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Should corporations be able to sue foreign governments? The U.S. could owe billions.

- November 3, 2016
A banner reads “Thank you — stop CETA” (EU-Canada Comprehensive Economic and Trade Agreement) on the facade of the Walloon parliament building in Namur, Belgium. (Nicolas Lambert/AFP/Getty Images)

Should multinational corporations be able to sue other countries’ governments, including the U.S. government? The current international Investor-State Dispute Settlement (ISDS) system allows multinational corporations to pursue international arbitration when they believe a foreign government has violated their property rights. Thousands of international treaties, including NAFTA and now the Trans-Pacific Partnership (TPP), enable ISDS. Giving special rights to multinational corporations under international law is controversial, to say the least. Even in the United States, the system is under pressure, although U.S. multinational corporations have sued foreign governments more than corporations from any other country.

[interstitial_link url=”https://www.washingtonpost.com/news/monkey-cage/wp/2015/11/30/investors-have-controversial-new-rights-to-sue-countries-heres-why-this-matters-for-the-u-s/”]Investors have controversial new rights to sue countries. Here’s why this matters for the U.S.[/interstitial_link]

The TPP doubles down on ISDS. Is that reason enough for the United States to reject the TPP? The well-known economist Tyler Cowen says, “No.” According to Cowen, “large and powerful countries” like the United States don’t have too much to worry about when it comes to ISDS, and the United States could renegotiate the TPP if downsides become apparent.

We can’t tell you whether the United States should accept the TPP. However, we think that Cowen’s case in favor of TPP rests on some major misperceptions. As scholars who do research on ISDS, we believe that the following issues are key to any analysis of TPP. First, under TPP, the U.S. government could eventually owe millions or billions of dollars directly to a foreign multinational corporation. Second, governments and interest groups have less power than usual under ISDS. Third, leaving a treaty is harder than it sounds.

[interstitial_link url=”https://www.washingtonpost.com/news/monkey-cage/wp/2015/11/30/investors-have-controversial-new-rights-to-sue-countries-heres-why-this-matters-for-the-u-s/”]Why do people hate ISDS and why does it matter?[/interstitial_link]

The U.S. could owe millions — or billions — to a foreign multinational corporation

When a foreign multinational corporation sues a government, the state wins about 38 percent of the time, the parties settle about 33 percent, and the investor wins an award in about 29 percent. Half of public awards are for $16 million or more, and a handful of awards are for $1 billion or more. (For more information on trends, see here.)

Unsurprisingly, there is often public outrage when governments are forced to pay taxpayer dollars directly to private, foreign multinational corporations. Backlash against ISDS has led eight countries so far to withdraw from some enabling treaties. ISDS cases have shaped political campaigns — and gotten governments voted out of office — around the world.

True, the United States has not lost any of the 13 cases brought against it thus far. But it is risky to bet that the United States will always win. Now, TransCanada, the Canadian corporation that was supposed to build the Keystone Pipeline, has sued the United States for $15 billion, under the terms of NAFTA’s ISDS chapter. If the United States loses this case, or another one in the future, it will likely lead to public backlash.

Governments and interest groups have less power than usual under ISDS — and multinational corporations have more

The special rights available to multinational corporations under ISDS are not available to other firms — for example, businesses that are just exporting their products to another country rather than investing in it. Problems with exports and imports are treated as trade issues, which means that only governments can sue other governments at the World Trade Organization or via other trade treaties. This means a firm with a problem has to petition its national government to file a case on its behalf. That’s why disputes over Chinese steel exports are between the United States and China, not a particular steel firm and China. Moreover, the government that loses a trade dispute doesn’t owe a cash award to the foreign firm that had the problem.

Despite heated political rhetoric, especially in this campaign season, the United States does not start an official trade dispute with China (or any other country) every time a U.S. exporter has a problem. That would be bad politics. But under ISDS, U.S. multinational corporations can file cases whenever they want. That means the U.S. government can’t filter cases, and diplomats can be sucked into disputes that they might prefer not to be involved in.

Furthermore, other interested parties can’t sue governments under ISDS. TPP allows violations of labor and environment provisions to be enforced as trade violations — which means that an environmental group would have to persuade its government to formally accuse another government of violating the Convention on Illegal Trafficking of Endangered Species, which is wholly subsumed in the TPP. Democratic vice-presidential nominee Tim Kaine has suggested giving interest groups the same kind of power as multinational corporations. But this could easily worsen another problem that concerns Cowen: excessive litigation.

[interstitial_link url=”https://www.washingtonpost.com/news/monkey-cage/wp/2016/08/02/yes-the-tpp-agreement-is-over-5000-pages-long-heres-why-thats-a-good-thing/”]The TPP agreement is over 5,000 pages long. Here’s why that’s a good thing[/interstitial_link]

Governments can’t just walk away from treaties

So what if the United States gets sued too much, or U.S. multinational corporations use ISDS in ways that diplomats don’t like? Why can’t the United States ratify the TPP and then walk away later if it doesn’t like its terms? In fact, that’s very difficult.

In a forthcoming article in Global Policy, we document that even governments vehemently opposed to ISDS haven’t fully withdrawn from the system. That’s because withdrawal from treaties with ISDS is hard. Crucially, most treaties have “sunset clauses,” meaning that the treaty remains in force for some time (often for a decade) after one party terminates it. Governments like Ecuador and Indonesia that have withdrawn from treaties see an increase in ISDS cases against them, because foreign multinational corporations scramble to file ISDS cases while they still can. Renegotiating treaties is difficult, too — because renegotiation requires agreement from all parties.

Large and powerful countries like the United States do have an advantage when it comes to writing treaties, and today’s ISDS-enabling treaties contain new transparency and flexibility provisions as a result. U.S. negotiators got much of what they wanted into the TPP. Australia pushed for a provision in the TPP that specifically says tobacco companies cannot sue under ISDS. Their negotiators were responding to an ISDS case by Philip Morris which claimed that Australia’s “plain packaging” law, which required that cigarettes be sold in plain packets, violated their investment rights. Australia eventually won that case — but it delayed regulations and roiled domestic politics in the meantime.

Is ISDS reason enough to reject the TPP?

So is ISDS so bad that the United States should reject the TPP because of it? Cowen says no, because it’s been a “largely unobjectionable part of the status quo for some time.” That’s an easy position to take in a country that hasn’t lost an ISDS case yet.

An alternative perspective might point to the political difficulties that TPP is encountering, and argue that it suggests that attaching ISDS provisions to trade deals is likely to weaken the coalitions for these deals rather than strengthening them. ISDS provisions reduce the TPP’s appeal for important groups that might otherwise like the TPP’s progress on labor, environment, and a variety of other issue areas (including freer trade). This is true outside the U.S. too — the E.U.’s trade deal with Canada nearly foundered in mid-October because of localized opposition to ISDS, and it was only saved when negotiators agreed to refer the ISDS provisions to the European Court of Justice. Special rules that advantage foreign multinational corporations over domestic interests are arguably becoming increasingly politically unsustainable, in ways that may have long-term consequences for trade and globalization.

Clint Peinhardt is associate professor of political science, public policy and political economy at the University of Texas at Dallas. Rachel Wellhausen is assistant professor of government at the University of Texas at Austin.