Eight Reasons To Purge Investor-State Dispute Settlement From Trade Agreements

Mar 4 2014, 6:45pm CST | by

For a variety of reasons, including poor management of public perceptions, the administration’s trade agenda is in trouble.  Much of the public’s antipathy toward trade agreements can be boiled down to concerns about the so-called Investor-State Dispute Settlement (ISDS) provision. ISDS enables foreign investors to circumvent domestic legal processes and sue host governments in third-party arbitration tribunals for unfair or discriminatory treatment – described hyperbolically by those fanning the flames of opposition as “running roughshod over domestic laws, regulations, and sovereignty.”

The inclusion of ISDS in trade agreements subverts prospects for trade liberalization. U.S. multinational corporations want access to ISDS, but they don’t need it.  If the trade agenda is the proverbial airplane that is down an engine and losing altitude, throwing ISDS out of the cargo hold to lighten the load is the best way to reduce the chance of a crash.

Following are eight reasons why ISDS should be purged from the Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership negotiations.  Here is a link to a new Cato Institute paper that gives background and goes into greater depth and detail about the eight reasons.

First, ISDS is overkill. Investment is a risky proposition. Foreign investment is usually more risky. But that doesn’t necessitate the creation of institutions to protect MNCs from the consequences of their business decisions. Multinational companies are among the most successful and sophisticated companies in the world. They are quite capable of evaluating risk and determining whether the expected returns cover that risk. Moreover, MNCs can mitigate their own risk by purchasing private insurance policies.

Second, ISDS socializes the risk of foreign direct investment. When other governments oppose, but ultimately concede to, U.S. demands for ISDS provisions, they may be less willing to agree to other reforms, such as greater market access, that would benefit other U.S. interests. That is an externality or a cost borne by those who don’t benefit from that cost being incurred. In this regard, ISDS is a subsidy for MNCs and a tax on everyone else. Taking the argument one step further, ISDS not only subsidizes MNCs, but particular kinds of MNCs. What may be too risky an investment proposition without ISDS for Company A is not necessarily too risky for Company B. By reducing the risk of investing abroad, then, ISDS is a subsidy for more risk-averse companies. It is a subsidy for Company A and a tax on Company B.

Third, ISDS encourages “discretionary” outsourcing. While ISDS may benefit U.S. companies looking to invest abroad, it neutralizes what was once a big U.S. advantage in the competition to attract investment. Respect for property rights and the rule of law have been relative U.S. strengths, but ISDS mitigates those U.S. advantages. Access to ISDS could be the decisive factor in a company’s decision to invest in a research center in Brazil, instead of the United States. Why should U.S. policy reflect greater concern for the operations of U.S. companies abroad than for the operations of U.S. and foreign companies in the United States? While we should not denigrate, punish, or tax foreign outsourcing, neither should we subsidize it, and ISDS subsidizes “discretionary” outsourcing.

Fourth, ISDS exceeds “national treatment” obligations, extending special privileges to foreign corporations. An important pillar of trade agreements is the concept of “national treatment,” which says that imports and foreign companies will be afforded treatment no different from that afforded domestic products and companies. The principle is a commitment to nondiscrimination. But ISDS turns national treatment on its head, giving privileges to foreign companies that are not available to domestic companies. If a U.S. natural gas company believes that the value of its assets has suffered on account of a new subsidy for solar panel producers, judicial recourse is available in the U.S. court system only. But for foreign companies, ISDS provides an additional adjudicatory option.

Fifth, U.S. laws and regulations will be exposed to ISDS challenges with increasing frequency. The number of cases is on the rise. Most claims have been brought against developing countries—with Argentina, Venezuela, and Ecuador leading the pack—but the United States is the eighth-largest target, having been the subject of 15 claims over the years. As the percentage of global Fortune 500 companies domiciled outside the United States continues to increase, U.S. laws and regulations are likely to come under greater scrutiny. The specter of foreign companies prevailing in challenges of U.S. laws outside the U.S. legal system would frustrate further the task of selling trade to a skeptical public and would reward trade critics who have been warning of just such an outcome for many years.

Sixth, ISDS is ripe for exploitation by creative lawyers. There is a lot of latitude for interpretation of what constitutes “fair and equitable” treatment of foreign investment, given the vagueness of the terms and the uneven jurisprudence. Thus, ISDS lends itself to the creativity of lawyers willing to forage for evidence of discrimination in the arcana of the world’s laws and regulations. Among the complaints worldwide in 2012 were challenges related to “revocations of licenses, breaches of investment contracts, irregularities in public tenders, changes to domestic regulatory frameworks, withdrawals of previously granted subsidies, direct expropriations of investments, tax measures and others.”

Seventh, ISDS reinforces the myth that trade primarily benefits large corporations. A persistent myth that has proven hard to dispel permanently is that trade benefits primarily large corporations at the expense of small businesses, workers, taxpayers, public health, and the environment. The fact is that trade is the ultimate trustbuster, ensuring greater competition that prevents companies from taking advantage of consumers. Lower-income Americans stand to benefit the most from trade liberalization, as the preponderance of U.S. protectionism affects products and services to which lower-income Americans devote higher proportions of their budgets. But by granting special legal privileges to multinational corporations, ISDS reinforces that myth and is a lightning rod for opposition to trade liberalization.

Eighth, dropping ISDS would improve U.S. trade negotiating objectives, as well as prospects for attaining them. Dropping ISDS would assuage thoughtful critics of the trade agenda, who do not oppose trade, but who believe trade agreements should be more modest and balanced. Meanwhile, what now appears to be an angry mob protesting trade generally will be thinned out, exposing the unsubstantiated arguments of the professional protectionists who benefit by impeding Americans’ freedom to trade.

ISDS raised too many difficult questions about the relationship between domestic sovereignty and the imperative of avoiding protectionism in all of its manifestations.  It also reflects some of the public’s worth fears about trade — fears based on nothing more than myth if ISDS is purged.

Source: Forbes Business

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Soyuz rocket carrying two Galileo satellites lifts off
Brussels, Aug 22 (IANS) A Soyuz rocket carrying two Galileo satellites, the fifth and sixth of Europe's Galileo global satellite navigation system, lifted off from the spaceport in French Guiana Friday, the European Space Agency (ESA) has announced.
 
 
Fresh cases of Ebola recorded in Nigeria: Official
Abuja, Aug 22 (IANS) Fresh cases of the Ebola virus disease have been recorded in Nigeria, where the highly contagious disease has already claimed five lives, Minister of Health Onyebuchi Chukwu said Friday.
 
 
Fuel cell technology gets a boost
Washington, Aug 22 (IANS) In an impetus for fuel cell technology to build "smart" cars, scientists at Stanford University have developed a low-cost, emissions-free device that uses an ordinary AAA battery to produce hydrogen by water electrolysis.
 
 
3D-printed technology to make drug delivery better
Washington, Aug 22 (IANS) The US researchers have developed an innovative method for using affordable, consumer-grade 3D printers and materials to fabricate custom medical implants that can contain antibacterial and chemotherapeutic compounds for targeted drug delivery.
 
 
 

Latest from the Network

Pakistan: Tensions ease as PTI agrees to resume talks (Roundup)
Islamabad, Aug 22 (IANS) Tensions in the Pakistani political landscape eased Friday with the Imran Khan-led Pakistan Tehreek-i-Insaf (PTI) party agreeing to return to the negotiating table as the Senate or the upper...
Read more on Politics Balla
 
Ukrainian rebels kill four soldiers
Kiev, Aug 22 (IANS) At least four security personnel have been killed and 23 wounded in clashes with rebels in eastern Ukraine, authorities said Friday. Four Ukrainian servicemen were killed Thursday overnight in...
Read more on Politics Balla
 
Miley Cyrus concert banned in Dominican Republic
Santo Domingo, Aug 22 (IANS/EFE) The Dominican Republic government has banned a concert where US pop star Miley Cyrus was scheduled to perform in the nation's capital Sep 13. In a notice sent to the SD Concerts and...
Read more on Celebrity Balla
 
George Clooney's ex Elisabetta Canalis engaged
George Clooney's ex Elisabetta Canalis has got engaged. The 35-year-old beauty is set to tie the knot with Brian Perri in Italy next month, as is George and his new fiancée Amal Alamuddin, after the orthopedic surgeon...
Read more on Celebrity Balla
 
Mariah Carey's jealously to blame for split?
Mariah Carey's jealousy is reportedly partly to blame for her and Nick Cannon's split. The 44-year-old singer is said to have trust issues with her spouse - with whom she has four-year-old twins Moroccan and Monroe -...
Read more on Celebrity Balla
 
Jessica Alba is 'fearless' after motherhood
Jessica Alba has become ''fearless'' since motherhood. The 33-year-old actress admits her whole perspective of her career has changed since welcoming her daughter Honor, six, and Haven, three, into the world with her...
Read more on Celebrity Balla
 
Daniel Radcliffe wants fans to forget Harry Potter
Daniel Radcliffe wants his fans to forget about 'Harry Potter'. The 25-year-old actor is currently starring in romantic comedy 'What If', and despite its success, the actor is resigned to the fact the comparisons to his...
Read more on Celebrity Balla
 
Hamas executes 18 alleged collaborators with Israel
Gaza, Aug 22 (IANS/EFE) Palestinian militias Friday executed 18 people accused of collaborating with Israel, 48 hours after three top military leaders of the Islamic Palestinian movement Hamas were killed in an Israeli...
Read more on Politics Balla
 
27 killed in CAR gold mine collapse
Yaounde, Aug 22 (IANS) At least 27 miners have been killed in a gold mine collapse in the Central African Republic (CAR), authorities said Friday. The Ndassima mine is situated 400 km north of the country's capital...
Read more on Politics Balla
 
Austrian humanitarian aid for 100,000 people in Iraq
Vienna, Aug 22 (IANS/WAM) The Austrian government has approved one million euros ($1.3 million) in emergency aid from the Foreign Disaster Relief Fund (FDRF) to the UN in northern Iraq, the country's foreign ministry...
Read more on Politics Balla