Each week, In Theory takes on a big idea in the news and explores it from a range of perspectives. This week we’re talking about multinational corporations. Need a primer? Catch up here.

William Krist is a senior policy scholar at the Woodrow Wilson International Center for Scholars and a former assistant U.S. trade representative in the Reagan Administration.

The provision in the Trans-Pacific Partnership that allows foreign corporations to force host governments into binding arbitration — known as investor-state dispute settlement, or ISDS — is one of the most controversial elements of trade agreements today.

To date, Canadian companies have brought suit against the United States under NAFTA provisions 12 times. If the TPP becomes law, our regulators at both the state and federal levels will have to worry about potential suits from companies in other developed countries, including Japanese and Australian companies, as well as from the developing countries in the TPP. Is this something we really want to open up?

ISDS allows a foreign investor to bring a suit under international tribunals, if he or she believes its investment has been unfairly expropriated by the government. ISDS provisions are found in almost all U.S. free trade agreements since the North American Free Trade Agreement, as well as some 3,200 other investment-related agreements negotiated by the United States and other countries.

Companies and other advocates of these provisions argue that they are needed because many countries, developing countries in particular, do not have robust judicial systems that would allow the investor to bring suit in the country’s court system. But opponents say these provisions have been abused by a few companies and can limit the ability of countries to protect public health and the environment.

A record high 70 cases were filed under ISDS provisions contained in free trade and investment agreements last year alone, and most recently, TransCanada has brought a suit against the United States asking for $15 billion for the decision rejecting construction of the Keystone XL pipeline. According to the Third World Network, defending against an ISDS suit on average costs about $8 million, and the average award to a company that wins its case is $76 million. This may not be much money for the United States, but it’s a lot for a poorer developing country. Critics argue that developing countries are often accordingly hesitant to adopt regulations to protect public health or the environment, if they believe they will be sued by a foreign investor.

But these arbitration agreements don’t just put pressure on poor countries. During the negotiations for the TPP, Australia vigorously opposed U.S. pressure to include ISDS in the agreement. At the time, Australia was dealing with a suit brought by the American tobacco company Philip Morris International, which argued that a pending Australian regulation requiring cigarettes to be packaged in a plain wrapper represented an expropriation of their investment.

Because Australia had previously refused to include ISDS in the U.S.-Australia free trade agreement, Philip Morris had to restructure its investment under a Hong Kong subsidiary in order to present its case under a bilateral investment agreement that Australia had agreed to with Hong Kong. In parallel, Philip Morris also brought suit in Australian courts and persuaded several small countries to bring a case in the World Trade Organization. The ISDS arbitration panel later ruled against the tobacco company on procedural grounds, but many civil society organizations believe similar suits can restrict the ability of regulators to protect public health.

Australia did finally relent in the TPP negotiations and agreed to include ISDS, but with a provision that ISDS did not apply to tobacco companies. Additionally, negotiators improved the arbitration provisions compared with those from previous U.S. agreements in order to meet some of the critics’ concerns — for example prohibiting investors from initiating parallel cases in other forums.

Yet the current TPP provisions still worry some observers because of what they fail to address. For instance, the provisions do not allow countries to appeal decisions. Individuals who serve on the three-member arbitration panels can also represent companies in other disputes, creating at least the appearance of a conflict of interest. And the definition of “investment” is very broad, encompassing even stock purchases, far more than the original standard of a direct investment in plant and equipment.

In our current negotiations with the European Union for the Transatlantic Trade and Investment Partnership, the E.U. is pressing for reforms to the ISDS system, including ensuring arbitrators do not have a conflict of interest and including an appellate mechanism. U.S. negotiators seem to be resisting these proposals. We should either drop ISDS from our trade agreements or fix the system.

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