How to make free trade fairer

It’s no secret that the Biden administration is trying to orchestrate a new global trade agenda. The White House had a setback in those efforts a couple of weeks ago when the US-EU steel and aluminium talks were pushed to end of the year. But it has another chance to make good on its promise of a “postcolonial” trade system at an inaugural summit of twelve countries within the Americas, being held in Washington this week. 

The Americas Partnership for Economic Prosperity (APEP) — which includes not only the US but Barbados, Canada, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru and Uruguay — was set up to put human rights and climate change at the heart of economic policy. One of the many topics up for discussion will be the investor-state dispute settlement process, or ISDS, and its threats to those goals. 

There are many ways in which the current global trade system is designed to favour large multinational companies over countries. But ISDS is one of the most egregious. It is a very common part of free trade agreements and bilateral investment treaties, in essence allowing foreign companies investing in particular nation states to sue governments for anything that stops them making profits — including climate regulations, financial stability measures, public health policy, and any number of other areas that are typically the purview of the state.

The idea originated in the early 1990s, the era of nonstop globalisation, as a way to draw foreign investment into developing countries while also protecting rich country investors from the weak legal and governance systems in those nations. As of 2022, 1,257 ISDS cases had been launched, according to Unctad, with 18 per cent of those against APEP nations. There are 73 pending disputes in those countries, with a combined claim sum of $46.9bn. 

But the asymmetries of the system have always been stark. Only foreign investors have rights and only foreign investors can initiate claims. And claims can include not just actual losses but future ones, too.

As a new white paper co-authored by academics from Georgetown and Columbia universities, as well as trade experts from the American Economic Liberties Project, points out, “corporations rarely invoke ISDS to protect against blatant expropriation or gross denial of justice”. Instead, they have been “consistently successful in exploiting the vaguely worded provisions within ISDS-enforced trade and investment agreements” to “initiate or threaten claims against democratic measures taken in the public interest that they believe have harmed their business interests.”

Multinational airport operators have used ISDS to challenge Chile’s pandemic shutdown measures; a Canadian company has argued that mining rights should trump environmental protection measures in Colombia. Huawei has launched a case against Sweden over measures limiting its participation in 5G because of security concerns. In the US, the Keystone pipeline is the classic example. TransCanada sued the US during the Obama presidency because they weren’t allowed a permit to build, then revoked it under Trump (who allowed it) then sued again under Biden.

So ISDS is also a pain for rich countries, but their companies usually benefit. For poorer countries, it can be devastating. Actions deemed to be in the public interest (such as raising health or labour standards) can lead to billions of dollars in claims that they can’t afford to pay.

The big worry now is that such agreements could be used to prevent the clean energy transition. Fossil fuel companies and investors have filed numerous ISDS cases, totalling billions. Academics have estimated that global climate change efforts could result in $340bn of claims (the Keystone XL suit alone is for $15bn)

Given all this, it’s little wonder that a lot of countries, including the US, Canada, Mexico, some EU member states, South Africa, India, Indonesia, and Ecuador are limiting or ending future ISDS agreements and even attempting to pull out of existing ones. The USMCA trade agreement, for example, which replaced Nafta, has a provision that requires companies to exhaust all domestic remedies before resorting to ISDS.

But if President Biden were to use the APEP summit as a way to end the ISDS system multilaterally, it would make a big statement about the postcolonial trade paradigm that US trade representative Katherine Tai has been advocating: one that would put inclusive and equitable growth, rather than GDP growth alone, at the heart of a reformed trade system.

Some academics and policymakers have advocated for such a group exit as a way to alleviate the fear that investors would see individual countries leaving the system as a sign of weakness. According to Nobel laureate Joseph Stiglitz, there is little evidence that countries signing ISDS treaties saw more or better foreign direct investment than those that didn’t: “These deals just haven’t lived up to their promise.”

The white paper authors lay out a number of ways that countries, including the APEP nations, could legally exit even existing agreements. This would undoubtedly raise investor concerns about the rule of law and continuity of agreements, which could have market impact. But the deals themselves have had too many negative real world impacts. It’s time for a fairer system.

rana.foroohar@ft.com