Japan Press Weekly

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2011 December 7 - 13 [ECONOMY]

ISDS enables multinationals to sue governments

ISDS stands for Investor-State Dispute Settlement, which enables foreign corporations or investors to sue governments in an international arbitration body over losses the foreign businesses claim they suffer in countries of these governments. The United States is seeking to incorporate the ISDS provisions into the Trans-Pacific Partnership (TPP) agreement.

Arbitral awards have a compelling force with which both parties should comply. For example, if arbitration recommends compensation, the government must pay. If restitution is recommended, the government must change its legislation if needed.

However, legislation of each nation is related to the sovereignty of that country. The ISDS mechanism is so advantageous to multinationals that the ISDS is becoming a worldwide concern.

Examples

In 2004, the Ecuadorian government was sued by U.S. Occidental Petroleum Corporation for not reimbursing it for its value added tax. VAT reimbursements are not applicable to domestic oil companies in Ecuador. However, the London Court of International Arbitration ordered the Ecuadorian government to pay VAT reimbursements plus 71.5 million dollars or about 5.6 billion yen in compensation to the foreign oil major.

In Mexico, due to major local protests, the government did not renew a license of Spanish firms to open their toxic waste disposal plant. Mexico ended up paying 5.5 million dollars or about 430 million yen in compensation to the Spanish firms.

In Australia, an overseas tobacco company sought compensation from the government for a loss caused by an Australian regulation on cigarette package logos.

The Canadian government was sued over subsidies it had provided to conserve forests. The claim was that the subsidy hampered free competition in timber trade.

Arbitral awards have a compelling force

The World Bank sets up an arbitral institution, the International Center for Settlement of Investment Disputes (ICSID), to which 157 countries are signatories. The ICSID deals with about 60% of total investment disputes. The U.N. Commission on International Trade Law (UNCITRAL) also functions as an arbitration body. Both mechanisms give multinationals a huge advantage.

Arbitration takes place just once. No matter how unjust the arbitral award, there is no second chance for arbitration.

An official of the Japanese Ministry of Economy, Trade, and Industry in charge of investment disputes says that if the arbitral award decision is ignored, “That case could be submitted to the International Court of Justice for violation of investment treaties. Not only that, the World Bank could suspend its loans.”

Most international investment agreements prohibit the use of mandatory performance requirements. Namely, governments cannot make foreign corporations promise to create jobs or restrict their easy withdrawal.

Such provisions are what the United States wants to include into the TPP agreement. Why should Japan get into line with it?