Protections for foreign investors are not the horror critics claim, but they could be improved
GOODBYE to the European Union’s environmental protections. Goodbye to Britain’s National Health Service. Goodbye, for that matter, to the ability of voters in sovereign, democratic states to determine the sort of country they would like to live in. These things are all doomed, thanks to an obscure clause in the free-trade agreement that the EU is negotiating with America regarding “investor-state dispute settlement” (ISDS)—or so the agreement’s opponents claim.
These exaggerations contain a kernel of truth. ISDS, which is intended to protect foreign investors from expropriations or other unfair treatment, requires countries to give up some of their sovereignty. The logic is simple. When a government molests a foreign firm—the forcible acquisition of stakes in foreign oil and gas ventures in Russia, say, or Venezuela’s nationalisation of gold mines, cement factories and cattle ranches—it cannot be relied on to fix things. Investors should therefore have recourse to an independent arbiter who can oblige the government to change course. In theory, the only power governments are giving up is the right to behave badly. In return they will receive more foreign capital, boosting economic growth.
The idea is a good one—so good that the members of the EU alone have signed perhaps 1,400 treaties involving ISDS. America is party to 50 trade deals that include it.
Unfortunately, there are growing problems with implementation (see article). The clauses that define the scope of ISDS are often insufficiently precise. This has allowed Philip Morris to demand compensation for Australia’s decision to require cigarette-makers to put grisly pictures of lung-cancer victims on their packets. It enabled Vattenfall, a Swedish utility which owns several nuclear plants in Germany, to demand compensation for the German government’s decision in 2011 to phase out nuclear power. And it provides the legal basis for the insistence of Lone Pine Resources, an American oil firm, that the Canadian province of Quebec must compensate it for its moratorium on fracking. Ever more firms see ISDS as a way of getting compensation for, or changes in, unwelcome policies. In 2012 a record 59 arbitrations were launched.
The manner in which complaints like these are typically resolved makes them all the more galling: the proceedings are not open to the public and the arbitrators making politically and fiscally important decisions are often moonlighting corporate lawyers. It is no surprise that many people believe ISDS stacks the rules of globalisation in favour of big firms.
Rein in the corporate lawyers
Happily, governments are beginning to learn from these mistakes. The free-trade agreement the EU is negotiating with Canada, for example, takes care to define, and narrow, the scope of ISDS. It pointedly states that measures “to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations”. It also requires ISDS proceedings and findings to be made public.
That is a good start. But reform of ISDS could go further. The World Trade Organisation, which administers the rules of global trade agreements, provides a ready model. Its member governments have ultimate control over the system to settle trade disputes, including the choice of arbiters. Only states can bring complaints, so firms must first convince their governments that trade rules have been breached. The proceedings are like trials, open to public scrutiny and subject to appeal. All future bilateral and regional investment treaties should adopt this approach, and it should be introduced into existing ones as they come up for renewal. Firms need protection; but so does the right of governments to pursue reasonable policies.
This article appeared in the Leaders section of the print edition under the headline "A better way to arbitrate"
