By Haley Sweetland Edwards
The environmental activist Jane Kleeb
was driving down Highway 281 near Lincoln, Nebraska, on a gray day in January
2016, when she got a call from a reporter.
At the time, Kleeb was still riding high
off of her success organizing local farmers, ranchers and environmentalists in
opposition to the Keystone XL Pipeline,
which would have carried petroleum products from Canada’s tar sands across the
Nebraska plains to the Gulf of Mexico.
Thanks to her and other activists’ efforts,
President Barack Obama had announced
in November 2015 that his administration would deny the Canadian company
TransCanada permission to move forward
with the project, ending an eight-year-long
effort to get the pipeline built.
The reporter was calling to ask Kleeb
about a new twist in the saga. Earlier that
day, TransCanada had announced it was
suing the US government for $15 billion
on the grounds that Obama’s decision to
block the project violated the North American Free Trade Agreement (NAFTA). It
was the first Kleeb had heard of the suit.
“I’m an organizer, so my reaction was,
‘When are the hearings? Where is this
happening? Who’s the judge?’” she said
recently. If TransCanada was challenging
the decision in court, she wanted to be
there. Could she protest on the courthouse
steps? Arrange for a rally in a nearby town?
But that, Kleeb learned, was not how
this case would go down. TransCanada
wasn’t suing the United States in a US
court, or in a Canadian court for that matter. Its argument would not be heard by
a judge, and the merits of the case would
not be considered under the auspices of
either country’s legal system. There would
be no protest on any courthouse steps.
Instead, the case would be heard by a
tribunal, manned by three private arbitrators, operating under a supranational legal
system that Kleeb had never heard of. “It
was totally strange,” she said. “A foreign
Previous page: Demonstrators protesting against
the Trans-Pacific Partnership (TPP) are seen on
Pennsylvania Avenue, near the White House,
on September 24, 2013.
company can sue us in some secret tribunal? How is that even possible?”
Investor-state dispute settlement, or
ISDS, first appeared in treaties in 1969. The
idea behind the mechanism was straightforward: If a foreign investor believed
that his host country — the nation where
his company was operating — had violated an international treaty by seizing or
destroying his factories, oil fields or other
assets, he could file an ISDS claim directly
against that country . He could do that
without involving his own government
and without having to wait endlessly for
a developing country’s corrupt or biased
court system to dispense judgment.
By filing an ISDS claim, the investor
would trigger the formation of a special
arbitration tribunal, which would exist
temporarily outside the jurisdiction of
any nation’s judiciary or any international
body. Its sole purpose would be to determine how much, if anything, the country
owed the investor in compensation for
property that had been seized or demolished. For example, in the late 1980s, the
Sri Lankan government destroyed a British seafood company’s shrimp processing
plant during a military raid on rebels.
The British investor filed an ISDS claim,
a tribunal was formed and the arbitrators
determined that the Sri Lankan government must pay the company $460,000
in compensation for the destroyed plant.
That was it. Case closed. The British company did not have to rely on Sri Lankan
courts. The episode did not become a
major diplomatic incident. The UK did
not have to step in to defend its investors’
interests.
And that was the whole point: ISDS
was supposed to be a cool, efficient and
apolitical dispute resolution system that
kept powerful nations from interfering in
the affairs of weaker countries, and that
offered an extra layer of protection for
foreign investors operating in countries
with unreliable courts. But in the last 20
years, the mechanism has quietly changed,
evolving into something much more powerful — and very political indeed.
One factor in this evolution is the
explosion of new claims. Between the
1960s and 2000, ISDS was almost never
used. Investors brought about 40 claims
total in 40 years. Since 2000, there have
30 FINANCIAL HISTORY | Fall 2016 | www.MoAF.org
been 647. In 2015 alone, there were 70 new
cases. That uptick is partly because there
are thousands more treaties today that
include ISDS.
For the last 25 years, countries have
signed thousands of bilateral investment
treaties, and beginning in the 1990s, nearly
every new trade agreement, from NAFTA
and the Central American Free Trade
Agreement to the Energy Charter, included
a chapter on investment, complete with
ISDS. In 1989, there were just a few hundred agreements that included ISDS. As of
2015, there were more than 3,000.
Another reason for the explosion of new
claims is that the definition of what it means
for a sovereign nation to seize or destroy
a foreign company’s property, or otherwise violate an investor’s property rights
under the terms of an investment treaty, has
become much more expansive. Investors
now regularly file claims if their host government passes a new law or regulation that
results in even a partial loss of a company’s
property or impinges in some way on its
future profits. For example, in TransCanada’s ISDS claim against the United States,
it argues that President Obama’s decision
to cancel the Keystone XL Pipeline violated
NAFTA by expropriating the company’s
expected future profits.
That modern interpretation has only
cropped up in the last 20 years, but it has
opened up a vast new gray area. Where
ISDS claims were once about seized oil
fields and bulldozed factories, now they
are about tax increases and environmental
regulations. Where is the line between
a government’s right to regulate in the
public interest and a foreign corporation’s
claim to its own property?
US trade negotiators are now working
to include ISDS in as many new treaties
as possible, including both of the massive new free trade deals coming down
the pike. The Trans-Pacific Partnership
(TPP), which President Obama signed in
February 2016 and which Congress will
likely ratify before he leaves office, already
includes ISDS.
Whether the mechanism will be
inserted into the Transatlantic Trade and
Investment Partnership (TTIP), linking
the United States and Europe, is a subject
of controversy. The question has already
catalyzed something of an intellectual civil