Even Rich Nations Now Worried About ISDS

Yves here. In the US, Public Citizen deserves a great deal of credit for turning policy-makers against the multinational-favoring, national-law-and-regulation-gutting “free trade agreement known as ISDS, or “investor state dispute settlement. These disputes are arbitrated by secret panels with no appeal and pro-corporate cronies acting as deciders. Public Citizen’s relentless digging got key bad facts out in the open.

Jomo mentions some well-known and perhaps not as well publicized past ISDS power grabs. Some other notorious cases, the first from a 2014 post:

Germans are particularly aware of the dangers of these foreign investor panels due to payments the German government has been forced to make. Vattenfal, a Swedish company, is a serial trade pact litigant against Germany. In 2011, Der Spiegel reported on how it was suing for expected €1 billion plus losses due to Germany’s program to phase out nuclear power:

According to Handelsblatt, Vattenfall has an advantage in seeking compensation because the company has its headquarters abroad. As a Swedish company, Vattenfall can invoke investment rules under the Energy Charter Treaty (ECT), which protect foreign investors in signatory nations from interference in property rights. That includes, according to the treaty’s text, a “fair and equitable treatment” of investors.

The Swedish company has already filed suit once against the German government at the ICSID. In 2009, Vattenfall sued the federal government over stricter environmental regulations on its coal-fired power plant in Hamburg-Moorburg, seeking €1.4 billion plus interest in damages. The parties settled out of court in August 2010.

What is particularly galling about these agreements is that they give investors the right to sue over lost future profits.

A report in the UK website Vox Political suggests that Germany has figured out what the TTIP is really about and isn’t about to be snookered. Germany’s willingness to defy the US may be part of the fallout of revelations of the amount of “Five Eyes” snooping that goes on in the Eurozone, and may also reflect discomfort with US escalation of hostilities with Russia, when it is not to Germany’s advantage to participate in economic brinksmanship.

Or see this section of a Nick Corbishley post from 2016:

International arbitration lawyers have a soft spot for Latin America, for a reason: over the last ten years, the region has been one of the primary sources of their exorbitant fees, which can range from $375 to $700 per hour depending on where the arbitration takes place.

By 2008, more than half of all registered claims at the International Centre for Settlement of Investment Disputes (ICSID) were pending against Latin American countries. In 2012, around one-quarter of all new ICSID disputes involved a Latin American state.

Today the region faces a fresh deluge of ISDS claims. The countries most affected include Uruguay, whose anti-tobacco legislation has been challenged by Philip Morris at an international arbitration panel; Argentina, Ecuador and Colombia, which until a few years ago had never been on the receiving end of an investor-state dispute settlement (ISDS). Now it is the target of multiple suits that could end up setting its government back billions of dollars.

The claimants include Glencore, the world’s biggest and most heavily leveraged commodities trader; Carlos Slim-owned América Móvil, the leading wireless services provider in Latin America and the third largest in the world; the Spanish insurance company Sanitas; the Swiss pharmaceutical giant Novartis; and the Canadian miner Eco Oro and US miner Tobie Mining and Energy.

Each company on that list feels that decisions or actions taken by the Colombian government have in one way or another cost or will cost them profits to which they feel entitled. And each company is doing what it has the right to do under today’s trade treaties — suing the government of that country for damages.

It is the last company on the list — Tobie Mining and Energy — that is the biggest concern to the Colombian government for the damages it seeks: $16.5 billion. That’s a lot of money for a nation with per-capita GDP of $7,831 and whose currency has lost 40% of its value against the dollar over the last 18 months. It’s the equivalent of 20% of its national budget.

But the whole point of ISDS had seemed to be colonialism in another guise, particularly deployed against proto or actual socialist countries that might take things like workplace rules and environmental protection too seriously. But then, as Jomo describes, advanced economies started being hoist on this multinational petard.

But ISDS, although waning in support, is still far from dead.

By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at Jomo’s website

Governments the world over are worried about investor-state dispute settlement (ISDS) rules. These allow foreign investors to sue them for billions over new laws or policies reducing their profits.

Typically favouring powerful transnational corporations (TNCs), ISDS blocks policy changes needed to address new challenges. Companies have successfully sued governments for policy changes which allegedly reduce their profits.

The Wicked of Oz

Tobacco giant Philip Morris tried to block the Australian government’s demand for ‘plain packaging’, with larger and more graphic health warnings on cigarette packs, by suing under ISDS and also in Australian courts. In the domestic case, Australia’s highest court ruled the legislation constitutional.

The company then transferred Philip Morris Australia to Philip Morris Asia in Hong Kong. Invoking ISDS in the bilateral investment treaty (BIT) between Australia and Hong Kong, it sued Australia. Luckily, the ISDS tribunal ruled it had no jurisdiction as considering the case would constitute an abuse of process.

More recently, Australian Clive Palmer has hired a former Attorney-General to demand nearly A$341 billion from state governments after moving his major mining companies to Singapore in 2019. His two ISDS claims invoke the Australia-New Zealand-ASEAN Free Trade Agreement (ANZAFTA).

The first seeks about A$300 billion in compensation and for ‘moral damages’ after Australia’s highest court ruled in favour of the Western Australian (WA) state government. Palmer is challenging the 2022 WA legislation to indemnify the state, ensuring he would get nothing.

He is also demanding A$41.3 billion in compensation for rejecting exploration permits for the Waratah coal mine in Queensland. The licence was refused on environmental grounds, including increasing carbon emissions.

Palmer is expected to take a third ISDS case against Australia’s Federal and Queensland government decisions to reject his coal mine licence application due to its likely adverse impacts on the local environment, including waterways, and the Great Barrier Reef.

Even if the governments win these cases, they would still incur millions in legal expenses. The Philip Morris cases against Australia took five years, and cost A$24 million in legal expenses, of which only half was recovered by the government.

Evading ISDS?

After such costly experiences, almost a decade ago, Australia successfully demanded a ‘tobacco carve-out’ to the Trans-Pacific Partnership’s (TPP) ISDS provisions.

Australia’s new Southeast Asia Economic Strategy to 2040, announced on 6 September 2023, promises to review existing free trade agreements (FTAs) with the region. This will include agreements containing ISDS clauses, including the ANZAFTA and other bilateral and plurilateral agreements.

Using side-letters, Australia has already opted out of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) ISDS provisions with both the UK and New Zealand.

In an ISDS case, the World Bank Group’s International Centre for the Settlement of Investment Disputes ruled Pakistan had to pay over US$5.8 billion to an aggrieved investor. This is equivalent to its entire US$6 billion new IMF loan, about an eighth of its annual budget.

Other ISDS Second Thoughts

The New Zealand government is now also against ISDS. While ISDS is part of several of its FTAs – e.g., the CPTPP and China-New Zealand FTA – its government has opposed ISDS provisions in FTA negotiations since 2018.

Hence, there is no ISDS in the Regional Comprehensive Economic Partnership (RCEP), the New Zealand-United Kingdom FTA, and the New Zealand-European Union FTA.

While it was considered too late to exclude ISDS entirely from the CPTPP at a late stage in negotiations, New Zealand has secured side letters with Australia, Brunei, Malaysia, Peru and Viet Nam. This means ISDS does not apply between New Zealand and these countries.

The current Chilean government is also concerned about ISDS. Hence, it has asked all other CPTPP governments for side-letters excluding ISDS between them, but only New Zealand has agreed so far!

Rich Nations Wary of ISDS

The US removed most ISDS provisions when the Trump administration replaced the old North American Free Trade Agreement (NAFTA) with the US-Mexico-Canada Agreement (USMCA) in 2020.

ISDS was in the TPP because Obama administration negotiators wanted it. But most 2016 presidential aspirants to succeed him, including Democrats, rejected the TPP. Trump’s US Trade Representative (USTR) Lighthizer specifically cited ISDS as the reason for US withdrawal from the TPP.

Biden and his USTR have maintained Trump’s anti-ISDS stance instead of reverting to Obama’s position. ISDS is not in Biden Administration ‘economic cooperation’ agreements such as the Indo-Pacific Economic Framework.

Meanwhile, the EU is urging withdrawal from the Energy Charter Treaty (ECT) as its ISDS provisions will block needed European climate policies. Several EU and non-EU countries have already begun withdrawing from the ECT, arguing it constrains their ability to act against global warming.

Developing Countries Saying No

Many developing countries have already been withdrawing from their BITs while the RCEP does not include ISDS. So, the CPTPP, other BITs and FTAs’ ISDS provisions are out of date. Worse, they block addressing emergencies, such as the COVID-19 pandemic and global warming.

Countries should reject and even withdraw from BITs and FTAs with ISDS. After all, there is no evidence ISDS attracts foreign direct investment. More and more developing nations – including India, Indonesia, Pakistan, Ecuador, South Africa, etc. – have already withdrawn from such BITs.

Governments should urgently review and remove ISDS provisions in all existing BITs and FTAs, or withdraw from them, to avoid more costly ISDS cases. They must be more critical and careful in ensuring future economic cooperation agreements to ensure they really serve their current and future best interests.