Foreign Trade

Trade Arbitration Clauses

3/23/14
from Bloomberg Businessweek,
3/20/14:

A fight over ow to resolve disputes between nations and corporations could derail a global treaty.

Beginning in the 1950s, trade negotiators evolved an elegant solution to a vexing problem: the risk that poor countries would seize the oil fields, mines, and factories of Western corporations that operated within their borders. Fearful of nationalization or other harsh treatment, multinationals were holding back on investment. Everyone lost. The answer was to include language in treaties specifying that disputes between investors and governments would be settled by independent arbitrators, not courts in the country where a disagreement arose. That gave corporations confidence that their projects were safe and helped unleash trillions of dollars’ worth of cross-border investment. Today there are about 3,000 treaties between countries that provide for such arbitration. Yet that fix is now the subject of a bitter disagreement between corporations and governments that’s impeding progress on two of the biggest free-trade treaties ever, both involving the U.S.: the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).

The problem is that to many people, arbitration looks profoundly undemocratic. Countries that sign the treaties give away a lot.

Opponents point to several disputes currently in arbitration where corporations are invoking treaties for protection from local laws. Philip Morris International (PM) has brought a case in Hong Kong challenging Australia’s plain-packaging law for cigarettes. The tobacco company says the law prevents it from marketing its brand, in violation of a treaty between Australia and Hong Kong. Sweden’s Vattenfall, which operates nuclear plants in Germany, is seeking compensation for the country’s planned phaseout of electricity generation from nuclear power, which it says breaks the countries’ bilateral investment treaty. Lone Pine Resources, a U.S. company that has licenses to produce natural gas from beneath the St. Lawrence River in Quebec, wants to be compensated by Canada for a moratorium on fracking in the province.

The voices of opposition are becoming harder to ignore. In January, in response to criticism of the arbitration clauses now standard in nearly every agreement, the European Commission announced a halt to negotiations with the U.S. on the arbitration provisions of TTIP, the ambitious effort to open more trade and investment between the U.S. and the European Union. The commission reaffirmed it was committed to including arbitration in the treaty, but said it wanted a 90-day break for “public consultation” to hear people’s views. A high-profile campaign by opponents could complicate talks long after the listening period ends.

For the U.S. government and other backers of arbitration, a bigger blow came in mid-March when the German government—which has been a staunch supporter of investor-state dispute settlements—said it decided to push for excluding it from TTIP. “Special investment protection rules are not necessary in an accord between the USA and EU,” the German economy ministry said in a statement. It said the rules were unnecessary because “both partners have adequate legal protection” for foreign investors in their courts.

The U.S. can’t afford to drop arbitration from the big Pacific and Atlantic trade deals, because that would send the wrong signal for future agreements, says Sean Heather, vice president for global regulatory cooperation at the U.S. Chamber of Commerce.

Some of the opposition to investor-state arbitration is clearly overheated. It’s one thing for a company to make an outrageous claim against a government and quite another to win. Companies win or settle about half their cases.

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