Global Trends by Martin Khor

Monday 24 November 2015

Tide turns on investor treaties

The winds of change are blowing against trade and investment treaties that contain the investor-sue-the-state system, which is now described as “toxic” by Western politicians and media.


The tide is turning against the controversial system in which foreign companies are allowed to sue governments of their host countries in a foreign court for millions or billions of dollars.

At first it was the developing countries that started to rebel against the system, known as investor-state dispute settlement (ISDS), which is embedded within bilateral investment treaties (BITS) or in free trade agreements like the Trans Pacific Partnership Agreement.

South Africa, Indonesia and Bolivia have withdrawn from the BITS they signed with other countries, following cases taken against them by multinational companies that made claims of hundreds of millions of dollars, or up to US$3 billion, in the case of Indonesia versus a British oil company.

Other developing countries are reviewing their BITS, or weighing whether to sign up to FTAs they are negotiating that contain the ISDS system.

It is a matter of time before many of them decide to pull out, or give notice that they are allowing existing BITS to expire and not to be renewed.

More surprising is that the disquiet against ISDS has spread to prominent developed countries, their institutions and establishment media.

The German government shocked Europe when it announced it would not sign up to a free trade agreement that the European Commission had concluded with Canada on behalf of the 28 EU states because it contains the ISDS system.

It is inconceivable that the FTA can take effect if Europe’s biggest economy refuses to be part of it. 

Germany has also made clear it does not want the ISDS system to be inside the trade agreement (known as TTIP) that the European Commission is negotiating with the United States.

This is a remarkable turn-around since Germany has been one of the main advocates of the BITS. 

One reason for this is that two cases have been taken against the country by a Swedish company claiming many billions of euros of lost profits because of the German new policies to phase out nuclear power and to tighten emissions regulations in power plants.

That the country’s environmental policies are being challenged in such an audacious way, and that this is made possible by a skewed ISDS system, outraged the public, the Parliament and the government.

Germany was not the first developed country to turn around.  A few years ago, Australia decided not to enter any new BITS or FTAs that contain ISDS, after its government was sued for billions of dollars by Philip Morris for its policy requiring minimum display of corporate logos on cigarette packages.

The new Australian government has watered down this ban by considering membership of FTAs with ISDS on a case by case basis.

Meanwhile, two of the new top officials of the EC, the President and Trade Commissioner, both made known their scepticism if not opposition to the ISDS when they took office a few weeks ago.

The Trade Commissioner even called the ISDS “toxic”.   Both officials hinted that they would make it difficult for future EU trade deals to contain the ISDS.

The new EC leaders were partly responding to the European Parliament, many of whose members are strong opposed to having the ISDS in the TTIP. 

The European NGOs are also up in arms against the ISDS, accusing the international tribunals that hear the cases of being heavily biased in favour of investors and against the states, and also to be riddled with conflict of interest situations.

The same 10 to 20 law firms act as lawyers in some cases and as arbitrators in other cases. In one case, the Chair of the tribunal that ruled against Argentina was later found to be a Board member of the parent company of the firm that sued and won.  Yet the review panel ruled that the decision would remain and that there was no need for the case to be heard again by another panel.

Another blow against the ISDS system came when the Secretary-General of the OECD, the club of developed countries, wrote an opinion piece on the “increasing problems” of the investment treaties.

Then the Financial Times and the Economist, the two most prominent pro-free enterprise newspapers in the Western world, also joined in the onslaught against BITS.  The FT even published a full-page article on what it headlined as “Toxic Deals.”

The winds of change were also evident when many governments and organisations spoke in favour of urgent reform of the whole ISDS system, at the World Investment Forum organised by the UN Trade and Development Conference last month in Geneva.

The criticisms against ISDS include that the provisions of the treaties are problematic, the arbitration system is biased and flawed, and that national laws, Parliaments and government policies are being seriously undermined by allowing foreign investors to bypass them by taking up cases in international tribunals that do not take account of the national laws when making their decisions.

In Malaysia, political leaders including the Prime Minister and the Minister of Trade have voiced concerns about the ISDS in the TPPA.  It has also come under attack by NGOs and some Parliamentarians.

Whether the positive aspects of the TPPA outweigh the negative in the calculations of the policy makers and the Parliament remain to be seen.

In this analysis, the ISDS must be at the top or near the top of the list of “negatives.”

It is important that the winds of change blowing so strongly against the ISDS, including in the Western world, be taken into account when making the decisions on whether to join the TPPA and other agreements.