Investor Treaties in Trouble

By Martin Khor Reprint | | Print | |En español

In this column, Martin Khor, executive director of the South Centre, writes that a growing number of countries are cancelling trade treaties that allow foreign investors to sue governments and claim billions of dollars in compensation.

GENEVA, May 12 2014 - The tide is turning against investment treaties and free trade agreements that contain the controversial investor-state dispute system, which allows foreign investors to take up cases against host governments and claim compensation of up to billions of dollars.

Recently, Indonesia has given notice that it will terminate its bilateral investment treaty (BIT) with the Netherlands, and says it will cancel all of its 67 bilateral investment treaties.

Indonesia joins South Africa, which last year announced it was ending all its BITS.

Several other countries are also reviewing their investment treaties. This was prompted by increasing numbers of cases being brought against governments by foreign companies which claim that changes in government policies or contracts affect their future profits.

Martin Khor

Many countries have been asked to pay large compensations to companies under the treaties. The biggest claim was against Ecuador, which has to pay a U.S. oil company 2.3 billion dollars for cancelling a contract.

The system empowering investors to sue governments in an international tribunal, thus bypassing national laws and courts, is a subject of controversy in Malaysia because it is part of the Trans-Pacific Partnership Agreement (TPPA) which the country is negotiating with 11 other nations.

The investor-state dispute settlement (ISDS) system is contained in free trade agreements (especially those involving the United States) and also in BITS which countries sign among themselves to protect foreign investors’ rights.

When these treaties containing ISDS were signed, many countries did not know they were opening themselves to legal cases that foreign investors can take up under loosely worded provisions that allow them to win cases where they claim they have not been treated fairly or expected revenues have been expropriated.

South Africa had been sued by a British mining company which claimed losses after the government introduced policies to boost the economic capacity of blacks to redress apartheid policies.

India is also reviewing its BITS, after many companies filed cases when the Supreme Court cancelled their 2G mobile communications licenses in the wake of a high-profile corruption scandal linked to the granting of the permits.

But it is not only developing countries that are becoming disillusioned by the ISDS. Europe is getting cold feet over the investor-state dispute mechanism in the Transatlantic Trade and Investment Partnership (TTIP) it is negotiating with the U.S., similar to the mechanism in the TPPA.

Several weeks ago, Germany told the European Commission that the TTIP must not have the investor-state dispute mechanism.

Brigitte Zypries, a Parliamentary State Secretary at the Ministry for Economic Affairs and Energy, told the German parliament that Berlin was determined to exclude arbitration rights from the TTIP deal, according to the Financial Times. “From the perspective of the [German] federal government, U.S. investors in the European Union have sufficient legal protection in the national courts,” she said.

The French trade minister had earlier voiced opposition to ISDS, while a report commissioned by the United Kingdom government also pointed out problems with the mechanism.

The European disillusionment has two causes. In first place, ISDS cases are also affecting EU countries.

Germany has been taken to the International Centre for Settlement of Investment Disputes (ICSID), an international arbitration institution that is a member of the World Bank Group, by the Swedish company Vattenfall which claimed it suffered over a billion euros in losses resulting from the government’s decision to phase out nuclear power after the Fukushima disaster.

And the European public is getting upset over the investment system. Two European organisations last year published a report showing how the international investment arbitration system is monopolised by a few big law firms, how the tribunals are riddled with conflicts of interest, and the arbitrary nature of tribunal decisions.

In January, the European Commission suspended negotiations with the U.S. on the ISDS provisions in the TTIP, and announced it would hold 90 days of consultations with the public over the issue.

In Australia, the previous government decided it would not have an ISDS clause in its future free trade agreements and BITs, following a case taken against it by Philip Morris International which claimed loss of profits because of laws requiring only plain packaging on cigarette boxes.

So far the U.S. has stuck to its position that ISDS has to be part of the TPPA and TTIP. However, if the emerging European opposition affects the TTIP negotiations, it could affect the TPPA as this would strengthen the position of those opposed to ISDS.
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