On September 15th, 2014, a broad coalition from labor, environment, immigrant, faith and trade sectors to protest at the World Bank Group’s International Centre for Settlement of Investment Disputes (ICSID). (CIEL/Creative Commons)
This article is a joint publication of Workday Magazine and The American Prospect.
In May 2020, then-presidential candidate Joe Biden told the United Steelworkers that his administration would end the inclusion in future trade deals of investor-state dispute settlement (ISDS) provisions. This little-known, but tremendously impactful, mechanism establishes secretive corporate tribunals that can award foreign investors damages from sovereign governments. ISDS has been used by some of the biggest corporations on Earth to wring millions—and even billions—of dollars from mostly Global South countries for the “crimes” of passing environmental regulations, implementing labor protections, banning toxic substances, denying mining permits, or other democratically agreed upon measures. “I don’t believe that corporations should get special tribunals that are not available to other organizations,” wrote Biden in response to a questionnaire from the union.
Two and a half years later, Biden has held to the pledge of keeping ISDS out of future trade deals; in fact, his administration hasn’t completed any new trade agreements. But ISDS lives on in existing trade deals. The United States has bilateral investment treaties with 40 countries and 14 “free trade” agreements with 20 countries. Most of these have ISDS provisions, according to the Congressional Research Service. And corporations are still using them to attempt to extract a fortune from poorer countries in secret tribunals.
Even as his administration negotiates massive economic agendas with other nations, like the Americas Partnership for Economic Prosperity and the Indo-Pacific Economic Framework for Prosperity, Biden has remained mum about the fate of past ISDS deals. This silence is alarming some activists. Manuel Pérez-Rocha, an associate fellow of the Institute for Policy Studies who has spent two decades opposing ISDS agreements, tells Workday Magazine and the Prospect, “If Biden’s admitting he doesn’t want more ISDS, he should dismantle it from previous agreements.”
Activists are planning advocacy around this issue in the coming weeks, but they are up against a key challenge: ISDS is poorly understood by members of the public—and even some lawmakers. The process, like a lot of corporate malfeasance, is made deliberately opaque and dry to avoid layperson scrutiny. But the details are important, and the human stakes are very urgent and real.
Biased Corporate Tribunals
ISDS is present in 3,300 “free trade” deals and other bilateral and multilateral investment agreements worldwide, and at least 1,229 cases have been brought. The mechanism allows foreign investors—both individuals and companies—to sue governments for allegedly violating the investment provisions of trade agreements or treaties. For example, if an investor from the Netherlands thinks a decision by the Argentinian legislature violated the Netherlands-Argentina bilateral investment treaty, it could sue under the ISDS provision that is included in that deal.
Proponents present ISDS as a neutral forum. The Obama administration’s Office of the U.S. Trade Representative said in 2014 that the system “creates a fair and transparent process, grounded in established legal principles, for resolving individual investment disputes between investors and states.”
But while foreign investors can sue governments, it doesn’t go the other way around; outside of certain narrow counterclaims, governments, people, unions, or groups impacted by those companies don’t have the ability to levy cases against companies. It’s as if there were a soccer match, and penalties could only be called against one team. “This is why we find it profoundly unjust,” Pérez-Rocha said. “Governments never win anything. They might not lose a case, but they don’t win anything. Companies don’t have anything to lose.”
Agreements typically allow companies to bring ISDS cases in response to violations of “fair and equitable” treatment. Melinda St. Louis, the director of Public Citizen’s Global Trade Watch, explains that corporations and some tribunals have interpreted this standard broadly. “When [corporate] expectations are different from what happened, they say it is unfair, even if domestic companies received the same treatment,” says St. Louis.
Another common standard is the protection against indirect expropriation, which has been interpreted by some tribunals as government actions or rule changes that reduce the overall value of an investment, or threaten expected future profits. “This asks taxpayers to fund the business risks of international investors,” says Ruth Bergan, the director of the Trade Justice Movement. “It puts private risk into public hands. It socializes risk.”
Supporters of ISDS point out that the mechanism doesn’t have the power to prevent governments from passing environmental or worker protections. This is true, but ISDS can certainly make it prohibitively costly to do so. There is no cap on the damages that states may be forced to pay out to an investor.
A current case underscores this point. On December 20, U.S.-based Honduras Próspera, Inc., announced it is submitting a $10.7 billion ISDS claim against the Honduran government for attempting to eliminate extreme special economic zones called ZEDEs, which give foreign investors sweeping power over governance. ZEDEs are unpopular in Honduras, and have been criticized by the country’s labor movement for putting power in the hands of foreign companies to shape labor law. Yet Próspera says that Honduras’s attempted repeal of ZEDEs violates a free-trade agreement with Central America and the Dominican Republic (known as CAFTA-DR). The sum of $10.7 billion is two-thirds of Honduras’s planned budget for 2023; it would be devastating to the country if Próspera were to win the case.
The awards can be staggering. In 2019, Pakistan was ordered to pay $6 billion to mining company Tethyan Copper (a joint venture between companies based in Chile and Canada) for denying the company a mining lease. A 2019 report found that mining companies have used the ISDS process to file dozens of multimillion-dollar claims in Latin America. Colombia, at the time of the report, faced $18 billion in suits that were either pending or threatened. Mexico and Uruguay each faced $3.5 billion. These pending lawsuits imperil long-term planning for precariously developing countries.
If the parties do not settle or throw out the case, they go through a tribunal, primarily overseen by the International Centre for Settlement of Investment Disputes (ICSID), which is administered by the World Bank, and the United Nations Commission on International Trade Law (UNCITRAL). Three lawyers, called “arbitrators,” are assigned to each case: The foreign investor picks one, the government being sued picks one, and then both are supposed to agree on the third. When they can’t agree, the institution overseeing the arbitration makes the appointment. The three arbitrators hear evidence, deliberate, and decide whether a company should receive an “award” from the country it is suing.
While some arbitrators are academics, many of them come out of corporate commercial law and international commercial arbitration, opening up the potential for significant conflicts of interest. “They can be an arbitrator in one case and a lawyer representing an investor in another case,” says Kyla Tienhaara, assistant professor at Queen’s University. “You could make a decision in one case that you know would benefit you in another case. You could also be in a law firm that gets a lot of business from a company, and then be an arbitrator in a case where you’re deciding whether a state breached a treaty against that company.”
Unlike traditional courts, tribunals have no set procedures or precedents. Standards of evidence are nonexistent, and mistruths or exaggerations go unpunished. In a 2018 lecture at Brooklyn Law School, international lawyer George Kahale III described a world of closed-door meetings and unspoken understandings. “Teams of lawyers meet in conference centers and hotels in wonderful locales all over the world … for a few days of drama before all pack up and rush to catch their flights home,” he said. “Many of the players in this game know and respect each other, like the gunslingers of the Wild Wild West, and one can detect a certain unwritten code of conduct, like lining up for the ceremonial handshakes.”
Despite minor transparency improvements in some newer treaties, ISDS remains largely shrouded in secrecy. Tribunals have a great deal of power to determine what information is made public. They are not required to accept submissions from NGOs, unions, or other groups with a direct interest in a case, though they sometimes do, depending on the arbitrators.
“The lack of transparency is really shocking given the kinds of issues being discussed, and also the public-policy importance,” says Tienhaara. “Huge amounts of money are being considered.”
Wins and Losses
Supporters of ISDS frequently point out that companies win at roughly the same rate as states. Whether you’re willing to engage this argument depends on whether you believe a foreign company should, on any occasion, be permitted to subvert the decisions of ostensibly democratically elected governments and, via a supranational secret tribunal, override public protections. But even accepting these terms, more scrutiny is warranted.
An analysis from the United Nations Conference on Trade and Development (UNCTAD) shows that, from 1987 to 2021, 38 percent of concluded ISDS cases were decided in favor of governments, 28 percent were in favor of the company, 19 percent resulted in settlement, 12 percent were discontinued, and 3 percent found a breach but awarded no damages. However, these figures are not as straightforward as they seem. For one, an unknown number of settlements result in a win for the company: a payment, or an abandonment of the government policy that instigated the case. Secondly, cases decided in favor of the state include claims that were dismissed on jurisdictional grounds—i.e., when arbitrators determined that an investor had no business being there in the first place.
According to that same UNCTAD analysis, 56 percent of cases decided on the merits resulted in damages paid to companies, while 39 percent were dismissed, with the remaining 5 percent resulting in a breach but no damages. In other words, once arbitrators determine that an investor has a right to a tribunal, companies stand a better chance than states.
Bigger companies have an even greater edge. In a 2016 paper, scholars Gus Van Harten and Pavel Malysheuski found that extra-large companies—worth at least $10 billion—have a 70.8 percent success rate (measured by “outcomes at the jurisdictional and merits stages of an ISDS claim combined”).
Van Harten told Workday Magazine and the Prospect that one must also consider “all the settlements that don’t register as such, because there is no formal claim filed, and that country just ran screaming from a potential claim or just self-censored.” The chilling effect, the mere threat of losing billions for poor countries, is felt most profoundly on the front end; which legislation dies in committee, can’t get political support, or is never even voted on. Everyone knows the risk, and the threat of large financial punishment does all the work long before the labor protection or climate change policy is considered, much less passed.
ISDS decisions are “highly enforceable,” says Tienhaara. Companies can even appeal to courts in many nations to seize assets from a country that cannot pay.
The proceedings can be punishment in themselves, with the ability to financially drain poor countries. In one bizarre scenario, U.S.-based billionaires launched a legal fund to help poor countries fight ISDS claims from the tobacco industry.
If the ISDS mechanism is a bludgeon, it is not wielded equally. A September 2022 report from UNCTAD notes that “developing countries are the most frequent respondents in ISDS overall.” One exception is Spain, which has faced significant lawsuits due to specific circumstances surrounding the Energy Charter Treaty.
The companies most frequently doing the suing, meanwhile, are more likely to hail from North America and Europe. A July 2022 report from UNCTAD states that U.S. companies have the number one slot for “most frequent home state of claimants,” followed by the Netherlands, the United Kingdom, Spain, and Germany. According to a report from the Congressional Research Service, U.S.-based investors account for roughly one-fifth of all ISDS claims. As of April 2022, no cases have ever been decided against the United States, though that could change: Canadian oil firm TC Energy has used the ISDS mechanism to challenge President Biden’s decision to revoke the permit for the Keystone XL Pipeline.
This global imbalance is no accident; the ISDS system emerged to protect the foreign investments of former colonizers. “The former, or soon-to-be-former, colonial powers after the Second World War in the 1950s were worried about what would happen to their assets in their former colonies, so they worked on developing a treaty system that would provide very lopsided protections for foreign investors,” explains Van Harten. “And those treaties were originally drafted in the home offices of the major Western European former colonial powers, and they sprung upon this innovation of allowing the foreign investors to sue countries directly, which was an incredible concession of sovereignty to the big multinationals at the time.”
The first ISDS agreement was struck in 1968 between the Netherlands and its former colony, Indonesia, just two years after the Suharto government mass slaughtered up to one million people accused of being communists, leftists, and atheists. The ISDS mechanism expanded slowly until the 1990s, when it became what Van Harten calls “an essential part of the legal architecture of globalization, boosting the position of corporations.”
Global South countries were lured into trade deals by promises of investments, cooperation, and prosperity. “Thirty years after that, we now know those promises have not been fulfilled,” says Luciana Ghiotto, a Buenos Aires–based researcher for the Transnational Institute, a progressive think tank.
Calls to Dismantle ISDS
In 2000, under the ISDS provision in the North American Free Trade Agreement (NAFTA), Mexico was ordered to pay more than $16 million in damages to the California-based Metalclad Corporation for denying the company a permit to expand a toxic waste facility that threatened the environment and local drinking water. In 2012, the French corporation Veolia made an ISDS claim against the Egyptian government for increasing the country’s minimum wage. While Veolia eventually lost the case in 2018, the Egyptian government spent six years, and millions of dollars, defending itself.
These cases and more have understandably infuriated communities around the world, leading to demands to eradicate the system. The successor to NAFTA, the United States-Mexico-Canada Agreement, limits the ISDS mechanism but does not completely eradicate it. The USMCA limitations have been touted by some as a step forward for future trade agreements, which should go even further. But that leaves a massive architecture already in place.
In particular, activists are warning that ISDS presents a fundamental barrier to the dramatic changes needed to avert the worst scenarios of the climate crisis, because it allows the fossil fuel industry to go after countries for implementing policies aimed at reducing carbon emissions. Some groups are calling for a “climate peace clause,” or a moratorium on using trade and investment treaties to oppose climate policies.
Some bodies, like UNCTAD, are pushing for reforms. But according to Melanie Foley, deputy director for Global Trade Watch, “small improvements around the margins don’t get to the heart of the issue.” She says the Biden administration has tools at its disposal to eliminate existing ISDS deals altogether. “Most agreements with ISDS allow for a government to unilaterally withdraw consent to ISDS. This keeps the underlying agreement intact, but ends the government’s responsibility to participate in ISDS cases.”
The U.S. could also unilaterally terminate bilateral investment treaties, or rework them to cancel ISDS. Congress’s approval would not be needed in this case; the Biden administration can accomplish this through executive action.
Despite the many downsides, Global South countries have been hesitant to dismantle ISDS agreements, Foley says, because of concern about political backlash. “There is a double standard that poor countries with ‘weak’ legal systems need ISDS to encourage investment from rich countries,” explains Foley. But despite these perceived pressures, some Global South countries have terminated bilateral investment treaties, among them South Africa, Indonesia, and Ecuador. If the United States truly wants to turn the page from ISDS, it too can scrap its past deals.
“We need to completely eradicate ISDS,” says Foley, “because it is an anti-democratic system that lets multinational corporations alone have the power to sue governments, and get taxpayer money, over democratically chosen policies.”