Some folks over at Heritage have a new Issues Brief in which they argue for including an Investor State Dispute Settlement (ISDS) mechanism in the U.S.-EU trade deal being negotiated right now.  In a nutshell, ISDS lets foreign investors sue host country governments in an international tribunal when they feel certain of their rights have been infringed.

I’ve been critical of ISDS.  I do see the potential that such international rules have for protecting property rights, but I worry about other aspects of the rules.  One issue is that these rules protect the rights only of foreign investors.  Using Venezuela as an example, there’s an assumption that the courts there can’t help much with protecting rights. To some extent, ISDS is a response to that. So, if Exxon feels its operations there have been badly treated by the Venezuelan government, it can use the ISDS mechanism to have recourse to an international tribunal.  However, if a small Venezuelan dry cleaner is being subject to governmental abuse, it’s just out of luck.  To me, that seems problematic.  Focusing on the wealthy seems like a fundamentally unbalanced way to protect property rights.

But beyond that, these investment obligations are not limited to protecting property rights.  There are much broader provisions that allow foreign investors to sue for, well, lots of things, and perhaps just about anything.  Here’s an example from a Canada-Barbados investment treaty:

… Mr. Peter Allard, Canadian owner of the Graeme Hall Nature Sanctuary, contends that the Government of Barbados has violated its international obligations by refusing to enforce its environmental laws.

…

Mr. Allard acquired the land for the Sanctuary in the mid-1990s and subsequently developed it into an eco-tourism facility. In the notice of dispute, Mr. Allard claims to have taken numerous steps to contribute to the sustainability of the Sanctuary only to have such efforts thwarted by the acts and omissions of Barbados.

Mr. Allard asserts that Barbados’ acts and omissions have severely damaged that natural ecosystem relied upon to attract tourists to the Sanctuary. Consequently, Mr. Allard contends that Barbados failed to provide his investment full protection and security and fair and equitable treatment in accordance with the Canada-Barbados BIT.

With respect to Barbados’ omissions to protect the Sanctuary, Mr. Allard argues that Barbados has, among other things, failed to: (i) prevent the repeated discharge of raw sewage into the Sanctuary wetlands, (ii) investigate or prosecute sources of runoff of grease, oil, pesticides, and herbicides from neighboring areas, and (iii) investigate or prosecute poachers that have threatened the wildlife within the Sanctuary.

To sum all that up: A Canadian who invested in Barbados is suing the Barbados government under an investment treaty for failure to protect its environment in accordance with its domestic law.

Will this claim succeed?  It’s not clear.  But what is clear is that the scope of these obligations is extremely broad and vague, enough so that it’s worth law firms’ time and money to explore the boundaries.  This is why I wrote that these agreements are more about litigation than liberalization.

Now, it may be that, in this particular case, the government of Barbados was behaving badly (“discharge of raw sewage” is rarely a good thing). I’m not familiar with the facts of the case, so I can’t say for sure who’s right and who’s wrong here.  But the larger issue is, what exactly is the scope for when foreign investors can sue governments for failing to protect the environment? Among his claims, the investor says he has not been provided with “fair and equitable treatment.” That’s a potentially broad obligation, which can be used in a lot of ways.  It’s not too hard to imagine, say, a claim that a government’s failure to take action against climate change was a violation. If you believe climate change needs to be addressed, you might cite to various international reports on climate change, and argue that the impact of climate change on your business is “unfair,” and the government needs to do something.  (To further illustrate the broadness of these obligations, if, in the alternative, you were skeptical of climate change, you might point to other climate data, and argue that actions that governments have taken against climate change (e.g., cap and trade) have harmed your business in a way that is “unfair.”)

The environment isn’t my area of expertise, so I’ll leave it to others to decide what our environmental problems are and what we should do about them. But it seems to me that an international law obligation that allows foreign investors to sue governments on the basis that they have not protected the environment, or have protected it too much, is kind of a big deal, and something that we should understand the scope of a little better than we do now. (And keep in mind, there is nothing special about the environment here – all domestic policy areas are in play). These issues are being litigated in international courts, and we should have a better sense of what that means before we extend ISDS further through new trade agreements.