ISDS Controversy



Last year, only trade wonks knew the acronym ISDS, investor-state dispute settlement. Thanks to the battle over the Trans-Pacific Partnership (TPP), ISDS has now become a blogosphere term. Senator Elizabeth Warren (D-MA) claims that ISDS is a synonym for corporate greed. She detects a backhanded mechanism for giant firms to ride roughshod over environmental, health and safety regulations, gut the Dodd-Frank financial reforms, and extract billions of dollars from American taxpayers.

So what is ISDS? Stripped to essentials, ISDS provisions are designed to protect firms that invest abroad against unfair treatment by foreign governments. This is done through substantive rules that compel compensation for expropriated property, ensure that foreign firms enjoy the same rights and benefits as local firms (national treatment), and require governments to give “fair and equitable treatment” to foreign firms. The substantive rules are enforced by an arbitration system in which foreign firms can challenge unfair treatment by local governments.

ISDS provisions are written into some 2,200 bilateral investment treaties (BITs) and numerous free trade agreements (FTAs). The Trans-Pacific Partnership—like NAFTA, the Korea-US FTA, and others—includes ISDS provisions. Arbitrators are seasoned lawyers and judges, chosen by the government and the firm. To date, around 500 arbitrations have been conducted under the auspices of the International Center for the Settlement of Investment Disputes (ICSID), housed in the World Bank. Worldwide, firms have prevailed in only a third of the cases. Foreign firms have won no awards in the 13 cases brought against the United States—for the simple reason that ISDS substantive rules virtually mirror US investment protection laws.

Critics of ISDS raise three good points. In some BITs, the substantive rules do not allow sufficient room for governments to update their environmental, health, and safety regulations and withstand complaints from firms. US agreements with ISDS provisions do not suffer this defect. Federal, state, and local agencies can all update their regulations in a fair and evenhanded manner without risking an arbitration award. Similar flexibility will certainly be a feature of ISDS provisions in TPP.

A second criticism is that ICSID does not require parties to post their briefs and arbitration decisions on the web so that the public knows the arguments and the rationale for any award. ICSID should change its rules to require full disclosure in all cases, and the investment chapter in TPP should certainly require full disclosure in TPP cases.

A third criticism is that current ISDS provisions, as well as ICSID procedures, do not have an appeals mechanism. An appeals system is badly needed, both to reconcile conflicting arbitration decisions and to correct erroneous awards.

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