The Washington PostDemocracy Dies in Darkness

Wonder how American tobacco companies can sue countries for antismoking campaigns?

Thomas Donohue, president and chief executive of the U.S. Chamber of Commerce, gives the annual State of American Business address at the Chamber’s headquarters Wednesday in Washington, January 14, 2015. (Pete Marovich/Bloomberg News)

Last week, the New York Times revealed in a pair of articles that the American Chamber of Commerce is fighting countries that try to reduce smoking. The tool that the Chamber is using in its battles is a treaty section called an “investor-state dispute settlement provision,” or ISDS. Obama’s administration is currently working to negotiate at least one new deal that so far includes an ISDS provision: the Trans-Pacific Partnership, or TPP, designed to further liberalize trade among the U.S., Canada and several countries in Asia and Latin America.  The ISDS provision is proving controversial; Elizabeth Warren spoke out against it, as have others.

But the ISDS issue goes beyond the TPP itself. As the Chamber’s fight on behalf of tobacco companies illustrates, even if the TPP stalls or if that provision falls out of the agreement, international companies can still sue countries, right now, under existing international agreements.

Many heads of state tend to rush to sign international agreements, which often have ISDS provisions, either to improve their nation’s reputation or to advance their own domestic agendas. The number of those agreements has increased dramatically in recent years. Many of these agreements potentially allow firms to “treaty-shop” by incorporating their firms in nations that have ISDS provisions that they’d like to use.

How does this work? Suppose a U.S.-based company invests abroad — say, in Venezuela — and subsequently wants to sue the host country for failing to protect its investment. If the country were Venezuela, for instance, U.S. firms suffered substantial losses when former President Hugo Chavez nationalized foreign firms, in particular energy companies. Traditionally, an aggrieved firm would have legal recourse only if its home country had an agreement with an ISDS provision with Venezuela (or whatever the host country might have been). If not — and the U.S. does not have such an agreement with Venezuela — the firm’s options would be limited.

However, ISDS provisions are embedded in a wide variety of international agreements — bilateral investment treaties and preferential trade agreements, for example — and across a broad swath of countries. And a multinational firm has the option of incorporating abroad. If a firm wanted to sue a country through an ISDS provision, it could simply use an existing subsidiary or set one up in a country that does have such a provision with the offending country — even after the offense. For example, after Australia introduced legislation requiring cigarettes to be sold in plain packaging, with only the brand name and a health warning, Philip Morris used its Hong Kong subsidiary to sue Australia, because of a stronger ISDS provision in the Australia-Hong Kong bilateral investment treaty.

Researchers have started examining this trend (here and here). And world leaders have belatedly started to catch on. In the TPP negotiations, Australia has requested exemption from ISDS provisions, in part as a reaction to the tobacco case. More and more countries are exiting or renegotiating agreements that have ISDS provisions.

The rise in international treaties cannot simply be applauded as an increase in international cooperation. Some agreements languish unused, as I’ve demonstrated here, while others can be used in ways never intended or envisioned in the original bargain. In our globalized world, leaders should be aware of the possible unintended consequences of international agreements.

Julia Gray will be joining the International Relations department at the London School of Economics in the fall.

Read more from The Monkey Cage about Obama’s trade bills:

Sarah Binder, Can a trade bargain be put back together again?

Gregory Kroger, How do you (try to) stop fast-tracktrade authority? With three separate filibusters.

Patrick Egan, What do Americans think about free trade? Not much.

Henry Farrell, People are freaking out about the Trans Pacific Partnership’s investor dispute settlement system. Why should you care?