THE BLOG
10/30/2014 01:16 pm ET Updated Dec 30, 2014

Does Investor State Dispute Settlement Promote Limited Government?

Recently, as part of the debate over investor state dispute settlement (ISDS), I've been called out, with my limited government credentials put under scrutiny. My position is that a state to state dispute settlement system, like that used in the WTO, is preferable to ISDS. But wait, ISDS supporters have said, doesn't that mean you are arguing for stronger government? And don't taxpayers now have to pay the expense of the lawsuit? "Ha," they think, "we've caught you in a contradiction!"

Should I be worried that my Cato ID card will be revoked? I don't think so. Here's why.

First of all, on the point about taxpayer expenses, I doubt it is possible to calculate the counterfactual here, but I suspect that taxpayers have to cough up a lot more money to defend all of the ISDS cases brought against governments than they would to fund the few state to state cases that would be brought. How many NAFTA investment disputes would there be in the absence of Chapter 11? Hard to say for sure, but if we take the U.S.-Australia FTA, which has only state to state dispute rules, as a guide, the number would be close to zero. And this is especially true if you limited investment rules to covering non-discrimination, as I would.

In addition, since I'm not even sure any investment rules are needed, I would save the taxpayers a lot of money by not negotiating all of these treaties in the first place (and then later revising them when they come under criticism). In my view, the defenders of the system have not sufficiently established the need for any obligations. I hear lots of anecdotes about bad treatment by governments, but I'd like to see the business groups who demand these rules do a comprehensive study of the issue, explaining exactly what the problem is we are supposed to be addressing, and where it exists.

More generally, with regard to whether state to state international dispute systems mean stronger government, the issue is more complex that it appears at first glance. In a very narrow sense, with state to state rather than ISDS, the power to bring a case is being taken from private parties and given to governments. But keep in mind that the state is made up of a number of entities, and that government exists at the local, national, and international level. So, in a state to state system, national governments (meaning, for the most part, the executive branch) maintain most of the power in that system. With ISDS, by contrast, power is shifted from the national executive to an international tribunal. Is that less power for government overall? Not really. The power has just shifted to a different branch of government, and at a different level. (ISDS courts are sometimes called "private courts," but that is clearly not correct. They arise from treaties, and hear cases involving public international law).

Now, there is actually a pretty good limited government argument, which one of my colleagues makes, for international constitutional courts to act as a check on national government actions. Just as domestic courts and constitutions provide constraints on excessive government power, international courts applying treaty law could do the same.

In theory, that is true. In practice, however, it may not be. You would have to design these treaties very carefully if you wanted them to serve as vehicles to promote limited government. My sense is, they are not written that way now. The provisions are broad enough to be used to argue for more and better government, rather than less government.

Beyond that, there are questions about the proper allocation of power among all the different levels of government. Arguably, governing at the local level is the best way to represent the will of the people. Taking power from democratic local governments and giving it to unelected international courts is problematic, especially when there is a lack of democratic input at the international level. Obviously, this is what domestic constitutional courts do as well. But they don't do it in a vacuum. There is a functioning domestic political system that acts as a check on their power.

ISDS raises complex questions, and there are not always easy and clear answers. However, I am not too worried that keeping the international system as a state to state one undermines my limited government credentials.