What is Investor-State Dispute Settlement?
After half a decade of negotiations, trade ministers from a dozen countries in North America and the Pacific Rim are meeting in Maui from July 28th to the 31st to finalize the terms of the Trans-Pacific Partnership (TPP), an ambitious trade deal poised to be the economic cornerstone of Obama’s proclaimed pivot to Asia. Taken together, the treaty’s members constitute more than 40% of the global economy, making the TPP the largest regional trade deal in history and arguably the U.S.’s most important free trade agreement to date. If the TPP goes through, many expect to see the partnership eventually expand to include countries like South Korea, Taiwan, Thailand, and even China.
The controversial trade agreement has drawn criticism from Democrats and Republicans alike, much of it directed towards Obama’s proposed Trade Promotion Authority (TPA), or “fast track,” as well as the predicted outsourcing of U.S. jobs to foreign nations and potential lowering of U.S. health and safety standards. We at Defending Dissent Foundation (DDF) have spoken out both against fast track and the lack of transparency in the ongoing TPP negotiations. While such criticisms are undoubtedly valid, there is another component to the bill that has received less attention in mainstream political discourse despite posing just as much of a threat to the wellbeing of our nation, if not more so—investor-state dispute settlement (ISDS). Investor-state dispute settlement is a legal mechanism common in free trade agreements that allows foreign corporations to sue a host country’s government for policies that negatively impact their investments and “expected future profits.” These claims, if not settled privately, are brought before an extrajudicial international tribunal consisting of three arbitrators appointed by the disputing parties.
To be clear, these tribunals don’t have the authority to force the U.S. or any other country to change its laws, but they can legally compel a government to compensate the corporation in question for its lost profits—a sum can reach the hundreds of millions, or in extreme cases, billions. One particularly egregious case occurred in 2012, when Ecuador was ordered to pay the U.S.-based Occidental Petroleum $2.3 billion for terminating its contract with the company under popular pressure. It’s easy to see how such costs would give corporations the ability to influence laws and regulations in other countries, even if indirectly. Lawmakers will likely think twice about passing a ban on the import of a gasoline additive that potentially acts as a neurotoxin—something most people would consider completely reasonable—when they fear that their government will get sued for $251 million over it, which is exactly what happened to Canada in 1997 under NAFTA’s chapter 11. Canada actually revoked the ban on the additive MMT and paid Ethyl Corporation $13 million in damages to settle out of court before the tribunal issued a final ruling.
The fact that a foreign corporation lacking any sort of accountability to the Canadian people was able to bully Canada’s democratically elected government into reversing a policy it had put in place for the good of its citizens is a potent illustration of the very real dangers of ISDS. Proponents of TPP may defend the treaty by pointing out that the U.S. has yet to lose a single arbitration under NAFTA. While true, it is foolish to simply hope that our luck will hold. This argument also ignores the fact that TPP is singular in its scope, opening the U.S. to potential lawsuits from a staggering 9,000 foreign-held corporations, many from countries like Japan and Australia, which are both wealthy and deeply invested in the U.S. It is deeply disturbing to think that any sort of private entity, much less a foreign one, will be able to dodge our domestic courts and laws and challenge the policies enacted by our government, potentially receiving millions of taxpayers’ dollars in compensation, through a secretive tribunal staffed by private corporate lawyers with serious conflicts of interest. Giving foreign companies such power strips away the people’s voice and directly undermines our democracy. Economic prosperity—if the TPP can guarantee even that—cannot come at the cost of our welfare and freedom.