Commentary

The Sad State of the Investor-State Debate

Much of what is being written these days about the issue of investor-state dispute settlement (ISDS) makes me want to slam my head on the desk in frustration and annoyance. Both sides are guilty of misstatements and hyperbole.

The critics of ISDS are more prominent, so let’s turn to them first. Over at StopTTIP.net, there is this claim, using rhetoric commonly seen from ISDS opponents: “Introduced in the TTIP, ISDS allows corporations to sue governments, such as that of the UK or of the EU, for any government action (at any level, including local government level) that limits a corporation’s future profits.” Anyone with a basic knowledge of investment agreements knows how silly this is. It is not limits on profits that are at issue. Rather, certain rights are protected, and damages can be awarded if those rights are violated.

But supporters are not much better. At the U.S. Chamber of Commerce blog, there is a post that contrasts the United States, which supports ISDS and is friendly to foreign investment, with Venezuela, which opposes ISDS and treats foreign investment badly (including the nationalization of foreign property). It concludes with the following: “So here’s a question for Europeans who say ISDS mustn’t be included in TTIP: Which path do you wish to follow?” There is no doubt that the ISDS debate in the EU is a heated one right now, but does anyone really think that a European rejection of ISDS in the TTIP (or in general) would mean that the EU will follow Venezuela’s path in relation to friendliness to foreign investment, protection of property rights, or anything else? The answer is no. Europeans are not debating whether to change national guarantees regarding protection of property rights, or whether to allow foreign investment. Neither of these policies would be affected by a rejection of ISDS.

Hopefully, politicians and government officials will be able to cut through the inflammatory rhetoric and give these issues some real thought.

The debate would be much more productive if people focused on the core issues. For example, let’s start with the scope of international investment obligations. Going back to the misstatements, some supporters have argued that ISDS is about preventing discrimination by governments against foreign firms. Boris Johnson, the mayor of London, writes the following in the context of the TTIP: “At the very most it will mean that there is some protection against government deciding — locally, at state level, or nationally — to legislate in some arbitrary and unexpected way so as to discriminate against foreign companies.” And economist Stephen Gordon, looking at a Canada — China investment agreement, puts things this way: “Foreign firms have to show that they’ve received different treatment than their Canadian-owned competitors.” (He does acknowledge the rules on expropriation, but doesn’t mention any other obligations.)

If all these agreements did was require non-discrimination, it is unlikely there would be much controversy. However, anyone familiar with investment agreements knows that they go well beyond creating a non-discrimination obligation. Importantly, it is not at all clear how far beyond it they go.

In this regard, let’s look at the obligation that governments provide foreign investors with “fair and equitable treatment.” For years now, governments and tribunals have tried to clarify what this means. They are not having much success.

In the Canada-EU trade agreement under negotiation — the CETA — the parties set out a number of examples of “fair and equitable treatment” (see Article X.9 of Chapter 10). In this regard, the draft text published recently by the EU states the following:

A Party breaches the obligation of fair and equitable treatment … where a measure or series of measures constitutes … [m]anifest arbitrariness.

So what, exactly, is “manifest arbitrariness”? That’s hard to say. In a brief Twitter exchange on this issue, Mark Feldman, a law professor and former Chief of NAFTA/CAFTA-DR Arbitration in the Office of the Legal Adviser at the U.S. Department of State, made the point that, even if there is “no legitimate reason for [a] measure,” it might not violate this provision. The facts of the case must rise to a “manifest” level of arbitrariness. In other words, even some arbitrary measures do not violate this obligation. That’s a fair point, but it just raises the question of when facts would rise to the level of “manifest” arbitrariness. What about measures that are not based on science? At the WTO, Canada has joined in two very sensitive complaints against the EU, one related to a ban on hormone-treated beef, and the other regarding approval of GMO products. In both cases, WTO dispute rulings found a violation of WTO obligations. So, if there were Canadian investors in the EU, could they succeed on an investment complaint under CETA that such measures were “manifestly arbitrary”? It would be nice if everyone had a better sense of this before the rules were agreed to.

Thus, one aspect of the problem with ISDS can be summed up this way: investment agreements go beyond non-discrimination in ways that no one seems to be able to define clearly, opening up the floodgates for litigation as creative lawyers look for new ways to characterize government actions as inconsistent with international law.

Another core issue was pointed out by Canada in defending against an investment complaint brought by pharmaceutical company Eli Lilly under the NAFTA (in response to the invalidation of certain patents by the Canadian courts). In one of its submissions in the case, Canada stated that Eli Lilly “seeks to have this Tribunal misapply NAFTA Chapter Eleven and transform itself into a supranational court of appeal from reasoned, principled, and procedurally just domestic court decisions.” In fact, Eli Lilly is not “transforming” the tribunal into a “supranational court of appeal” of this kind. Rather, it is Canada (along with its NAFTA partners the United States and Mexico) that created such an appeals court. Because that’s what investment tribunals are: Supranational courts of appeal, available only to foreign investors. All domestic laws, regulations and court decisions — including those of the highest courts — can be appealed. That does not mean all the appeals will succeed, of course; it just means foreign investors have a right to challenge domestic government actions in an international tribunal.

Does that sound controversial? No matter what your political leanings, it should be obvious that it is. Even if you consider yourself an internationalist, as I do (I worked for an international court myself), you should be aware of the implications of giving power to international courts. There are times when it may make sense to do so, but we need to think carefully about it. What is the scope of this power? What obligations have been created? Who has access to this appeals court? How enforceable are the obligations? What is the design of the system?

Defenders of the international investment system might say, what’s the difference between a WTO complaint and an investment complaint on issues such as a hormone-treated beef ban or GMO approvals? As noted, WTO complaints were brought successfully, and the world did not end.

The distinction is that the enforcement process at the WTO is structured very differently, as it has an important political component. Governments have the ability to recognize when the system cannot handle a particular complaint. Investment complaints do not have a similar feature. Investors might push for compensation even if it means undermining the system; governments know when to pull back.

There are signs that rational voices are poking their way into the debate. Hopefully, politicians and government officials will be able to cut through the inflammatory rhetoric and give these issues some real thought. There is a way forward here, but it requires some fresh thinking in an area where many people have dug in their heels and do not seem to want to engage with the issues.

Simon Lester is a trade policy analyst at the Herbert A. Stiefel Center for Trade Policy Studies at Cato Institute