The Truth about ISDS Disputes and the TPP

The provision of the TPP that yielded the strongest opposition from activists during the public debate over the agreement in 2015–16 was its provision regarding ISDS (Investor-State Dispute Settlement). Even people who should have known better latched onto the hysteria, including Nobel prize winning economist Joseph Stiglitz, who wrote in a May 2015 Marketwatch column that the TPP was nothing short of a corporate takeover, allowing corporations to “overturn regulations” through ISDS lawsuits.

The premise of activist fear of the ISDS clause was this: Corporations would be allowed to sue nations for “takings” as the result of regulatory actions to protect the environment or public health. Depending on how grounded the activist was in reality, the consequences of that interpretation of ISDS would either be the overturning of local laws by ISDS courts (a completely false presumption, as an ISDS court remedy would be monetary settlements, not the overturning of local laws, something Stiglitz should have known), or local governments overturning their environmental and consumer protection laws to avoid paying the settlements of endless takings lawsuits.

The concept of “takings” is that a government cannot seize land without compensating the owner of the land. The concept dates back to the 5th Amendment of the US Constitution, and English common law before that. However, that concept does not only apply only to land condemnation. If the government issues regulations so stringent that nearly all of the value of the land has been stripped away, a landowner can also sue for compensation.

Ignoring the fact that the TPP included environmental standards, labor protections, mandated a minimum wage, and banned child labor, activists’ interpretation of ISDS courts is problematic.

Firstly, courts have not followed through on that interpretation in the high profile ISDS cases activists highlighted in the TPP debate. In Philip Morris v. Uruguay, Philip Morris lost, and Uruguay was not obligated to pay the tobacco giant’s lost profit because the nation strengthened its labeling standards. In Churchill Mining v. Indonesia, Churchill Mining lost, and Indonesia was not obligated to pay the company for lost profits because the nation regulated its mining sector.

Not only does the real life track record of courts not match the fears of activists, but there are provisions intentionally kept to prevent that. Tobacco companies have specifically been barred from bringing forward ISDS claims under Article 29.5 of TPP Chapter 29.

Annex 11-B to the investment chapter of the TPP also declares:

3. (b) Except in rare circumstances, such as, for example, when an action or a series of actions is extremely severe or disproportionate in light of its purpose or effect, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, the environment, and real estate price stabilization (through, for example, measures to improve the housing conditions for low-income households), do not constitute indirect expropriations.

Moreover, the ISDS provisions of the TPP copy heavily from the US-Korea Free Trade Agreement, which has existed for years, and there have not been horror stories of multinationals receiving large settlements as the result of environmental laws in the US and Korea. The Office of the United States Trade Representative even specifically stated that ISDS in the TPP or any other agreement does not allow corporations to sue for “lost profits.” A violation of the TPP must occur for ISDS to be used.

In short, regulations that are applied fairly and are not egregious or a violation of the partnership cannot be the basis for suits seeking damages against states in ISDS disputes. The hypotheticals activists have been fearing have no basis in reality, and the language of the TPP actively prohibits the usage of ISDS courts in that manner.

ISDS isn’t a novel concept to the TPP. Over 2,500 bilateral investment treaties between nations use it as a form of dispute resolution, and have done so for over 20 years. It’s a system of international trade law where international investors (multinational corporations) can sue nations in an impartial international court for unfair treatment, or for violating trade agreement negotiations. The mechanism does not even disproportionately favor investors/multinational corporations. A UN report found that 42% of ISDS court decisions favored the state, with only 31% favoring the investor.

The ISDS provisions of the TPP exist because they serve as an instrument to improve the business legal framework of developing nations with weak institutions, increasing the ease of doing business.The ISDS courts serve as an enforcement mechanism of the TPP itself, supplementing the sometimes shady or biased local courts, ensuring that investments are safe and disputes are arbitrated fairly and faster. A realistic ISDS case is an oil company suing a nation for damages after it seized its property when it nationalized its oil reserves, an example of expropriation, prohibited under the TPP. Local courts would likely not be as fair on the issue as an international trade court.

The TPP was not a perfect trade deal. There are provisions included in it regarding patent protection that threatened Japanese dōjinshi. The ISDS provision lacks an appeals process. Some of the partnership’s clauses regarding corporate secrets may be too strict, and result in overuse of noncompete contracts. But it’s important to base opposition to the partnership in reality. Screaming that the TPP is “corporate control of government” is not only dishonest, but distracts from actual issues in the agreement.

Heck, with the TPP’s environmental and labor standards, it’s likely that ISDS would have been used as a way to protect worker’s rights. If Company A noticed Company B hiring children, it could bring an ISDS dispute against the state to pay damages, encouraging the state to ratchet up enforcement. Activists shot themselves in the foot opposing the TPP for ISDS. Compared to other trade deals, the TPP was quite literally the “gold standard” for consumer, labor, and environmental protections.

The TPP was going to change geopolitics in East Asia, reducing the competitiveness of China and increasing American soft power by letting the democratic West write the rules of business and trade in Southeast Asia, instead of authoritarian China. It would have improved labor standards in Asia, reduced corruption (all ratifying nations were required to criminalize bribery and create government codes of conduct), and long term would have bound east Asian nations tighter to the West, increasing global stability and likely leading to the democratization of nations such as Vietnam, which reduced its crackdown on activists to comply with the TPP.

Unfortunately, the liars and the conspiracy theorists won. When the Infowars-watching conspiracy loving Donald Trump entered the White House in January 2017, he promptly killed the agreement to appease his populist base. His reasons varied from “It’s too long” to “I only want to work one-on-one with nations to pass trade deals.”

I probably shouldn’t read too much into Trump’s statements on the TPP. There’s very little evidence that he understands the partnership at all.

All is not lost, though. All member states except the US reformed the TPP after the US withdrew, and carried on, dropping the wildlife conservation and labor rights provisions that were in the original agreement. It’s possible that the member nations will allow the US back into the agreement once a sane government is elected again. We can hope.

Further Information

I highly recommend everyone to read this report from the PIIE about the TPP. Most of my information is sourced from it.

Environmental Economics and Policy alum of Oregon State University

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