The 101 on how global trade treaties came to threaten the environment

International trade agreement provisions once meant to protect investors today can challenge a nation’s sovereignty and invalidate environmental laws.

In an ideal world, international trade treaties would have tremendous potential for protecting the environment. With their global reach, they might, for example, be one of the few policy tools available possessing the authoritative heft to make the Paris Climate Agreement national emission reduction commitments stick.

But in the rough and tumble legalistic world of geopolitical trade negotiations, the system that births such treaties is often tipped advantageously toward corporate profit and investor protection, and against the environment, and by virtue, national sovereignty — at least that’s what critics say.

Such accusations have been made lately against a bewildering alphabet soup of global treaties now under negotiation, including the TTP, TTIP, and TISA.

Yet for as flawed as the current system may be, it seems such investor protections were originally created with the best of intentions — as over the last century the globe saw horrific political volatility. Economic booms and busts, coupled with civil uprisings and wrenching regime changes, caused cautious foreign investors to fight for protection in the form of stronger investment provisions in trade treaties.

One major result of these struggles was the creation of the Investor-State Dispute Settlement (ISDS) mechanism in 1966. Approved by a host of nations, and unused for decades, this tool today is decried by its opponents as antithetical to both transparency and democracy. It entitles foreign investors, they say, to the same or greater legal rights as a nation’s citizens. And it moves treaty arbitrations out of the bright light and public eye of domestic courts and into the unseen backrooms of institutions like the World Bank’s International Dispute Resolution Center in Washington, D.C.

“When you explain how ICSID [International Center for Settlement of Investment Disputes] works to people, generally they find it hard to believe,” said Scott Sinclair, Director of Policy Alternatives Canada, an NGO. “These provisions were created to protect foreign investors against grievous behaviors in situations where justice was unlikely in domestic courts,” when one government violently overthrew another, for example, and then backpedaled on its treaty commitments.

“But now it’s an alternative used [by investors to press suits] even in places with well-established courts. Even scarier, environmental issues are at the heart of a lot of disputes, and often the public only becomes aware of such cases after the fact.”

Many of the biggest ISDS cases in recent years have involved investor challenges to national sovereignty, hoping to invalidate environmental laws to gain access to foreign natural resources or markets. In some instances this has resulted in the overturning of laws set up by governments to protect the environment and ensure public safety in favor of investor profits and protection.

To date, 696 ISDS cases have been filed against 107 countries, and by 2014 countries worldwide had shelled out in excess of US $440 million to investors for treaty violations.

And that doesn’t include suits recently completed or now in process. The passage of time has seen a rapid raising of the bar regarding award size. Just last year an ICSID court negotiated Ecuador’s award to Occidental Petroleum downward to US $1 billion. (The company claimed the South American country wrongfully terminated their Participation Contract to exploit a block of Ecuadorian land for oil production.)

And as of 2016, the US government could be on the line for US $15 billion owed to the TransCanada Corporation in compensation for the federal government’s rejection of the Keystone XL pipeline.

The European Trade Commission estimates investors win disputes in about a quarter of such cases, while states win a little over a third, with another third settled out of court — each dispute costing an average of US $8 million in legal fees. So taken together, litigating the 696 cases cost roughly US $5.6 billion — with trade lawyers numbering among the big winners.

With ISDS clauses already written into the more than 3,000 investment agreements already in-force globally, and also written into all of the big international trade treaties currently on the table right now — like TTP, TTIP and TISA — it’s easy to see why many environmental, public health, pro-democracy and labor NGOs have raised the alarm.

But how concerned should we be? And what actions can we take to assure that business, nations, the environment and civil rights all continue to thrive alongside one another? The best answer to these questions requires a close examination of the wonky, murky, and according to critics, sometimes unsettling, evolution of international global trade agreements to see how we arrived at this critical moment in history.

Even scarier, environmental issues are at the heart of a lot of disputes, and often the public only becomes aware of such cases after the fact.

Scott Sinclair, director, Policy Alternatives Canada

Great expectations

The catastrophic upheaval of World War I, the Great Depression, and World War II left global markets in ruin. As a result, throughout the first half of the 20th century many nations tightened international trade barriers, raising or promoting tariffs (taxes on imported goods). Some nations even devalued their currency to undercut competition from abroad.

In 1944, forty-five allied nations met in the small New Hampshire town of Bretton Woods to plan the rebuilding of war-torn Europe and the global economy. The International Monetary Fund (IMF), and World Bank were both proposed at the meeting, as was the International Trade Organization (ITO), an international trade regulatory body.

A year later, the World Bank (meant to fund development), and the IMF (meant to maintain world financial order), came into effect with 29 of the Bretton Wood countries ratifying the Articles of Agreement — some 189 nations are members today. The ITO failed to gain enough support.

While the IMF did help stabilise the flow of global funds, the need still existed for an international regulatory agency similar to the rejected ITO, to help govern the investments needed to boost the economy and fund the World Bank’s development projects.

In 1948, eighteen European nations ratified the Organization for European Economic Cooperation, reducing trade barriers such as tariffs. (It became the Organization for Economic Cooperation and Development, or OECD, in 1961.) At the same time, the heavily US backed General Agreement on Tariffs and Trade, or GATT, was ratified by 23 founding nations.

A tale of two dispute mechanisms

GATT is rarely discussed outside insider circles. But in many ways, it’s the modern milestone marking the beginning of investor protection provisions in international trade agreements.

The investor provisions built into GATT weren’t initially large or entirely clear. Primarily, protection focused on ensuring foreign investors got national and most-favored-nation treatment — the same treatment as domestic investors.

Disputes that arose due to a violation of these terms were to be settled by the contracting parties and the GATT council. The GATT chairman determined early cases. Later, small expert panels chosen by the involved parties were given the task of recommending rulings to the council.

But as subsequent foreign investment moved from recovering Europe to developing nations in Africa and elsewhere, the GATT dispute settlement system became vastly more complicated. Bilateral and multilateral trade treaties and investment agreements became all the rage in the second half of the 20th century, linking robust economies with failing or fledgling ones.

“[G]lobal trade expanded at a rapid rate, and what parties found was that each country had their own laws referential to domestic needs,” explained Timothy Lemay, UNCITRAL secretariat and principal legal officer. “There needed to be a common legal standard all could sign onto to remove these kind of blockages to trade.”

This story was published with permission from Mongabay. Read the full story.

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