In recent days, President Donald Trump and Commerce Secretary Wilbur Ross have indicated that they intend to begin the process of renegotiating the North American Free Trade Agreement (NAFTA), one of many trade agreements that include what is known as an investor-state dispute settlement (ISDS) clause. These clauses in trade agreements allow corporations to challenge the laws and regulations of sovereign governments if they believe a government action has violated their rights as foreign investors. One particular ISDS case launched under NAFTA illustrates the challenge that this extrajudicial system poses for sensible regulation and democratic governance more generally.
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In January 2016, TransCanada, the oil company behind the notorious Keystone XL pipeline, filed a $15 billion suit against the United States government for its refusal to approve the pipeline. TransCanada suspended the case in February 2017, but the fact that it was ever able to launch it in the first place is a prime example of the undemocratic and unjust nature of the ISDS system. Trump has vowed to renegotiate NAFTA, the trade pact under which this case was launched. However, Trump has not made clear whether he intends to remove or alter the ISDS provisions within NAFTA as a part of the renegotiation. And given that his cabinet will likely be the wealthiest in presidential history, there is little reason to think that he will make restrictions on corporate power — like the removal of ISDS — a priority in trade policy. Despite this, progressives and leftists must be unequivocal in their insistence that ISDS must be removed from all past agreements and left out of any future treaties.
Since ISDS first appeared in 1969, the number of agreements with ISDS clauses has exploded, as has the number of ISDS cases launched under these agreements. In 2014, 42 ISDS cases were launched by investors and, in 2013, 59 such cases were launched. In the past two years, much of the opposition to the recently defeated Trans-Pacific Partnership (TPP) centered on its inclusion of ISDS. So what is ISDS?
Under an agreement that includes ISDS, a foreign corporation may challenge the laws or regulations of a partner country in ad hoc arbitral tribunals separate from that country’s domestic legal system. If the tribunal rules in the corporation’s favor, they may order the country to compensate that company for lost profits due to the law or regulation. The arbitrators on the tribunals are often corporate attorneys who arbitrate decisions one day and then initiate cases on behalf of those same investors the next day.
Some ISDS cases have produced outcomes so shocking that it is difficult to believe their decisions could be legal. This is in part due to the fact that the tribunals are not bound by precedent like formal judicial systems. In addition, their claims are made on the basis of vague language subject to many interpretations. For example, an ISDS tribunal in 2012 granted Occidental Petroleum Corp. $1.77 billion, later reduced to $1 billion, after the government of Ecuador terminated an oil concession with the company. Despite the fact that Occidental Petroleum breached its contract with the government, the tribunal sided with the corporation. It concluded that the government of Ecuador had breached the terms of its Bilateral Investment Treaty (BIT) with the United States by engaging in “indirect expropriation” and by violating the requirement of “fair and equitable treatment” for foreign investors. The vague language of “fair and equitable treatment” is the most frequent basis for ISDS claims and “indirect expropriation” is also very common. These phrases lead to widely varying interpretations, depending on the particular arbitrators assigned to a claim.
Because of the public outcry over cases like Occidental v. Ecuador, researchers and politicians have discussed reforming the ISDS system for years. These proposals range from the Obama administration’s toothless “reforms” in the TPP, to the proposed EU Investment Court System for use in the Transatlantic Trade and Investment Partnership (TTIP). The proposals for reform of the ISDS system generally focus on issues, such as lack of transparency, biases of arbitrators and inconsistencies between rulings. In other words, the reforms do not question the underlying assumption of the ISDS system: that it is proper and justified to allow corporations to challenge the policies of governments outside of that country’s judicial system.
The basic argument in favor of ISDS is that many countries do not have fully developed legal systems and, in order to attract foreign investment to these countries, investors must feel confident that their property will be secure. A typical example used to show the necessity of ISDS is a government seizing a factory of a foreign corporation without fully compensating the company for their assets. In fact, there are many real-world ISDS claims made on this basis. In October 2014, an ISDS tribunal ordered Venezuela to pay oil giant ExxonMobil $1.6 billion after the Venezuelan government nationalized two of the company’s oil projects. Exxon claimed that the government did not fully compensate them and, after pursuing an ISDS claim, an arbitral tribunal ruled that Venezuela had engaged in “direct expropriation” and had violated the required standard of “fair and equitable treatment.”
Venezuela’s experience with ISDS is particularly notable because many of the claims made against the country appear to be perfect examples of ISDS working as it is intended to. After the leftist Chavez administration gained power in the country, the government began nationalizing various industries as part of its progressive economic reforms. These reforms led corporations to launch more ISDS claims against Venezuela than any other country besides Argentina. After all, ISDS is intended to prevent governments from expropriating the property of foreign investors. The fact that the Chavez government’s expropriations were part of an economic policy intended to reduce poverty and inequality in the country was seen as irrelevant by investors and arbitrators alike. As a result of being subject to these many ISDS claims, Venezuela has been ordered to pay billions of dollars to wealthy multinational corporations that have exploited the country’s citizens and resources for years.
The experience of Venezuela reveals the futility of trying to reform the ISDS system and shows the necessity of abolishing the system entirely. A just vision of society must allow governments to take actions that ensure the protection of their environment as well as the health and well-being of their citizens. Because of this, reforms to ISDS that leave intact the basic structure of the system are insufficient. We must protect countries’ rights to regulate in the public interest, but we must also protect governments’ rights to take more drastic actions, such as expropriation and nationalization of corporations’ property.
The ISDS system, at its core, is opposed to this right and therefore can never be fully reformed. Any future society based on principles of social justice requires the subordination of corporate power to the will of the people, a goal completely at odds with the ISDS system.