May 29, 2014 - 1:15pm

Investaphobia and the Irrational Fear of Investor-State Dispute Settlement

Senior Vice President, International Regulatory Affairs & Antitrust

Every night, as I put my son to bed, I make sure his closet doors are closed. Like many children at bedtime, he has a fear that something may be in his closet, and somehow by having the doors closed he feels safer.

His fear is irrational, and he will soon grow to an age when he no longer cares about his closet doors at bedtime. However, throughout his life, like all of us, he will continue to have fears, most of which, upon reflection, will still be found to be irrational.

When it comes to foreign direct investment, there can be any number of irrational fears. Some fear that outbound investment means the outsourcing of jobs; others fear that inbound investment means foreigners are taking over. However, the greatest fear at the moment involves Investor-State Dispute Settlement (ISDS), a provision included in investment treaties (and many trade agreements).

Investment treaties ensure foreign investors are not subject to discrimination, are treated fairly, and are compensated in the event of expropriation. ISDS simply allows an investor to make a claim when a government has violated the obligations it undertook upon signing an investment treaty.

The next time you hear someone trying to sell fear of ISDS, remember:

ISDS is neither new nor exotic. It has been included in more than 2,700 investment treaties signed over the past four decades. ISDS upholds the same kind of due process protections against expropriation and government takings that appear in the U.S. Constitution.

Under ISDS, relatively few disputes are brought to arbitration. According to UNCTAD, a total of 512 investor-state disputes were filed between 1987 and 2012 — a surprisingly small number for thousands of agreements over nearly half a century.

Under ISDS, investors usually lose. Independent arbitrators aren’t swayed by weak arguments. Governments comfortably win in the vast majority of cases. Even when an investor prevails, it usually is granted a fraction of the amount of compensation originally sought. According to the scorecard of Public Citizen — which actively cultivates fear of international investment agreements — the average recovery is about 15% of the original claim in those instances where the investor prevailed.

Hypothetical and pending cases are no substitute for the record. The fear tactics of anti-ISDS activists rely on hypothetical scenarios or cases that have been initiated but not yet decided. Hypothetical concerns over labor and environmental laws are often cited. At times cases that are still pending are often showcased. Such hyperventilation can only be addressed by an examination of the established track record, which shows that when a government acts in a non-discriminatory manner and affords investors due process, it always wins.

The next time someone comes peddling fear of ISDS, ask this simple question: “Can you cite an ISDS case where the investor won but didn’t deserve compensation?” Expect to hear silence in return. 

About the Author

About the Author

Senior Vice President, International Regulatory Affairs & Antitrust

Sean Heather is Senior Vice President for International Regulatory Affairs & Antitrust.