Responses to Some Criticisms on ISDS

In the response essays and reader comments on these essays, supporters of ISDS make some important points. Let me now respond to their arguments and clarify my own view a bit.

First, John Veroneau points out that “economic nationalism is alive and well.”  I fully agree, which is why I support international investment rules that prohibit discrimination against foreign companies. The concerns I have are mainly with the rules that allow investors to sue states and the substantive obligations that go beyond non-discrimination.

Second, with regard to subsidies, I want to emphasize the importance and scope of this issue. In almost every article about a new foreign investment in the United States (or elsewhere), there is inevitably a discussion of the subsidies that were offered to that company to locate here. We even subsidize companies that are rivals to major U.S. manufacturers:  We subsidize Airbus![1]  Subsidies to foreign investors are a huge problem, and international investment obligations ignore it completely. Why do they ignore it?  Because big business loves subsidies and lobbies against any effort to rein them in. That is not something we – libertarians or others – should accept. We should take a strong stand against such policies, and not just follow the demands of business groups in formulating international investment law.

Third, Ingrid Persson raises what I think is the most important point in this debate, but one which usually gets overlooked:  As currently written, ISDS includes “judicial review” of the “arbitrary” behavior of governments. In large part, such review arises from the provisions on the “minimum standard of treatment” obligation, of which “fair and equitable treatment” is usually a crucial part (expropriation and non-discrimination are much narrower concepts). ISDS supporters often obscure this point, but it is the crux of the issue.

The impact of international judicial review of arbitrary government behavior should not be underestimated. Governments act in an arbitrary manner quite often. It is not just some rare, occasional event. Health laws are often not based on science; safety regulations are often not based on evidence; courts often do not follow appropriate procedures. And to be clear, I don’t mean that this something that occurs only in poor countries; this happens in rich countries, too.

Most people probably agree that this should be improved. We want governments to base their actions on science, evidence, and proper procedures, and to avoid arbitrary behavior. But the question is, should it be the task of international tribunals to improve things?  There are reasons to say yes, but it does not seem that most politicians are even aware of the issue. President Obama recently said that there is “zero chance” that U.S. food safety, environmental, and financial regulations will be challenged in ISDS.[2] That is not remotely true. In fact, there is a very good chance they will be challenged, and there is also a good chance the United States will lose some of these challenges. That is not really in question. You do not have to be a libertarian to understand that governments often act in arbitrary ways, and international investment tribunals will confront instances of this.

What is in question is whether people in the U.S. government, and U.S. citizens, and governments and citizens around the world, can live with this. I suspect they will have trouble doing so, although I suppose we will only know for sure when it happens.

John makes the point that domestic law and courts are able to handle these same principles. That is certainly true. But elevating the principles to the status of enforceable international law is a huge leap, one that governments need to understand better than they seem to.

Related to this, Ingrid says that I have not pointed to any frivolous claims under ISDS. But my argument is not that there are frivolous claims. Rather, my argument is that the “minimum standard of treatment” obligations are so broad that they encompass huge numbers of non-frivolous claims. As an example, look at the recent NAFTA Chapter 11 award in the Bilcon case.[3]  If the government actions at issue there constitute a violation, there are thousands of violations out there.

Let me turn now to what I think is my most fundamental objection:  ISDS only gives rights to foreign investors, not ordinary citizens. John, perhaps implicitly, and Perry Bechky, in the comments more directly, suggest that perhaps the international system could be expanded to cover people other than foreign investors (“expand individual access to, and the effectiveness of, other international adjudicatory mechanisms where individual rights are at stake, especially regional human rights tribunals”). If that happened, I would be a lot more comfortable with the system. But it is clear that this is not politically feasible any time soon. Most likely, it will not happen in our lifetimes. The result is that we have an international system that gives rights only to foreign investors. If someone were proposing a new system that gave rights to all, that would be one thing; but defending an existing system that gives rights only to foreign investors, but could, in theory, possibly some day give rights to others as well, seems very unbalanced.

To illustrate the implications of this, let me raise Ingrid’s point about the AbitibiBowater case, where a Canadian province expropriated assets without compensation. I am glad the investor got compensation through ISDS, but to me this just highlights the fact that a Canadian investor would not have any recourse for such compensation under Canadian law, which lacks good rules on expropriation.[4]  Under ISDS, foreign investors are helped but domestic investors and ordinary citizens are not. I think we can do better, and one way is a treaty that promotes better expropriation rules in domestic law, so that in the future both Canadian and foreign investors have a remedy.

This is also relevant for Ingrid’s point about how to fix domestic courts. A treaty could encourage or require governments to incorporate due process obligations into their domestic law.

There are a few other points I want to address. Ingrid says that state-state dispute settlement only works in trade agreements because “trade disputes are mostly systemic and impact all interested parties.”  I don’t think that is an accurate description of the WTO dispute system, where many of the cases involve narrow issues relating to trade remedy tariffs imposed on specific companies, or domestic regulations that harm specific industries or companies. State-state dispute settlement at the WTO has been a great success. It should be noted that the WTO’s General Agreements on Trade in Services actually covers investment, and I have never heard a suggestion that the state-state dispute procedures have caused problems in that context.

In terms of whether “smaller investors would have the leverage to negotiate good investment protection against powerful states or will be able to afford political risk insurance,” I would want to see evidence that they could not. At first glance, I’m not sure why that would be the case. More generally, on Ingrid’s point that “[i]nvestors ought fight their own battles, and not rely on the defense of their government,” I don’t agree that this argument supports treaty-based ISDS. Such treaties come about when business groups lobby their government to spend political capital on special rights for the benefit of (usually wealthy) investors (as noted above, these rights are not available to anyone else). I would prefer that governments do things to help society more generally, such as reducing or eliminating tariffs. “Investors fighting their own battles” would mean using good sense and mitigating risks when investing abroad (or anywhere).

As to whether the spread of investment treaties led to the decline of expropriation, it is worth nothing that expropriation slowed down massively by the early 1980s, while litigation under investment treaties did not begin until 1989 and did not really pick up until the late 1990s.[5]  Thus, I don’t think a correlation exists here. The better explanation, it seems to me, is that expropriation stopped because governments’ attitudes changed (and because some governments had already expropriated everything there was to expropriate!).

Finally, while like any good libertarian, I am not opposed to a “regulatory chill,” it is worth noting that under the minimum standard of treatment, investors can challenge not just over-regulation, but also under-regulation. For example, governments who have tried to withdraw subsidies have been faced with ISDS complaints.[6]