Investor-State Dispute Settlement Faces Hurdles on the Road Ahead

This is the third in a series of three articles by Scott Miller for TradeVistas on the Investor-State Dispute Settlement (ISDS) mechanism in trade agreements. The first article describes why governments created a unique method for companies to settle investments disputes with governments – why not use the same dispute settlement procedures that apply to most other aspects of trade under the agreement? The second article examines who uses the investment dispute process and how often. There are strong critics of ISDS and staunch defenders of ISDS. In this final article of the series, we look at the future of ISDS provisions in U.S. trade agreements.

Challenges to the Legitimacy of ISDS

First included in a treaty in 1959, investor protections became embedded routinely in free-standing investment treaties and bilateral trade agreements through the mid-1990s. The commitments were designed to promote the rule of law in developing and emerging economies, which would in turn help developing economies attract more capital. In 1995, a member governments of the Organization for Economic Co-operation and Development (OECD) launched an effort to create a multilateral framework for international investment that would both open markets to foreign investment and include a form of ISDS, effectively creating a common template for ISDS.

At a time when anti-business NGOs were ramping up protests against “globalization” and the institutions that advance it, the OECD talks attracted the attention of these vocal critics, who saw ISDS as a way for foreign investors to challenge the legal systems in the countries where they invest or to invest irresponsibly.

Negotiations were discontinued in 1998 when governments determined that there was too little “on the table” to proceed further. Critics, emboldened by the collapse, maintained their challenge to investment treaties and the ISDS commitments in them. At the same time, many governments myopically focused on responses in specific ISDS disputes – i.e., cases where investors had sued them – and failed to provide a robust argument in favor of bilateral investment treaties (BITs) and the ISDS provisions in them. Over the ensuing 20 years, the public debate was fueled by vocal critics of investment disputes, but met with silence from the governments that entered into the treaties on behalf of its investors. The OECD experience from the 1990s, wherein NGOs mounted significant pressure on the governments involved, seemed to have the lingering effect of chilling any public defense of the liberalization agenda.

All Politics are Local

Vague and speculative criticism of the OECD negotiation effort took on more specific shape and importance in the American debate over ISDS through our experience with investor-state disputes under NAFTA. The U.S. government had become a respondent in disputes brought by Canadian investors using NAFTA’s Chapter 11 procedures. U.S. policymakers accepted the idea that investment agreements gave foreign investors access to a unique process (ISDS), but worried that investment treaties gave foreign investors substantive protections beyond those found in U.S. law and practice.

In 2001, U.S. officials along with Trade Ministers of Canada and Mexico, clarified the definition of “minimum standard of treatment” when dealing with foreign nationals and their property so that it more closely adhered to U.S. legal standards. Congress took a similar stance in the Trade Act of 2002, directing the administration to ensure that commitments in trade agreements not confer to foreign investors “greater substantive rights” than are conferred to U.S. persons.

The Attempt at a “Model BIT”

Before U.S. trade negotiators sit at the negotiating table with foreign governments, they develop their positions through interagency discussions, interactions with Congress, and public stakeholder engagement. On particularly sensitive topics, like provisions in investment treaties, and because the U.S. Government was negotiating a series of bilateral investment treaties with foreign governments, negotiators developed a so-called “model text” to arrive at the U.S. preferred set of commitments that could be pursued consistently with foreign government counterparts.

Direction from Congress in the 2002 Trade Act prompted the Administration to undertake a major review of the 1984 Model BIT, a process that resulted in the 2004 Model BIT. As often happens, the model text grew (from 10 pages to 40). But, it also achieved the objective set by Congress while seeking to advance a broader reform agenda. Among the changes to the model BIT were improved transparency to ISDS tribunals.

When President Obama took office in 2009, his advisors remained concerned about BITs, launching another review that produced the 2012 Model BIT. The 2012 version closely mirrored both the substantive obligations and the dispute settlement process of 2004. Most recently, during the Senate debate on the Trade Priorities Act of 2015, Senator Warren (D-MA) proposed to amend the negotiating objectives to prevent the usage of ISDS in future agreements. The amendment failed 39-60, an expression of bipartisan support for investor-state dispute settlement, but the current NAFTA negotiations have revived the debate.

Can ISDS survive?

As recently as 2015, it was reasonable to believe that, in the United States, ISDS was “better than its press clippings”. Presidents of both parties, from Reagan to Obama, supported treaty-based investment arbitration and found ways to refine and improve the process rather than discarding it. In Europe, however, ISDS has been subject to intense opposition lately, including 1990s-style protests like those surrounding the failed OECD effort. Despite Europe being a major capital exporter and party to over 1,300 member-state BITs, EU policy on ISDS became a major stumbling-block in the now-dormant Transatlantic Partnership negotiations between Europe and the United States.

More recently, current U.S. Trade Representative Robert Lighthizer has called investor protections “political risk insurance for outsourcing, paid for by the U.S. government.” In response, over 100 members of Congress, including the key committee chairmen, recently tied their support for a new NAFTA to the inclusion of ISDS, but the matter remains unsettled as NAFTA negotiations continue.

The United States has a long history of advancing the rules-based order and, as a practical matter, has never lost a dispute arising from one of its many investment agreements. But if the United States cannot maintain political support for ISDS, or decides from the executive branch that it does not want to keep ISDS, it’s hard to see how ISDS has a future as a legitimate tool of statecraft.