ISDS: The Trans-Pacific Partnership clause that everyone should be against

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A police woman removes a woman protest­ing the Trans-Pacif­ic Part­ner­ship (TPP) on Capi­tol Hill in Wash­ing­ton Jan­u­ary 27, 2015. (Kevin Lamarque/Reuters)

The Unit­ed States is in the final stages of nego­ti­at­ing the Trans-Pacif­ic Part­ner­ship (TPP), a mas­sive free-trade agree­ment with Mex­i­co, Cana­da, Japan, Sin­ga­pore and sev­en oth­er coun­tries. Who will ben­e­fit from the TPP? Amer­i­can work­ers? Con­sumers? Small busi­ness­es? Tax­pay­ers? Or the biggest multi­na­tion­al cor­po­ra­tions in the world?

One strong hint is buried in the fine print of the close­ly guard­ed draft. The pro­vi­sion, an increas­ing­ly com­mon fea­ture of trade agree­ments, is called “Investor-State Dis­pute Set­tle­ment,” or ISDS. The name may sound mild, but don’t be fooled. Agree­ing to ISDS in this enor­mous new treaty would tilt the play­ing field in the Unit­ed States fur­ther in favour of big multi­na­tion­al cor­po­ra­tions. Worse, it would under­mine US sov­er­eign­ty.

ISDS would allow for­eign com­pa­nies to chal­lenge US laws — and poten­tial­ly to pick up huge pay­outs from tax­pay­ers — with­out ever step­ping foot in a US court. Here’s how it would work. Imag­ine that the Unit­ed States bans a tox­ic chem­i­cal that is often added to gaso­line because of its health and envi­ron­men­tal con­se­quences. If a for­eign com­pa­ny that makes the tox­ic chem­i­cal oppos­es the law, it would nor­mal­ly have to chal­lenge it in a US court. But with ISDS, the com­pa­ny could skip the US courts and go before an inter­na­tion­al pan­el of arbi­tra­tors. If the com­pa­ny won, the rul­ing couldn’t be chal­lenged in US courts, and the arbi­tra­tion pan­el could require Amer­i­can tax­pay­ers to cough up mil­lions — and even bil­lions — of dol­lars in dam­ages.

If that seems shock­ing, buck­le your seat belt. ISDS could lead to gigan­tic fines, but it wouldn’t employ inde­pen­dent judges. Instead, high­ly paid cor­po­rate lawyers would go back and forth between rep­re­sent­ing cor­po­ra­tions one day and sit­ting in judg­ment the next. Maybe that makes sense in an arbi­tra­tion between two cor­po­ra­tions, but not in cas­es between cor­po­ra­tions and gov­ern­ments. If you’re a lawyer look­ing to main­tain or attract high-pay­ing cor­po­rate clients, how like­ly are you to rule against those cor­po­ra­tions when it’s your turn in the judge’s seat?

If the tilt toward giant cor­po­ra­tions wasn’t clear enough, con­sid­er who would get to use this spe­cial court: only inter­na­tion­al investors, which are, by and large, big cor­po­ra­tions. So if a Viet­namese com­pa­ny with US oper­a­tions want­ed to chal­lenge an increase in the US min­i­mum wage, it could use ISDS. But if an Amer­i­can labor union believed Viet­nam was allow­ing Viet­namese com­pa­nies to pay slave wages in vio­la­tion of trade com­mit­ments, the union would have to make its case in the Viet­namese courts.

Why cre­ate these rigged, pseu­do-courts at all? What’s so wrong with the US judi­cial sys­tem? Noth­ing, actu­al­ly. But after World War II, some investors wor­ried about plunk­ing down their mon­ey in devel­op­ing coun­tries, where the legal sys­tems were not as depend­able. They were con­cerned that a cor­po­ra­tion might build a plant one day only to watch a dic­ta­tor con­fis­cate it the next. To encour­age for­eign invest­ment in coun­tries with weak legal sys­tems, the Unit­ed States and oth­er nations began to include ISDS in trade agree­ments.

Those jus­ti­fi­ca­tions don’t make sense any­more, if they ever did. Coun­tries in the TPP are hard­ly emerg­ing economies with weak legal sys­tems. Aus­tralia and Japan have well-devel­oped, well-respect­ed legal sys­tems, and multi­na­tion­al cor­po­ra­tions nav­i­gate those sys­tems every day, but ISDS would pre­empt their courts too. And to the extent there are coun­tries that are riski­er polit­i­cal­ly, mar­ket com­pe­ti­tion can solve the prob­lem. Coun­tries that respect prop­er­ty rights and the rule of law — such as the Unit­ed States — should be more com­pet­i­tive, and if a com­pa­ny wants to invest in a coun­try with a weak legal sys­tem, then it should buy polit­i­cal-risk insur­ance.

The use of ISDS is on the rise around the globe. From 1959 to 2002, there were few­er than 100 ISDS claims world­wide. But in 2012 alone, there were 58 cas­es. Recent cas­es include a French com­pa­ny that sued Egypt because Egypt raised its min­i­mum wage, a Swedish com­pa­ny that sued Ger­many because Ger­many decid­ed to phase out nuclear pow­er after Japan’s Fukushi­ma dis­as­ter, and a Dutch com­pa­ny that sued the Czech Repub­lic because the Czechs didn’t bail out a bank that the com­pa­ny par­tial­ly owned. US cor­po­ra­tions have also got­ten in on the action: Philip Mor­ris is try­ing to use ISDS to stop Uruguay from imple­ment­ing new tobac­co reg­u­la­tions intend­ed to cut smok­ing rates.

ISDS advo­cates point out that, so far, this process hasn’t harmed the Unit­ed States. And our nego­tia­tors, who refuse to share the text of the TPP pub­licly, assure us that it will include a big­ger, bet­ter ver­sion of ISDS that will pro­tect our abil­i­ty to reg­u­late in the pub­lic inter­est. But with the num­ber of ISDS cas­es explod­ing and more and more multi­na­tion­al cor­po­ra­tions head­quar­tered abroad, it is only a mat­ter of time before such a chal­lenge does seri­ous dam­age here. Replac­ing the US legal sys­tem with a com­plex and unnec­es­sary alter­na­tive — on the assump­tion that noth­ing could pos­si­bly go wrong — seems like a real­ly bad idea

This isn’t a par­ti­san issue. Con­ser­v­a­tives who believe in US sov­er­eign­ty should be out­raged that ISDS would shift pow­er from Amer­i­can courts, whose author­i­ty is derived from our Con­sti­tu­tion, to unac­count­able inter­na­tion­al tri­bunals. Lib­er­tar­i­ans should be offend­ed that ISDS effec­tive­ly would offer a free tax­pay­er sub­sidy to coun­tries with weak legal sys­tems. And pro­gres­sives should oppose ISDS because it would allow big multi­na­tion­als to weak­en labor and envi­ron­men­tal rules.

Giv­ing for­eign cor­po­ra­tions spe­cial rights to chal­lenge our laws out­side of our legal sys­tem would be a bad deal. If a final TPP agree­ment includes Investor-State Dis­pute Set­tle­ment, the only win­ners will be multi­na­tion­al cor­po­ra­tions.