Senator Warren Distorts the Record on Investor-State Dispute Settlements

March 2, 2015 3:30 PM

Senator Elizabeth Warren (D-MA) has fired an opening shot on behalf of opponents of the Trans-Pacific Partnership (TPP), the trade and investment agreement being negotiated by the United States, Japan, and ten other countries in Asia and the Americas. In a Washington Post op-ed on February 25, she singled out the investor-state dispute settlement (ISDS) provision in TPP’s investment chapter, calling it a “corporate giveaway.” The Senator claimed that ISDS would favor big multinational corporations, undermine US sovereignty, and expose US taxpayers to huge payouts to foreign firms. These claims, and some other criticisms of the TPP, have no foundation in the long history of ISDS provisions that have been in existence for more than 50 years.

ISDS provisions enable a foreign investor to seek compensation in an amount determined by an impartial panel of arbitrators, if a host government expropriates its property, or regulates its business in an arbitrary or discriminatory manner. Such protections have been deemed necessary in agreements going back at least to a Germany-Pakistan accord in 1959, and they have successfully protected US investments overseas in many countries.

Often these ISDS provisions are part of bilateral investment treaties (BITs), of which more than 2,200 are now in force worldwide. The United States has 41 BITs with countries near and far, and is actively negotiating a BIT with China, aimed at strengthening the rights of investors in a country that has not always been fair. Starting with the North American Free Trade Agreement (NAFTA) in 1994, the United States has also included ISDS in the investment chapters in nearly all its free trade agreements (FTAs), now numbering 20. Given this rich history, Senator Warren should be able to cite actual examples of the multiple abuses that she claims have occurred. She has not done so, because she cannot. Senator Warren makes a big deal about the hypothetical outcome of the old Methanex case against California’s regulations on gasoline additives, but the case was decided against the Canadian corporation.

The record shows that, far from a record of multinational corporations trampling sovereign states, investors have won fewer than a third of the cases resolved by the ISDS process.1 Arbitration procedures were formalized in 1996, when the World Bank created the International Center for the Settlement of Investment Disputes (ICSID) as a neutral forum to handle ISDS claims. Similar fora are based in London, Paris, and Stockholm, but ICSID oversees the vast majority of claims. To date, ICSID has handled almost 500 cases.2 Of these, 36 percent were settled between the parties before going to arbitration. The arbitrators declined to hear 16 percent of claims for want of jurisdiction. They dismissed 19 percent of claims for lack of merit. Only in 29 percent of cases did the arbitrators uphold some or all of the business claims.

Over the decades, only 13 ISDS cases have been brought to judgment against the United States.  The United States has not lost a single case. Why? Because the United States does not expropriate private property without compensation, and the United States does not enact arbitrary or discriminatory laws against foreign firms. Contrary to what the Senator implies, American taxpayers have not had to cough up millions and even billions of dollars in damages. They have not had to cough up anything.

To be blunt, Senator Warren has no facts to support her accusations. Instead, her op-ed, which ran 1,000 words, resorted to hypothetical scenarios that had no basis in 50 years of ISDS history and that ignored conflicting evidence.

Senator Warren starts by impugning the integrity of arbitrators, arguing that they serve corporate clients one day and act as arbitrators the next. She neglects to mention that arbitrators are selected from a large panel of qualified attorneys and that each side has several opportunities to remove candidates with a potential bias. She overlooks their oath of impartiality, to decide cases strictly in accordance with the law and the facts.  She was unwilling or unable to cite a single case of corrupt or inappropriate behavior by an ISDS arbitration panel. Warren might as well attack the integrity of federal judges who served corporate clients before their confirmation by the Senate.

The Senator then complains that only international investors make use of ISDS provisions. But that is hardly a surprise. An “investor dispute settlement” procedure by definition involves investors—the firms at risk of expropriation or discrimination by foreign governments. Also by definition, international firms tend to be big firms: In the world of foreign direct investment (FDI), fewer than 2,000 multinational corporations (MNCs) probably account for more than 80 percent of world FDI, now totaling approximately $28 trillion. There is ample precedent for creating special courts for special purposes, in this case investors, because expertise is required to make sensible decisions. Thus the US Court of Appeals for the Federal Circuit has exclusive jurisdiction over patent appeals, and the World Trade Organization’s Appellate Body decides government-to-government disputes over trade rights.

Senator Warren points out that many countries—not only the United States—have honest and competent judicial systems. This is true, but many do not. Moreover, the international law and procedure dealing with investor rights is a complex field, and in many respects differs from the laws and procedures of domestic courts. In particular, international law has higher standards in terms of fair compensation, and ISDS procedures are more expeditious than many national courts. Senator Warren’s answer to these realities is that multinational corporations should just take a gamble on national court systems and forget about ISDS. What she ignores are two basic facts of international investment life. First, many developing countries want ISDS provisions in their BITs and FTAs, in order make themselves more attractive to investments by MNCs. Second, when countries change political course and decide to expropriate the property of American investors, it is not just Wall Street investors that lose. The “investor class” includes Harvard’s endowment, the major public employee pension funds like Calper’s, and ordinary Americans with retirement savings managed by investment funds. Thus ISDS is needed to protect the pocketbooks of ordinary Americans.

Senator Warren follows by shorthand descriptions of cases in which she warns that plaintiffs may succeed in suing such countries as Egypt, Germany, and the Czech Republic to overturn their laws. But these are hypothetical scenarios. The cases have not been decided and the countries in question may well prevail. Her descriptions of these lawsuits overlook something that Senator Warren should know as a former law professor: Lawyers often bring cases seeking huge damages precisely when the facts are against their claims. Just look at the 13 ISDS cases brought against the United States and dismissed, or the 175 cases dismissed worldwide.

Sounding like a Tea Party politician railing against the United Nations, Senator Warren contends that international courts might replace the US legal system. Again she has the story backwards. The United States has been the chief architect of ISDS and other forms of international dispute settlement precisely because the United States has been able to export its legal principles to other countries. ISDS arbitration is not an alien monster imposed on the United States. It is part of the broader US answer to the demands of 21st century globalization of trade and investment. Global investment and trade have delivered enormous benefits to American households, but global commerce requires global rules, and ISDS is part of the needed structure.

The ISDS system is not perfect. But years of experience have led to improvements. Since NAFTA was ratified two decades ago, ISDS provisions have been amended to ward off frivolous claims involving environmental, health, and safety regulation of corporate practices. We do not yet know the precise terms of the ISDS provisions in TPP. A good guess is that they will follow the template found in the Korea-US FTA.

That template might be further improved by requiring briefs to be published at a suitable time and establishing an appeals mechanism. But just because the existing ISDS template falls short of perfection is no reason to jettison the concept. It is even less of a reason to reject the entire TPP, though that seems to be Senator Warren’s objective.

Notes

1. High-profile cases cited as cause for concern about ISDS cite companies that allegedly seek to rollback regulations, for example, the Philip Morris–Australia plain-packaging tobacco case and the Vattenfall–Germany nuclear energy case among others. But the fact that such cases have been launched says nothing about the utility of the ISDS system; moreover, the cited cases and others in contention have not yet been fully decided. It makes no sense to condemn the ISDS system for imagined failures.

2.  See the latest ICSID report, “The ICSID Caseload – Statistics,” Issue 2015-1.

Comments

Ed Walker

Rich Dutch corp. awarded $236 million against Czech government because Czech government didn't bail out a private bank they owned a share of. http://www.isdscorporateattacks.org/#!financial-stability/cudd. Suppose US didn't bail out Deutsche Bank in the next financial crisis?

ccimino

Questioning ISDS, Ed Walker cites Saluka v. Czech Republic, in which the Dutch minority investor won an award of $236 million because the Czech government gave the private bank decidedly less favorable treatment in a banking crisis than it gave its own public banks. The arbitrators held that the discriminatory treatment was not “fair and equitable”, the legal standard under the Netherlands-Czech BIT. Mr. Walker, you link a slanted capsule description of the Saluka v. Czech Republic case from the website published by www.ISDSCorporateAttacks.org. That organization is relentlessly opposed to TPP and TTIP, and its website features highly biased descriptions of several ISDS cases. Independent observers can certainly disagree with particular ISDS arbitral decisions. But as I survey the cases cited by ISDSCorporateAttacks, it seems that the great majority squarely violate “fair and equitable” treatment. More important is the fact that independent observers who evaluate any judicial system – the World Trade Organization, the European Court of Justice, the British High Courts, or the US Circuit Courts – will disagree with many decisions. This fact does not justify discarding the system.

But it may trigger a debate on how the system can be improved. Like many critics, I object to the absence of an ISDS appellate system that would harmonize disparate interpretations of “fair and equitable treatment”, “expropriation”, and other terms common to BITs and FTAs, and would also review the amounts awarded. I would like to read constructive suggestions from other critics.

mick

Any country with a high ranked world class legal system would be foolish to disregard it and accept the lesser ISDS quasi legal system.

Kevin Gallagher

Dear Dr. Hufbauer, Trade liberalization in goods and some services is generally a good thing. That said, as the PIIE work shows, the gains from further trade liberalization are relatively small juxtaposed to the gains in the past. Thus, they have to be weighed against potential risks. Here is a short overview of some of the concerns that academics have with ISDS: http://tinyurl.com/p5jxh52

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