Foreign Investment Disputes in International Courts

In a recent opinion piece, Washington Post columnist Harold Meyerson criticized something called the “investor-state dispute settlement” (ISDS) mechanism, which is included in some trade agreements. My colleague Dan Ikenson responded here; I wrote a letter to the Post, which said:

Harold Meyerson made valid points about the Investor-State Dispute Settlement (ISDS) clause in trade agreements in his Oct. 2 op-ed column, “A flawed trade clause.” However, with all the misinformation that exists on this issue, it is important to be precise. Foreign investors cannot sue “over any rules, regulations or changes in policy that they say harm their financial interests.”

Rather, they can sue if the host government has discriminated against an investor because it is foreign; if an investment has been expropriated, either directly or indirectly; or if the investor has experienced bad treatment of a more general sort (this controversial standard is known as “fair and equitable” treatment).

In a sense, the ISDS provision creates international judicial review of national laws and regulations, with such review available only to foreign investors. That is certainly a controversial proposition, but it is important to keep the debate focused on the facts, rather than on myths that have been put forward.

You only get so much space for these letters, so I thought I’d elaborate here.

ISDS allows foreign investors to challenge any and all domestic government actions before an international tribunal.  That includes local, state, and national measures, by legislators, regulators, or courts.  In terms of the substance of the claims that can be made, they look a lot like certain constitutional doctrines: Equal Protection, Takings, and Due Process.  What you end up with, in effect, is a special international “constitutional” court (of sorts), available only to foreign investors.  (It can’t strike down the domestic laws, of course, but it can award damages for violations.)

I’ve been very skeptical of this.  I don’t want to go through all the arguments, but let me raise three three critical points about ISDS:

  • If we’re going to have this kind of international judicial review, why give it only to foreign investors? Why not oppressed minorities? It doesn’t look very good when you protect the rights of only the rich.
  • If we’re going to have international judicial review, shouldn’t we debate it more explicitly? It’s kind of a big deal. But when Congress and the Administration talk about issues related to these foreign investment rules, they don’t mention this aspect of it.
  • Some libertarian-ish people I’ve talked to see this procedure as another valuable check on excessive government actions. I’m not convinced. Sure, ISDS could be used to argue that the government has over-reached. But it could also be used to get the government to reach further. The “fair and equitable” treatment clause in particular offers the scope to argue that the government should do more. For example, companies who receive renewable energy subsidies have [$] sued or threatened to sue when governments try to cut back on those subsidies. Thus, it can also be used to get in the way of sensible, more limited government.
Topics: