Corporate Sovereignty's Chilling Effects

from the brrrr dept

As we've noted before, corporate sovereignty -- known more formally as investor-state dispute settlement (ISDS) -- has emerged as the most contentious element of the transatlantic trade deal TAFTA/TTIP, currently being negotiated. Not only has the ISDS chapter been put on hold pending the analysis of 150,000 submissions to a consultation held on the subject, but top EU politicians continue to flip-flop nervously on the subject.

Many of the worries have been about foreign investors being able to sue governments for bringing in policies that are claimed to be an indirect "expropriation". The sums awarded under corporate sovereignty provisions can be considerable, but monetary losses are not the only threat that ISDS chapters pose. Arguably even more serious is the chilling effect they can have on a country's ability to frame and bring in future legislation. This is not a new phenomenon. The North American Free Trade Agreement, NAFTA, is 20 years old, and its Chapter 11 provides guarantees of corporate sovereignty for investors. Here's what happened in Canada as a result, according to a 2001 article in The Nation:

Carla Hills, the US Trade Representative who oversaw the NAFTA negotiations for Bush I and now heads her own trade-consulting firm, was among the very first to play this game of bump-and-run intimidation. Her corporate clients include big tobacco -- R.J. Reynolds and Philip Morris. Sixteen months after leaving office, Hills dispatched Julius Katz, her former chief deputy at USTR, to warn Ottawa to back off its proposed law to require plain packaging for cigarettes. If it didn't, Katz said, Canada would have to compensate his clients under NAFTA and the new legal doctrine [of corporate sovereignty] he and Hills had helped create. "No US multinational tobacco manufacturer or its lobbyists are going to dictate health policy in this country," the Canadian health minister vowed. Canada backed off, nevertheless.

A former government official in Ottawa told me: "I've seen the letters from the New York and DC law firms coming up to the Canadian government on virtually every new environmental regulation and proposition in the last five years. They involved dry-cleaning chemicals, pharmaceuticals, pesticides, patent law.Virtually all of the new initiatives were targeted and most of them never saw the light of day."

Canada continued to find its room for democratic action constrained by threats of ISDS action over the next decade. In 2013, Elizabeth May, a member of the Canadian Parliament, and leader of the Green Party of Canada, wrote:

I am aware of a letter warning Alan Rock when he was Health Minister that removing the registration of pesticides for use in lawns for cosmetic purposes could give rise to Chapter 11 suits, so the move was not made. We have no way of assessing the "chilling effect" of the Chapter 11 cases that Canada has lost. In my opinion, there is a compelling case that the Ethyl and S.D. Myers case [relating to attempts by Canada to introduce tougher environmental laws] have resulted in failures of the Canadian government to regulate and/or ban toxic substances that they would have in the pre-Chapter 11 era.

Here's a more recent example of ISDS's chilling effects on democratic law-making. It concerns Indonesia, which has recently decided to terminate all 67 of its bilateral investment treaties. A long and fascinating post on the Transnational Institute Web site explains what happened:

In July 2014, Newmont Mining Corporation brought a case against Indonesia using the Indonesia-Netherlands [Bilateral Investment Treaty] at the International Centre for the Settlement of Investment Disputes (ICSID). In making the legal claim, the mining giant argued that the Indonesian Government's plans to implement a ban on unprocessed mineral exports would violate the investment agreement between Indonesia and the Netherlands. The case at ICSID was presented four months after Indonesia announced it would not renew its Bilateral Investment Treaty (BIT) with the Netherlands when it expires in July 2015. After one month, Newmont withdrew its case against Indonesia but only after it had reached an agreement with the Indonesian government, giving the mining company special exemptions from the new mining law.

Although the Newmont Mining Corporation may not have liked Indonesia's decision to require mineral processing to take place domestically, rather than abroad, that policy seems a legitimate one for a government to adopt in order to stimulate its local economy and provide employment for its population. As the Transnational Institute's post notes, what's troubling here is that the mere threat of of a corporate sovereignty case was enough to extract special treatment from the Indonesian government, and the lack of transparency of how that was agreed:

It has long been argued that the impact of Bilateral Investment Treaties is not just shown in the cases brought to tribunals that rule against states' rights to regulate and protect citizens, but also in the many cases that do not make it to ICSID because states backtrack on regulation for fear of lawsuits. This is called the 'chilling' effect or regulatory chill of investment arbitration. However it is very difficult to show how the chilling effect works, because governments that backtrack in face of threats often do so without public knowledge and because agreements with corporations are made between closed doors. The case of Newmont against Indonesia however, shows the consequences that arise from a mere threat of a billion dollar claim in response to a (proposed) new policy.

The fear has to be that the more such threats are successful in "chilling" governmental plans, the more they will be made. As with threats from patent and copyright trolls, governments may well decide that it is simpler to acquiesce to demands, rather than go to the expense and trouble of fighting them in ISDS tribunals, which are a law unto themselves, with the result that their outcomes are far from predictable and potentially very costly.

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Filed Under: chilling effects, corporate sovereignty, isds, nafta, tafta, ttip