The recent leak of a secret chapter of the Trans-Pacific Partnership’s Investor-State Dispute Settlement system (ISDS) is getting many people on both the left and the right upset. Left-wingers don’t like a system in which corporations can push back against government regulations. Right-wingers don’t like a system where U.N.-affiliated tribunals can overturn U.S. law. I asked Rachel Wellhausen, an assistant professor at the University of Texas at Austin who works on investor treaties, to explain the basics of ISDS.
HF — What is ISDS?
RW — ISDS, or Investor-State Dispute Settlement, is the international system whereby multinational corporations (MNCs) can sue the governments of countries in which they invest for violating their property rights. International treaties give MNCs access to ISDS, under which ad hoc international tribunals decide whether or not an MNC deserves compensation. There is no appeals system in place.
For example, an MNC just won $455 million in compensation from Venezuela, because in 2010 Venezuela nationalized and seized the MNC’s two bottling plants in the country. Another MNC is suing India over a retrospective tax bill, which the MNC says unlawfully devalued its property by reducing its share prices. An MNC recently lost a case against Uganda, where the tribunal found that Uganda’s regulation of transactions in the oil and gas industry was legitimate.
HF — How many ISDS arrangements are there, and how many times have governments been sued?
RW — Currently, about 3000 international treaties give MNCs the ability to sue governments. Some 2700 of these are Bilateral Investment Treaties. The rest are trade treaties, including NAFTA. These treaties have spread rapidly around the world since the 1990s.
From 1990 through the present, over 100 different countries have been sued over 550 times. Most of these are developing countries. The U.S. and Canada have been sued under NAFTA, but Western European countries have been sued only a handful of times (and Japan never). Sometimes these cases are brought at the World Bank’s International Center for the Settlement of Investment Disputes (ICSID). Sometimes they are brought under special U.N. rules (UNCITRAL). Because these cases can sometimes be private, we don’t know the full number of cases.
For my research, I have compiled a database of 360 cases in which we know what happened as of 2012. Of these, the state won 34 percent of the time. The MNC won 31 percent of the time. The case settled before reaching a final judgment 34 percent of the time (which lawyers think of as a win for the MNC). In all but a handful of cases, governments appear to have been compliant with the awards rendered.
HF — What is the leaked TPP document, and what does it tell us about ISDS in TPP?
RW — ISDS is already on the table — and under fire — in a different important trade deal: the U.S.-E.U. Transatlantic Trade and Investment Partnership (TTIP), which is also being negotiated right now. The leaked draft of the Trans-Pacific Partnership (TPP) agreement investment chapter spells out what it might look like among signatory countries in the Pacific region.
The TPP draft chapter includes some notable elements. There are clear transparency rules, requiring that all cases brought under the TPP must be public. Governments cannot be sued simply for defaulting on debt, and governments retain some rights to control the flow of capital across their borders. MNCs can sue for “pre-establishment” violations — if they feel their property rights were violated even before investing in the country — but Chile, Canada, Mexico and New Zealand had already included exceptions to this in the draft. And, Australia has said no — in the draft, it is exempted from the whole system. (Australia also refused to agree to ISDS in the recent U.S.-Australia Free Trade Agreement.)
HF — Why do many people in Europe and the U.S. worry about the consequences of ISDS?
RW — The TPP draft chapter says that the point of investment protection has long been “to encourage and promote the flow of investment…as a means to promote economic growth.” At the same time, the TPP draft chapter specifically highlights “the inherent right to regulate…to protect legitimate public welfare objectives, such as public health, safety, the environment, the conservation of living or non-living exhaustible natural resources, and public morals.”
The question is, can the ISDS system properly adjudicate between these economic and social goals? One person’s violation of MNC property rights might be another person’s legitimate government regulation. The European Union is wrestling with this: Hungary and Romania, for example, have been sued by MNCs for actions that they say were necessary for E.U. harmonization. There is broad outcry over Philip Morris’s actions against Uruguay and Australia, in which Philip Morris claims that regulations that make it hard to market cigarettes violate its intellectual property rights. Many countries are reconsidering treaties that arguably get the balance wrong.
The other potentially scary thing about ISDS is that MNCs themselves bring cases against sovereign governments. In the World Trade Organization, firms have to lobby their home governments to bring government-to-government cases over trade violations. But in ISDS, MNCs can use the treaty without their home government ever knowing. Many in the legal community have seen this as a good thing — “depoliticizing” investment disputes. In my research, however, I find that home governments regularly get pulled into disputes anyway.
HF — Are these fears justified, given the history and prospects of ISDS?
RW — The best justification for investment protection and ISDS would be evidence that it helps increase investment flows. The problem is, that evidence that it helps investment is decidedly mixed. We do know that countries that get sued lose out on foreign investment. Because of this, some scholars have recently come out against ISDS in the E.U.-U.S. TTIP negotiations. In a recent paper, I identify a benefit of ISDS — a government that generates revenue through expropriation gets cheaper access to debt, even if an MNC sues it. But this would matter more to a developing country than the U.S. While many oppose today’s ISDS, but most want it repaired, not abolished. They think that the need for the protection of property rights is too central to the integrated global economy.
Rachel Wellhausen is an assistant professor of government at the University of Texas at Austin. Her recent book, The Shield of Nationality: When Governments Break Contracts with Foreign Firms, deals with issues around ISDS.