Sen. Elizabeth Warren wrote that the Trans-Pacific Partnership (TPP) could erode U.S. financial safeguards designed to “prevent future financial crises.” (Timothy D. Easley/AP)

With the conclusion of negotiations in Atlanta on the Trans-Pacific Partnership (TPP), we will soon have texts to look at, and, eventually, a vote in Congress. It’s the biggest deal in trade politics in several years. It will be widely covered in the media against the backdrop of the presidential election — where many candidates, both Republicans and Democrats, are touting their TPP opposition.

The vote on Fast Track Trade Promotion authority earlier this year showed that opponents of trade deals can get within striking distance of a win in the House of Representatives. In the final vote, it passed by only 219-211. The administration will have to hold on to roughly the number of votes it got then, and opponents will try to get a few to flip.

One sticking point will be the agreement’s chapter on investor-state dispute settlement (ISDS). My colleagues Henry Farrell and Rachel Wellhausen posted a good explainer on The Monkey Cage earlier this year. Let me recap a few of the main points.

[People are freaking out about the Trans-Pacific Partnership’s investor dispute settlement system. Why should you care?]

ISDS is a legal system that has been included in investment treaties and trade agreements over several decades, including under the North American Free Trade Agreement (NAFTA). Under these rules, foreign investors can legally challenge host state regulations outside that country’s courts. A wide range of policies can be challenged: Argentina has had its macroeconomic policies challenged, Australia its anti-smoking efforts, Costa Rica its environmental preservation laws. While the United States has never lost a case, U.S. corporations have won many of their complaints against foreign governments.

The system is unusual in international law. Most international courts only allow disputes between states. ISDS, in contrast, creates one-way rights: Corporations can sue governments, but not vice versa.

It’s also ad hoc: The legal challenges are decided by arbitrators hired for that case only. The typical set-up is that the foreign investor appoints an arbitrator, the host state appoints a second, and the two parties or arbitrators appoint a third to chair the case. After their decision, they are paid by the parties, and the tribunal is dissolved.

Finally, it’s also unusually powerful for international law. Arbitrators can order governments to pay cash to the investor, who can then enforce arbitrators’ decisions with the full force of domestic courts. As the U.S. Supreme Court determined last year, domestic courts must defer to their decisions and not review their merits.

The White House faced substantial criticism for its decision to include ISDS in TPP. Progressives like Sen. Elizabeth Warren (D-Mass.) see the system as lacking checks and balances and as an attack on regulatory sovereignty.

In response, the United States Trade Representative, or USTR (the trade office of the U.S. government), has trotted out an increasingly sophisticated defense of the system, which engages more with critics than in the past. “Not a problem” was the old answer, an easy position to take given that the U.S. has never lost a case.

As TPP moves toward Congress, both sides will attempt to revive the ISDS issue. The White House will attempt to argue that new provisions (like a code of conduct for ISDS arbitrators) make enough of a difference to assuage critics’ concerns. TPP opponents, on the other hand, will have to argue why this deal is singularly problematic when there are already 3,200-plus treaties around the globe that already contain similar investor rights.

[Why losing a trade vote in Congress may strengthen America’s bargaining position]

Indeed, the sheer volume of treaties out there is a problem for both proponents and opponents, as it simultaneously reduces the costs and benefits to one-more-deal. This is what I call creeping multilateralism, which legal scholars like Stephan Schill, Martins Paparinskis and Sergio Puig have written extensively about. Investors have numerous moves at their disposal because of creeping multilateralism.

  • Under many investment treaties, mere incorporation in a claimed “home” country is all that is needed to be considered an “investor” of that country, and benefit from whatever treaties it signed. For example, Australia and the U.S. have a trade agreement, but not with ISDS. Australia has an ISDS pact with Hong Kong however. Philip Morris was able to use its Hong Kong subsidiary to launch a claim against Australia — something it could not have done directly from its U.S. headquarters.
  • Most investment treaties have more than one standard of protection for investors. Investors need not limit themselves to alleging one violation, such as rules on expropriation, non-discrimination or fair-and-equitable treatment. Instead, investors engage in what I call “standard stacking.” This means they allege as many bases for protection as they can, to increase the odds that a tribunal will side with them on at least one, which is typically enough to be entitled to some cash damages.
  • Most-favored nation (MFN) rules in the investment treaties allow investors to claim the best procedural and substantive treatment contemplated in any of a host country’s treaties. This is particularly useful where the treaty that the investor used as its vehicle is more state-friendly (say TPP, arguably) than others in the respondent’s treaty portfolio. Arbitrators have allowed an Argentine investor to challenge Spain with rights from a Chile-Spain treaty, an Australian investor to challenge India with Kuwait-India rights, and a Russian investor to use Denmark-Mongolia rules. As arbitrator Charles Brower writes, arbitrators have been increasingly willing to entertain MFN-based claims.
  • Investors also have a choice of whether to launch the case at ICSID (a World Bank arbitration center with relatively better transparency), or at a private arbitral center with lower transparency requirements.
  • Finally, once a tribunal has rendered a ruling, the investor can seek enforcement in any country it estimates likeliest help secure payment (which might be driven by investor-friendly national arbitration laws or courts, or the presence of seizable assets).

Nationality shopping, relief shopping, forum shopping, enforcement shopping: Investors can “shop until they drop,” and nations must pay the bill.

[What do Americans think about free trade? Not much.]

The figure below models the choices of an investor considering going after the Argentine government under an investment treaty. It’s not a merely illustrative choice; Argentina is the most frequent respondent.

  • Say the Argentine subsidiary of a U.S. company wanted to challenge an Argentine government regulation. The firm could pursue its case in a simple way: use the protection afforded the parent company under the U.S.-Argentina bilateral investment treaty (BIT), have its case heard in the perennially operating ICSID facilities, and later seek enforcement in U.S. courts.
  • Alternatively, the U.S. company can manipulate its multinational holding company structure so that its Dutch subsidiary is the legal owner of its Argentine operations. If can then bring the case under the Dutch-Argentina treaty, get that treaty’s protections, and seek enforcement in Dutch courts.
  • Between these options lie many others, such as taking advantage of the treatment standards under third country treaties (e.g., the Argentina-Chile BIT), enforcement opportunities of third-country courts (e.g. Switzerland or Britain), or private non-ICSID arbitral centers. In the figure, the thinner lines represent the simpler options described above. The thicker lines represent more complicated options also available to investors.

And this is the status quo ante, all before the ink dries on the TPP. Anything that is better in TPP can be gotten around through MFN rules. Many bad claims that an investor wanted to make against a TPP government could have probably already been done without TPP.

This does not mean that the TPP changes nothing for investment rules.

While TPP countries already have 35 investment treaties between themselves, the new pact would raise the number effectively to as many as 66. (The number is somewhat uncertain, because it is not clear if Australia was successful in its efforts to be exempted from ISDS in the trans-Pacific deal.) Without a TPP, arbitrators had greater discretion as to whether to allow investors to game the system through nationality planning. Investment arbitration claims can cost millions of dollars to litigate, so the TPP will bring enhanced legal certainty to investors that want to attack government regulations in a more straightforward manner.

The TPP is also an important qualitative shift in investment arbitration. While most treaties that include ISDS are between a single developed and a single developing nation, the TPP is the biggest pact to date that includes many developed nations (Japan, Canada, Australia, New Zealand, and the United States). Because developed countries are more likely to have foreign direct investments in the U.S., the U.S. exposure to new claims could be doubled, according to some estimates.

With passage of the TPP, the old argument that ISDS is only necessary because of poor nations’ weak court systems must be officially retired. Indeed, ISDS would have to be seen as a core part of economic governance at the center of the world’s most important trading relationships.

I would be surprised if a TPP vote in Congress really aired all the finer points of this issue. Groups concerned about ISDS will have to fight for air against all the numerous side deals being negotiated. The genius of wrapping up so many issues (from auto tariffs, to dairy quotas, to intellectual property, to regulation) in a single package is that any group or senator can usually find something to like, some goody. This is already on display, with environmental groups that dislike ISDS praising some of the TPP provisions on wildlife protection.

It’s a bizarre flip of what political scientists used to say about protectionist legislation. One of the early studies of the legislative process was E.E. Schattschneider’s book on how protectionist legislation — through log-rolling, deal-making and provision-adding — became a legislative Christmas tree. Now, it is the (nominally) anti-protectionist legislation that brings the yuletide.

Todd Tucker is a Gates Scholar who recently completed a PhD at the University of Cambridge’s Centre of Development Studies. Follow him on twitter @toddntucker.