Free trade agreements such as ChAFTA (China-Australia Free Trade Agreement) and the proposed TPP (Trans-Pacific Partnership) are treaties that are signed and ratified by national governments in a bid to increase the volume of trade within their country, as well as to reduce the obstacles that limit local and foreign investment. This is particularly useful seeing as incentives such as reduced or eliminated tariffs serve to encourage investors from far and wide to invest in the said country (Lim, Elms, and Low, 2012). For many years, such treaties have successfully ensured increased volume of trade as well as investor confidence and certainty, which have significantly contributed towards the growth of the trade sectors of countries that are part of the treaty.
However, over the years, the need for governments to protect their citizens looking to invest in other countries has seen the rise of the Investor-State Dispute Settlement, or ISDS, in many trade treaties. This is a set of provisions and clauses that allow investing corporations to sue the national governments of the countries in which they are investing (Lim, Elms, and Low, 2012). These lawsuits are filed against national governments for violating trade agreements or enacting laws that compromise the ability of said corporations to continue running their businesses or enjoying maximum profits from their investments in the country. Needless to say, this has widespread ramifications for the power of national governments.
First, such ISDS clauses prompt the question of the sovereignty of the state, and the ability of a country to decide its way forward on matters of interest. The presence of ISDS clauses has exposed many national governments to the risk of increasing lawsuits from foreign corporations (Provost and Kennard, 2015). In essence, this is a controversial issue because the presence of such clauses inadvertently implies that investors can force national governments to change laws and policies to satisfy the investors. This results in the inability of national governments to act out of their national interests, seeing as doing so may expose them to endless barrages of litigation. Such clauses are also counterproductive seeing as governments may be forced to pay large amounts of money (in terms of compensation) to corporations, effectively reducing the profitability of the treaty in question.
Secondly, it is paramount that national governments should be protected from such lawsuits, particularly when the ISDS clauses in question impose a significant financial risk. It is vital that national governments understand the full scope of the treaties that they ratify, and the ISDS implications that these treaties bring with them (Regan, 2006). This is especially so for countries that are developing or still underdeveloped, seeing as the number of corporations that thy have a fewer and smaller than those corporations in economic powerhouses in developed countries (Berger et al., 2013). Consequently, investment from such corporations could open up avenues for ISDS litigation that bear the risk of being legitimate financial hazards to the country. Often, the amounts sued for as compensation often number in the millions and sometimes billions of dollars such as when the national government of Ecuador was ordered to pay Occidental Petroleum a record $1.8 billion dollars as compensation for the cancellation of an oil exploration contract (Provost and Kennard, 2015). The scale of this financial risk can be understood by realizing that the amount to be paid as compensation was roughly equal to the annual national health budget of the country. Needless to mention, such litigation also results in very high legal fees that national governments have to bear as well.
Third, policy risk is also a significant aspect of trade treaties that include ISDS clauses. The ratification of such treaties is often symbolic to the national government being handcuffed, seeing as very little can be effectively done in the interests of the public by the government (Faunce, 2012). Often, the change in trade policy in a country has a widespread effect, particularly for foreign investors. This is because such policy changes often demand a complete changing of the business model or the application of new permits of operation among other challenges. Consequently, foreign investors are inclined to fight policy changes through the use of the ISDS system. A great example is the Kraftwerk Moorburg case launched against the Federal Republic of Germany by the Swedish energy conglomerate Vattenfall (Hill, 2014). Vattenfall had set up a coal-fired power-generating plant on the River Elbe and had acquired water permits. However, once local authorities faced intense pressure from residents over the environmental implications of the plant, they passed stringent policies that regulated the use of the water (Hill, 2014).
This resulted in an ISDS case that ended in Germany settling with Vattenfall, as well as agreeing to weaken the environmental standards imposed to favor the company (Provost and Kennard, 2015). This is a representation of the policy risk that free trade agreements with ISDS clauses portend for the national government. The result of such scenarios is the adoption of a “regulatory chill”, which is a situation in which the government is reluctant to impose new policies on trade out of fear of the possible litigation it could face from investors.
The power of the national government stems from the population it serves, and it is essential that national governments act in the interests of their citizens. However, the presence of free trade agreements that have open, and sometimes hidden, ISDS clauses opens up national governments to significant financial and policy risks (Lester, Mercurio, and Bartels, 2015). This is detrimental to the development of the nation’s trade policy. Consequently, such agreements and clauses bear significantly negative ramifications for the power of national governments.
References List
BERGER, A., BUSSE, M., NUNNENKAMP, P. AND ROY, M., (2013). Do trade and investment agreements lead to more FDI? Accounting for key provisions inside the black box. International Economics and Economic Policy, 10(2), pp.247-275.
FAUNCE, T.A., (2012). Challenges to Australia’s national health policy from trade and investment agreements. Medical Journal of Australia, 196(5), pp.354-356.
HILL, J. (2014). ISDS: The devil in the trade deal. [online] Radio National. Available at: http://www.abc.net.au/radionational/programs/backgroundbriefing/isds-the-devil-in-the-trade-deal/5734490 [Accessed 24 Mar. 2016].
LESTER, S., MERCURIO, B. AND BARTELS, L. eds., (2015). Bilateral and regional trade agreements: Commentary and analysis (Vol. 1). Cambridge University Press.
LIM, C.L., ELMS, D.K. AND LOW, P. eds., (2012). The trans-pacific partnership: a quest for a twenty-first-century trade agreement. Cambridge University Press.
PROVOST, C., AND KENNARD, M. (2015). The obscure legal system that lets corporations sue countries | Claire Provost and Matt Kennard. [online] the Guardian. Available at: http://www.theguardian.com/business/2015/jun/10/obscure-legal-system-lets-corportations-sue-states-ttip-icsid [Accessed 24 Mar. 2016].
REGAN, D.H., (2006). What are trade agreements for?two conflicting stories told by economists, with a lesson for lawyers. Journal of International Economic Law, 9(4), pp.951-988.
