Improbably, the new North American Free Trade Agreement (NAFTA) that Congress passed in January guts the nefarious Investor-State Dispute Settlement (ISDS) system, a development that has been largely left out of mainstream reporting on the deal.
ISDS empowers multinational corporations to sue governments before panels of three corporate lawyers to demand compensation for domestic policies they claim violate their investor rights. The lawyers can award the corporations unlimited sums to be paid by taxpayers, including for “expected future profits.” Decisions are not subject to appeal.
Given that ISDS is a fundamental threat to government actions to counter the climate crisis, protect public health and conserve natural resources, eliminating ISDS was a top demand for environmental and consumer groups. Already, corporations have extracted hundreds of millions of dollars from North American taxpayers after NAFTA ISDS attacks on energy, water, timber and toxics policies.
The new NAFTA, officially called the U.S.-Mexico-Canada Agreement, garnered broad Democratic support in part because it guts ISDS. In 2015, a major reason the Trans-Pacific Partnership (TPP) could not garner a majority in Congress was its expansion of ISDS rights, an issue Sen. Elizabeth Warren helped elevate to the center of the debate.
More surprising is that almost all congressional Republicans are now on record in support of a deal rolling back ISDS after decades of insisting they would oppose any pact without it. Yet even as Big Oil champions like Sen. Bill Cassidy (R-Louisiana) decried U.S. petrochemical firms’ loss of ISDS rights for Mexican investments, and oil lobbyists worried that U.S. firms’ contracts with Pemex and other Mexican entities would lose ISDS protections, the new NAFTA passed with overwhelming bipartisan House (385-41) and Senate (89-10) majorities.
How Did This Happen?
Opposition to ISDS among Democrats has been growing, thanks in part to new U.S. public awareness after a series of corporate attacks on tobacco regulation, basic environmental reviews and energy policies essential to combating the climate crisis. (Public fury about ISDS in Europe was also the proximate cause of the demise of the Transatlantic Trade and Investment Partnership.)
It’s no wonder why. ISDS elevates individual corporations to equal status with entire countries, empowers them to attack democratically created public interest policies and minimizes the risks of outsourcing jobs to low-wage countries.
While most congressional Republicans reflect the ISDS love of their corporate donors, some conservatives — including those leading Trump administration trade policy — consider ISDS as an insult to national sovereignty. Not only does it empower foreign firms to skirt U.S. courts, but it gives foreign investors operating here superior rights relative to domestic firms while subsidizing the outsourcing of jobs.
Thus, for different reasons, key players in the United States all agree ISDS has to go. These include hundreds of academics, the U.S. Conference of Mayors, a bipartisan group of 300 state legislators from all 50 states, small businesses, 100 health organizations, faith groups, consumer groups, the National Conference of State Legislatures, the National Association of Attorneys General, the National Association of Counties, the National League of Cities, and more than 1,000 other civil society organizations.
Specific ISDS Improvements
The new NAFTA ends ISDS between the U.S. and Canada. All but one of the NAFTA ISDS payouts implicating environmental and health issues have involved U.S. firms challenging Canadian policies. Ending U.S.-Canada ISDS also eliminates 90 percent of all U.S. ISDS exposure.
Between the United States and Mexico, ISDS is replaced with a new approach that reflects many longstanding progressive demands.
The extreme investor rights relied on for almost all payouts are eliminated. This includes the guaranteed “minimum standard of treatment,” which obliges governments to pay off corporations for policy changes that frustrate their expectations of how they should be treated. Also eliminated is compensation for “indirect expropriation,” which empowers corporations to claim that any government action that lessens the value of an investment, such as denying a toxic waste dump permit, is tantamount to government seizure of the property. And the pre-establishment “right to invest” is terminated, meaning corporations can no longer demand a payout if their future plans to try to open a mine are foiled because of a negative environmental review.
A new process requires investors to first exhaust domestic courts and other means to resolve their dispute with a government — or at least try to for 30 months. Only then may a review be filed, and only for direct expropriation — defined narrowly as actual transfer of title or physical seizure of property — or post-establishment discrimination, which means government actions that treat existing foreign investors and firms less favorably than domestic ones.
The new approach also remedies key procedural problems. Inherently speculative damages are banned to counter exorbitant expected future profits claims. Additionally, lawyers are forbidden from rotating between “judging” cases and suing governments on behalf of corporations.
The new rules will prevent future ISDS damage. The most infamous NAFTA ISDS attacks on health and safety policies would no longer be possible, including the $15 million from Canadian taxpayers that ExxonMobil and Murphy Oil grabbed after an attack on offshore oil drilling policies; the U.S. pharmaceutical company Eli Lilly’s attack on the Canadian drug patent system that cost taxpayers $1.2 million after Canada “won”; and the U.S. waste disposal company Metalclad’s $16.2 million payout from Mexican taxpayers over a toxic waste facility that threatened a city’s water supply.
Between Canada and Mexico, NAFTA ISDS is gone, but the system still remains for the two countries as parties to the TPP.
Despite the major win on ISDS, the new NAFTA has a significant loophole that is highly problematic. It allows a small group of U.S. oil and gas companies to still make claims using the most dangerous ISDS rights.
The loophole grandfathers in ISDS rights for nine U.S. investors that obtained 13 concessions from the Mexican federal government’s National Hydrocarbons Commission during the previous government’s partial privatization. These rights only apply if Mexico provides such ISDS protections to competing investors under other agreements, which it does. Many of the procedural reforms apply, but not the domestic exhaustion rule.
The loophole appears more extensive than it is. It mentions economic sectors beyond oil, but in reality, its application is very limited: An investor must have a “covered government contract” with the federal government in a specific listed sector. A “covered contract” is narrowly defined to exclude the licenses, regulatory authorizations and other mechanisms used in the other listed sectors.
Although the new NAFTA otherwise terminates the existing expansive ISDS rights now in effect for every U.S. and Mexican investor in every sector, any access, much less for oil companies, to the old ISDS regime is unacceptable.
The Future of ISDS
The new approach is a significant scaling back of corporate power, in contrast to ISDS “reforms” promoted by the European Union, which only address procedural issues while preserving expansive investor rights.
That the United States has joined the growing list of countries dumping ISDS is newsworthy — especially given the past U.S. role in pushing this corporate rights regime worldwide even as it became evident that nations terminating ISDS agreements saw no fall-off in foreign investment.
While the new NAFTA’s rollback of corporate ISDS powers is a major gain, the new NAFTA is not a template for future agreements. There is no legitimate reason why multinational investors should be granted any special treatment, and future pacts should be altogether free of ISDS.
Truly progressive pacts would also include binding climate standards, stronger rules to stop race-to-the-bottom outsourcing of jobs and pollution, and enforceable rules against currency cheating. They would not limit safeguards needed to ensure our food and products are safe, our privacy is protected, monopolistic online firms are held accountable, and big banks do not crash the economy again.
However, with the evisceration of ISDS and other improvements, the new NAFTA sets the floor from which fair-trade advocates will continue to fight after their three-year-long campaign on NAFTA renegotiation.