Creeping multilateralism

The debate over Fast Track is heating up, and President Obama is getting more riled up by the details of the investor-state dispute settlement mechanism, or ISDS, than I’ve ever seen a sitting president get. On a recent conference call with reporters discussed by Greg Sargent, Obama said:

This is the notion that corporate America will be able to use this provision to eliminate our financial regulations and our food safety regulations and our consumer regulations. That’s just bunk. It’s not true.

ISDS is a form of dispute resolution. It’s not new. There are over 3,000 different ISDS agreements among countries across the globe…

ISDS has come under some legitimate criticism, when they’re poorly written, because they’ve been used in particular by some tobacco countries in some countries to challenge anti-tobacco regulation. That’s why we have made sure that some of the legitimate criticisms around past ISDS provisions are tightened, are strengthened, so that there is no possibility of smaller countries or weaker countries getting clobbered by the legal departments of somebody like R.J. Reynolds so that they can’t pass anti-smoking regulations.

The president is correct about the widespread proliferation of investment treaties. Indeed, I can’t think of another category of international pact that is equally bounteous.

Notably, most of these treaties – UNCTAD estimates nearly 80 percent – include most-favored nation provisions. MFN rules have a long history, and are premised on the notion that – when King Sam extends privileges to King Jack, he should do the same for King George. Fast forward to investment treaties, and MFN means that the US must treat German investors as well as it treats Canadian investors, and Argentine investors, and so on.

As legal scholar Martins Paparinskis has shown, investment treaty arbitrators have had a field day with MFN provisions. Arbitrators have found that investors from Country A investing in Country B get to have access to equal treatment as Country B offers investors from Countries C, D and so on. But this “treatment” goes beyond Country B’s direct relations with the investor in question, and can include the benefit of the substantive and procedural treaty provisions that Country B negotiated with those other nations.

Pause for a moment to imagine the mischief this allows. Let’s say that we take Obama at his word that his investment agreements are better than past ones – perhaps by blocking challenges of health measures. Great. But if the past pacts continue to exist, then investors could pluck the most pro-investor provisions from a country’s entire roster of treaties. Such use of MFN sharply diminishes the utility of treaty-by-treaty reform efforts.

The problem is actually a bit deeper than that. As I wrote with some colleagues in a previous life, investment treaties also have a pretty open definition of which investors can benefit from them – typically requiring little more than registration in a chosen “home country”. (Some recent treaties create greater hurdles, such as requiring investors to have a “substantial business presence” in their designated “home country”. However, arbitrators reviewing these hurdles have determined that as little as two employees and a small paper trail in a home country were “substantial”.) This home country need not be the country that the public associates the investor with. Indeed, Philip Morris has used its Hong Kong subsidiary to launch claims against Australia, and Canadian firm Pac Rim has used its US subsidiary to get access to the US-Central America trade deal.

Let’s illustrate how these provisions I’ve mentioned could play out when considered together. Let’s assume that Deutsche Bank wished to launch an ISDS claim against some aspect of the US’ Dodd-Frank financial reform law. The German company would not need to wait until the US implemented a Trans-Atlantic Trade and Investment Partnership (TTIP) to do so. Instead, it would merely need to make on-paper alterations to its corporate holding structure, such that its US operations were “owned” by Deutsche Bank AG (Canada). The Canadian subsidiary would benefit from NAFTA protections in the US – even without TTIP – through this “nationality planning”. To take matters further, imagine that NAFTA (or TTIP, for that matter) blocked investors from making certain types of financial services claims, but that an older US-Argentina investment treaty did not block such claims. Deutsche Bank would be able to claim that Argentine investors in the US could hypothetically benefit from more generous treatment than Germans and Canadians. By “treaty shopping” under MFN provisions, Deutsche Bank could claim the best treatment in the US’ 30-year-old network of treaties.

So while the policy debate focuses on whether Obama should sign a Trans-Pacific Partnership (TPP) or TTIP, the reality is that an investor could already make almost any claim it wished to make, through smart use of treaty-shopping and nationality planning. Thus, it is misguided for policymakers and analysts to think about investment pacts in bilateral and regional terms.

To paraphrase one of my favorite new bands Coup Sauvage, your new treaty will not save you. Without engaging with the “creeping multilateralism” of the 3,200-plus investment pacts, governments will waste a lot of time and energy trying to put their own mark on newer treaties. Fun stuff, but only if you like whack-a-mole.

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