The Obscure Trade Provision Everyone Is Talking About

05/16/2015 10:38 am ET | Updated May 16, 2016

Last week the U.S. Senate dealt the President a temporary surprise setback on a central piece of his trade agenda, refusing to allow Fast Track trade authority to move to a vote. The Senate showdown was just a preview of the epic battle brewing in the House. Whether the President can convince enough members of Congress to go along with him will depend in large part on what horses he's willing to trade to get a deal.

There are a huge number of issues on the table, but the make-or-break may come down to an obscure provision of international law, obliquely called 'Investor State Dispute Settlement' (ISDS) mechanisms. ISDS gives foreign corporations the right to bring private lawsuits through secretive supra-national tribunals when governments pass laws that protect the public interest, but might harm profits.

In the U.S., libertarians and conservatives worried about national sovereignty have joined with pro-environment, pro-labor progressives to mobilize against Fast Track, in large part because Fast Track would grease the skids to expand ISDS through trade treaties.

ISDS allows foreign companies to dodge national justice systems and sue governments in front of self-selected panels of private arbitrators (drawn from the ranks of corporate trade lawyers), whose decisions are binding and cannot be appealed. The system has already generated literally billions of dollars in frivolous claims by foreign corporations against democratic governments.

When Germany began phasing-out nuclear power after Japan's Fukushima disaster, Swedish energy company Vattenfall sued to recover their lost projected profits.

Australia and Uruguay are now under attack by Phillip Morris for requiring health warnings on tobacco products, because the regulations, designed to save children's lives, are cutting into profits.

French company Veolia sued Egypt after Egypt raised its minimum wage, increasing Veolia's operating costs.

And most recently, Canada was successfully sued for refusing to grant a mining company a permit for destructive mega-blasting, in an effort to protect the ecosystem and the livelihoods of local fisherman in Nova Scotia.

The size of damages can be breathtaking. An ISDS arbitration panel ordered Ecuador to pay Occidental Petroleum $2.3 billion as compensation for lost hoped-for future profits when Occidental broke the law and suffered the fully foreseeable consequences.

ISDS threatens foundational legal principles of due process, equality before the law, and equal access to justice. "Our legal system rests on the conviction that every individual, regardless of wealth or power, has an equal right to bring a case to court", wrote prominent legal scholars in a letter to Congress last week. "ISDS, in contrast, is a system built on differential access ... Only foreign investors may bring claims under ISDS provisions. This option is not offered to nations, domestic investors, or civil society groups alleging violations of treaty obligations. Under ISDS regimes, foreign investors alone are granted legal rights unavailable to others - freed from the rulings and procedures of domestic courts."

The purpose of ISDS is to spur foreign investment and economic growth in countries with poor records of respecting property rights and the rule of law. But extensive research by economists over the past two decades has found zero robust evidence of gains from ISDS -- no increases in economic growth, no uptick in foreign investments, and no generation of the promised shared prosperity. Many emerging economies who've rejected ISDS, Brazil and South Africa among them, continue to receive massive capital inflows.

ISDS is also totally unnecessary to protect business investments. Foreign investors operating in volatile countries can and should hedge against arbitrary government treatment by purchasing widely available political-risk insurance. And investors in legal environments with generally predictable and independent judicial systems, like the U.S. and Germany, should play by the rules and take disputes and disappointments to court--just like everyone else.

A hallmark of U.S. investment deals since the 1960s, ISDS has slowly extended through more than 3,000 treaties worldwide. The number of corporate claims is rising fast: in the forty years before 2000, less than a hundred claims were filed; over the past ten years, that number has increased fivefold. And the relative share of cases against countries with strongly impartial legal systems is also increasing: 40 percent in 2014 compared to a historical average of 28 percent.

The blowback against ISDS is now transcontinental, threatening to derail years of nail-biting negotiations on the proposed Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Across the Atlantic, the European Commission, under siege from citizens aghast at potential threats to public health and safety, is cooking-up an alternative in an effort to thread the needle between U.S. negotiating demands and citizen pressure. Meanwhile, some brave emerging economy governments, like Brazil and South Africa, are bucking the U.S. and repudiating these secretive investor courts entirely.

Obama promises that the problems with ISDS are "fixed" in the Trans-Pacific Partnership, the administration's cherished trade deal that will follow close on the heels of a Fast Track. But that's not good enough.

No tweaks can "fix" a private, parallel supra-national justice system that allows foreign companies to do an end-run around the rule of law. And what about the dozens of other trade and investment deals now in the negotiating pipeline, like TTIP, which will also include investor arbitration tribunals? A congressional grant of Fast Track authority would last for six years, making it virtually impossible to block special rights for foreign companies embedded in new trade agreements negotiated by future presidents.

Done right, global trade and investment agreements can be good for everyone: creating jobs and promoting fair labor and environmental protections worldwide. Obama claims those are his goals. But ISDS erodes democracy and the rule of law, and lets companies sue governments for shutting-down dangerous nuclear plants, banning cigarette marketing to children, and protecting the environment and workers' rights. There is nothing fair about that.