A Compromise to Advance the Trade Agenda: Purge Negotiations of Investor-State Dispute Settlement

Abstract

President Obama’s major trade initiatives, the Trans-Pacific Partnership, the Transatlantic Trade and Investment Partnership, and obtaining fast-track trade negotiating authority from Congress, have run into a buzz saw of opposition, which has derailed prospects for U.S. trade liberalization for the time being.

What began as the usual objections from the usual suspects — labor unions blaming trade for manufacturing decline and job loss; environmental groups blaming trade for climate change; anti-globalization activists sparing the developing world from development — has grown into a populist backlash against the TPP, which is portrayed as a secretive, corporatist plot to circumvent democratic processes and usurp national sovereignty. The nascent TTIP negotiations have been smeared with a similar taint.

Characterizations of the TPP as a scheme to boost the fortunes of tobacco, oil and gas, banking, and pharmaceutical companies at the expense of worker protections, the environment, public health, and food and product safety have gone viral. And without so much as a single public repudiation of these claims by the president those perceptions are sticking.

As is true of most populist causes, buried beneath the enabling mythology and hyperbole are some kernels of truth. One such truth, which this paper seeks to distill from the vacuous, anti-capitalist hyperventilation surrounding the trade agenda, is that the so-called Investor-State Dispute Settlement (ISDS) mechanism, which enables foreign investors to sue host governments in third-party arbitration tribunals for treatment that allegedly fails to meet certain standards and that results in a loss of asset values, is an unnecessary, unreasonable, and unwise provision to include in trade agreements. Although detractors may not know it by name, ISDS is a significant reason why trade agreements engender so much antipathy. Yet, ISDS is not even essential to the task of freeing trade. So why burden the effort by carrying needless baggage?

Purging both the TPP and the TTIP of ISDS makes sense economically and politically, would assuage legitimate concerns about those negotiations, splinter the opposition to liberalization, and pave the way for freer trade.

Keywords: TPP, TTIP, Investor-State Dispute Settlement, ISDS, foreign direct investment, national treatment obligations, discretionary outsourcing

JEL Classification: F1, F13, F4