ISDS: Obscure Free Trade Rules Turn Malignant – Part 1

Series: ISDS: Obscure Free Trade Rules Turn Malignant

From being an obscure clause originally designed to protect foreign investors from weak local legal systems, the Investor-State Dispute Settlement provisions embedded in many trade agreements are increasingly used by multinationals to bypass domestic legal systems.

Part 2 of the series lays out the major flaws of the ISDS regime and key liabilities faced by sovereigns, along with real cases faced Canada, Australia and other developing countries.

With the TransPacific Trade Partnership ever closer to getting passed by the US Congress, and with a rare opportunity of access to the political parties thanks to the upcoming federal election, what should Canadians do to ensure their social values and those of the political parties are aligned?

 TPP protestors(image: International Business Times)

This is a three part series. In case you want to skip some sections and jump straight to the meat, here’s the outline.

Part 1:

Part 2:

Part 3: What actions Canadians should take for the upcoming federal election


Hot summer days, endless blue skies and the enticing smell of BBQ. Saturated with the excitement of spectator sports and emotionally grabbing headlines such as Cecil the lion from the mainstream media, little wonder the vast majority of the North American public, when surveyed, have no clue what the Trans-Pacific Partnership (TPP) or its sister Transatlantic Trade and Investment Partnership (TTIP) is all about, for which their governments are in the final stages of inking the deals, or what the heck is in these treaties (okay, that part is by design, as explained below).

In principle, liberalized trade agreements among trading nations are overall beneficial to all as a whole assuming that labor standards, no less than minimum but rising over time, are adhered to and cost-and-only-cost focused multinational enterprises do not arbitrage labor, environmental and other societal oriented regulations to the lowest bidders.

By definition, deals are negotiated, meaning that for most parties involved, they contain compromises of gives and takes. From that regard, there are no shortages of questionable ‘gives’ in the TPP from which negotiating members face the dilemma of having to swallow some very bitter pills or risk being ‘left out’ of the deal.

One particular section of the treaty – the subject of this article, is with regards to a provision known as the Investor-State Dispute Settlement (ISDS) mechanism. Ostensibly to safeguard foreign investors in jurisdictions where the local judicial systems are less than transparent, incompetent, compromised or any combination of the above, this little publicized provision has over the years mutated into a mechanism increasingly used by foreign corporations to challenge – on an equal basis – sovereign countries when they feel their interests are threatened.

TPP Process Transparency

Before we delve into the specifics of ISDS, it is worth noting that alarm bells should be going off at the way the entire TPP negotiation process is conducted.

Right off the bat, it fails the smell test.

As little information is available in Canada, we can only go by what muffled information there is coming out from the States. The TPP deal is negotiated in secrecy. Not only are the details completely shielded from the public, not even legislators in the US Congress are filled in on the details. Those who want to read the massive documents could only do so in a closed room, not allowed to bring their assistant staff or take notes and have no internet access during the session. They are also forbidden by law to talk about any detail in public.

So if the public has no access and the legislators have virtually no access, who does have access? The Huffington Post:

“The Administration’s 28 trade advisory committees on different aspects of the TPP have a combined 566 members, and 480 of those members, or 85%, are senior corporate executives or industry lobbyists,” the Warren-Brown letter asserts. “Many of the advisory committees — including those on chemicals and pharmaceuticals, textiles and clothing, and services and finance — are made up entirely of industry representatives.” Absent from that table are all congressional representatives.

Not only do the industry lobbyists have virtually unlimited access, chances are the texts of the treaty were literally typed from their keyboards.

Proliferation of ISDS Lawsuits

While investor-state dispute settlement provisions have existed in various forms and have been a component of many bilateral treaties, the explosive use of such provisions especially against governments over their policies on the environment, energy, consumer health, toxics, water, mining and other non-trade policies is a relatively recent phenomenon.  As the graph below shows, the number of publicly known ISDS related cases mushroomed from just 50 from 1960 through 2000, a span of four decades, to more than 50 for each of the last three years through 2013 for which the latest data is available.

 ISDS cases 1987 to 2013Number of annual public ISDS cases (image: Public Citizen)

Not surprisingly, the amounts of taxpayer money governments having to cough up as a result of losing arbitrations also soared in past years. Under US FTA alone and where data is available, foreign corporations have won over $420 million via investor-state cases. Tribunals have ordered $3.6 billion in compensation to foreign investors under all FTAs and bilateral investment treaties (BITs).

Growing Worldwide Opposition to ISDS

As legal fees and penalties against losing countries continue to mount, citizens all over the world are also growingly concerned about the increasingly frequent attacks by foreign corporations on legislations designed to protect their local environment, health and other public interest, and are pressuring their governments to reject investor-state regimes:

  • South Africa and Indonesia have started terminating BITs that contain ISDS provisions;
  • Ecuador is conducting an audit on its BITs to see if they are in the nation’s best interest;
  • India’s Ministry of Commerce is recommending that all BITs containing ISDS provisions be terminated or renegotiated.
  • Venezuela and Bolivia have withdrawn from the World Bank Forum where most investor-state cases are tried; and
  • Brazil, as a matter of policy, has never signed trade agreements containing ISDS provisions.

Developed countries are also sounding their alarm bells. While governments are under pressure to review ISDS provisions, outcry from civil society groups across broad political and social spectrums are getting louder as the details of an expanded ISDS regime pushed by both the EU and US governments under the TTIP and the TPP begin to emerge:

  • A formal public consultation process conducted by the EU amid growing public concerns over the ISDS provisions in the TTIP drew over 150,000 submissions.
  • In what appeared to be a reversal, Germany voices its opposition to the inclusion of ISDS in the TTIP. Brigitte Zypries, a German junior Economy Minster, recently advised the German parliament that “special investment protection rules are not necessary” in the TTIP because “US investors in the European union have sufficient legal protection in the national courts.” (details)
  • ISDS was excluded from the US-Australia free trade agreement after Australia insisted that the extrajudicial mechanism was neither in its national interest nor necessary between countries with adequate domestic legal systems.
  • A November 2010 Bilateral and Regional Trade Agreements report from the Australian government’s Productivity Commission, filed before the high profile ISDS court case launched by Philip Morris (see case in Part 2).

 “Available evidence does not suggest that ISDS provisions have a significant impact on investment flows.”

 “Experience in other countries demonstrates that there are considerable policy and financial risks arising from ISDS provisions.”

“In relation specifically to investor-state dispute settlement provisions, the government should seek to avoid accepting provisions in trade agreements that confer additional substantive or procedural rights on foreign investors over and above those already provided by the Australian legal system.”

TPP Received Fast Track Authorization in US

So faced with a growing chorus of organizations representing the largest US labor, environmental, consumer and other society groups calling for a public consultation similar to the one conducted by the EU, what did the US government do?

The administration pushed the bill through Congress and received fast track authorization, approved by legislators most of whom likely had not read the secret bill, reminiscent of a similar episode when House Minority Leader Nancy Pelosi immortalized the phrase “you have to pass the [healthcare] bill so that you can find out what is in it”, when urging her fellow congresspersons to vote for the Obamacare bill.

With fast track authorization, Congress will only get to do a go/no-go vote on the entire bill with no ability to amend any of its provisions, and a simple majority rather than a 67-vote threshold (as required in approving a treaty) would be required to pass the bill.

ISDS Liability Clear & Present and Non-hypothetical

Details of the ISDS provisions contained in the TPP remains sketchy as they are kept secret and tightly guarded from the public. What is known, based on what has been leaked by whistleblowers is that ISDS under TPP has been further ‘enhanced’ in favor of the investors compared to similar provisions in other bilateral agreements such as NAFTA.

Advocates of ISDS especially in the US dismiss the surging risks of liability arising from ISDS, downplaying it as either something hypothetical or that, in instances where ISDS cases it did arise, the US has never lost a case.

Well, good for the US. That might well have been the case for the US. However, the same cannot be said for other trading partners.

Not only did small countries like Ecuador (see Exhibit D) get hit with jaw-dropping penalties under the ISDS regime, much bigger OECD countries are also getting nailed.

In fact, the whipping boy of ISDS happens to be Canada.

[counters_box columns=”1″ color=”” title_size=”” icon_size=”” body_color=”#bc6969″ body_size=”16px” border_color=”#ffffff” class=”” id=””]
[counter_box value=”70″ delimiter=”” unit=”%” unit_pos=”suffix” icon=”” direction=”up”]of all NAFTA investor lawsuits since 2005 are against Canada[/counter_box]
[/counters_box]

Of the 78 investor-state claims filed under NAFTA since it came into effect just over two decades ago, 36 of them involved Canada, helping the country secure the honor of being the most screwed sued developed country in the world. The country also happens to be on the shit wrong end of the stick in 70% of all NAFTA investor lawsuits since 2005. (Huffington Post)

In Part 2 we will outline the key concerns over the TPP’s ISDS provisions and illustrate how the liability to a sovereign is neither trivial nor hypothetical.

References and further reading:

Investor State Dispute Settlement (ISDS)

This article is part of the Investor State Dispute Settlement (ISDS) in-depth topic. Get a crash course and read the latest developments on this topic.

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