5/1/2015
Among the controversies surrounding the anticipated Trans-Pacific Partnership (TPP) agreement between the U.S. and 11 other Asian-Pacific countries, the most hotly debated component is the inclusion of the Investor-State Dispute Settlement (ISDS) system. Under ISDS procedures, in case of a disagreement, a multinational corporation and a nation in which that corporation does business can settle disputes before an international panel, potentially awarding compensation to be paid by a sovereign nation (i.e. taxpayers). Although many current trade pacts that the U.S. and other countries worldwide currently engage in already have ISDS systems in place, many fear the enormity of the economic output of member states in the TPP agreement will result in some loss of national sovereignty. According to the U.S. Trade Representative (USTR), ISDS exists for 3 main purposes: “To resolve investment conflicts without creating state-to-state conflict, to protect citizens abroad, and to encourage investment by signaling to potential investors that the rule of law will be respected.” While there have been several noteworthy cases involving the use of ISDS, only 10 percent of the 2400 current trade pacts worldwide with ISDS systems have ever brought a claim. As of yet, no country has ever successfully won an ISDS case against the U.S.
Although use of the ISDS system is rare among existing trade deals, it has been a dramatically increasing method of dispute resolution over the past decade. Since 2003, there have been between 30-60 ISDS disputes annually. Some predict and others fear that TPP will significantly increase the trend of resolving trade disputes from “State-to-State” negotiations to a “Company-to-World” arbitration system. Howard Mann, an expert at the International Institute for Sustainable Development, believes that it is certain that “investor–state arbitration has shifted from being a shield of last resort to a sword of first resort in many disputes.” Proponents of TPP including the USTR and President Obama, have insisted that TPP’s ISDS process is an improvement over existing deals because it tightens the requirements for taking a case to ISDS proceedings. According to the USTR, TPP provides “an opportunity to improve global practice by establishing a higher standard for investment protection rules and ISDS procedures.” Truthfully, however, it is not known how frequently the process will be used, nor is it apparent without analyzing the full text of the forthcoming agreement, what kind of legal loopholes will become problematic.
More than the mere existence of the ISDS process itself is its structure within the TPP agreement that has critics the most alarmed. Unlike the U.S. and many member states’ judicial systems, which involve presumably impartial judges and attorneys who generally focus on one side of the bench, members of the ISDS panels are amorphous. Panel members rotate between being lawyers and judges depending on the dispute. The foreign investor and the state each choose one of the three ruling judges, and the foreign investor is the only entity that can initiate a case. Many opponents of the panel structure believe that it is too easy for investor-states to stack the deck in their favor, given the ambiguous structure of the panels. Even more alarming to legal scholars, however, is the fact that panel rulings are not required to follow legal precedent, nor are there avenues for appellate review. It is likely the structure of these panels that will be the most hotly contested component of TPP when it faces its “fast track” vote through Congress, presumably near the end of the month. It would be surprising to see the bill pass without some alterations regarding the ISDS structure, especially the latter two parts regarding precedent and appellate review.
The final main criticism of the ISDS process is the fear of lost sovereignty at the expense of taxpayers. While this may be an issue for other countries more so than for the U.S., there are some existing examples that illustrate the point. One of the two most frequently cited cases involves Phillip Morris, a U.S. company that wanted to attack an anti-smoking law in Australia. The company used a subsidiary based in Hong Kong, which has an ISDS treaty with Australia, to proceed with a complaint through the ISDS system. However, under TPP provisions, according to the USTR, “U.S. trade agreements include numerous safeguards that deter and restrict the ability of investors to engage in country-hopping for purposes of accessing investment treaty protection.” Another frequently cited case under the NAFTA agreement was between U.S. mining company Bilcon, and Canada. Bilcon was refused a mining license for a project in Canada due to a negative environmental impact report. A panel ruled 2-1 in favor of Bilcon in March with a compensation amount yet to be determined. ISDS panels cannot require countries to change laws, however, only to award compensation presumably at taxpayer expense.
This sounds true, but take for example New Zealand, who has similar trade pacts as Australia. The country decided against changing their smoking laws out of fear of similar retribution through ISDS, thus indirectly affecting the nation’s sovereignty. For the Bilcon case, the company could have appealed through the Canadian legal system, but instead they circumvented Canada’s national-level system and went first to the ISDS process and benefited from it. These examples highlight the need for some form of appeals process, or at least some kind of oversight for extreme cases. The bigger questions that many are wondering are, how frequently will cases like this occur, and to what degree will investor-states use this process to manipulate the system? These are fair questions to raise.
It must be noted that even with all of the criticisms having some merit; I think that there is a degree of strategic brilliance in this system from an international security perspective. Much like the Engagement policy towards China a generation ago, the theory remains that countries with strong economic relations are reluctant to go to war with each other. Unfortunately, the downside of this is that it may require some loss of national sovereignty, moving away from Thomas Jefferson’s aversion to “entangling alliances” and perhaps closer to the one-world government that many fear. In general though, the ISDS was created to avoid more violent forms of conflict. It is difficult to judge, however, how frequently the system will be used or abused. Statistical evidence demonstrates the increasing trend to use ISDS among existing trade pacts. The fast track vote will likely depend on the final language of the agreement, and if I were to speculate, changes will still be forthcoming regarding appellate review and the specific structure of the ISDS panels if the measure is going to gain Congressional approval.
Sources:
Intellectual Property Watch – Sean Flynn
The Hill – Simon Lester and Ben Beachy
VOX – Danielle Kurtzleben
Washington Post – Greg Sargent
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