The Shadow Courts That Rule Global Trade - WhoWhatWhy

The Shadow Courts That Rule Global Trade

How Secret Tribunals Have Shifted the Balance of Global Trade Power

TPP, TTIP, Investor State Dispute Settlement
Photo credit: Adapted by WhoWhatWhy from hand shake (UNIDO / Flickr - CC BY 2.0) and map (Clker-Free-Vector-Images / Pixabay)
Reading Time: 14 minutes

A little-known provision, embedded in almost all global trade deals, grants corporations more power than sovereign states. Journalist Haley Sweetland Edwards explains to WhoWhatWhy’s Jeff Schectman how a shadowy scheme known as the Investor State Dispute Settlement (ISDS) tribunals exists outside of the World Trade Organization and allows corporations to extract payments for government policies that should be a matter of national sovereignty.

This provision, which has its origins innocently enough in agreements going back to the 1950s, is now the basis of almost 700 lawsuit by corporations against nations.


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Jeff Schechtman: Welcome to Radio Whowhatwhy. I’m Jeff Schechtman.

There’s so much talk about trade and trade deals in this election cycle that it’s almost painful. Some might want to cover their ears or just tune out another recitation about NAFTA or TPP or jobs that may or may not have been lost. However, there is a single issue buried deep inside the often superficial discussion. One that’s worth sitting up and taking notice. That is the legal underpinnings of many of these deals, the mechanism by which corporations often have more power than sovereign states, including the U.S., and the structure by which a shadowy scheme of trade courts known as the Investors State Dispute Settlement Tribunals represent a major shift in global power away from government and towards corporations. We’re going to talk about this today with my guest, journalist Haley Sweetland Edwards. Haley Sweetland Edwards is a national correspondent, she previously was an editor at the Washington Monthly, she’s lived and worked in the Middle East and the former Soviet Union, she’s written for such publications as the Atlantic, the New Republic Foreign Policy. She studied philosophy at Yale and journalism at Columbia’s Graduate School of Journalism and it is my pleasure to welcome Haley Sweetland Edwards to talk about shadow courts, the tribunals that rule global trade. Haley, thanks so much for joining us on Radio Whowhatwhy.

Haley Sweetland Edwards: Thank you so much for having me.

Jeff Schechtman: This idea of these investor state dispute settlement tribunals, this was something that was originated back in the 1950s, had a very different reason for being then. Talk a little bit about its origin back then.

Haley Sweetland Edwards: Right. Europeans and Americans started discussing this back in the wake of World War II. The idea was to protect European and American investors, corporations that were sort of beginning to build oil fields and factories in the developing world. Sort of the beginning wave of what would become globalization as we know it today. And at that time, the world was just a very different place. You had a lot of nationalist leaders coming to power, a lot of Communist regimes rising up around the world, and you had expropriation as a major problem, where governments would just come in and take over oil fields or take over factories and that would be it. The investors would be out of luck. So this tribunal system came of aid during that period and the idea was to protect foreign investors, to protect their property in foreign countries so they didn’t have to use those countries’ court systems.

Jeff Schechtman: Why did this scheme evolve separate and apart from the fundamental dispute resolution mechanism through the World Trade Organization, the way it worked with respect to nations suing nations.

Haley Sweetland Edwards: That’s a really important point. These are two parallel tracks. When we talk about these investor state dispute settlement tribunals, we’re really talking about investment; we’re talking about private property, corporations and private investors. On the other side of this is trade as we know it, as we think of it, and that’s the World Trade Organization, the dispute settlement body and in all of that area it is sovereign nations versus sovereign nations. So at the World Trade Organization, you can only ever have, say the government of Canada going against the government of the United States. Over here in these shadow courts, in these investor state dispute settlement courts, you actually have private corporations going against sovereign nations. So you might have a corporation in Canada actually using this binding arbitration to challenge the sovereign nation of the United States.

Jeff Schechtman: When did this really start to gear up? When did it begin? When were the first lawsuits brought by corporations within the framework of ISDS?

Haley Sweetland Edwards: The first challenges were in the late ‘60s and early ‘70s. This provision started appearing in trade agreements in bilateral investment treaties in the late ‘50s. And you just saw this flow ratcheting up. There weren’t very many cases, there was an occasional challenge, maybe one a year, one every few years from about 1960 up until the mid-1990s. And then all of a sudden we saw an explosion. We saw in the last fifteen years, there have been about 650 claims. In the entire time that this mechanism existed before then, there were about 50 claims total.

Jeff Schechtman: How much of that grows out of all the things that we have tried to add on to trade agreements in the areas of environment, human rights, copyright protection, as the agreements themselves have become more complex has it set the stage for more disputes under this mechanism?

Haley Sweetland Edwards: Those two things are actually kind of unrelated. These trade agreements have gotten enormously complicated, they’re no longer about tariffs and quotas in the way that they were 40 years ago. Now they’re about the trafficking of exotic animals and the trafficking of humans and labor laws and all kinds of things, intellectual property, things that wouldn’t have existed in trade agreements, even 30 years ago, 25 years ago. So we have seen those change a lot, but again that’s all in one category and all of those disputes go under the World Trade Organization Dispute Settlement Body. This mechanism, this investor state dispute settlement, is again its own thing and that’s where just corporations are challenging sovereign nations or their property rights.

Jeff Schechtman: What about in situations where private investors’ interests are directly impacted by some of these other issues and Keystone, which you talk about, and the lawsuit from TransCanada and I’d like you to expand on that, but that arguably is impacted by the environmental issues that surround it as well.

Haley Sweetland Edwards: Absolutely, absolutely. So in that case, you have TransCanada, which is the company that would have built the Keystone XL pipeline in the United States. They made certain investments in figuring out where that pipeline would go and lobbying the government to have it built, things like that. So they laid down investment basically and when President Obama decided last November to cancel that project, to cancel the Keystone XL pipeline, three months later, TransCanada, again a private Canadian company used this mechanism, Investor State Dispute Settlement, under NAFTA to demand binding arbitration with the United States government. And we don’t know exactly what the grounds of the dispute is yet, it hasn’t been made public. But in the past, these cases have been brought on the grounds of lost future profits, so TransCanada could say: “President Obama’s decision essentially expropriated our future profits.”

Jeff Schechtman: How transparent is this process of dispute resolution?

Haley Sweetland Edwards: Not very. It’s getting more so. For years and years, you didn’t even have to disclose that a dispute was occurring, so I mentioned before there have been more than 700 claims; those are the 700 claims that we know about and that’s an important caveat because there could have been twice that many, three times as many. We have no idea. In almost every bilateral investment treaty and free trade agreement up until really the early 2000s, maybe 10 years ago, even the mere fact that these disputes were occurring was private, was behind closed doors. No obligation to make them public. Beginning in about 2004, there have been transparency measures injected into them and they’ve gotten more transparent as time has gone on but a lot of these existing bilateral investment treaties are still on the book, totally un-transparent.

Jeff Schechtman: Where did these courts, these tribunals reside and who are the players? Where do the players emerge from, that are the arbitrators, that are the judges in these situations?

Haley Sweetland Edwards: The best way to understand this is to think about it in terms of corporate arbitration. So in those cases, two corporations, two private companies would determine that they were to have binding arbitration in case of a dispute. In those cases, each party appoints an arbitrator and then they agree on a third and they meet wherever. They’ll meet in a boardroom, they’ll meet in a private building in a rented room, and they’ll determine the outcome of the two private corporations’ dispute. And that is exactly, more or less, how investors state dispute settlement works except for the profound difference is that we’re not dealing with two private companies. We’re dealing with one sovereign nation and one private company. And this is an extraordinary point because it’s really the only mechanism that exists on the international face that has anything even remotely similar to that. John Roberts, the chief justice of the United States Supreme Court pointed this out in a recent decision from 2014; he just pointed out that this is really extraordinary. It’s unprecedented, and the fact that we would allow a binding arbitration, that our government would submit to binding arbitration with a private company is unprecedented.

Jeff Schechtman: Why has this been allowed to continue to be a part of these international trade agreements? I mean, clearly, as we talked about, this has been going on for a long time and even in something like TPP, the most current, the most modern of all the trade agreements, it’s still part of it.

Haley Sweetland Edwards: Right, so this is actually a great discussion that’s happening in D.C. right now. You have so much opposition to this coming from both sides of the ideological spectrum. You have the Tea Party group who are very suspicious of these tribunals because they are an imposition on U.S. sovereignty. You have the Libertarian free market folks at Cato Institute and elsewhere who are worried about it for different reasons. I mean they see it as a basically taxpayer subsidy for outsourcing. And then you have people on the left. You have Elizabeth Warren and Bernie Sanders who are deeply concerned about it because it allows foreign corporations to challenge public regulations here in the United States and then the last sort of corner of this is you have more established Democrats like Tim Kane who have also expressed concern about what this does. So the question of course is what you said, why do we still have this thing? And I think that some explanation for it is that it’s still really new. I mean as I said, for the first 50 years of its existence, it was basically never used. It was a curiosity on the international legal stage, if anything. And suddenly in the 1990s or late-1990s, early-2000s, you see this explosion of new cases. People are just beginning to wrap their minds around the possibility that these tribunals have and it’s so complicated and so hard to pass a multilateral investment treaty like TPP that there’s this very real sense of let’s not rock the boat. Let’s not take out anything that has existed in previous treaties and let’s not put in anything new. I think that’s part of it.

Jeff Schechtman: Talk about it though, from an international perspective because while we talk about the imposition on U.S. sovereignty, this is also something that affects the sovereignty of other nations that are part of trade agreements and other countries, be they Argentina or other nations around the world have been sued under this agreement by corporations. Talk about that part of it.

Haley Sweetland Edwards: This is a fascinating time to be studying this issue because we are seeing this backlash, not only from the Ecuadors and the Argentinas and countries that have had problems with their judicial systems and with the way that they are treating foreign investors on their soil, but also from countries like Australia, where we have a robust democracy with a complex regulatory system. Just about a few years ago, they passed a public health law that was designed to restrict smoking in the country and Phillip Morris, the massive tobacco company used this mechanism, Investor State Dispute Settlement, through a bilateral investment treaty that Australia had had with Hong Kong, used this mechanism to challenge that public health law. And Phillip Morris’ argument was by restricting consumers’ access basically to tobacco advertising and the packaging on cigarette boxes and things, that regulation was expropriating the intellectual property of Phillip Morris. And you see cases like that, and that one actually: the tribunal ended up deciding in favor of the government but it’s cases like that that you see happening all over the world, cropping up here and there, and there are these extraordinary gray areas where suddenly – just recently, another case that I talk about: it was a long standing case in Ecuador about environmental degradation as a result of an oil well, originally Texaco, became Chevron. It worked its way all the way up to the Ecuadorian court. The highest court in Ecuador decided that Chevron had to pay damages, and Chevron used this mechanism: used Investor State Dispute Settlement to challenge the decision from the highest court in Ecuador and the decision was overturned. Now Chevron no longer has to pay damages, decided by the court of this sovereign nation. So you talk about these issues and it gets really muddy and fascinating. From Chevron’s perspective, this court case was never fair in the first place, they were not given due process. But from an environmental standpoint or a human rights standpoint or even the standpoint of someone who is concerned about local rule and national sovereignty, what about the court system here in Ecuador? What about the indigenous people who would have received a payout for the environmental damage that’s in their backyard to the result of Chevron’s activities there? How does this three-person tribunal that meets in some board room on the other side of the world, in this particular case it was The Hague, why should they have more control over this than the government in Ecuador or the justice system in this sovereign nation?

Jeff Schechtman: How has the movement and the frame of reference towards corporations as having personhood and having property rights within that context, how has that impacted the way all of this is looked at?

Haley Sweetland Edwards: I think that we are in an extraordinary period right now. I think we’re probably going to look back on the last 30 years of the way that we think about corporations and the way that we think about property as just a watershed. Richard Epstein, who is a major thinker in the conservative movement, in the 1970s he came up with this idea of taking; regulatory takings. But the entire idea was that the government should pay every private citizen and every private business any time it passes a law or regulation that imposes in any way on the property of a citizen. If you think about that for even a second, it begins to balloon out of control because if the government passes a law on restricting say the amount that you can pollute in water, then suddenly how many people are negatively affected by that in terms of how they have to redo their wells or how they have to redo their businesses so that they’re polluting less in rivers and streams. And if the government was required to payout to all of those businesses and private citizens, then it would very rapidly go broke. So this idea of regulatory takings was always the extreme sense of valuing corporations and valuing property rights over everything else; over society, community, environment, public health, any other concern that you might have. And what we’re seeing now is that this intellectual idea is being seeded in these investor state dispute settlement tribunals. Where it didn’t take route in the United States, several times the Supreme Court actually decided look, we’re sympathetic to this takings idea, but it just can’t apply. We can’t have a government and honor regulatory takings. But on the international level, in these tribunals, you’re really seeing these arbitrators embrace that idea and say, hey Canada, if you want to pass a law that requires offshore drillers to contribute more to research and development, you’d better pay up. You better pay them because you’re actually expropriating what they thought would be their future profits, and that’s a real case, that happened just recently.

Jeff Schechtman: Talk about how this is being looked at in the EU and more and more pushback to the very idea of investment protections, investor protections simply being taken out of some of these trade deals.

Haley Sweetland Edwards: Yes. The backlash has been profound in a lot of places and I mentioned South America before. You’re seeing a lot of countries there that are actively backing out of bilateral investment treaties that include investor state dispute settlement. Europe has also been a major pushback place and there’s kind of two camps there. There are people in Europe who think that we should just get rid of any sort of form of investor state dispute settlement whatsoever and their argument is why would we allow corporations to challenge our country’s court systems or our country’s decisions outside of our court. And that’s an important point, so just a side-note. If you’re a foreign investor operating in Germany and Germany acts in a way that you believe is unfair, you can sue the government of Germany through German court just like everyone else. Just like a German company might be able to do that or just like a human rights activist in Germany might be able to do. The German courts exist and are robust and respected, so it’s not as if you lose all judicial channels if you don’t have access to this tribunal. So that’s kind of the argument from one portion of these European detractors who say what is the point of this in the first place? And then you have another side, more institutional and you have the EU Parliament come out with a proposal that basically took aspects of investor state dispute settlement tribunals and then institutionalized them, so put them into a situation where judges would be not appointed willy-nilly, they would be vetted, they would have longer appointments, they wouldn’t just be private arbitrators, often corporate lawyers rising up and making these decisions. They would also put in place an appellate at court, so if a tribunal made a decision that either party deeply disagreed with, there would be a mechanism that you could take that to an appeals board of some sort, so this new court: ICS is what they’re calling it, is also on the table and was included in a few recent new free-trade agreements like the EU-Canada Free Trade Agreement. It includes this new institutionalized version of investor state dispute settlement.

Jeff Schechtman: Is there any sense of corporations actually pushing actively for this to continue? Is this something that exists because of inertia as we talked about at the outset, or is there really corporate effort to keep this institutionalized in some way in these trade agreements, and what would be any different from a corporate perspective, from an investor perspective, if they were gone?

Haley Sweetland Edwards: There is an active push. From a corporate perspective, they have only to gain from ISDS. They don’t have to use the mechanism if they don’t want to and it provides an additional avenue of judicial remedy should they want it. So from any multinational corporation’s perspective, they want ISDS, of course and you see that happening behind the scenes in these negotiations. You see these big business groups, business round table and chamber of commerce pushing for it on behalf of their clients. So that’s another reason why it remains in these trade deals. If they didn’t have it, if they didn’t have access to it, then they would have to use the court systems of the countries where they were operating and that puts them on the same playing field as all of the domestic corporations of that country that only have that avenue as well. This could be a problem from their perspective in places like China, I mean China’s always the big elephant in the room when it comes to these discussions. They say well, if we’re going to operate in China, shouldn’t we get extra protection? We shouldn’t have to submit our dispute to some Chinese court that is going to automatically decide against a foreign corporation. And the counter argument to that – there’s a few – but one is that’s not the only option. When a corporation enters a country, they sign a contract, there’s a contractual agreement with that country and they can write into that contractual agreement on a private level, certain dispute settlement agreements. Another is that foreign direct investment is risky and this is the Libertarian Cato Institute argument: that Apple knows when it goes into China that it is taking a risk. It knows that and it chooses to take that risk anyway. Why should the taxpayers be on the hook to subsidize those risks in the future?

Jeff Schechtman: If one looks at the history of the rulings from these courts, is there any pattern? Have corporations won more than the states? Have the states won more than the corporations? Has a pattern emerged in terms of how these get resolved?

Haley Sweetland Edwards: If you look just at every single case that’s been heard, again only the ones that we know about, it’s about a 50/50 split. You see about 60% of the time, the tribunal decides in favor of corporations and 40% of the time, it’s in favor of governments. That’s after you exclude the number of cases that have been dismissed for jurisdictional reasons and whatnot. So, it does lean towards deciding in favor of corporations, but it’s not a 90/10 situation yet.

Jeff Schechtman: Haley Sweetland Edwards, her book just published by Columbia Global Reports is Shadow Courts: The Tribunals That Rule Global Trade. Haley, thanks so much for spending time with us here today on Radio WhoWhatWhy.org.

Haley Sweetland Edwards: Thank you so much for having me. It was a pleasure.

Jeff Schechtman: Thank you. Thank you for listening and joining us here on Radio WhoWhatWhy.org. I hope you join us next week for another Radio WhoWhatWhy.org podcast. I’m Jeff Schechtman.

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One response to “The Shadow Courts That Rule Global Trade”

  1. Avatar Bob Williams says:

    Critical maybe seminal interview!
    Now that ISDS and WTO Dispute Settlement Body are unmasked, we see that John Roberts, pro-Liberty and Sovereignty advocates, climate realists and Libertarians are in fact on same side.
    Therefore, ISO fresh info re TransCanada US Suit also ISDS Arbitation.