ISDS has become a dirty acronym in trade. Frequently perceived as a tool for corporations to exploit states at the expense of the public interest, it is a prime target for anti-globalists and anti-capitalists. Elizabeth Warren has long lambasted it for providing a ‘huge handout to global corporations while undermining American sovereignty’ and has committed to ensuring it never sees the light of day in future trade deals. Additionally, 150,000 Europeans signed a petition demanding its removal from the now dead TTIP. Yet, despite being the means of dispute settlement within trade agreements for decades, exaggerated rhetoric – that ISDS simply serves corporate interests and harms the state’s ability to govern, is misleading and unproductive.
Investor-state dispute settlements provide a vital function in the international legal order, providing a mechanism for investors to sue states for alleged discrimination and breach of trade agreements. Many nations, notably developing nations, lack the basic protections to ensure foreign corporations can confidently invest in them. ISDS aimed to fill this vacuum, offering an external legal system to comfort investor fears of corruption and discrimination, simultaneously facilitating greater foreign investment for poorer states. The system also removes pressure off domestic courts, providing a substantial benefit for more developed states. Yet, while ISDS improves the enforceability of international law, its provision for claims for investors have created the perception that it is a fundamentally unfair and exploitative system.
Such a demeaning reputation is epitomised by ISDS’s effect on issues of public concern –obstructing the regulation of the environment, public health and labour standards, providing an easy platform for critics to incite widespread support. Prominent cases such as Phillip Morris’ lawsuits against Australia and Ecuador for inaugurating plain-packaging and successful claims by Italian bondholders against Argentina for defaulting on its sovereign debt have been frequently used to form the basis of backlash towards ISDS. In reality, many of these cases, like Phillip Morris, fail, or are rare.
This does not suggest that ISDS is a perfect dispute mechanism system. Often vague definitions in treaties have allowed corporations to stretch the meaning of terms such as ‘investment’ and ‘fair and equitable treatment’. While these have contributed to the backlash towards ISDS, a complete overhaul of the system is disproportionate when existing treaties can be altered and future ones can clarify the definitions of these terms.
Another common attack of ISDS is focused on the allegedly biased judges that arbitrate disputes. As panels partially consist of arbitrators appointed by the investors themselves, the allegation follows that investors will only appoint arbitrators who have been favourable to them in the past. Arbitrators are also seen to be biased as a result of their previous roles as counsel in similar cases they would arbitrate, and the interchanging of these roles is seen as facilitating procedurally illegitimate decisions. Despite the mere appearance of bias, these criticisms are based on assumptions of how the courts operate and minimal empirical evidence exists to suggest the procedure has created biased courts.
Misleading criticism based on the substantive and procedural flaws of ISDS has generally originated from NGOs and academia, who have successfully swayed public opinion on TTIP and TPP. While President Trump has answered their prayers, albeit for his own protectionist justifications, the outrage over ISDS was a disproportionate one.
Yet, such ISDS ‘backlash’ is a more complex phenomenon that has manifested as a result of broader concerns about globalisation. As globalisation has become a more diffuse target, anti-globalists need something more tangible to blame. Despite arguably more damaging effects of TTIP and TPP such as job losses and lowering of wages, ISDS forms a more convenient focal point to express fears of infringement of sovereignty and increasing power of multinational corporations. Therefore, citing rare but consequentially damaging ISDS judgments such as the Italian bondholders case, or unsuccessful but shocking claims such as the Phillip Morris cases, along with biased arbitrators, forms a clearer and more persuasive narrative.
Complete abolition of the system will deprive investors with genuine claims from seeking recourse and discourage foreign investment, notably in developing countries. There is a greater case for reform, as some scholars have advocated for a ‘World Investment Court’ – a centralised court to ameliorate procedural and substantive issues that have plagued ISDS’s reputation. Rather than investor-chosen arbitrators, the court would employ judges, selected through the WTO by states, to avoid perceived bias, and the court would also have a lower and appellate body to develop precedent and consistent decision-making.
Ultimately, prospects of a world court will be determined by the willingness of a collection of states to adhere to the system. To be embraced broadly, the mechanism must meet the interests of states and claimants, or disputes may avoid the system. The proposal also risks politicising the state-based appointment process, especially within the shadow of the trade war. Whether the court can even supersede these hurdles first depends on the expansion of the WTO which is required for the court’s creation. However, to suggest expansion while the institution is in decline, at risk of not having a quorum of judges and even an US exit, is an optimistic and almost laughable goal.
Reforms may have to be conducted at a bilateral, or regional level. There are greater prospects for the creation of regional or agreement-specific courts, shown by the EU’s court proposal and the EU-Vietnam treaty. However, many states have already alleviated their own concerns of ISDS by guaranteeing protection within agreements to limit investor exploitation. For example, new agreements are increasingly adopting ‘enterprise-based’ definitions of investment, which only include investments within the host state, rather than previous all-encompassing asset-based definitions. More narrowly drafted ‘fair and equitable’ clauses, to prevent broad interpretations, are now more common. States have also included ‘carve-outs’ to prevent investors from suing on public policy issues, including tax and tobacco-based claims, as seen in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPATPP).
We must be wary of groups and politicians such as Elizabeth Warren, who are adamant that ISDS is manipulative tool for corporations, even though the US have not experienced ISDS claims against them. Suggesting complete abolition of ISDS, simply because it is ‘pro-investor’ is not a sustainable approach to trade disputes. Piecemeal changes are arguably more practical and direct solutions, to ensure investors have protection that does not go beyond what is reasonable. As states are increasingly aware of ISDS provisions, these drafting changes may be incorporated into large-scale agreements, already demonstrated by CPATPP. This way, anti-globalists will struggle to have a strong claim against future trade deals that involve ISDS.
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