The Hill: Dagger aimed at the heart of democracy


A corporate dagger is now aimed at the heart of our democracy. It has been well concealed by the noise of battle. Washington is once again fighting about trade. Once more we see most economists lined up in favor of trade along with the global corporations and opposed by the labor unions.

[Reposted from The Hill  |  Ralph Gomory  |  June 1, 2015]

All this sound and fury creates a gripping, reportable narrative of ongoing battle. But that narrative distracts from what is really going on; the most dangerous part of these new trade pacts is only rarely mentioned. This part is called ISDS.

The initials ISDS are unfamiliar to most people. They stand for Investor State Dispute Settlement. ISDS is a massive expansion of dispute settlement clauses that appear in other trade treaties like the World Trade Organization (WTO) agreement. That agreement gave a complaining nation the right to bypass another nation’s court system and bring their claim of economic harm to a panel of international decision-makers. These arbitrators have tremendous leeway in how they interpret the WTO agreement and their decisions have  been contentious.

The U.S., for example, recently lost to Canada and Mexico under this arbitration clause. We are now busy repealing our own laws, which require country of origin labeling (COOL) for beef.  We will no longer be allowed to know what country our beef is coming from.

Other treaties have widely extended these WTO provisions and given corporations – in addition to foreign governments – the right to sue. ISDS allows corporations to sue any nations in which it does business. Under these treaties, corporations can take a claim of injured profitability to binding arbitration. There is no shortage of such claims. Philip Morris, for example, has sued Uruguay for its anti-smoking legislation and Australia for restricting cigarette advertising.

Under NAFTA, the American mining company Bilcon successfully sued the Canadian government when Bilcon was forbidden to develop a mine. The Canadian government’s study of the proposal had concluded there was harm to the nature of the surrounding communities, but the arbitrators rejected their decision. The company is suing for $300 million in damages.

These examples illustrate the crux of the matter. Which do we want to prevail in our country, the laws and standards of our elected government or those of arbitrators? Do we want to substitute binding arbitration for democracy?

Furthermore, nations can be sued for the actions of their states and cities. If ISDS goes through in its present form and Los Angeles raises its minimum wage, the U.S. can be sued by foreign businesses operating there because of the impact on their profitability.

Is this what we want? Do we want to give corporations the right to sue governments to protect their profitability, or do we want to leave to our legal and democratic processes the business of balancing the harms against the gains?

The history of ISDS suits shows that corporations can use the ISDS process to contest a virtually unlimited range of actions. These include, among many others, measures relating to taxation, environmental regulation, rates for water and electricity, health insurance regulation, and safety regulations for pharmaceutical imports.

And what a process it is. Unlike our national courts that can judge a case against a body of law, there is no such body of law; instead, the arbitrators are allowed enormous scope. The Columbia Center on Sustainable Investment gives a compelling and authoritative review of ISDS’s functions and consequences in its policy paper, “Investor – State Dispute Settlement, Public Interest and U.S. Domestic Law.”

And there will be a chilling effect. In considering any law or action a legislature or local government will need to consider the possibility of an ISDS suit against it. Do we want these possibilities to shape our every action?

From the corporate point of view, the importance of “fast track” legislation is that it ties together the trade and ISDS parts of the TPP. With “fast track,” our Senate and House can only accept or reject both parts; with that restriction, their vote may well be shaped by their familiar and visible positions on trade.

We must separate this ungainly bundle into a trade part and an ISDS part and consider them separately. Once out in the light of day ISDS will perish. This is the outcome that “fast track” seeks to avoid.

We have here a dagger aimed at the very heart of democracy. We should not give up our national system of laws based on a constitution and a long legal history. We should reject “fast track,” and if we fail at that we should fight on and reject TPP. TPP ties together a contentious trade pact with a process to protect corporate profits that is above our democratic processes. We should stand up for democracy.

Gomory is a research professor at New York University’s Stern School of Business and a recipient of the National Medal of Science. He is a former president of the Alfred P. Sloan Foundation and former director of research at IBM.

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