One of the public policy paradoxes of the past quarter-century is why the center-left governments of advanced economies have supported trade policies that undermine the very environmental and labor protections they fight for at home. Foremost among these self-subverting policies have been the Investor-State Dispute Settlement (ISDS) provisions included in every significant trade deal the United States has signed since Ronald Reagan’s presidency. Under ISDS, foreign investors can sue a nation with which their own country has such treaty arrangements over any rules, regulations or changes in policy that they say harm their financial interests.
These suits aren’t heard in the courts, however. If a U.S. company wants to sue, say, California or the Environmental Protection Agency, it must pursue its claim in a California or federal court. Under ISDS, however, a foreign-owned company suing California or the EPA gets to plead its case to an extra-governmental tribunal of three extra-governmental judges engaged just for that case — and the judges’ ruling can’t be appealed to a higher court. Under ISDS, there are no higher courts.
The mockery that the ISDS procedure can make of a nation’s laws can be illustrated by a series of cases. In Germany in 2009, the Swedish energy company Vattenfall, seeking to build a coal-fired power plant near Hamburg, used ISDS to sue the government for conditioning its approval of the plant on Vattenfall taking measures to protect the Elbe River from its waste products. To avoid paying penalties to the company under ISDS (the company had asked for $1.9 billion in damages), the state eventually lifted its conditions.
Three years later, Vattenfall sued Germany for its post-Fukushima decision to phase out nuclear power plants; the case is advancing through the ISDS process. German companies that owned nuclear power plants had no such recourse.
After Australia passed a law requiring tobacco products to be sold in packaging featuring prominent health warnings, a Philip Morris subsidiary sued the government in Australian court and lost.
It also sued the government through the ISDS, where the case is still pending. The health ministry in next-door New Zealand cited the prospect of a Philip Morris victory in ISDS as the reason it was holding up such warnings on cigarette packages in its own country.
ISDS provisions began popping up in trade deals during the Reagan and first Bush administrations. The mystery is why they continued to be included in trade deals, such as NAFTA, enacted under Democratic administrations in the United States and social democratic governments in Europe and elsewhere. While beloved by Wall Street, they have drawn the increasing ire of environmentalists and labor advocates — two of the center-left’s key constituencies.
Now, at long last, one of those center-left governments has come to its senses. In a speech last week to the Bundestag, German Economy Minister Sigmar Gabriel — a leader of the Social Democrats in Chancellor Angela Merkel’s coalition government — announced the government’s opposition to including the ISDS procedure in a pending trade agreement with Canada and, by extension, in the proposed Transatlantic Trade and Investment Partnership between the European Union and the United States. There would be no transatlantic trade deal, said Gabriel, unless negotiators scrapped the ISDS provision and the special treatment for foreign investors that it affords.
The German government’s decision was likely shaped by its experience with the ISDS in the Vattenfall cases, but its position has broad European support. In March, E.U. Trade Commissioner Karel de Gucht let it be known that the European Union had proposed dropping the ISDS from the transatlantic agreement, but the United States objected. The president-elect of the European Commission, Jean-Claude Juncker, has said that he won’t “accept that the jurisdiction of courts in the EU Member States is limited by special regimes for investor disputes.”
Which raises the question of why the president of the United States thinks the jurisdiction of U.S. and European courts should be subordinated to those special ISDS courts. An E.U.-U.S. treaty with an ISDS clause invites a massive end-run around national regulations: Public Citizen’s Global Trade Watch has counted 24,200 U.S. subsidiaries of E.U.-based corporations that could avail themselves of ISDS under the treaty, and 51,400 E.U. subsidiaries of U.S.-based companies that could do the same.
The Obama administration’s insistence on ISDS may please Wall Street, but it threatens to undermine some of the president’s landmark achievements in curbing pollution and fighting global warming, not to mention his commitment to a single standard of justice. It’s not worthy of the president, and he should join Europe in scrapping it.
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