Tide turns on investor treaties

The winds of change are blowing against trade and investment treaties that contain the investor-sue-the-state system, which is now described as “toxic” by Western politicians and media.

by Martin Khor

The tide is turning against the controversial system in which foreign companies are allowed to sue governments of their host countries in a foreign court for millions or billions of dollars.

At first it was the developing countries that started to rebel against the system, known as investor-state dispute settlement (ISDS), which is embedded within bilateral investment treaties (BITs) or in free trade agreements (FTAs).

South Africa, Indonesia and Bolivia have withdrawn from the BITs they signed with other countries, following cases taken against them by multinational companies that made claims of up to $3 billion, in the case of Indonesia versus a British oil company.

Other developing countries are reviewing their BITs or weighing whether to sign up to FTAs they are negotiating that contain the ISDS system.

It is a matter of time before many of them decide to pull out or give notice that they are allowing existing BITs to expire without being renewed.

Developed-country opposition

More surprising is that the disquiet against ISDS has spread to prominent developed countries, their institutions and establishment media.

The German government shocked Europe when it announced it would not sign up to a free trade agreement that the European Commission had concluded with Canada on behalf of the 28 European Union states because it contains the ISDS system. It is inconceivable that the FTA can take effect if Europe’s biggest economy refuses to be part of it. 

Germany has also made clear it does not want the ISDS system to be inside the Transatlantic Trade and Investment Partnership (TTIP) that the European Commission is negotiating with the United States.

This is a remarkable turnaround since Germany has been one of the main advocates of BITs. One reason for this is that two cases have been brought against the country by a Swedish company claiming many billions of euros of lost profits because of new German policies to phase out nuclear power and to tighten emissions regulations in power plants. That the country’s environmental policies are being challenged in such an audacious way, and that this is made possible by a skewed ISDS system, outraged the public, the parliament and the government.

Germany was not the first developed country to turn around. A few years ago, Australia decided not to enter any new BITs or FTAs that contain ISDS, after its government was sued for billions of dollars by Philip Morris for its policy requiring minimum display of corporate logos on cigarette packages. The new Australian government has since watered down this ban by considering membership of FTAs with ISDS on a case-by-case basis.

Meanwhile, two of the new top officials of the European Commission, the President and the Trade Commissioner, both made known their scepticism if not opposition to ISDS when they took office a few weeks ago. The Trade Commissioner even called ISDS “toxic”. Both officials hinted that they would make it difficult for future EU trade deals to contain ISDS.

The new EC leaders were partly responding to the European Parliament, many of whose members are strongly opposed to having ISDS in the TTIP. 

European non-governmental organizations are also up in arms against ISDS, accusing the international tribunals that hear the cases of being heavily biased in favour of investors and against the states, and also of being riddled with conflict-of-interest situations.

The same 10 to 20 law firms act as lawyers in some cases and as arbitrators in others. In one case, the chair of a tribunal that ruled against Argentina was later found to be a board member of the parent company of the firm that sued and won. Yet a review panel ruled that the decision would remain and that there was no need for the case to be heard again by another panel.

Another blow against the ISDS system came when the Secretary-General of the OECD, the club of developed countries, wrote an opinion piece on the “increasing problems” of the investment treaties.

Then the Financial Times and The Economist, the two most prominent pro-free enterprise newspapers in the Western world, also joined in the onslaught against BITs. The FT even published a full-page article on what it headlined as “toxic deals.”

The winds of change were also evident when many governments and organizations spoke in favour of urgent reform of the whole ISDS system at the World Investment Forum organized by the UN Conference on Trade and Development in Geneva in October.

The criticisms against ISDS include that the provisions of the treaties are problematic, the arbitration system is biased and flawed, and that national laws, parliaments and government policies are being seriously undermined by allowing foreign investors to bypass them by taking up cases in international tribunals that do not take account of the national laws when making their decisions.                                                     

Martin Khor is Executive Director of the South Centre, an intergovernmental policy think-tank of developing countries, and former Director of the Third World Network. This article first appeared in The Star (Malaysia) (24 November 2014).

Third World Economics, Issue No. 581, 16-30 Nov 2014, pp2-3