U.S. Business Abroad Deserve Fair Treatment

Protecting U.S. business from unfair treatment abroad, particularly in countries with a history of corruption, is truly important to the American economy. When U.S. firms invest abroad, they draw American exports and spread the high cost of innovation over a global market. That's why, since the 1980s, the U.S. government has long included a mechanism known as Investor-State Dispute Settlement (ISDS) in investment treaties and trade agreements.

ISDS allows firms to seek compensation, through a process of neutral arbitration, if a foreign government takes their assets or unfairly regulates their business. This provides justice in nations where prompt and even-handed judicial systems aren’t always the norm. ISDS was a cornerstone of the key investment chapter in the North American Free Trade Agreement (NAFTA). Among the many NAFTA provisions now up for renegotiation, ISDS is crucially important for defending U.S. firms and their American workers from unfair treatment overseas. The fate of ISDS in the new NAFTA will set the template for ISDS in all other U.S. investment treaties and trade agreements.

Despite the crucial protections ISDS offers, the provision has come under attack in recent years from voices like Sen. Elizabeth Warren, who claims that the mechanism unduly favors multinational corporations. Senator Warren’s attempts to formally eliminate ISDS were rebuffed by 60 senators, including 8 Democrats. Others on the Left, such as labor unions and environmental groups, have cried foul over ISDS, saying it contributes to offshoring American jobs, a claim that holds little water since U.S. firms that invest overseas are the leading exporters of U.S. goods and services.
 
Doubts have also been raised on the opposite side of the political aisle. Some conservatives have expressed concern that ISDS provides an unwarranted incentive for US firms to invest in countries that do not respect property rights and the rule of law. President Trump has not taken a position on ISDS, but his intense focus on renegotiating NAFTA to benefit American workers should lead to vigorous support of the core concept. Improvements can be made in shielding health and environmental regulations from unfair attack, selecting arbitrators, and ensuring transparent decisions, but the essential features of ISDS should not be abandoned.
 
Fortunately for advocates of ISDS, the provision’s history refutes the claims leveled from both sides. With a track record of almost 60 years, dating back to the Germany-Pakistan accord in 1959, the facts about ISDS speak for themselves.
 
For example, foreign firms have brought 18 cases against the United States in the 22 years of NAFTA. The results? The United States has won every single case. Compare that to the 40 cases brought by U.S. firms against Canada and Mexico. Of those cases, U.S. firms have won or favorably settled nearly a third of the time. ISDS has clearly served the interests of U.S. firms seeking redress from unfair treatment in Canada or Mexico. To date, ISDS decisions and settlements have paid U.S. firms over $100 million in compensation.  Equally important as the monetary awards is the strong signal that these cases send as to the importance of property rights and fair treatment.
 
America’s business community is in broad agreement. Recently, over 100 American companies and business associations wrote to the Trump Administration, “ISDS is a strong enforcement tool that helps ensure that American investors, businesses and their workers will be treated fairly overseas. This mechanism has been an essential part of the NAFTA and other high-standard U.S. trade and investment agreements. We urge that investment and ISDS remain high priorities in the NAFTA modernization to strengthen enforcement and ensure the fair treatment for U.S. individual, non-profit and business investors.”

Consider the cases of Cargill and Archer Daniels Midland, which settled and won $77 million and $33.5 million, respectively, because of unfair trade barriers imposed by the Mexican government. Or the shocking Ecuadorian seizure of Occidental Petroleum’s property and oil field operations in 1993. After a lengthy investigation, the ISDS panel found in favor of Occidental. In each of these cases, the ISDS provision proved essential to secure justice for American firms. More important, the existence of ISDS in an investment treaty or trade agreement serves to ward off an untold number of unfair policy proposals before they result in government takings or regulations.

Today, ISDS provisions are contained in 41 bilateral investment treaties (BITs) that the United States has negotiated with foreign nations. Another crucial BIT is under negotiation with China, a nation known for rough treatment of American firms. Keeping ISDS as part of NAFTA will ensure that Mexico and Canada treat U.S companies fairly. Preserving the same system in other agreements, especially the BIT still being written with China, will go a long way to opening up foreign markets, offering justice when disagreements arise, and enhancing prosperity here at home.

Gary Clyde Hufbauer is Reginald Jones Senior Fellow at Peterson Institute for International Economics.