Corporate Dominance of International Trade System Is Ending, Claim Economists After Honduras Leaves ISDS Court

“As economists, we commend (Honduran) President Castro and the people of Honduras, and hope that countries across the world follow their lead toward a fairer, more democratic trade system.”

In 2023, the small Central American country of Honduras (population: 10.7 million) was the second most sued nation at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), with a total of nine ISDS (investor-state dispute settlement) cases against it (the only country with more was Mexico, with 10). Just one of those suits, brought by U.S. corporation Próspera Inc, a company financed by several Silicon Valley investors, including Peter Thiel, Balaji Srinivasan, and Marc Andreessen, is for $10.8 billion, equivalent to around a third of Honduras’ GDP.

Próspera Inc. filed its ISDS case with ICSID in late 2022 after Honduras’ left-leaning President Xiamora Castro (no relation to Fidel) partially repealed a law granting foreign investors like Próspera the right to create charter cities in Zones of Employment and Economic Development, or ZEDEs. Established in 2021 on Roatán, an island 40 miles off Honduras’ northern coast, Próspera was described by the tech news website Rest of World as a “crypto-libertarian paradise.”

Then, just a year later, the Castro government pulled the rug from under Próspera’s feet by doing away with part of the law allowing ZEDEs to operate as more or less autonomous territories on Honduran soil. In its ISDS suit, Próspera Inc. alleges that Honduras owes it more than $10 billion for breaking a “50-year legal stability guarantee” granting it sovereignty over Próspera, including the ability to create its own laws, courts, authorities and taxes.

Claws and Teeth

For those unfamiliar with this topic, ISDS clauses are what give most bilateral or multilateral investment treaties their claws and teeth, essentially enabling foreign investors to ride roughshod over domestic laws and regulations. Put simply, foreign investors get to sue governments for any loss of profit, including profits not yet earned, resulting from new laws and regulations, and they tend to have a chilling effect on pubic-interest regulatory action. The cases are decided by secret panels staffed by highly-paid, investor-friendly arbitrators and are always brought by corporations against governments, never the other way round.

But something almost unheard of is happening in Honduras’ case. Instead of waiting for the imposition of crippling fines that would almost certainly bankrupt her government, Xiaomi Castro decided in late February to withdraw her country from ICSID, arguing that the court was infringing illegally on Honduran sovereignty.

In taking this step, Honduras has become the first Central American country to walk away from ICSID, the world’s most important forum for the settlement of differences between investors and States, with a total of 149 government signatories. Until now, Latin America has been a hugely lucrative source of income for (mostly Western) corporations seeking legal damages against governments for passing laws or regulations that threaten their bottom line as well as the international arbitration lawyers that argue the cases. From an article I wrote in 2016:

[O]ver 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.

A Little Background

Xiomara Castro is the wife of former Honduran President Manuel Zelaya, who was ousted in a 2009 US-supported coup. In April, 2022, four months into office, she announced that she had already fulfilled one of her main campaign pledges by repealing a 2013 passed by the government of former strongarm President Porfirio Lobo Sosa that had allowed foreign investors to create charter cities in designated ZEDEs. According to Reuters, the law has only been partially repealed, though further steps to do away with the ZEDEs are expected in 2025.

The amount of autonomy that Lobo Sosa’s government had granted to the owners of the ZEDE’s is mind-boggling. As the Honduran daily newspaper La Prensa reported in 2021, the 2013 law clearly established that “each ZEDE will have its own internal security bodies (…), including its own police, crime investigation bodies, intelligence, criminal prosecution and penitentiary system.” The cities will also have an independent financial regime, and will not be subject to the exchange control of the Central Bank of Honduras; they are empowered to develop their own internal monetary policy.

Even before Castro’s election, local businesses were complaining that the law had granted too many privileges to foreign investors to the detriment of domestic capital. The US economist Paul Rohmer, the godfather of international charter cities who had initially worked with the Lobo Sosa government to develop ZEDEs, had disowned the project, warning that Honduras’ ZEDEs system was undemocratic, opaque, destined for collapse and shrouded in lies. As a recent article in The Intercept explains, the legal showdown between the Honduran government and the investors behind the charter cities presents an “almost impossible-to-believe scenario”:

A group of libertarian investors teamed up with a former Honduran government — which was tied at the hip with narco-traffickers and came to power after a U.S.-backed military coup — in order to implement the world’s most radical libertarian policy, which turned over significant portions of the country to those investors through so-called special economic zones. The Honduran public, in a backlash, ousted the narco-backed regime, and the new government repealed the libertarian legislation. The crypto investors are now using the World Bank to force Honduras to honor the narco-government’s policies…

The law that established ZEDEs — short for Zone for Employment and Economic Development — effectively carved out portions of Honduras and turned them over to American investors, who operate as effective sovereign governments. The ZEDEs could one day control 35 percent of Honduras’s territory, according to the United Nations, which has said that the zones raise human rights concerns.

It took enormous political muscle more than a decade ago to force the ZEDEs into law. They only became possible when Castro’s husband, Manuel Zelaya, was removed in a U.S.-backed coup in 2009.

After Zelaya was ousted, a new election brought in President Porfirio Lobo Sosa, who quickly moved to undo Zelaya’s social reforms, attacking workers rights and reneging on land reform efforts. The Supreme Court struck down the first version of the ZEDEs law as unconstitutional, but after the constitution was amended and four new justices were added to the Supreme Court, the law stuck in 2013.

“Economic Self-Harm”

Eleven years later, business lobbies in Honduras are warning of imminent disaster as foreign investors begin shunning the country. The Honduran Council of Private Enterprise described the Castro government’s decision to withdraw from ICSID as “economic self-harm,”  putting at risk not only Honduras’ current economic stability, but also future opportunities for growth and development. The government’s move, it said, “slams the door in the face of foreign investors and the international community” and risks “triggering a flight of investors at a moment that we most need their confidence and capital to support our economy.”

A group of 85 international economists, including many whose names regularly appear on this site (e.g. Ha-Joon Chang, Yannis Varoufakis, Ann Pettifor, Jayati Ghosh and Daniela Gabor), could not disagree more. In a letter published in Progressive International the economists argue that they have found “scant economic evidence that mechanisms like ICSID stimulate meaningful foreign direct investment.” Instead, they say, “international arbitration courts like ICSID have allowed corporations to sue states and restrict their freedom to regulate in favour of consumers, workers and the environment” for decades:

Since 1996, governments in Latin America alone have been forced to compensate foreign corporations over $30 billion, intimidating regulators away from raising minimum wages, protecting vulnerable ecosystems, and introducing climate protections, among other domestic policy priorities.

The economists also describe Honduras’ predicament as a “powerful case of corporate abuse through the ISDS system”:

Since the 2021 election of the country’s first woman President, Xiomara Castro, corporations have brought a total of 10 ICSID cases against them. The largest, brought by the US corporation Próspera Inc, seeks more than $10 billion — two-thirds of the country’s annual budget — as compensation for the country’s decision to derogate the disastrous “ZEDEs” law that forfeited Honduran territory to foreign corporations like Próspera to found private cities that operate almost without regard for labour, environmental, or health regulations.

The letter closes with a bold assertion that “the era of corporate supremacy in the international trade system is coming to an end”.

The European Union recently announced its withdrawal from the Energy Charter Treaty (ECT). US President Joseph R. Biden, meanwhile, has pledged to not have provisions for these corporate courts in future trade deals. And major developing countries, such as Brazil and India, stand firm in their refusal to enter treaties like ICSID in the first place.

Now, the government of President Xiomara Castro has taken another important step to prioritise sustainable development over corporate profit. As economists, we commend President Castro and the people of Honduras, and hope that countries across the world follow their lead toward a fairer, more democratic trade system.

While it is hard to find fault with the letter’s overall message, especially the hope that other countries follow Honduras’ lead, the claim that corporate dominance of the global trade system is coming to an end, while certainly a desirable outcome, is perhaps a little optimistic. As Yves noted in the preamble to a recent cross-posted article on the gathering backlash against ISDS clauses, “while new ISDS provisions aren’t simply accepted as they once were, there are still plenty of trade deals in force with those stipulations.”

Rest assured that powerful international arbitration tribunals such as ICSID will do whatever they can to protect their racket for as long as possible. In other words, while the current ISDS system is most probably in terminal decline, especially after the collapse of the TPP and TTIP eight years ago, which in the eternal words of Obama’s US Trade Rep Michael Froman would become “the global benchmark for standards in a globalized world,” its death is likely to be painfully slow (for members of the global public, not the corporations that will continue to benefit from it).

Advanced economies like Australia and the EU may wish to disentangle themselves from their ISDS commitments but this will take time. Six years ago, the European Court of Justice ruled that the ISDS clauses contained within almost 200 bilateral investment treaties (BITs) between EU member countries are incompatible with EU law. Since then, the EU has modified the legal mechanism applicable to the trade agreements it signs while developing its own multilateral investment court system. However, as a 2022 European Parliament report notes, the number of IPAs (investment partnership agreements) signed by the EU has stalled since then, quite possibly due to the new arrangements.

Meanwhile, one hopes that Xiomara Castro’s defence of her nation’s economic interests against the rapacious demands of the ZEDE investors holds firm, and that her presidency doesn’t meet a similar fate to her husband’s. These are, after all, powerful forces — i.e., many of the world’s largest corporations — she is up against, and the last thing they will want is for countries in the Global South to begin abandoning the ICSID and other international arbitration panels.

To cap it all off, Castro’s government is currently negotiating a trade agreement with China after announcing the establishment of diplomatic relations with Beijing in October. In doing so, it became the latest in a long line of Latin American governments to jettison their decades-long ties with Taiwan, much to Washington’s chagrin. As the Washington Post ominously noted at the time, Honduras (emphasis my own) “was long among the most docile of U.S. regional partners.” Now, its government is cosying up to China, Washington’s principal strategic rival.

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  1. John

    I have long thought ISDS was preposterous. It amounts to bailouts, a means of privatizing the profits and socializing the costs.

  2. Chris Smith

    I see no reason why an ambitious prosecutor could not charge these secretive arbitrators for engaging in economic terrorism and offer an eight figure reward for delivery of the offending arbitrators into custody. That would put an end to ISDS pretty quick.

  3. lyman alpha blob

    Thank you Nick. Best news I’ve read in a while!

    Here’s hoping ISDS’ demise occurs like Hemingway’s bankruptcy – gradually at first, and then suddenly.

  4. hemeantwell

    A good sounding of the international race to the bottom of the sacrifice of societies to corporate dominance. Quite a contrast to the good old days of direct military rule.

  5. Jabura Basaidai

    this is great – never understood why ANY country would allow such an attack on their sovereignty – Clinton all in on this with NAFTA

      1. Kouros

        Canada goy out of that on the recent round of renegotiations on NAFTA. One positive thing I can pin it on Chrystia Freeland.

    1. ISL

      It’s almost as if the leaders were siding with the wealthy investor class (oligarchs) against the popular will as expressed in the constitution, laws, and elected bodies.

  6. The Rev Kev

    Thanks for this important update, Nick. Hard to believe that Honduras agreed to cut off bits of their country and hand over sovereignty of them to corporations for fun and profit. But I have always hated the whole idea of the ISDS as it benefits nobody except big financial interests. The whole thing is on an ad hoc basis and you might have a lawyer acting as one of the judges on one case, prosecuting the next case, and then the next time being a judge again. But kudos to Honduras for just bailing on the whole thing before they had to end up mailing their whole GDP to Wall Street. Readers might remember the Trans Pacific Partnership that Obama really pushed until Trump killed it. At the heart of that was an ISDS that the US insisted had to be there and that every country had to sign up for. After Trump killed it, the remaining countries kept going with that organization but with the US gone, they dropped the ISDS component. Those things are nothing less than financial ticking time bombs.

  7. Robby44

    Under the terms of Canadian trade agreements with the US, a corporation had the right to sue the Canadian government for millions unless it permitted the use of MMT, a fuel additive with possible health implications. MMT additives are not permitted in the US but Canadians to this day are forced to breathe these exhaust gases all because of a NAFTA agreement and its successor. We now have foreign corporations dictating over our parliament and sovereignty. Who would have thought corporations could ever exercise this much power over an independent country?

    1. steppenwolf fetchit

      My memory of this is different. Could my memory be wrong?

      I remember reading that it was a Canadian company which invented Methylcyclopentadienyl manganese tricarbonyl and sold it and even tried ISDA-suing California when California tried to ban it in California.

      So I tried finding out something about it via the Search Obstruction Engines still existing and found this article indicating this chemical was being used in Canada since 1976, which was years before the forced-existence of the Clinton-Mulroney-Salinas de Gortari NAFTA. Here is the link.

      And then I found this SFGate article titled ” Canadian Firm Sues California Over MTBE / $970 million suit seeks to end gas-additive ban “. Here is the link.

      So in the MMT case it was actually a Canadian firm which sued the California government. And part of the broader problem with NAFTA was that any corporation was granted the right to sue ANY government within the US, Canada AND Mexico under this ISDS provision. And unless the Trump revision corrected this, it is still in force.

      1. steppenwolf fetchit

        Whoops. I went off semi-half-cocked here. MMT ( Methylcyclopentadienyl manganese tricarbonyl )
        is one thing and my first linked-to article shows it was being used in Canada before the invention of NAFTA.

        But my memory of a Canadian-based company suing California was over a different chemical called
        called MTBE (Methyl tert-butyl ether (MTBE), also known as tert-butyl methyl ether). So I got a very key detail very wrong in my memory. The very key detail was the chemical which a Canadian company sued California over. MTBE, not MMT.

        But I did remember the basic principle correctly, which is that a Canadian company had sued an American state under ISDS provisions when that American state tried to ban a made-in-Canada chemical.
        Here is a wikipage about MTBE.

        So I found this other link about an ISDS suit about yes-indeed MMT, made in Canada by a corporation set up there and wholly owned by the US corporation called Ethyl Corporation, which did sue the Canadian government to force MMT to remain legal to sell and use in Canada. Here is the link.

        So . . . a Canadian company sued California to force the use of one gasoline performance enhancer chemical in California and an American company sued Canada to force the use of another gasoline performance enhancer in Canada. Two different ISDS suits flying past eachother like missiles in the night. It goes to show that ISDS is a real problem.

  8. JustAnotherVolunteer

    Some of the named investors are also backers of the “California Forever” city project in Solano County.

    The same governance concerns apply according to County officials and ballot initiative is under way.

  9. Matthew G. Saroff

    I am convinced that the entire ZEDE was, from the Thiel side, less about profits than it was an attempt to recreate Galt’s Gulch from Atlas Shrugged.

  10. spud

    do “TARIFFS” help keep the peace, do ‘TARIFFS” help stop wars? it appears to be true

    the 1800’s a era of free trade collapsed in 1914 into WWI, with much of the world in chains to corporations.

    the slaughter induced by free trade called WWI was not even over yet, and the prototype fascist WOODREW WILSON was already forcing free trade yet again on the world.

    as always, free trade collapsed into the great depression. and countries like the U.K. wisely dropped out of free trade in 1930, and the depression was mild their compared to the rest of the world.

    actually the british recognized smoot hawley as the quickest way out of the depression and they went right into protectionism and it worked.

    when fascism came to america, its was sold as free trade spreads democracy, and eradicates poverty.

    remember, free trade is the elevation of capital over sovereignty, labor, the environment.

    free trade treats everything as a commodity, nationalism and sovereignty are fundamental for freedom.

    history is clear, free trade is fascism: the origins of fascism can be directly linked to the the utopian endeavor of free trade

    hitler was all for autarky and sovereignty, that is only germany and italy that is.

    “British advocacy of free trade, he believed, was political cover for British domination of the world. A prosperous Germany required exchange with the British world, but this trade pattern could be supplemented, thought Hitler, by the conquest of a land empire that would even the scales between London and Berlin.

    Once it had gained the appropriate colonies, Germany could preserve its industrial excellence while shifting its dependence for food from the British-controlled sea lanes to its own imperial hinterland.

    It was reassuring to Hitler that such an alteration of the world order, such a reglobalization, had been achieved before, in recent memory. For generations of German imperialists, and for Hitler himself, the exemplary land empire was the United States of America.”

    “Globalization led Hitler to the American dream. In American idiom, this notion that the standard of living was relative, based upon the perceived success of others, was called “keeping up with the Joneses.” Behind every imaginary German racial warrior stood an imaginary German woman who wanted ever more.”

    “When Hitler wrote in My Struggle that Germany’s only opportunity for colonization was Europe, he discarded the possibility of a return to Africa. The search for racial inferiors to dominate required no long voyages by sea, since they were present in Eastern Europe as well.”

    “The Slavs are born as a slavish mass,” wrote Hitler, “crying out for their master.” He meant primarily the Ukrainians, who inhabited a stretch of very fertile land, as well as their neighbors—Russians, Belarusians, and Poles.

    “I need the Ukraine,” he stated, “in order that no one is able to starve us again, like in the last war.” The conquest of Ukraine would guarantee “a way of life for our people through the allocation of Lebensraum for the next hundred years.”

    really sounds like any other free trader that came into power in 1993.

    “George Friedman
    Geopolitical Forecaster and Strategist
    Nationalism Is Rising, Not Fascism
    06/03/2016 02:18 pm ET Updated Jun 04, 2017

    Recently, there have been a number of articles and statements asserting that fascism is rising in Europe, and that Donald Trump is an American example of fascism. This is a misrepresentation of a very real phenomenon.

    The nation-state is reasserting itself as the primary vehicle of political life. Multinational institutions like the European Union and multilateral trade treaties are being challenged because they are seen by some as not being in the national interest.

    The charge of a rise in fascism comes from a profound misunderstanding of fascism. It is also an attempt to discredit the resurgence of nationalism and to defend the multinational systems that have dominated the West since World War II.

    Nationalism is the core of the Enlightenment’s notion of liberal democracy. It asserts that the multinational dynasties that ruled autocratically denied basic human rights. Among these was the right to national self-determination and the right of citizens to decide what was in the national interest.

    The Enlightenment feared tyranny and saw the multinational empires dominating Europe as the essence of tyranny. Destroying them meant replacing them with nation-states. The American and French revolutions were both nationalist risings, as were the risings that swept Europe in 1848. Liberal revolutions were by definition nationalist because they were risings against multinational empires.

    Fascism differs from nationalism in two profound ways. First, fascists did not consider self-determination a universal right. Adolf Hitler, Benito Mussolini and Francisco Franco, to mention three obvious fascists, only endorsed nationalism for Germany, Italy and Spain. The rights of other nations to a nation-state of their own was, at best, unclear to the fascists.

    In a very real sense, Hitler and Mussolini believed in multinationalism, albeit with other nations submitting to their will. Fascism was an assault on the right of nations to pursue their self-interest, and an elevation of the fascists’ right to pursue it based on an assertion of their nations’ inherent superiority and right to rule.”

  11. James P McFadden

    The book “Silent Coup” by Provost and Kennard, begins with a discussion of an ICSID enabled attack on El Salvador. It goes on to describe other corporate attacks and investor-benefiting institutions designed to siphon wealth and land from the majority of humans. The corporate technocrats (lawyers, economists, think tanks, and political handlers) are attempting to build a corporate-controlled global infrastructure beneficial to the investor-class, a process that began at Bretton Woods (IMF, WB), has sometimes been met with setbacks (WTO Seattle 1999, collapse of TPP, etc) — but continues to find corrupt leaders who allow them to insert their sneaky verbiage into treaties. I’m beginning to believe we need something equivalent to Frank Herbert’s Butlerian Jihad against the great enemy — corporate structure and its think tank armies of lawyers and economists. It is not AI that is the real threat to humanity but rather the sociopathic corporate structure whose emergent behavior prioritizes profit at the exclusion of all else, and is dooming humanity to dystopic governance incapable of solving problems like climate chaos, war, environmental pollution, and planned famines to steal land.

  12. JonnyJames

    Very informative article, thank you. Xiomara’s democratically-elected husband Manuel was taken at gunpoint and flown out of the country in a coup orchestrated by the Obama regime under Sec. State HR Clinton. Manuel and Xiomara are not far-leftists at all, Manuel was ousted just for some relatively moderate reforms.

    HRC cites Henry Kissinger as a mentor, and implicitly admitted illegal activities. Of course, the so-called opposition party did nothing as they are in lock-step when it comes to important policy matters.

    I hope Xiomara Castro is taking extra precautions against another coup happening again. El Imperio Norte-Americano is not pleased with her.

    1. steppenwolf fetchit

      It is well to remember Hillary’s driving role in this coup. The Obama Administration was prepared to accept the Zelaya election and was accepting it until Hillary convinced Obama to reverse that acceptance and agitate for the OAS to reject that election.

      That coup was very specifically Hillary’s goal and desire, rather than being a US goal and desire in general.
      Sometimes personnel really is policy. And Hillary was a very bad personnel. And very very evil.

      Not for nothing did I vote for Trump in the Trump versus Hillary election.

  13. Eclair

    You have done it again, Nick! Transformed what could be a mind-numbing account of corporate malfeasance in an ignorable ‘banana republic’ (they do export a lot!) into a fascinating, readable and eminently relevant tale of capitalist plots that reach their tentacles into our daily lives.

    As commenter James P McFadden writes above: “It is not AI that is the real threat to humanity but rather the sociopathic corporate structure whose emergent behavior prioritizes profit at the exclusion of all else, and is dooming humanity to dystopic governance incapable of solving problems like climate chaos, war, environmental pollution, and planned famines to steal land.”

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