The secret tribunals that fleece the world

This is how corporations bring governments to their knees

Trade agreements are ostensibly about making it simple and easy for trade and investment to happen across national borders. In many ways that's questionable, but nowhere more so than with respect to the secret tribunals that settle many disputes between corporations and governments.

The practice, known as Investor-State Dispute Settlement (ISDS), is the subject of Shadow Courts, a new book by Haley Sweetland Edwards. It's a short, vital introduction to its history and use, the shocking ways in which corporations have used it to bend governments to their will, and the total lack of justification for using such mechanisms in developed, stable countries. But perhaps most important, it reveals the bankrupt logic behind its most aggressive employment.

First, a quick primer on ISDS. This is the mechanism by which corporations can sue governments who are party to a free-trade deal containing an ISDS clause (which means most countries these days). If a government nationalizes the local subsidiary of some foreign company, for example, the company might file an ISDS claim for damages. If so, a three-member tribunal is assembled — one member picked by each side, and a third picked by both, or some outside institution like the World Bank if they can't agree.

By design, the tribunals are completely one-way. Nations cannot use ISDS against corporations that damage their ecosystems or economies.

The tribunal is completely above the home country's court system, and there is no appeal system, nor even the slightest requirement for consistency. Imagine a country called, say, "the Czech Republic," and imagine that a company files an ISDS claim under its Czech subsidiary, plus an identical claim from the owner of the company. If the latter tribunal rules against the company, but the former rules the Czechs must pony up a sum greater than the budget of their Ministry of Health, the contradiction means nothing. (Yes, this actually happened.)

ISDS was included in early trade deals more or less on a whim. Negotiators had the vague idea that it might help developing countries build a more fair and stable legal system, and provide foreign companies with the confidence to invest in rickety developing countries. Others copied and pasted the originals, until there were thousands of different treaties with ISDS provisions.

ISDS was barely used or even noticed for the first several decades of its existence. But over time, a much more expansive view of ISDS developed, drawing on a doctrine called "regulatory taking" from the libertarian legal scholar Richard Epstein. In keeping with the typical libertarian view of property rights as sacred and pre-political, new regulations which interfered in future profits were cast as a sort of theft. Epstein wanted these to be challenged in the U.S. under the Fifth Amendment, but it was in ISDS that this idea found its fullest expression.

Influenced by Epstein, if regulations were changed such that a corporation lost future profits, corporations started filing for damages under ISDS. The logical endpoint of this doctrine is handily illustrated by a decision handed down against Mexico, in the first ISDS case filed under the North American Free Trade Agreement:

In fact, the arbitrators decided, any act by any government official that results in even a partial loss of a company's "reasonably-to-be-expected" profits amounts to an expropriation — and therefore warrants compensation. [Shadow Courts]

The key part here is the goofy vagueness of "reasonably-to-be-expected." Who decides what's reasonable or expected? Not juries or judges beholden to legal precedent, but three unaccountable lawyers.

ISDS is now basically a sneaky way for corporations to line their own pockets. After shifting their legal headquarters around to take advantage of the most favorable investment agreement ("treaty shopping"), they get to tap the public fisc for whatever goofy "expropriation" they can manage to get past semi-random tribunal members.

As one ISDS specialist lawyer crowed in 1998, "It wouldn't matter if a substance was liquid plutonium destined for a child's breakfast cereal. If the government bans a product and a U.S.-based company loses profits, the company can claim damages."

But as Sweetland demonstrates, ISDS may soon run into limits. Smaller countries like Ecuador and Argentina, which have been constantly shaken down by corporate goons over the last couple decades, have already torn up several trade treaties over the issue — but hesitate to burn them all for fear of retribution from the leg-breakers of international capital like the IMF and World Bank.

But if the Trans-Pacific Partnership passes (perhaps during the lame duck session), the U.S. will dramatically increase its ISDS exposure, and will very likely face a slew of cynical claims from corporate sociopaths looking to gnaw off a chunk of Uncle Sam's hide. That might be a bite too big for this parasite — indeed, the European Parliament has already categorically condemned ISDS provisions.

If enough big countries decide to stop hemorrhaging sovereignty to corporate parasites, the days of ISDS are numbered.


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