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ISDS: An In-Depth Look at a Crucial Part of Free Trade

ISDS: An In-Depth Look at a Crucial Part of Free Trade

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Negotiations for the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) are concluding. Final negotiating rounds will focus on the contentious issue of Investor-State Dispute Settlement, a means of settling legal disputes between foreign investors and host nations through a neutral arbitration process. Known as ISDS, this process encourages foreign investment by establishing a standardized, impartial system of arbitration designed to provide safeguards to foreign investors. Reassured by the existence of such a legal framework, corporations and other investors would be unafraid to begin operations in any country covered by the trade agreement, as the ISDS system of arbitration is more predictable and reliable than potentially biased or erratic domestic courts.

Despite the obvious value of a system designed to adjudicate legal complaints, ISDS is the basis of disagreement between the negotiating parties and criticism from observers. European Union Trade Commissioner Cecilia Malmstroem acknowledges that ISDS is the largest remaining issue in TTIP negotiations, and she explained that the US and the EU have different preferred methods for solving problems arising from investment and regulation. According to Malmstroem, European negotiators have suggested an idea for a UN-based investment court as an alternative to the traditional ISDS process that is favored by representatives from the US.

Outside criticism ranges across the ideological spectrum from suspicion of corporate favoritism to fears about loss of national sovereignty. Some opponents of the free trade agreements worry that corporations from developed countries could use ISDS to prevent partner states from adopting health and safety regulations intended to modernize developing economies; others are afraid that an international judicial process could require taxpayer-funded payments to foreign corporations.

Such fears, though, are largely overblown and result from a misunderstanding of ISDS’s role in international trade. According to a study by the United Nations Conference on Trade and Development (which can also be found through the Conference’s website), responding countries have won around 42% of published decisions as of 2012. Though in recent years corporations have been more successful than their historical average, ISDS does not serve simply as a rubber stamp to approve whatever business interests demand. Even despite the incomplete information that makes detailed analysis difficult, ISDS as currently practiced does not appear to be a markedly unfair process.

Furthermore, neither TPP nor TTIP will introduce the arbitral process of ISDS to any of the United States’ potential new trading partners. Each country in both agreements is already party to numerous trade deals that include ISDS provisions. The new trade agreements, however, will introduce some innovations to ISDS, which should only serve to increase the effectiveness of this necessary process.

TPP and TTIP will likely both include a new process for appealing arbitrators’ decisions and robust protections of individual countries’ rights to regulate, as well as requiring the most extensive public reporting process ever used in ISDS proceedings. Even without the creation of the European alternative to ISDS, reforms that are already part of the new trade deals will make the process work better. Particularly, new transparency requirements should eliminate the lack of public information that the UN report noted made examining the ISDS system unnecessarily complicated. Rachel Wellhausen, an international investment protection expert interviewed by the Washington Post, noted the positive changes TPP makes to ISDS:

“The TPP draft chapter includes some notable elements. There are clear transparency rules, requiring that all cases brought under the TPP must be public…At the same time, the TPP draft chapter specifically highlights ‘the inherent right to regulate…to protect legitimate public welfare objectives, such as public health, safety, the environment, the conservation of living or non-living exhaustible natural resources, and public morals.’”

ISDS is an important part of any trade agreement, and deserves the vigorous public debate that has accompanied its inclusion in both TPP and TTIP. Many participants in that debate, though, misconstrue the necessary role ISDS plays in a free trade agreement. ISDS is a tool to protect investors and encourage investment, and in the past has offered security to nations facing claims from foreign-based corporations. New developments promise to make the system more transparent and well-functioning than ever before, as mandatory reporting and a new process for appealing decisions bring ISDS into closer harmony to more well-known legal procedures. With these innovations for the ISDS process, TPP and TTIP will set a new standard for free trade agreements.