Investor-State Dispute Settlement (ISDS) Questions and Answers

Senator Warren raises some important questions about an element of the Trans-Pacific Partnership (TPP) called Investor-State Dispute settlement, or ISDS.

There are good answers.

The purpose of investment provisions in our trade agreements is to provide American individuals and businesses who do business abroad with the same protections we provide to domestic and foreign investors alike in the United States.  

ISDS is an arbitration procedure – similar to procedures used every day by businesses, governments, and private citizens across the globe – that allows for an impartial, law-based approach to resolve conflicts and has been important to encouraging development, rule of law, and good governance around the world. ISDS does not undermine U.S. sovereignty, change U.S. law, nor grant any new substantive rights to multinational companies.  

The reality is that ISDS does not and cannot require countries to change any law or regulation. 

ISDS has come under criticism because of some legitimate complaints about poorly written agreements. The U.S. shares some of those concerns, and agrees with the need for new, higher standards, stronger safeguards and better transparency provisions. Through TPP and other agreements, that is exactly what we are putting in place.

It is an often repeated, but inaccurate, claim that ISDS gives companies the right to weaken labor or environmental standards, for example, suggesting that a trade agreement could result in the United States having to lower its minimum wage.

The reality is that ISDS does not and cannot require countries to change any law or regulation. Looking more broadly, TPP will result in higher levels of labor and environmental protections in most TPP countries than they have today. If TPP is passed by Congress, it will also create strong, enforceable new labor protections that would allow the United States to take action – on its own, or on the basis of a petition from labor unions or other interested parties – against TPP governments that don't honor their labor commitments. The same is true for enforcing environmental commitments.  

Similarly, the investment provisions under TPP are designed to protect American investors abroad from discrimination and denial of justice.

Under our Constitution, the Government has wide powers to regulate on behalf of the public interest even if that impacts private property. But when government takes its citizen’s property from them – be it a person's home or their business – the government is required to provide compensation. This is a core principle reflected in the U.S. Constitution and recognized under international law and the legal systems of many countries.

Unfortunately, foreign courts have not always respected this principle, and U.S. investors often face a heightened risk of bias or discrimination when abroad. That’s why governments have looked to international arbitration to resolve such disputes for centuries. Earlier in our history, the United States used gunboat diplomacy, sending our military to defend our economic interests abroad. The decision was made by our predecessors that it was better to rely on neutral arbitration instead.

Over the last 50 years, 180 countries have entered into more than 3,000 agreements that provide investment protections, the vast majority of which have some form of neutral arbitration. European countries are party to more than 1400 of those agreements. The U.S. is party to about 50.

Those thousands of agreements contain a wide range of standards, some that strongly protect a government’s right to regulate, others that do not. The U.S. has been at the leading edge of updating, upgrading and clarifying these standards; protecting the right to regulate; and drawing lessons from previous agreements to ensure that our agreements have the highest possible standards. TPP incorporates and builds on those efforts and goes beyond them by:

• Further raising the standards: TPP will make it absolutely clear that governments can regulate in the public interest, including with regard to health, safety and the environment, and narrowing the definition of what kinds of injuries investors can seek compensation for.
• Adding safeguards: TPP will include the ability to dismiss frivolous claims quickly and award fees against the claimant to deter such suits; making it possible for governments to provide binding direction to the arbitrators; and creating additional filters for cases having to do with financial services.
• Closing loopholes: For example, TPP will prevent sham corporations from accessing the investment protections provided by the agreement.
• Creating transparency: All arbitration proceedings under TPP will be open and non-parties, including labor unions and civil society organizations, will be able to file briefs to inform the outcome of cases.

There have only been 13 cases brought to judgment against the United States in the three decades since we’ve been party to these agreements. By contrast, during the same period of time in our domestic system, individual and companies have brought hundreds of thousands of challenges against Federal, state, and local governments in U.S. courts under U.S. law.

We have never lost an ISDS case because of the strong safeguards in the U.S. approach.

And because we have continued to raise standards through each agreement, in recent years we have seen a drop in ISDS claims, despite increased levels of investment.

Through TPP, we can set a new, higher set of standards, stronger safeguards and better transparency provisions.

The truth is that it is difficult for a claimant to win under our agreements and, if they have a legitimate claim, they tend to bring it under our domestic court system.

Senator Warren alludes to a number of specific cases, most of which are not under U.S. agreements and based on different standards, but each one of which is instructive:

• In the only U.S. case alluded to in Senator Warren’s op-ed, a regulation was adopted banning a chemical used in gasoline additives made only by a Canadian company. An arbitration panel found in favor of the government and underscored the right of governments to regulate for public purposes, including regulation that imposes burdens on foreign investors, and noted that investors cannot expect that environmental or health regulations will not change.
• The French-Egyptian case is instructive for two reasons.  First, we don't know much about it because the facts and briefs are not public. Our proposal creates transparency to address that issue.  Second, the information currently available on the case suggests it is not based on the fact that there was an increase in the minimum wage, but rather on a claim that the government has not honored its contract to pay a fixed percentage of the operating costs.
• The Swedish suit against Germany is also instructive. Here, too, details on the case are not public, unlike cases under U.S. agreements. But available information suggests that the case is not about whether Germany can change its national energy policy to do away with nuclear power, but whether Germany needs to provide compensation for abrogating its existing commitments. German domestic courts have upheld claims relating to these issues in cases filed by Germany's domestic energy companies under German law. This case is also instructive because the Swedish company is pursuing claims both in German domestic courts and through neutral arbitration. Our reforms would prevent this kind of forum shopping.
• In the case of the Dutch bank’s lawsuit against the Czech government, the investment agreement at hand had a different standard than what we are proposing in TPP. Our approach is more demanding and, among other things, would affirm the right of governments to take prudential measures to protect the financial system.

Senator Warren also questions the integrity of the arbitrators who decide cases, suggesting that they are biased against governments. In fact, ISDS panels more frequently side with respondent governments. The U.S. government, for example, has won every single case concluded against it.

The arbitration rules used under TPP require the independence of arbitrators and provide for challenge and disqualification in the event of conflict of interest or bias. They also provide a central role for the government being sued to determine which arbitrators hear the case.

We share a number of the theoretical concerns Senator Warren raises. But we disagree with her suggestion that we leave it to the free market to put in place basic rule of law and protections. That hasn't worked in the past and government has a role to play.  

We can’t change the standards in the more than 3,000 agreements among other countries. Most of those agreements will continue to exist, with or without TPP. But through TPP, we can set a new, higher set of standards, stronger safeguards and better transparency provisions.

That's exactly what we're doing.

Learn more about ISDS and it's role in our trade agreements here.