The Investor-State Dispute Settlement Provision in the Trans-Pacific Partnership: Not the Death Knell Critics Are Looking For

Michael Pucci, Vol. 37 Associate Editor

A little over a year before handing over the keys to the White House to his successor, President Obama finds himself in a peculiar position: he may have to rely primarily on Republican support for one of his last major legislative initiatives. After years of negotiations, the United States and eleven Pacific Rim countries concluded the Trans-Pacific Partnership (“TPP”), a trade agreement that is a “capstone [to Obama’s] economic agenda to expand exports and of his foreign policy ‘rebalance’ toward closer relations with fast-growing eastern Asia.”[1] Now Congress will have its say on that matter. Earlier this summer, the Senate approved fast-track authority for the TPP, ensuring that Congress will have an up-or-down vote free from a Senate filibuster or any amendments.[2] 

Notwithstanding this favorable procedural posture, the TPP still faces significant resistance in Congress, particularly over its Investor-State Dispute Settlement (“ISDS”) provision which allows private corporations  “the right to bring a claim in international arbitration autonomously . . . against host country governments that allegedly violate those rules” thus allowing corporations the ability to bring “a public international law ‘dispute’ . . . to be settled by an international arbitration tribunal outside the jurisdiction of the host country.”[3] Indeed, “[g]ranting a private party the right to bring an action in an international tribunal against a sovereign state with respect to an investment dispute was once a revolutionary innovation that now seems to be taken for granted.”[4] However, critics argue that multinational corporations ought not to have the ability to effectively control a foreign nation’s policy through an arbitration process or for an international tribunal to have a binding effect over a nation’s domestic law.[5]

ISDS provisions are not new. In fact, about 3,000 international treaties—mostly Bilateral Investment Treaties, but also trade agreements—include a mechanism for corporations to sue nations.[6] Such provisions have been exercised nearly 550 times, mostly against developing countries.[7] Venezuela, for example, was forced to pay $455 million dollars to a multinational corporation when the government nationalized two of company’s plants in the country.[8] According to the Office of the United States Trades Representative (“USTR”), the U.S. is currently a party to fifty agreements that include ISDS, but no foreign investor has ever successfully pursued arbitration against it.[9]

While critics of ISDS may rightfully point to concerns of its potential abuse, its historical use paints a different picture. As the USTR points out, no corporation has ever successfully sued the U.S. ISDS provisions have not caused the United States to alter its public policy decisions or crippled its ability to regulate industries in the past, and there is no indication why its inclusion in the TPP is any different. Absent any such reason, history should allay the concerns that private corporations will have an undue ability to affect domestic policy decisions or to dismantle regulatory regimes.

Although not perfect, critics also fail to realize the benefits of ISDS. Most significantly, ISDS incentives investment and trade by ensuring the property rights of corporations: that a country will not seize its property without compensation. A neutral, legal framework ensures that corporations and investors can seek redress if the substantive rights a host nation granted them have been violated. ISDS provides that foreign and domestic investors will have equal access to enforce their rights and provides an “effective, swift and independent way to implement and enforce commitments in [international agreements], not least as in many legal regimes the international public law commitments in these agreements cannot be directly enforced in domestic courts.”[10] Rather than subverting national interests, ISDS provisions are an enforcement mechanism for rights and protections that a country agrees to provide foreign investors because, “[w]ithout ISDS, investors have very limited and unreliable means to protect their investment and business activities” and may, therefore, be reluctant to take on the risk of investing or trading with a foreign government without such protections.[11]  ISDS merely assures that everyone, including nations, is playing by the rules to which they agreed.

ISDS’s historical use and the many benefits it provides in facilitating international investment and trade make it an element of the TPP which should not cause its demise. Rather, Congress should look at what ISDS does: provide an incentive for corporations to do business in the U.S. by ensuring that they have a means to enforce the protections which the U.S. says it will. If the U.S. intends to abide by that to which it agrees, there should be no reason to worry about ISDS.  If the TPP’s substantive provisions are palatable, why worry about enforcing them?


[1] Jackie Calmes, Trans-Partnership is Reached, but Faces Scrutiny in Congress, N.Y. Times (Oct. 5, 2015), http://www.nytimes.com/2015/10/06/business/trans-pacific-partnership-trade-deal-is-reached.html.

[2] Alexander Bolton, Senate Approves Fast-Track, Sending Trade Bill to White House, The Hill (Jun. 24, 2015), http://thehill.com/homenews/senate/246035-senate-approves-fast-track-sending-trade-bill-to-white-house.

[3] Jeswald W. Salacuse, Is There a Better Way? Alternative Methods of Treaty-Based, Investor-State Dispute Resolution, 31 Fordham Intl’l L.J. 138, 139 (2007).

[4] Id. at 144.

[5]Henry Farrel, People are freaking out about the Trans Pacific Partnership’s investor dispute settlement system. Why should you care?, Wash. Post (Mar. 26, 2015), https://www.washingtonpost.com/blogs/monkey-cage/wp/2015/03/26/people-are-freaking-out-about-the-trans-pacific-partnerships-investor-dispute-settlement-system-why-should-you-care.

[6] Id.

[7] Id.

[8] Id.

[9] Office of the United States Trade Representative, Investor-State Dispute Settlement (ISDS) Fact Sheet (2015), https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2015/march/investor-state-dispute-settlement-isds.

[10] Business and Industry Advisory Committee to the Organization for Economic Co-operation and Development, Investor-State Dispute Settlement: An Indispensable Element of Investment Protection (2015), http://www.investmentpolicycentral.com/sites/g/files/g798796/f/201502/BIAC%20FIN%2015-01%20ISDS%20paper.pdf.

[11] Id.