One way to make sense of the bewilderingly complex debate over the massive Trans-Pacific Partnership trade deal — which involves a dozen countries around the Pacific and could impact some 40 percent of U.S. trade — is to understand that there are a number of separate arguments about it proceeding on different tracks.
There’s the argument over whether the deal’s higher labor standards will even be enforceable for countries such as Vietnam. There’s the argument over whether more import competition will further weaken American manufacturing, or whether lowering tariffs abroad will strengthen American exports. There’s the argument over whether TPP’s intellectual property rules will primarily benefit Big Pharma and major corporations. There’s the argument over whether the “fast track” process is legitimate.
And this is one of the most contentious arguments of all: The debate over the TPP’s Investor-State Dispute Settlement provision. The ISDS, which has drawn high profile criticism from Elizabeth Warren and many others, is a mechanism contained in the deal that would allow for the litigation of disputes between corporations and local governments in a manner designed to create a stable legal environment for investments in participating countries.
On the conference call with reporters that I wrote about on Friday, President Obama defended the ISDS at length.
Critics of the ISDS provision have argued that it could allow major corporations to challenge local laws, including financial and environmental regulations in the United States and anti-smoking regulations in other countries; it could put taxpayers on the hook for expensive settlements in favor of those corporations; and it could undermine U.S. sovereignty and tilt the playing field further in their favor.
In his remarks, Obama rejected these arguments. I’ll quote him at length:
“This is the notion that corporate America will be able to use this provision to eliminate our financial regulations and our food safety regulations and our consumer regulations. That’s just bunk. It’s not true.
“ISDS is a form of dispute resolution. It’s not new. There are over 3,000 different ISDS agreements among countries across the globe. And this neutral arbitration system has existed since the 1950s. The United States has investment agreements with 54 different countries over the last 30 years. Under these various ISDS provisions, the U.S. has been sued a total of 17 times. Thirteen of those cases have been decided so far. We’ve won them all. They have no ability to undo U.S. laws. They don’t have the ability to result in punitive damages.
“ISDS has come under some legitimate criticism, when they’re poorly written, because they’ve been used in particular by some tobacco countries in some countries to challenge anti-tobacco regulation. That’s why we have made sure that some of the legitimate criticisms around past ISDS provisions are tightened, are strengthened, so that there is no possibility of smaller countries or weaker countries getting clobbered by the legal departments of somebody like R.J. Reynolds so that they can’t pass anti-smoking regulations.
“That is a more legitimate concern for some of the other signatories to the deal, who would not be able to manage expensive litigation, than it is an argument that our laws would be challenged. One of the main reasons that ISDS is important is because, in a lot of these countries, U.S. companies are discriminated against, and going through their court system does not give them relief. Part of our goal here is to make sure that there is a neutral process that is legally recognized, so that if an arbitrary burden or tax or tariff is imposed on a U.S. company in these countries, that they have recourse to a fair, impartial venue to resolve it. Foreign countries already have that here in the U.S….
“The whole notion that somehow Dodd Frank is going to be challenged by corporations under this is just not true.”
I asked Senator Sherrod Brown, a leading critic of TPP, to respond. He emailed:
“Under ‘investor state’ provisions, a foreign company can mount trade challenges against laws and regulations. President Obama’s remarks would lead people to believe that American companies have no other recourse than ISDS when it comes to discrimination in a foreign market. However, there is country-to-country dispute settlement. That means American companies can ask our government – through the United States Trade Representative – to initiate a case with a foreign government if they feel they are being discriminated against. There is no need to extend this ability to corporations seeking to maximize profits by challenging government regulations they don’t like in an extrajudicial system with rulings that are divorced from precedent.
“State, local, and federal governments shouldn’t have to be looking over their shoulder every time they decide to pass a public health measure, or deny a permit for environmental reasons. The mere threat of costly litigation can impose a chilling effect on efforts – in the U.S. and among TPP countries – on passing laws or finalizing regulations that may be challenged under ISDS.
“If the argument for including investor-state in our trade agreements is to ensure that American investors have adequate protections, then why isn’t our goal to improve the legal systems in our trading partners so that they can develop their own property rights and strengthen their judicial institutions? We seek to improve institutions and raise standards in other areas, like labor standards, but in the legal system, we prefer to set up an alternative system of arbitration panels totally separate from the courts.”
Danielle Kurtzleben recently did a deep dive into the debate over ISDS and determined that critics have a point. While corporations can’t win any direct changes to local laws through the process, they can, through winning settlements, exert pressure on local governments to change their regulations. Still, that would more likely apply in smaller countries. It’s possible that TPP could lead to an explosion of ISDS litigation, but it remains to be seen whether that would allow corporations to meaningfully game the process.
And, with Obama leaning hard into the idea that TPP’s ISDS will be drawn explicitly to prevent such corporate gaming of the process, this provision of the TPP — like so much of the rest of the deal — probably can’t be evaluated until we actually see it.