The Left’s Latest Excuse to Derail Free Trade
The next stage of the Trans-Pacific Partnership (TPP) battle has already begun to heat up in Congress. During the fast track authorization debate in the Senate, a large portion of Democratic lawmakers’ complaints about the trade bill focused on an obscure provision called Investor-State Dispute Settlement (ISDS). Senator Elizabeth Warren (D-MA) penned an op-ed in the Washington Post slamming ISDS, and unions like the AFL-CIO quickly followed in support. As fast track authorization for TPP nears a vote in the House, following Senate passage last month, members of the protectionist wing of the Democratic Party will likely step up their attacks on ISDS. But these attacks are misplaced. ISDS can serve as a powerful tool for American businesses facing unfair trade practices abroad.
The ISDS provision of the TPP was created to protect foreign investors from unfair treatment and expropriations by foreign governments. ISDS essentially allows investors to bring complaints against member governments before a panel of arbitrators that have the ability to award damages. The concept is nothing new, according to the Economist. The United States has already signed 50 trade deals involving ISDS and Europe is a party to nearly 1,400.
Since ISDS is so common there are plenty of examples of its successful use for arbitration. In 2006, the Ecuadorian government seized the property of the American oil company Occidental in response to anger about the company’s environmental practices. Occidental responded by claiming that Ecuador had not fulfilled its obligations as a member of the Bilateral Investment Treaty (BIT) because the decision to nationalize had been unfair, arbitrary, and discriminatory. Using ISDS, Occidental was able to obtain a $1.6 billion payout from the Ecuadorian government to compensate for damages. In this case, ISDS was essential to ensuring Ecuador lived up to its treaty obligations.
Complaints about the use of ISDS in treaties have existed for years, but they have only just become prevalent in mainstream politics. The voting population has recently become more skeptical of the standard argument that protectionist policy is necessary for a thriving economy. According to an NBC News/Wall Street Journal poll, 2015 marks the first year in recent memory that Americans have had a net positive view of free trade.
Democrats have turned to arguments against ISDS in order to avoid the debate about the merits of free trade and to refocus political discourse on the issue of state sovereignty. Senator Bernie Sanders (I-VT), who caucuses with the Democrats, has claimed that ISDS puts the ability to legislate “in the hands of an unelected international tribunal.” Others, such as Senator Warren, have called the arbitration proceedings “rigged pseudo-courts.” Both Sanders and Warren are massively overstating their case.
Sanders’ claims that U.S. law will be overruled and that corporations will bend the law to their whims has not played out. Although the United States is a party to 50 treaties with ISDS provisions, a complainant has never won an arbitration against the United States using this process. The impressive U.S. record exists not only because Americans generally follow treaty obligations, but also because the standards for proving wrongdoing in ISDS arbitrations are high.
While the United States has avoided losing in ISDS arbitrations, Europe has not been so fortunate. Many European ISDS provisions were written with vague language that has allowed abuses of the system. In 2009 the Swedish nuclear company Vattenfall attempted to obtain damages from the German government after the phase-out of German nuclear power plants in response to the Fukushima disaster. If the Obama administration and other members of the TPP are to be believed, the drafters of TPP have learned from Europe’s mistakes and improved the TPP’s ISDS language to avoid frivolous claims and ensure member governments will retain their ability to regulate at necessary levels without fear of litigation. The United States has no reason to pay attention to any of the apocalyptic tales about a loss of sovereignty that critics of ISDS are so eager to propagate.
Warren’s assertion that the arbitration process is inherently rigged in favor of corporations also does not hold up under scrutiny. Under the existing language for the ISDS, the panel of three arbitrators is balanced by design. The arbitrators are unlikely to be biased “highly paid corporate lawyers” because the TPP mandates that each side of the dispute choose a single arbitrator and jointly appoint the third. It is hard to believe that governments would choose to be judged by lawyers with a track record for bias. ISDS arbitrators also have an incentive to maintain their reputation of objectivity if they wish to retain their ability to hear ISDS cases.
ISDS is an obscure but worthwhile provision of the TPP. Strong ISDS would incentivize U.S. companies to expand their businesses abroad and to take advantage of the new TPP. The ISDS provision lowers the risk that foreign states will target American companies with unfairly applied regulations. These states recognize that companies will be able to fight back through arbitration instead of being forced to use local courts, which could have a pro-government bias. ISDS will allow American companies to enjoy the benefits of free trade because it ensures that their property rights will be protected.
Next week the issue of ISDS will likely re-enter the trade authorization debate. Democrats will attempt to shift the debate’s focus away from free trade and towards state sovereignty. It will be important to remember that the downsides of ISDS are overblown and that the provision is part of TPP for a reason. ISDS is essential to enforcing treaty obligations and ought to be defended vigorously.
Patrick Holland is a contributor to Economics21.
Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.