THE BLOG

Leaked Draft TPP, Foreign (But Only Foreign!) Corporate Veto (and Extortion) Power, and the Original Intent of Investor-State Dispute Settlement (ISDS)

06/25/2015 09:22 am ET | Updated Jun 25, 2016

Alarm and criticism has been published about the Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Partnership (T-TIP). Among other well-founded concerns about the process of negotiating the trade treaties, what they may include, and their impacts, is the fact that they are likely to include some form of Investor-State Dispute Settlement (ISDS) mechanism.

These kinds of mechanisms allow foreign investors and companies to seek, through a supra-national arbitration, compensation from governments for actions that interfere with the profitability of business ventures, including, for example, instances where legislatures or agencies enact laws or rules to protect human health and the environment.

It's interesting to look back on the early days of ISDS. One of my first articles -- NAFTA's Indirect Expropriation Protections: Will Compensation Be Required When Ecological Protections Are Applied? Mealey's International Arbitration Report, Vol.15, No.2 (2000) -- explained the original motivation for such provisions: to provide a means of redress in cases of nationalization of assets, especially when foreign investors are restricted in how they may seek compensation in the host nation's courts.

The recent trend toward increased use of ISDS procedures by foreign businesses to (1) effectively veto (or discourage a government from even trying to pass) rules to protect citizens or the environment and (2) seek compensation for losses arising from the passage of laws and rules should therefore be seen as beyond what was originally intended when ISDS was initially imagined.

What should make it even more irritating to anyone -- including those in the business community everywhere -- is that this is not a veto-and-extortion power that is equally available to anyone within a given free trade community created by these treaties. It's not available, most obviously, to advocates for people or the environment. You need to show that an investment or property or potential profits are being affected by a government action.

But odder still, a foreign company or investor has a mechanism to challenge a U.S. federal, state, or local decision or regulation that an American business or investor does not have. Worse still, for those who don't like paying taxes, if the foreign business interest were to win damages or negotiate a settlement, the host country's taxpayers are effectively made to hand over cash to a foreign entity in an undemocratic and non-transparent process without any form of appeal.

Of course, American investors then have this supra-national mechanism for resolving disputes arising in other countries, where those countries' domestic business interests would lack access to these ISDS processes. This should also be unsettling, however, even if you happen to be a purely self-interested US company, since the abuse of ISDS mechanisms by some other Amercian interest could sour the investment and business climate for you.

A soon-to-be-available working paper will consider a few ways that the language creating ISDS mechanisms could be somehow modified to get rid of some of the unfairness and abuse that none other than The Economist recently documented.

We know that the key language that allows foreign businesses to challenge a country's (or state's or locality's) government actions is no doubt included in the relevant chapter of a recent draft of the TPP, thanks to Wikileaks.

As U.S. Senator Elizabeth Warren succinctly summarized, the recent increase in use of ISDS and its likely inclusion in the TPP should disturb conservatives because of the undermining of state sovereignty, libertarians because it forces taxpayers to pay for non-market risks, and progressives because of resulting discouragement of policies that protect human health and ecology.

The article linked above on the roots of ISDS in NAFTA's indirect expropriation provisions should further give pause and help us realize that ISDS procedures are being exploited in a way that less than two decades ago was deemed surprising, novel, and unintended. This should further contribute to a consensus that, if there are to be free trade pacts, and must be ISDS procedures included, that common sense safeguards against their abuse should be included.

My thanks to Professor David A. Wirth of Boston College, for whom I worked as a research assistant, for having me research issues of trade and the environment in law school (his publications are linked here). A version of this content originally appeared at adamsulkowski.com.