Forbes.com

Hope Springs Anew For NAFTA Detractors

If at first (or second, or third) you don’t succeed. . .

Interest groups that don’t like the way international trade disputes are settled have just been given another bite at the apple.

The Canadian company that wanted to build the Keystone XL oil pipeline from Alberta to Texas says it intends to file a NAFTA arbitration claim against the U.S. government for refusing to allow the pipeline’s construction.

If the company, TransCanada Corp, wins, the anti-free trade interest groups will at long last get what they want: evidence to bolster their claim that the dispute resolution system is flawed and poses grave danger to American taxpayers.

The system in question is called Investor-State Dispute Settlement or ISDS. It’s included in most trade agreements and bilateral investment treaties, which number in the thousands. ISDS allows businesses with interests in a foreign country to request arbitration by a UN or WTO tribunal if they believe the government of that country has discriminated against them.

No ISDS claim has ever caused the United States any undue hardship, as the anti-free trade factions grudgingly admit.

Ah, but it’s only a matter of time, they say.

“ISDS advocates point out that, so far, this process hasn’t harmed the United States,” wrote Sen. Elizabeth Warren in a February 2015 op-ed in the Washington Post. “But with the number of ISDS cases exploding and more and more multinational corporations headquartered abroad, it is only a matter of time before such a challenge does serious damage here.”

In a recent ISDS case, Philip Morris International (NYSE:PM) challenged an Australian law mandating plain packaging of cigarettes. That means no brand names. Anti-free traders were watching that case closely and were ready to pounce in the event that Philip Morris prevailed. It didn’t. A UN arbitration panel declined to render a decision.

Now we have TransCanada Corp. saying it will file an ISDS claim against the United States. The company says it will demand $15 billion (US) in damages arising from President Obama’s refusal to authorize the pipeline. TransCanada plans to do this via the ISDS chapter in NAFTA.

In the 22 years since NAFTA took effect, the United States has not lost an ISDS case. TransCanada knows that, but said in a press release, “we have undertaken a careful evaluation of the administration’s action as it relates to NAFTA and believe there has been a clear violation of NAFTA in these circumstances.”

Opponents of ISDS ask: what’s wrong with the federal courts? Why does a company like TransCanada get to make its case before an international arbitration tribunal?

“While a judge in a U.S. court might toss out such a desperate argument, TransCanada is not taking its case to a court, but to a trade tribunal not accountable to any domestic legal system,” wrote the Sierra Club’s Ben Beachy on Medium. “Instead of a judge, three private lawyers will issue a binding ruling that cannot be appealed. Neither NAFTA nor the TPP (Trans-Pacific Partnership) has meaningful rules requiring these lawyers to be impartial.”

Maybe not, but NAFTA’s ISDS chapter holds that each side in a dispute gets to pick one of the three arbitrators. They then pick the third by mutual consent. So, each side has an advocate, just as they would in a trial.

There’s also the fact that ISDS works both ways. Without it, an American company that has been mistreated by a foreign government would have to sue that government in a domestic court that might not be as impartial or uncorrupt as American courts are.

Gary Hufbauer and Tyler Moran of the Peterson Institute for International Economics pointed out in a yet-to-be-published paper that the ISDS chapter in the TPP is “much more restrictive with respect to corporate claims. The ISDS mechanism in the TPP specifically respects the legitimacy of environmental, health, and safety regulation, and more narrowly defines ‘fair and equitable treatment’ than in NAFTA.”

So, a ruling in favor of TransCanada would not necessarily set a dangerous precedent for the TPP, which has yet to take effect.

TransCanada said Obama’s rejection of the Keystone XL pipeline violated NAFTA’s requirement that foreign investors be accorded “fair and equitable treatment” by the host government. That’s obviously a subjective standard. Companies often play the fair and equitable treatment card in ISDS claims when they can’t point to a more tangible violation of their rights. They almost always lose.

Canadian and Mexican companies have brought more than two dozen ISDS claims under NAFTA. They’re batting zero. Of course, there’s a first time for everything, but the TransCanada case will take years to resolve. Speculating about the outcome now seems like a pointless exercise.

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