Economics for the Earth Blog

Old trade deal wine in new bottle

Posted May. 4, 2012 / Posted by: Bill Waren

U.S. model for Trans Pacific trade pact will generate investment lawsuits threatening the environment

In 2001 William Greider, the famed progressive journalist, wrote about the North American Free Trade Agreement’s investment chapter in The Nation: “Multinational investors can randomly second-guess the legitimacy of environmental laws or any other public-welfare or economic regulation, including agency decisions, even jury verdicts…NAFTA's arbitrators cannot overturn domestic laws, but their huge damage awards may be nearly as crippling--chilling governments from acting once they realize they will be ‘paying to regulate’...”

In Dallas, from May 8 to 18, negotiators from the United States and eight other Pacific nations will seek to craft one of the most far reaching trade agreements ever considered. Perhaps the most controversial issue that the negotiators will debate is whether to include a NAFTA-style investment chapter in the Trans Pacific Partnership trade agreement.

Leading up to the Dallas negotiations, the U.S. Trade Representative is heralding alleged advances in protecting public interest regulation in the  new 2012 U.S. Model Bilateral Investment Treaty. This is a template that encompasses U.S. negotiating demands for future bilateral investment treaties and investment chapters in free trade agreements, including the Trans Pacific deal.  Unfortunately, a close reading of the recently released text puts the lie to USTR’s rhetoric about public interest advances. The “new” U.S. model BIT would provide no enforceable environmental reforms - and no enforceable labor rights either. Like the “old” 2004 U.S. model for investment agreements, the “new” U.S. model presents a significant risk to the environment, local democracy, and human rights, just as Bill Greider described.

The new U.S. model BIT continues to favor corporations in the formal dispute resolution process. This bias is at the heart of investment cases brought under existing U.S. trade agreements.  For example in three cases brought under the “old” U.S. model, communities in El Salvador, Ecuador, and Peru are fighting for environmental justice against multinational corporations. The “new and reformed” U.S. model for international investment agreements would do little to prevent the replication of the Pac Rim, Chevron, or Renco cases.

The “New” U.S. Model BIT

On 20 April 2012, the U.S. State Department and Trade Representative’s Office released a new U.S. Model Bilateral Investment Treaty, concluding a process that dragged on for three years.  In February 2009, the Obama administration began a formal process to review the 2004 U.S. Model BIT.  The U.S. State Department and the Office of the U.S. Trade Representative received testimony and consulted with members of Congress, major corporations, law professors, labor unions, representatives of state and local officials, and environmentalists.  Throughout this three year process, business representatives pushed for greater rights for international investors, arguing that the incremental reform of the language in NAFTA’s investment chapter included in the 2004 Model BIT went too far.  Environmental, labor, and many state and local representatives called for scrapping the NAFTA framework altogether and replacing it with a system that gives greater weight to preserving the capacity of governments to regulate business and act in the public interest.

The whole process seemed to be designed to produce a classic Washington D.C. stalemate that would largely validate the status quo represented by the 2004 U.S. Model BIT.  And indeed, the 2012 U.S. Model BIT looks very much like the 2004 one, although there are some worrisome amendments related to “transparency” and “promulgation of technical regulations” that could give an additional advantage to global investors.  

First, international investors would be allowed to help set the standards for what constitutes barriers to trade resulting from the promulgation of technical regulations.  Second, new language mandates that governments adhere to strict “transparency” standards for the promulgation of regulations and adoption of other governmental measures.      

The 2012 Model U.S. BIT also includes new language in the “investment and environment” article, but the language is more notable for what it omits. It provides no enforcement mechanism, other than non-binding discussions.  The parties to an investment agreement, such as countries that ratify a completed TPP, are committed to ensure that they do not fail to effectively enforce environmental laws “through a sustained or recurring course of action or inaction.” But the model BIT provides no mechanism for enforcing this obligation, such as state-to-state dispute resolution before an international tribunal.  The text of the “investment and environment” article only provides for:

  • the right of one government to request consultations with another government regarding any matter arising under the environment article;
  •  an obligation on the government receiving the request to respond within 30 days; and
  • An admonition two both governments to consult and endeavor to reach a mutually satisfactory resolution.

The new language in the environment article on adherence to multilateral environmental agreements is even more toothless. It states that the governments recognize that MEAs to which both governments are a party play an important role in protecting the environment.  This does not even rise to the level of an indepedent obligation to abide by such MEAs.

The new labor rights language in the 2012 U.S. Model BIT is also unenforceable and equally empty.

On the other hand, the rights of investors under the 2012 U.S. Model BIT come with a powerful enforcement mechanism: the assessment of money damages. The model BIT would allow foreign investors to sue for millions of dollars in taxpayers’ money as compensation for complying with public health and environmental regulations. Taxpayers could even be forced to pay foreign corporations and rich investors for lost future profits resulting from government regulations.  Such damage awards can be large enough to severely stress public budgets in many countries. For example, Ecuador and Argentina now face billions on dollars in potential liability. The fear of such ruinous judgments can force a developing country to settle unjust investor claims and to back away from protecting the environment and public health, among other vital community concerns.

The TPP investment chapter

The release of the 2012 U.S. Model Bilateral Investment Treaty came just in time for the next round of the Trans Pacific Partnership negotiations, which begin on May 8, 2012.  Naturally, big oil, mining multi-nationals, and giant agri-business are demanding TPP investment provisions of the kind provided in the new model BIT.   This would allow them to sidestep national legislatures and courts, and avoid being held accountable for the environmental destruction, health risks and social injustice wrought by their investment projects around the Pacific Rim. 

Greater rights for multi-national investors.  If the TPP negotiations result in adoption of an investment chapter based on the new model U.S. BIT, multinational investors would be able to sue governments directly when they believe domestic laws or regulations, including environmental measures, impinge upon sweeping new property rights provided to them. The substantive and procedural rights of “property” are far more broadly defined in the new model BIT than in U.S. constitutional law or the legal practice of nations around the world, generally.

Greater substantive rights follow from, among other provisions, an overbroad definition of investment that includes the expectation of gain or profit. This potentially allows regulations that incidentally thwart multinational corporations’ expectations of future profits to be treated as if they were a government "taking"; similar to how a government is required to pay a landowner fair value for taking property to widen a highway. By contrast, it is very difficult for a U.S. company to use U.S. courts to challenge a regulation for reducing its profits, so long as there is some “rational basis” for the regulatory policy. 

A TPP investment chapter based on the new model BIT would also establish greater procedural rights for multinational investors.  The usual practice in international law is for claims to be arbitrated on a government-to-government basis, but the new model BIT would put multinational corporations and wealthy investors on the same level as nation-states. No similar procedural rights are provided to ordinary citizens, other than the occasional opportunity to file briefs as a friend-of–the-court.

 Such expansive theories of property rights in international trade law are a special concern for defenders of the environment.  Over the past two decades in the United States, a radical “property rights” movement has attempted to roll back land use, conservation, and environmental laws and regulations. They have litigated in state and federal courts.  They have lobbied Congress, state legislatures, and county councils.  They have tried to exploit the referendum process.  Property rights extremists achieved some successes in the United States much to the disappointment of environmentalists, but in general they failed to reach their goal of revolutionary change.  Environmentalists, therefore, are understandably concerned that the new U.S. model BIT and similar international investment agreements could be the vehicle that, over a period of decades, substantially fulfills the ambitions of these extremists, not only in the United States but also around the globe.    

A separate court for multinational capital. 

Under the new model BIT and previous NAFTA-style agreements, transnational capital is granted the right to circumvent domestic courts by challenging government policy before a tribunal of three arbitrators.

Unlike U.S. federal judges, international investment arbitrators do not enjoy tenure with employment security, which serves as a buffer against inappropriate political and financial influences.  Instead, investment arbitrators are appointed to each case on an ad hoc basis. Those seeking such an appointment have obvious incentives to curry favor with the politically and economically powerful. Worst of all, this system of ad hoc appointment means that an  international corporate lawyer may alternately serve as an arbitrator in one case and as plaintiff‘s counsel in the next, raising questions of conflict of interest or at least personal bias. 

Nor are international investment arbitrators subject to confirmation by the legislative branch, as judges are. Their background and values are not vetted by elected representatives of the people: they are not questioned about their experience and personal values related to the role of government in protecting the environment, among other key concerns..     

Arbitrators often lack expertise in the specialized subject matter or with the domestic law related to a particular investment claim.  They, nonetheless, are frequently required to judge these issues. The model BIT’s process for investor-state arbitration, unlike the usual practice in international law, does not require that domestic courts and agencies first resolve questions of fact and domestic law.  This raises questions about the basic competence of the investment tribunals, for example when dealing with challenges to environmental regulations with their complex scientific fact patterns.    

Finally, international investment tribunals make their decisions based on the text of an international investment agreement and customary international law, both of which are to be interpreted in light of the purpose of the agreement: to promote international investment. As a result, when international tribunals decide cases, commercial interests all too often trump the public interest

A totally new model for international trade agreements is required.

When the United States Trade Representative arrives in Dallas to begin the next round of talks on the TPP, the big corporations will be lobbying for an investment chapter based on the new model BIT. If they are successful, it would open the door for the export to countries around the Pacific of the extreme right-wing property rights ideology currently at high tide in the United States.  

A coalition of environmental, labor, family farm, consumer, and public health organizations will strongly urge the eight other Pacific nations meeting in Dallas to reject the U.S. model for trade agreements and for investment chapters in particular. Already, the U.S-Australia free trade agreement excludes a provision for investor-state arbitration, and other countries will be urged to follow the Australians lead.

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