Trade Compliance

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Beyond the Hysteria, ISDS Reforms Needed

Posted October 13, 2014

Though far from being the sole objection of critics to so-called next generation free trade agreements such as the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP), the controversial investor-state dispute settlement (ISDS) mechanism has been the primary conduit through which much of the recent public outcry about these trade deals has been funneled.
ISDS Dispute
The origin of the ISDS mechanism can be traced back to an obscure 1959 business investment treaty, but is today a commonplace feature routinely included in most international trade agreements. ISDS was originally designed for depoliticizing investment disputes, removing them from the vicissitudes of domestic law and court procedures, and providing instead an alternative forum that would offer investors a fair hearing before an independent, neutral and qualified tribunal capable of rendering final and enforceable decisions through a swift, cheap, and flexible process.

Aside from the more hysterical fears of anti-free trade activists about the ISDS process inevitably leading to the gutting of environmental protections, a wholesale “corporate takeover” of public healthcare systems or robbing citizens in sovereign, democratic states of the ability to determine the sort of country they want to live in, there are legitimate concerns about the current ISDS system of arbitration. These include, among others things, a perceived lack of legitimacy and transparency, questions about the independence and impartiality of arbitrators, and concerns relating to the costs and time involved in the process.

This week’s edition of The Economist examines some of these shortcomings and looks at the growing problems with implementation of the mechanism intended to protect foreign investors from expropriations or other unfair treatment. While perhaps not exactly the “worst judicial system in the world” as claimed by an oft-cited report critical of ISDS, there is, the magazine points out, a kernel of truth in the exaggerations of TTIP protesters.

The overall number of known cases reached over 500 in 2012, with host countries facing claims of up to $114 billion and awards of up to $1.77 billion. In many cases foreign investors have used – or abused, according to some – ISDS claims to challenge measures adopted by countries in the public interest (for example, policies to promote social equity, foster environmental protection or protect public health). A notable example in this regard is that of Vattenfall, a Swedish utility operating two nuclear plants in Germany which demanded compensation of almost $5 billion, under the ISDS clause of a treaty on energy investments following the German government’s decision in 2011 to phase out nuclear power.

The manner in which complaints like these are typically resolved makes them all the more galling: the proceedings are not open to the public and the arbitrators making politically and fiscally important decisions are often moonlighting corporate lawyers. It is no surprise that many people believe ISDS stacks the rules of globalisation in favour of big firms.

The article describes how an increasing number of governments around the world are beginning to learn from past mistakes and the steps being taken by some to reform the process, such as taking care to more narrowly define the mechanism’s scope and ensure that ISDS proceedings and findings are made publicly accessible.

Click here to read the article (and the cover piece here).