An article by Daniel Pearson (senior fellow in trade policy studies at the libertarian Cato Institute) appears in The Hill titled ‘Boost support for TPP by rethinking ISDS’, in which he suggests removing investor-state dispute settlement from the negotiation:
True, cross-border investors would prefer that TPP include ISDS. But most U.S. companies understand that the real benefits of TPP would come from reforms that reduce barriers to trade in goods and services, as well as making foreign investment possible by opening up previously closed sectors of the economy. If there are no ISDS provisions in TPP, companies have other approaches to risk management: adding arbitration clauses to contracts; purchasing political risk insurance; or simply investing somewhere safer. It’s worth noting that there is no ISDS agreement between the United States and China, for instance, yet a large number of U.S. firms have invested there. No ISDS provision was included in the U.S.-Australia FTA, yet its passage was strongly supported by the business community. The same would be true for TPP even in the absence of ISDS.
Could Obama cultivate additional votes for TPP among Democratic members of Congress by addressing ISDS concerns? First he would have to persuade other TPP nations to adjust or eliminate ISDS fairly late in the negotiating process. Since the United States has been the strongest proponent of including such a measure, the president may be able to get other countries to agree. Removing ISDS would be the simplest and quickest alternative. However, if realities dictate that some ISDS provision must be retained, the wording should be tightened to remove – at a minimum – the fair-and-equitable-treatment language. Such a change would strengthen the coalition in favor of TPP by showing that the president has been listening to his critics, especially those who want him to succeed.
This is not the only libertarian criticism of ISDS. This Cato Institute article suggests ISDS socialises the risk of foreign direct investment and subsidises bad investment decisions:
When other governments oppose, but ultimately concede to, U.S. demands for ISDS provisions, they may be less willing to agree to other reforms, such as greater market access, that would benefit other U.S. interests. That is an externality or a cost borne by those who don’t benefit from that cost being incurred. In this regard, ISDS is a subsidy for MNCs and a tax on everyone else. Taking the argument one step further, ISDS not only subsidizes MNCs, but particular kinds of MNCs. What may be too risky an investment proposition without ISDS for Company A is not necessarily too risky for Company B. By reducing the risk of investing abroad, then, ISDS is a subsidy for more risk-averse companies. It is a subsidy for Company A and a tax on Company B.
