[A2k] Economist: A better way to arbitrate

Thiru Balasubramaniam thiru at keionline.org
Thu Oct 9 23:39:30 PDT 2014


*Free-trade agreements*

*A better way to arbitrate*

*Protections for foreign investors are not the horror critics claim, but
they could be improved*

The Economist

By Staff Writers

October 11, 2014

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

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.

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