May 2015

The rules for settling disputes between corporations and states come from an earlier era. Is it time for reform?

In the post-World War II era of decolonization and economic nationalism, one of the big risks in foreign investment was the danger that one’s capital would be seized by an ex-colonial power. In response, treaties and judicial venues were set up to try to redress corporate grievances against often quite hostile states. 

Things are quite different today, however. The Cato Institute’s Simon Lester writes our lead essay this month, and he argues that the danger of expropriation has subsided - but that a new one has taken its place. Nowadays governments are more likely to be too favorable to corporations, with unclear but probably inefficient and unfair results, in a world where supply chains routinely span the globe, and where corporations can shop around for favorable treatment. He suggests that it’s time to take a second look at the way that investor-state disputes are resolved, in light of radically different conditions in international trade today.

Joining him to discuss this month will be international trade adviser Ingrid Persson, international trade lawyer Ambassador John K. Veroneau, and Associate Professor of Law Jason Yackee. Each will have a response essay over the course of the coming week. We also welcome your comments, whether here or elsewhere.

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Lead Essay

  • Simon Lester says that the rules for international investment dispute resolution are outdated - and they’re hurting global trade. When the rules were first written, the big danger seemed to be from government expropriation, for socialist or economic nationalist reasons. This made corporations reluctant to invest in the developing world. But now, the same legal regime that once protected them is being used increasingly to win treatment for corporations that is actually too favorable, at least for corporations that are particularly adept at this type of rent seeking. Lester suggests we re-examine the rules and their consequences to improve them for an era when supply chains literally span the globe.

Response Essays

  • In a wide-ranging dissent, John K. Veroneau argues for the continued importance of investor-state dispute settlement. Economic nationalism is alive and well, he writes, and it is found today in non-tariff barriers and subsidies. Leaving disputes to be settled between states also leaves states less answerable to the private sector; this is inherently dangerous, because on many issues, states face incentives that may lead them to act in ways that do not align with the best interests of their citizens. And while “fair and equitable treatment” may be a vague standard of adjudication, it is not unprecedented, and it does not exist in a vacuum.

  • Ingrid Persson says libertarians should welcome investor-state dispute settlement because it protects property rights, with good consequences all around. The worldwide decline in outright expropriation of foreign investment capital is, she says, a direct result of previous decades’ ISDS agreements, and of the good normative work they have done. Repealing these regimes would therefore be inadvisable. Indeed, we should move in the opposite direction and protect property rights still further. This is a goal that libertarians should constantly strive for; it is highly consistent with libertarian values, and ISDS has an important ongoing role to play in the process.

  • Jason Yackee argues that the TPP and TTIP trade agreements don’t need investor-state dispute settlement and would be better off without it. Empirical evidence is mixed about whether ISDS encourages investors to invest abroad. They may or may not even know that it exists, or in what cases it can be of help. Making use of it is costly, investors lose most of their cases, and they rarely win anything like the damages they sought. Both expropriation and gunboat diplomacy are increasingly relics in the modern world, and it would be a mistake to legislate defensively against them. The costs of ISDS seem likely to rise as it is implemented more widely, but its benefits remain elusive.

Coming Up

Discussion to follow through the end of the month.

Related at Cato

Capitol Hill Briefing: “TPA, TPP, TTIP, and You: When Will We Enjoy the Fruits of the U.S. Trade Agenda?” with Simon Lester and Dan Ikenson, March 7, 2014

Conference: “The Investor-State Dispute Settlement Mechanism: An Examination of Benefits and Costs,” May 20, 2014

Article: “Rethinking the International Investment Law System,” by Simon Lester, Journal of World Trade, 2015