Tuesday , September 25 2018

ISDS and the US

Summary:
I’ve been touting the fact, i.e., as I understand it, that this new US/Mex NAFTA agreement just struck yesterday largely gets rid of investor dispute rules (investor state dispute settlement, or ISDS) that many progressive have long complained about. (To be clear, whether this deal is going anywhere is a whole other story; I’m skeptical.) I’m working on a piece about how the new deal looks a lot better for workers on both sides of the border than prior agreements, but re ISDS, the very knowledgeable Lori Wallach tell me it “ends the possibility of any future U.S.-Canada ISDS cases. This is huge given major US-Canada cross investment.” For Mexico, where domestic courts are less reliable, investors who want to bring a case must first exhaust domestic court and administrative remedies, before

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I’ve been touting the fact, i.e., as I understand it, that this new US/Mex NAFTA agreement just struck yesterday largely gets rid of investor dispute rules (investor state dispute settlement, or ISDS) that many progressive have long complained about. (To be clear, whether this deal is going anywhere is a whole other story; I’m skeptical.)

I’m working on a piece about how the new deal looks a lot better for workers on both sides of the border than prior agreements, but re ISDS, the very knowledgeable Lori Wallach tell me it “ends the possibility of any future U.S.-Canada ISDS cases. This is huge given major US-Canada cross investment.” For Mexico, where domestic courts are less reliable, investors who want to bring a case must first exhaust domestic court and administrative remedies, before turning to new procedures that significantly raise the bar to investor compensation (the fact that the Business Roundtable is already complaining about this part of the deal is revealing in this regard). There is apparently a carve out for investments in Mexican energy production that would allow a small group of U.S. investors the same protections as in earlier agreements, but this looks to have been the negotiating price for the larger advances just noted.

My friend Jay Shambaugh, presumably implying that ISDS ain’t so bad, asks the reasonable, though rhetorical (if not snarky: surely Jay, a former Obama-admin economists who’s one of my go-to peeps on international trade, knows the answer). Has a company used ISDS under NAFTA to overturn a US law or regulation?

No, meaning fears about the process overriding US sovereign laws have not been realized. If that’s Jay’s point, it’s a relevant one with which I agree.

But their are still at least two big, existing problems. First, ISDS has been used by corporate bullies of rich countries to extract millions in fines and fees from poorer countries, and not for investor takings (which would be legit) but for protections prohibited by trade deals (examples here and here). What I want to see much more in U.S. trade agreements–and Jay might agree–is less protectionism of the advanced countries’ investor class and its IP and drug patents, and more lifting of standards in poor countries.

The second problem with ISDS is broader:

Through the backdoor of trade agreements, the ISDS process imposes extreme property rights’ concepts rejected repeatedly by Congress and U.S. courts, such as the notion that governments should pay “regulatory takings” compensation to property owners for the right to enforce environmental, health and other safeguards that could undermine the value of their property or investment. We must not solve the problem of weak rule of law among our trading partners by having the broad public bear investment risk or by changing fundamental principles of U.S. law. Instead, investment risk must be borne by the investors themselves; it is their skin, not ours, that should be in the game.

Final point. While the US hasn’t lost a case, a country is only really exposed to ISDS risk when partner countries have substantial investments in the other countries in the deal. That’s why, according to Lori, “54 of the 56 NAFTA ISDS cases to date attacking U.S. or Canadian laws were brought by investors from the Canada or the U.S., not from Mexico.”

Surely, this makes no sense. ISDS isn’t in place–or at least it shouldn’t be–to be invoked in advanced countries with mature legal systems. Let the nationally-sanctioned, highly functional court systems work it out! (Jay: agree or disagree?.)

In fact, recent journalistic research reveals speculation by financial investors in ISDS cases, wherein investors either purchase companies with the express purpose of filing an ISDS claim or directly bankrolling the cases in order to claim a share of the fine. (Investors refer to this practice as “third-party funding of international arbitration against foreign sovereigns”.) Gus van Harten, a law professor who has studied these activities, finds that investors “…can get an award for billions of dollars when that award would never come out in domestic law. It’s just a jackpot for speculators.”

End of the day, the fact that ISDS hasn’t overridden any U.S. laws is comforting and Jay’s right to “ask” about it. But that doesn’t mean it’s non-evil!

Jared Bernstein
Jared Bernstein joined the Center on Budget and Policy Priorities in May 2011 as a Senior Fellow. From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, Executive Director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team. Prior to joining the Obama administration, Bernstein was a senior economist and the director of the Living Standards Program at the Economic Policy Institute, and between 1995 and 1996, he held the post of Deputy Chief Economist at the U.S. Department of Labor.

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