S. trade deal of the past 25 years is a system of private tribunals, known as the Investor-State Dispute Settlement (ISDS), which allows corporations to sue governments when they feel that their financial interests have been breached by a government policy, rule or regulation. These suits are not heard in any court, but in an extra-governmental tribunal consisting of three judges engaged for just that one case. And there is no appeal from that tribunal to a higher court. Under ISDS, there is no higher court.

The position of the U.S. Trade Representative (USTR), who represents the U.S., is that ISDS attracts foreign investment by protecting investors from government expropriation or rogue judgments in countries with weak judicial systems. The inclusion of ISDS mechanisms in the Transatlantic Trade and Investment Partnership (TTIP), the most significant trade agreement between the U.S. and the EU currently in negotiation, has actually endangered its passage because of growing opposition from strong constituencies in both the EU and the U.S. At this point, officials in both areas as well as their respective business groups support the inclusion of ISDS in the TTIP, although approval is waning among EU leadership (more on this later).

While the above reasons of the USTR for favoring ISDS hardly pertains to the EU where well-established legal systems and effective protections for investors exist, the U.S. insists that the goal of the TTIP is to close loopholes in existing bilateral deals and set a high standard for future trade agreements, especially in countries whose judicial systems are not as highly developed as those in Europe. However, those arguments have not convinced the majority of those who oppose ISDS.

The Greens/European Free Alliance in the European Parliament has written several reasons on its website why ISDS is not needed in the TTIP and they are similar to arguments presented by groups on both sides of the Atlantic. These “fundamental flaws” in the dispute system were listed in mid-July 2014 after a period of public consultation (a significant exercise in transparency not used as extensively in the U.S.):

  • ISDS has a chilling effect on regulations because of the possibility of a costly legal dispute between a government and a company. The costs of defending a case are so high — $8million on average — as to act as a disincentive to public policies that might affect corporate interests. The threat alone acts as a deterrent for governments in their efforts to protect citizens or their environment.
  • Almost 75,000 companies (the number of U.S. companies operating in the EU and vice versa) could potentially seek damages from the U.S. and the EU governments (thus citizens, through taxes).
  • Only foreign investors can use ISDS panels (or tribunals); regular citizens and domestic companies must continue to use the normal legal system of courts.
  • ISDS is explicitly designed to operate outside the regular legal system and does not require that local remedies be exhausted, thus undermining democracy and the rule of law.
  • ISDS allows companies to sue governments for any legislation they deem unfair or inequitable that is developed after the treaty becomes effective, thus fundamentally shifting the balance of power between investors and states in a way that undermines fair resolution of legal disputes.
  • ISDS is not bound by legal precedent, which makes many of its decisions seem arbitrary and introduces a high level of uncertainty into the system.
  • ISDS is the only international dispute settlement system giving rights to corporations instead of states.
  • EU guidelines mandate an impact assessment in any situation where substantial sums can be transferred from the EU to foreign entities. Such an impact has never occurred.
  • ISDS proceedings are held behind closed doors and are totally non-transparent even though cases may involve an issue of high public interest.
  • Even without ISDS mechanisms, the EU and U.S. already trade huge volumes ($2.2 billion in 2012), proving that ISDS is unnecessary.
  • Risk insurance is offered to all companies by a host of providers, one of many alternatives to ISDS.
  • Corporations have become more aggressive in the past few years with substantial challenges to government policies. Only 50 ISDS claims were filed in the first 50 years of investor-state dispute settle, but 58 new cases were initiated in 2012 alone. In a September 4, 2014 letter to the USTR, an array of U.S. organizations (e.g. AARP, AFL-CIO, Center on Budget and Policy Priorities — CBPP, Consumers Union) wrote: “Biased outcomes, large compensation awards and the potential for forcing policy changes appear to be driving an unprecedented number of challenges by global corporations.”
  • U.S. state and local governments have no standing to defend the state and local policies that are often challenged in ISDS cases.

Most importantly, in light of the primary reason given by the USTR for supporting ISDS, there is no conclusive evidence that signing investment treaties with ISDS mechanisms leads to increased foreign investment. As a matter of fact, nearly all governments around the globe are doing everything they can to lure foreign investment and few are experiencing difficulty if they have sound domestic policies in place — not trade agreements. For example, neither Brazil nor China has signed many trade treaties, yet both have attracted substantial amounts of foreign direct investment, according to an article in the October 1, 2014 issue of the Financial Times.

It appears that many of the foregoing problems with ISDS as well as numerous concrete examples from countries with ISDS trade agreements have given pause to officials in the EU, especially after they received more than 150,000 comments (mostly against the inclusion of ISDS in the TTIP) during their public consultation period. They have also been influenced by the countries of South Africa, Brazil, India and Indonesia, which have established policies against ISDS-type tribunals in international trade agreements.

Lauding South Africa’s policy of opposition to ISDS, Joseph Stiglitz, a Nobel Prize-winning economist, wrote that the real reason for including such tribunals in any investment agreement is “to restrict governments’ ability to regulate and tax corporations — that is, to restrict their ability to impose responsibilities, not just uphold rights. Corporations are attempting to achieve by stealth — through secretly negotiated trade agreements — what they could not attain in an open political process” (quoted in an April 24, 2014 blog by Thomas McDonagh in “Our Kingdom: Power and Liberty in Britain”).

What are some egregious examples handled by secretive trade tribunals that have impelled a change of attitude in many German officials, including Angela Merkel, in the new President of the European Parliament, Jean-Claude Juncker, and in numerous other EU officials? Here are a handful of many cases that are offensive to most democratic countries:

  • Philip Morris International v Australia’s Plain Packaging Law: the company maintains that Australia has expropriated its intellectual property by insisting that its cigarettes be sold in plain drab packaging with warning labels and stark images of their unhealthy effects on the human anatomy, as Australia’s 2011 law demands. Case is still pending, according to an October 6, 2014 article in the Financial Times.
  •  Eli Lilly (pharmaceuticals) v Canada: the company claims that a Canadian court decision which invalidated one of its patents breached international obligations that are part of NAFTA. This case challenged in a trade tribunal a drug patent ruling from a Canadian court, according to an August 1, 2014 issue of Citizens Press.
  • Lone Pine (Canadian Oil and Gas Company) v Quebec: the company claims that Quebec’s moratorium against all oil and gas exploration activities under the St. Lawrence River, adopted by the province in June 2011, is a form of indirect expropriation without compensation of the company’s potential future profits.
  • Vattenfall (a Swedish energy company) v Germany: the company has sued Germany through the ISDS process for its post-Fukushima decision to phase out nuclear power plants throughout the country. This case followed a prior case in which approval of Vattenfall’s permit to build a coal-fired power plant was conditioned on its taking measures to protect the Elbe River from its waste products. Because of the company insisting on $1.9 billion in damages, Germany eventually lifted its conditions and allowed the company to build the plant, according to a Harold Meyerson editorial in the October 9, 2014 Washington Post.
  • Pacific Rim (a Canadian mining company) v El Salvador: the company contaminated 90% of El Salvador’s surface water and when the government attempted to withdraw its mining permit, Pacific Rim sought $314 million in damages, an outrageous amount based on El Salvador’s GDP (that amount would be equal to nearly 2% of its GDP), according to Lauren Carasik in the October 1, 2014 issue of Foreign Affairs.

The latter case is emblematic of tribunals awarding damages that are not only onerous for struggling economies like that of El Salvador, but force their eventual capitulation, and make them wary of laws sought by environmentalists to prevent global warming. After all, do secretive tribunals have the power to dictate the terms of development for emerging economies?

In the EU environmentalists worry that the TTIP’s inclusion of ISDS panels would allow big U.S. oil companies to challenge anti-fracking laws in various countries and other strict environmental regulations. Consumer groups and others are disturbed by the possibility that the EU’s ban on genetically modified foods will be challenged by American agribusiness. These are major concerns outlined in a March 10, 2014 article written by Shawn Donnan in the Financial Times.

Groups in the U.S. also have concerns about the consequences of accepting the standard clauses of ISDS in the TTIP and other trade agreements. For example, many of these groups point to global pharmaceutical companies that could challenge state legislatures, the Congress, or public agencies in their ability to manage pharmaceutical costs in public programs. Probably the worst fear on both sides of the Atlantic, is the proliferation of cases before ISDS panels at the present time  involving investments in oil, gas and mining — 9 cases are currently pending in bilateral treaties between the U.S. and various countries in the EU, all brought by U.S. investors. At risk are a whole range of environmental laws and regulations.

It is one thing to have liberal economists like Joseph Stiglitz and Paul Krugman argue that ISDS panels undermine the sovereignty of nations, but it is quite another when the head of the trade division at the libertarian Cato Institute, Daniel Ikensen, says that ISDS protections not only have amounted to a corporate subsidy, but also that now such tribunals have become toxic. He continues to plead that ISDS be eliminated from all trade agreements.

Trade officials and supporters of ISDS contend that ISDS tribunals issue commonsense rulings, for the most part, and that frivolous cases rarely succeed. In addition, by allowing negotiations of ISDS to proceed, a welcome opportunity will be created for closing loopholes learned from other trade agreements and will raise the bar for future treaties. But, as some members of the Cato Institute claim, these arguments grossly underestimate the depth of popular opposition to the use of any ISDS mechanisms.

Some remedies that have been discussed include: clearly defining the grounds under which foreign investors may seek compensation; clarifying the nature of each dispute clause; opening all hearings, documents and cases to the public; and, exempting from challenge all regulatory actions designed to protect legitimate public welfare objectives such as public health, safety and the environment (these remedies are discussed in greater detail in a lengthy article in the October 1 issue of the Financial Times and a July 31, 2014 article in a Woodrow Wilson International Center for Scholars’ blog entitled “ISDS: A Sticky Issue in Both the TPP and TTIP”).

Skepticism, even outright rejection of retaining ISDS mechanisms in international trade agreements, is growing in both the EU and the U.S., making remedies appear rather quaint. In the U.S. suspicion of ISDS is partly fuelling the reluctance of Democrats to grant the president fast-track negotiating authority, according to Cato Institute’s Ikenson.

Nations with  poverty requiring them to seek foreign investment, should not be bullied by corporations, whose chief concern is to maximize profits, but should be able to protect their citizens through safeguards to their health, safety and general well-being and in accordance with their needs as well as those of their environment. The supporters of ISDS tribunals have not provided viable proof that they are either essential to international trade agreements or necessary for the implementation of the TTIP.

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