On the precipice of the biggest congressional trade debate in decades, a once-arcane investment provision has become a lightning rod of controversy in the intensifying battle over whether Congress should revive Trade Promotion Authority (TPA), also known as “fast track,” for the Trans-Pacific Partnership (TPP). Sen. Elizabeth WarrenElizabeth WarrenOvernight Finance: Dems seek probe of acting SEC chief | Defense hawks say they won't back short-term funding | Senate seen as start point for Trump infrastructure plan | Dems want more money for IRS Senate Dems call for investigation of acting SEC chairman Petition calls for Melania Trump to move to White House or pay NY security costs MORE (D-Mass.) calls this provision a system of “rigged, pseudo-courts.” The Republican leadership of the House Ways and Means Committee defends it as “a vital part of any trade agreement.”
But this is not your standard partisan congressional battle. Inside Congress and out, criticism and support for this parallel legal system, known as investor-state dispute settlement (ISDS), crosses the political spectrum. Analysts with the Cato Institute and Public Citizen usually stand on opposing sides of trade policy issues, but we find common ground in opposing this system of special privileges for foreign firms.
Pacts with ISDS are often promoted as simply prohibiting discrimination against foreign firms. In reality, they go well beyond non-discrimination, and create amorphous government obligations that have given rise to corporate lawsuits against a wide array of policies with relevance across the political spectrum. Foreign corporations have used this system to challenge policies ranging from the phase-out of nuclear power to the roll-back of renewable energy subsidies. Nearly all government actions and inactions are subject to challenge, covering local, state, and federal measures taken by courts, legislators and regulators.
Take, for example, the recent U.S. Supreme Court rulings that companies cannot patent human genes or obtain abstract software patents favored by patent trolls. Foreign holders of those patents could use ISDS to claim that these decisions interfere with their patent rights and ask an international tribunal to order compensation from the U.S. government. And just recently, some TPP supporters suggested that foreign firms could use ISDS obligations to challenge domestic antitrust enforcement decisions.
The wide scope of policies exposed to challenge arises from broad obligations in these agreements, which offer corporations extensive litigation opportunities. For example, provisions typically guarantee foreign firms a “minimum standard of treatment,” including a government obligation to provide “fair and equitable treatment.” To a non-lawyer, such an obligation may sound like a modest provision. Who could be against fairness?
But creative ISDS lawyers acting as “judges” have generated a variety of broad interpretations of this obligation, including that governments should not "frustrate the expectations" of foreign investors. The system's innocuous sounding legal principles thus function more like corporate litigation handouts, with the substance and process of almost all government actions susceptible to challenge.
Importantly, foreign investors alone – not domestic businesses or civil society groups – are empowered to use this parallel system of legal privileges. You may believe that international law can and should protect the rights of individuals. But why start with transnational corporations, which are pretty well situated to protect their own rights? Few other private actors enjoy such broad and enforceable international law obligations as ISDS grants to transnational corporations.
The structure of the system is also deeply flawed. ISDS cases are not heard by a permanent judicial body made up of neutral arbitrators. Instead, there is a rotating group of lawyers who litigate cases on behalf of corporate clients one day, but then act as “judges” in other cases the next day. Oddly, the judges are chosen by the parties themselves. And while the foreign investor and the defending government each pick one judge, only foreign investors can initiate cases. This structure creates an incentive for at least some ISDS judges to tailor their interpretations to the views of foreign firms that are uniquely positioned to launch new ISDS cases and to select them to serve again as (highly-paid) judges.
And unlike typical legal systems based on rule of law, ISDS tribunals are not required to follow legal precedent, nor is the substance of their rulings subject to review by an appellate court.
Seeing the utility of this system, foreign firms are now launching more ISDS cases than ever before. Though no more than 50 ISDS cases were initiated in the system’s first three decades, foreign firms filed at least 50 cases each year from 2011 through 2013, and at least 42 claims in 2014.
Amid this surge in ISDS challenges, it is surprising that the Obama administration intends to subject the United States to an unprecedented increase in ISDS liability via the TPP and the Transatlantic Trade and Investment Partnership (TTIP). While most existing U.S. agreements with ISDS cover developing countries whose firms have few investments here, these two deals would newly grant ISDS privileges to corporations from 13 of the world’s 20 largest exporters of foreign investment. Those corporations own more than 32,000 subsidiaries in the United States, any one of which could serve as the basis for an ISDS claim for U.S. taxpayer compensation.
While not all claims are successful, a majority of ISDS cases have resulted in the government having to compensate the foreign firm, either by order of the tribunal or via a settlement. And even when firms do not win, the government must spend an estimated $8 million per ISDS case just to defend a challenged policy.
Exposing domestic laws, not to mention taxpayers, to a wave of ISDS litigation does not even make sense in the name of promoting investment. A litany of studies, producing mixed results, has not been able to show that ISDS-enforced pacts actually boost foreign investment.
While we disagree about many aspects of today’s trade pacts, we agree that plans for ISDS expansion should be scrapped. Across the political spectrum, few would support a system primarily designed to increase litigation, not liberalization. ISDS may be good for lawyers; it is less clear that it benefits anyone else.
Lester is a trade policy analyst with Cato’s Herbert A. Stiefel Center for Trade Policy Studies. Beachy is research director at Public Citizen's Global Trade Watch.