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ISDS—What’s That?

April 01, 2015

Trade-deal doomsayers are raising a stink about one of the more mundane procedures of trade law: the investor-state dispute settlement (ISDS). These critics are determined to torpedo job-creating trade agreements, and they’re leaving no hyperbole behind. The way they tell it, ISDS panels are corporate shills that gut public-safety regulations and undermine U.S. sovereignty.

Do they have a point? Hardly.

The truth is, there are few better tools for holding other countries accountable to the agreements they make—especially when they harm American job creators. Here’s why.

A trade deal sets up rules for, among other things, how each country will treat the other’s investors. Countries agree not to discriminate in favor of their own companies when applying their laws. For instance, our trading partners agree not to take U.S. investors’ property without due compensation or to require them to use local suppliers. American job creators get the same chance as everybody else to compete for other countries’ business. Ninety-six percent of the world’s customers live outside the U.S, so making sure other countries treat our job creators fairly is crucial.

There are thousands of investment agreements in force today across the globe, and over 90 percent of them have never seen an investor dispute. But inevitably some do arise, and investors are understandably wary of using domestic courts to seek redress—because the government has a home-court advantage. So instead, they agree to binding arbitration by an investor-state dispute settlement panel. Acting as neutral arbiters—selected from a pool of judges nominated by participating countries—these panels make sure American investors get a fair shake from other countries.

If you listened to the critics, you’d think these panels are some newfangled contraptions that will upend the way we do business around the world. In reality, “various forms of ISDS are now a part of over 3,000 agreements worldwide, of which the United States is party to 50,” according to the United States Trade Representative.

Still, critics bring forth a parade of horribles—lawsuits where companies challenged governments after they changed their laws. If we sign up more of our trading partners for ISDS panels, they argue, they will undermine the U.S. government’s public-safety and environmental regulations. Never mind that the facts don’t match the rhetoric, as the Washington Post editorial board recently pointed out. An ISDS panel can’t change a country’s laws; it can only challenge a country’s application of the law.

And here’s what the critics don’t mention: The United States has never lost an ISDS suit. That’s largely due to the fact the U.S. plays by the rules. But we need these tools to make sure our trading partners match our commitment to the rule of law and enforceable contracts.

The fact is, these panels just don’t present the danger their critics say they do. One third of disputes end in a settlement. And in those cases that go to arbitration, governments win twice as often as investors do. And when investors win, they usually get a lot less than they asked for—less than ten cents on the dollar, according to the Center for Strategy and International Studies.

It’s also no surprise that the countries most likely to become embroiled in disputes are countries with weak legal systems: Argentina and Venezuela are the two biggest targets of ISDS disputes. It’s also no surprise that disputes are concentrated in areas with a lot of state intervention, like oil, gas, and mining.

In short, using ISDS panels brings other countries up to U.S. standards; they don’t bring the U.S. down to other countries’ standards. They help build up the rule of law in international trade, and they’re a vital part of any trade agreement.