Credit: ustr.gov

In an op-ed published by Asia Pathways, ASP Consensus Member Peter S. Rashish takes on one of the most contentious issues that has dominated trade talks all across the globe: the Investor-State Dispute Settlement clause (ISDS). It is hard to find another trade related talking point that has stirred up more controversy lately than ISDS.

If ISDS is included in a bilateral investment or free trade agreement, it provides foreign investors or companies with the possibility of legal recourse to an international panel of judges outside of the domestic court system of the host country in case of expropriation or other breaches of commitments in in the investment treaty or free trade agreement.

Peter S. Rashish

As Rashish writes, including ISDS in bilateral trade and investment agreements has become a common practice ever since Germany first incorporated a similar system in a 1959 treaty between the country and Pakistan. The rationale behind including ISDS is easy: to ensure fair treatment of investors in the host country, there should be an independent panel of judges that has jurisdiction over the investment provisions. Since 1959, ISDS has been incorporated into more than 3,000 bilateral investment agreements worldwide.

So if ISDS is such a standard practice and has been for such a long time, why has it caught so much attention in the media lately? The widely covered mega-negotiations for the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership have been raising ISDS’s public profile both in the U.S. and in Europe – raising a substantial political and public backlash.

Rashish also points at high-profile cases such as the Vattenfall case in Germany and Phillip Morris International in Australia, which have generated public outrage. Even though the chances of these companies actually winning their ISDS cases are statistically very slim, the fear exists that countries will be led preemptively to avoid passing certain legislation. While a country must pay compensation if it loses an ISDS case, it cannot be compelled to change its laws.

As a second explanation, Rashish touches on the broader issue governments face when dealing with trade and investment agreements – especially in the EU and the U.S. – namely the difficulty in communicating the gains from trade deals to the public at large. As ASP has written before, trade authorities in Europe are having a hard time debunking some of the myths that surround the TTIP negotiations, including ISDS.

In the U.S., some believe that TPP will lead to unfair competition from lower-wage, lower-standard countries in Southeast Asia, even though TPP has some of the highest standards to have ever been negotiated on in a trade agreement. “ISDS is portrayed by its opponents in the U.S. and Europe as yet another apparent purveyor of losses – in this case as an attempt by private corporations to use trade agreements to overrule governments’ sovereign prerogative to protect their people.

“The problem according to Rashish: “What is missing from this view is a reasoned appreciation of the opportunities that trade liberalization in general and ISDS in particular can offer to the economies involved in TTP and TTIP.”

So what does ISDS have to offer? “In today’s world, companies invest in foreign markets in order to be close to their customers and partners, to participate in global value chains, and to tap talent wherever it may exist – and in the process boost innovation, create jobs at home, and contribute to domestic economic growth.” Investors take an extra risk when investing in less well-known foreign markets, particularly when these countries are lacking a long history of independent judiciary. But even in countries with a strong tradition of the rule of law, local courts are not always equipped to enforce all the provisions of an investment treaty.

It is important for our investors to have guaranteed and fair legal recourse in the countries they invest in. The same principle works the other way around, too. In TPP and TTIP, the negotiating partners have the opportunity to reshape ISDS to set a benchmark for all future trade agreements around the world – and take away many of the dangers that the public associates it with. ISDS, as Rashish writes, is not set in stone. “TPP and TTIP can serve as the proving grounds for such an updated ISDS that should help to increase public confidence in investor protection agreements specifically and trade liberalization more broadly.”

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