U.S. companies profit from investor-state dispute system

Hankyoreh, Seoul

U.S. companies profit from investor-state dispute system

Past cases show millions in compensation, and using the ISD to neutralize state policy

By Jung Eun-joo

2 November 2011

The South Korean government describes the investor-state dispute system (ISD), introduced by the country for 81 bilateral investment treaties (BITs) formed since 1967, as a means of protecting offshore investments by South Koreans. But South Korea has never once sued another country, nor has the government been sued by a foreign investor. The reason was that none of those treaties was with the United States.

Indeed, it is mainly the United States that has profited from the system. Of the 390 cases for international arbitration reported through late 2010, some 108, or 27.7%, were requested by U.S. investors. In particular, there was a rapid increase when the North American Free Trade Agreement (NAFTA) among the United States, Canada, and Mexico took effect in 1994, and it became apparent what they represented.

In a January 2004 piece for the New York Times titled “The Broken Promise of NAFTA,” Joseph Stieglitz, a Nobel laureate in economics and professor at Columbia University in the United States, wrote, “Hidden in Nafta was a new set of rights - for business - that potentially weakened democracy throughout North America.” Stieglitz went on to say that “[e]nvironmental, health and safety regulations have been attacked and put in jeopardy. To date, suits with claims in excess of $13 billion have been filed.”

In the case of Mexico, tax policy became an issue. The Mexican government decided to levy a consumption tax on soft drinks that used other flavorings besides cane sugar. The aim was to protect the country‘s cane sugar industry, which was in jeopardy from imported high-fructose corn syrup. But three U.S. corn syrup producers referred the Mexican government for arbitration, charging that this was a violation of the FTA. The court ruled that it had to pay damages of $191.8 million.

In July 2006, the Argentine government had to pay $165 million to the U.S. firm Azurix. A spinoff of Enron, Azurix had secured a 1999 concession to operate waterworks for the Buenos Aires for 30 years. The supply was subsequently spotty, with toxic bacteria discovered the following year. When the local government terminated the management contract in 2001, Azurix requested arbitration and received compensation.

What characterizes the hearings is that they do not show the same consideration for the legitimacy or motivations of national policy as administrative lawsuits do. They determine whether a party receives compensation based on whether an investor’s asset value declined as a result of certain measures by a state and whether these were in violation of the agreement. A case in point came when the U.S. company Metalclad requested arbitration after the Mexican government cancelled a permit to built a garbage dump. The government was ordered to pay $16.6 million in compensation.

Large payouts are not all that foreign investors can claim. It is also possible to neutralize state policy without resorting to arbitration. In 2001, the Canadian government attempted to introduce regulations banning the use of the term “light” and “mild” on cigarette packs. In response, the cigarette maker Philip Morris sent a written protest contending that this violated the FTA. After calculating the costs of compensation according to the ISD system, Ottawa decided to withdraw the plan.

The South Korean government also abandoned measures for regulating the supply of construction equipment, which would have limited the registration of new excavators after a surplus supply with the Four Major Rivers Restoration Project, for reasons having to do with the South Korea-United States Free Trade Agreement (KORUS FTA)