Columbia Centre on Sustainable Investment – Written Evidence (UST0036)

We at the Columbia Center on Sustainable Investment (CCSI) are grateful for the opportunity to provide input to House of Lords EU International Agreements Sub-Committee with respect to a call for evidence on the ongoing UK-US trade negotiations towards a comprehensive free trade agreement.

CCSI, a joint center of Columbia Law School and the Earth Institute at Columbia University in New York City, focuses on international investment, including related dispute resolution mechanisms, and the impacts such investment and dispute resolution can have on rights-compliant, inclusive sustainable development.

Our attached submission responds to Question 13 of the Call for Evidence. We elaborate in the attached on the investor-state dispute settlement (ISDS) mechanism, how it relates to the UK’s negotiating objectives, and some of the concerns and costs associated with that dispute settlement system.

As explained in the attached, CCSI respectfully submits that there is no appropriate role for ISDS in an agreement between the UK and the US. The ISDS mechanism imposes costs on governance, democratic institutions, and taxpayers that are not offset by demonstrated public benefits. Moreover, its increasingly controversial nature means that it can frustrate negotiations and ratification, threatening to stall progress on other important aspects of a potential agreement.

These negotiations present an important opportunity to move away from the practices of the past, exemplified by ISDS, and craft an agreement that (1) more strategically supports cross-border investment beneficial for both the US and the UK, (2) supports good governance of investment projects, and (3) enhances cooperation to solve challenges associated with cross-border investment that are not easily solved by any one country acting alone, such as efforts to combat races to the bottom in terms of environmental, labor, health, and other regulatory standards.
 

Response to Question 13

1. As the UK and the US continue negotiations toward a comprehensive FTA, this comment will specifically focus on the investor-state dispute settlement (ISDS) arrangements that is being considered.

2. Our main conclusion is that ISDS is a tool that was crafted decades ago and no longer deserves a place in modern trade and investment agreements. It would expose the UK – and its taxpayers - to a range of potential undue costs, including undue constraints on policy space and the right to regulate, costs of litigation and liability, and social and administrative costs associated with erecting and implementing a system of unequal treatment under the law. Moreover, there is no clear evidence that the costs of ISDS are offset by its hoped-for benefits.[1] We believe the inclusion of ISDS in the agreement would undermine, rather than advance, the UK’s negotiating objectives.

3. Our analysis is summarized further below.

ISDS and Its Relationship to Increasing Investment Flows

4. The UK has identified removing barriers to investment in the US as one of its objectives for a US-UK agreement.[2]

5. In this context, ISDS has, in theory, a potential role to play. As a form of government-provided risk insurance, it arguably decreases political risk that might otherwise discourage investment. As a general matter, however, evidence of the link between ISDS and investment flows, remains lacking.[3] Political risks, moreover, do not seem at present to be significant barriers to investment flows between the US and UK.[4] Thus, it is unclear that the availability of ISDS will have any meaningful impact on investors’ perceptions of risks or investors’ investment decisions.

6. If ISDS were included in an investment treaty that also included liberalization provisions, investors could potentially use ISDS to enforce those liberalization commitments and remove investment barriers. Notably, however, states – even those that include ISDS as a general matter – often restrict the power of ISDS tribunals to adjudicate claims that liberalization commitments have been breached.[5] This apparent concern about permitting ISDS claims on these issues seems to reflect uncertainty about giving investors power to advance their particular interpretations of the treaty provisions, and ISDS tribunals’ ability to interpret and apply treaty provisions in accordance with states’ intent. It similarly reflects an interest among states to maintain appropriate rights to regulate in this context.[6]

7. There are, however, other tools available that
• can be used to more effectively and systemically identify and reduce undue barriers to investment,
• may be more accessible to SMEs than costly and uncertain litigation under ISDS,[7] and
• do not give rise to the same costs and risks to states as ISDS (discussed further below).

8. A treaty-based process or mechanism for ongoing dialogue and information sharing could, for instance, serve to enhance cooperation between the UK and the US on investment-related issues and solve challenges associated with cross-border investment that are not easily solved by either country acting alone. More specifically, as barriers to investment are removed, competitions for capital can and do develop. This can put pressure on countries to offer unduly generous incentives or reduce regulation. A UK-US agreement could usefully include provisions seeking to prevent wasteful and harmful races to the bottom. These provisions could, for example, restrict treaty parties’ abilities to use tax incentives to cause an investment to move its operations from one country to another; a UK-US agreement could also provide for increased dialogue and transparency about the use of such incentives.

9. An agreement could also seek to strengthen cooperation between the UK and US on investment-related aspects of other global goals, such as achieving the objectives of the Paris Agreement. It could, for instance,

• establish cooperative and consultative mechanisms to catalyze cross-border investment in climate change mitigation and adaptation; and
• institute mechanisms to identify and mitigate negative impacts of cross-border investments between the US and UK on climate change goals.

10.                     A number of states have begun to implement treaty-based or a more general investment ombudsperson or similar offices in order to address hurdles and problems surrounding investment projects or processes.[8] These mechanisms can be used to address complaints by investors about conduct by governments. They can also be used to hear and address complaints by civil society organizations about conduct of governments or investors related to investment projects or policies and their effects, including compliance with treaty obligations.

11.                     Through such an ombuds office or otherwise, states can jointly pursue tools and agreements related to risk mitigation and economic and political cooperation to attract, channel, retain, and benefit from FDI. These can focus on helping investors better identify cross-border opportunities; enabling policy-makers to better understand and address unintended investment impediments or barriers; aiding states in providing more effective technical, financial or other treatment to aid and facilitate investment; and providing citizens channels to redress harms and improve outcomes from FDI.

ISDS and Its Impact on the Right to Regulate in the National Interest

              Relationship to Domestic Law, Policies, and Institutions

12.                     Another of the UK’s negotiating objectives is to “[m]aintain the right to regulate in the national interest.”[9]

13.                     In order to ensure this right is maintained, it is crucial to first:
• assess whether and to what extent the substantive standards in investment treaties restrict that right as compared to restrictions on government power already in place in domestic law; and
• evaluate how ISDS provisions – including with respect to standing to bring claims, limits on who can be sued, and rules on available damages – affect the strength and content of investment treaties’ substantive obligations, and impact state’s regulatory powers in practice.

14.                     This evaluation of the interrelationship between substantive protection standards and procedural dimensions of ISDS is a complex, but necessary task in order to fully understand how an investment treaty may impact the government’s rights and abilities to regulate.

15.                     We have done that analysis for the US context based on such treaties as the North American Free Trade Agreement and the Trans-Pacific Partnership. Based on our analysis, we have concluded that, notwithstanding US negotiators’ efforts to ensure investment protections in investment treaties do not provide foreign investors greater rights than domestic investors,[10] the procedural features of ISDS mean that covered foreign investors do enjoy greater substantive rights than other stakeholder within the US domestic legal system.[11] Those greater rights, in turn, impose enhanced constraints on the government’s powers to regulate in the public interest.

16.                     In this context, it is important to highlight that the fact that governments can be sued is not inherently problematic; indeed, it is essential for government accountability. Both US and UK law offer many tools for private litigants to bring claims against the government for wrongful conduct and harm. But in both the US and the UK, citizens, legislators, and judicial decisionmakers strive to ensure substantive standards and procedural rules permitting those suits are carefully calibrated to strike a proper balance between public and private rights and interests, and ensure that the government has adequate flexibility to regulate in the public interest. In democratic and common law societies such as the US and the UK, that calibration is an ongoing exercise, evolving based on, among other things, new insights and information about the effects of different laws and policies; new challenges, issues, and technologies; and changes in societal preferences and priorities.

17.                     When ISDS is included in an investment agreement, the normal application and evolution of domestic norms is undermined as foreign investors are granted privileged procedural rights to bypass domestic rules and institutions. Questions about the proper role of government in society are thus shifted, at the investor’s election, to arbitral tribunals. When interpreting treaty language, ISDS tribunals are not bound by treaty party intent nor any desire to tether international standards to domestic ones. Indeed, in some cases tribunals have shown considerable willingness to demonstrate their freedom to depart from treaty parties’ expressed positions.[12]

18.                     Any resulting ISDS award is also enforceable in processes specifically designed to limit the role of domestic courts and the relevance of domestic law and policy considerations.[13] In his dissenting opinion in BG Group plc v. Republic of Argentina, US Chief Justice John Roberts noted the extraordinary power held by arbitration tribunals to “review [a state’s] public policies and effectively annul the authoritative acts of its legislature, executive, and judiciary...a power it typically reserves to its own courts, if it grants it at all: the power to sit in judgment on its sovereign acts.”[14]

19.                     Evolution of law and policy can be significantly frustrated when certain actors – namely protected investors – are given rights that exceed those of domestic companies and other domestic actors. In the context of the US, Ambassador Lighthizer has stated:

We’ve had situations where real regulation which should be in place which is bipartisan, in everybody’s interest, has not been put in place because of fears of ISDS ... Why should a foreign national be able to come in and not have the rights of Americans in the American court system but have more rights than Americans have in the American court system? It strikes me as something that at least we ought to be skeptical of and analyze. So a U.S. person goes into a court system, goes through the system and they’re stuck with what they get. A foreign national can do that and then at the end of the day say ‘I want three guys in London to say we’re going to overrule the entire US system.’[15]

              ISDS Remedies and the Right to Regulate

20.                     When a breach of an investment treaty is found, the typical remedy is monetary damages. These damages are commonly in the tens of millions of dollars, and not infrequently in the hundreds of millions.[16] Some decisions have awarded investors multiple billions of dollars, and ordering payment of sums representing sizeable portions of the respondent country’s GDP.[17]

21.                     Costs to the UK as a result of liability (and litigation) associated with ISDS should be examined with respect to a potential agreement with the US. Although the UK has been relatively insulated from ISDS claims to date, its exposure will increase dramatically if it includes an agreement with the US, the main source country of inward FDI in the UK.[18]

22.                     Nevertheless, it is often stated that because ISDS decisions tend to require payment of money, not other forms of relief, they do not prevent states from regulating in the public interest; states’ right to regulate remain. That assertion, however, is misleading for several reasons:

• under relevant domestic legislation, it may be not be legally or politically possible for the relevant government actor – whether it is an agency, subnational jurisdiction, or otherwise – to maintain a measure deemed by an ISDS tribunal to violate international law;[19]
• the obligation to compensate may make a measure cost prohibitive; and
• the mere prospect of having to pay compensation may deter governments from adopting or maintaining relevant measures.

23.                     Furthermore, when compensation is paid to the investor by the state, that payment affects not only the cost of measure, but the distribution of the costs and benefits of societal regulations.

24.                     These practical and distributional implications of adverse ISDS awards noted in paragraphs 20-23 above merit serious attention and should be evaluated in any meaningful attempt to understand the implications of ISDS for the government’s right and ability to regulate in the public interest.

Implications of ISDS for Equality before the Law

25.                     As noted above, the US and the UK both wish to open up opportunities for investors seeking to invest into the other country and to secure rights and protections for those investors that do not exceed substantive rights granted to domestic companies.[20]

26.                     As also noted above, ISDS makes it exceedingly difficult – if not impossible – to operationalize this “no greater rights” principle. Thus, additional costs of ISDS relate to the political and administrative costs of setting up a system of unequal treatment under the law. ISDS provides a special legal regime for foreign sources of capital, granting holders of such capital significant rights vis-à-vis the host government and vis-à-vis all other stakeholders within the host economy.[21] This can make it difficult for governments to understand what obligations it owes to what actors and what liabilities it is potentially generating; and it can create mistrust and tension among citizens who feel their voices and rights are being diminished by those of corporate actors with more powerful legal tools. Due to these factors, rather than supporting a climate that is open to foreign investment, ISDS can make domestic constituents more cautious of it.

CONCLUSION

27.                     We thank you for the opportunity to provide comments through this process.

28.                     These negotiations present an important opportunity to move away from the practices of the past, exemplified by ISDS, and craft an agreement that (1) more strategically supports cross-border investment beneficial for both the US and the UK, (2) supports good governance of investment projects, and (3) enhances cooperation to solve challenges associated with cross-border investment that are not easily solved by any one country acting alone. We look forward to further opportunities to engage on these issues.

26 June 2020