by Hannah Graunke, Summer Fellow, Office of Public Witness
As governments are scrambling to enact life-saving policies during the COVID-19 pandemic, investors and international corporations are striving to save their profits at the expense of citizens around the globe. More and more nations are taking measures to ensure adequate health care, water, and electricity for their people while lessening the economic burden of the crisis. These policies are essential. Nevertheless, investor-state dispute settlement (ISDS) clauses in many trade agreements will allow companies to sue governments for enacting such policies that interfere with their ability to collect profits.
If investors decide to pursue ISDS cases in response to COVID-related government policies, it could have catastrophic consequences, especially for low-income states. The average ISDS claim is $300 million; the average award is $120 million, and the average legal fees are an additional $5 million. For countries with small budgets, an ISDS case that costs the government millions of dollars could devastate the budget. Money set aside for health and social service programs could instead be redirected to already wealthy investors.
To illustrate this point, international corporations have recently threatened Peru with an ISDS suit because of a government decision to halt toll collections temporarily. The goal of this policy was to both contain the spread of COVID by limiting direct passenger and tollbooth employee contact and promoting essential good flow by minimizing transportation stops. However, since foreign companies operate these tollbooths and receive a portion of the revenue collection, they have the right to sue the Peruvian government under the ISDS framework.
While the World Trade Organization (WTO) oversees and publicly settles trade conflicts between states, private tribunals preside over ISDS cases. Panels of private lawyers decide the outcome, often over years of secret deliberation. While these panels may consider legal precedent when making their official decision, there are no strict requirements on what documents, past cases, or policies the lawyers must use to make their final decision. And, they are not required to take into account the needs of the most impacted community.
When states sign on to trade negotiation documents (such as NAFTA, CAFTA, or the Trans-Pacific Partnership), they commit to certain expectations. Countries frequently agree to eliminate or decrease tariffs, which are a type of tax on imported goods usually put in place to incentivize local buyers to purchase domestic products. These trade agreements also establish benefits for foreign investors, including protecting patents or physical capital, such as factories or manufacturing plants.
For example, in 2017, a tribunal found the state of Egypt responsible for damage inflicted by protestors on a U.S.-owned pipeline during the Arab Spring. Though the protests were an unprecedented event, the ISDS tribunal ruled that Egypt failed to abide by its trade agreement promise to protect foreign capital “by not providing enough police protection to the pipeline” during the protests.[i]
Most trade agreements have clauses that require “prompt, adequate, and effective” compensation for investors when a government action negatively impacts profits. If a new government policy results in revenue loss, and the government does not pay investors for the resulting decline in revenue, investors can pursue an ISDS because the state broke its trade agreement. Importantly, investors are entitled to ask for both lost current and future expected revenue. For instance, when President Obama rejected TransCanada’s construction permit for the Keystone XL pipeline to avoid future environmental degradation, the company launched a $15 billion claim for the potential profits they would have received from operating the pipeline.
In times of crisis, governments enacting life-saving domestic policies often cannot take extra time to consider foreign investors. Proving that government action is “necessary” is extremely difficult under the ISDS framework; the government must show the tribunal that its efforts were the only way to protect against a “grave and imminent peril.”[ii] Essentially, a time of emergency might not be a valid defense against these suits if investors argue that the state could have tried less extreme measures first. In the earlier example of Peru, the corporations may win their ISDS claim if they can prove that the government could have pursued less extreme measures at that time.
ISDS is a one-way judicial system: investors can sue states for enacting policies that affect revenue, but states cannot sue investors through the ISDS system for violating domestic laws or for disrespecting local norms. Investors can technically violate domestic laws yet still win an ISDS case if the tribunal decides the state negatively affected revenue. The fact that states cannot sue investors gives an incredible amount of power to investors, but this power imbalance stems from the trade agreements themselves.
The conversations around free trade have been dominated by the United States and other wealthy nations at the expense of the global South. Even the World Bank, a proponent of free and open trade, acknowledges that trade agreements have favor wealthy countries over those in the developing world.
Low-income countries often face negative environmental and agricultural consequences as a result of these international trade agreements. NAFTA allowed American companies to dump their toxic waste in Mexico because of looser local environmental standards. The low price of subsidized U.S. rice nearly eliminated local rice farming in Haiti after the signing of CAFTA, causing a food crisis following the 2010 earthquake.
As Presbyterians, we “reject any ideology or economic regime that puts profits before people, does not care for all creation and privatizes those gifts of God meant for all.”[iii] The current system was written by the wealthy to benefit the wealthy, harming the health and well-being of our most vulnerable brothers and sisters.
Hundreds of development, faith-based, and human rights groups around the world have signed a letter supporting the suspension of ISDS. While we continue to work to correct the current power imbalance when it comes to trade and economic growth, the fight for a suspension of ISDS cases during the pandemic should be our utmost priority. Governments should be able to save their citizens without fear of retribution in the name of profit.
[i] “Cashing in on the Pandemic: How Lawyers Are Preparing to Sue States over COVID-19 Response Measures,” Corporate Europe Observatory, May 18, 2020, https://corporateeurope.org/en/2020/05/cashing-pandemic-how-lawyers-are-preparing-sue-states-over-covid-19-response-measures.
[ii] “Draft Articles on Responsibility of States for Internationally Wrongful Acts, with Commentaries – 2001,” State Responsibility, n.d., 114. Pg 83.
[iii] Kelly Wilkinson, “The Accra Confession,” n.d., 13. Pg 8. https://www.pcusa.org/site_media/media/uploads/hunger/pdf/accra-confession.pdf