Hyperbole Aside, Elizabeth Warren Is Right About the Risk of Investor-State

Sen. Elizabeth Warren takes to the Washington Post op-ed pages today to warn about the dangers of the so-called Investor-State Dispute Mechanism, which is likely to be a part of the emerging Trans-Pacific Partnership deal.  In substance, if not style, Sen. Warren’s perspective on ISDS is one that libertarians and other free market advocates should share. At least, my colleague Simon Lester and I do

ISDS grants foreign investors the right to sue host governments in third-party arbitration tribunals for treatment that allegedly fails to meet certain standards, such as new laws, regulations, or policies that might have a discriminatory effect on foreign investors that reduces the value of their assets. Certainly, investors – and in this context we’re talking mostly about multinational corporations (MNCs) – should have recourse to justice when these situations arise. But under ISDS, U.S. investors abroad and foreign investors in the United States can collect damages from the treasuries of their host governments by virtue of the judgments of arbitration panels that are entirely outside of the legal structure of the respective countries. This all raises serious questions about democratic accountability, sovereignty, checks and balances, and the separation of power.

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.

As a practical matter, investment is a risky proposition. Foreign investment is even more so. But that doesn’t mean special institutions should be created to protect MNCs from the consequences of their business decisions. Multinational companies are savvy and sophisticated enough to evaluate risk and determine whether the expected returns cover that risk. Among the risk factors is the strength of the rule of law in the prospective investment jurisdiction. MNCs may want assurances, but why should they be entitled to them? ISDS amounts to a subsidy to mitigate the risk of outsourcing. While outsourcing shouldn’t be denigrated, punished, or taxed – companies should be free to allocate their resources as they see fit – neither should it be subsidized.

A persistent myth that has proven hard to dispel is that trade benefits primarily large corporations at the expense of small businesses, workers, taxpayers, public health, and the environment. That is where Sen. Warren and I part ways.  She would use the existence of an ISDS provision to impugn trade liberalization, broadly, as a tool of corporatism. Unfortunately, ISDS plays right into that narrative. But the fact is that trade is the ultimate trustbuster, ensuring greater competition that prevents companies from taking advantage of consumers. Small business, consumers, taxpayers, and especially 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.

So, while inclusion of ISDS would constitute a deep pockmark on the TPP and on subsequent trade agreements, one should consider the final agreement holistically before deciding whether to support or oppose it. The deal will certainly include a lot of liberalization.  And if particularly egregious ISDS cases emerge, the issue can be revisited with real evidence to marshal in support of change.