Governments the world over are worried about investor-state dispute settlement (ISDS) rules. These allow foreign investors to sue them for billions over new laws or policies reducing their profits.

Typically favoring powerful transnational corporations (TNCs), ISDS blocks policy changes needed to address new challenges.

Companies have successfully sued governments for policy changes which allegedly reduce their profits.

The wicked of Oz

Tobacco giant Philip Morris tried to block the Australian government’s demand for ‘plain packaging,’ with larger and more graphic health warnings on cigarette packs, by suing under ISDS and also in Australian courts.

In the domestic case, Australia’s highest court ruled the legislation constitutional.

The company then transferred Philip Morris Australia to Philip Morris Asia in Hong Kong.

Invoking ISDS in the bilateral investment treaty (BIT) between Australia and Hong Kong, it sued Australia.

Luckily, the ISDS tribunal ruled it had no jurisdiction as considering the case would constitute an abuse of process.

More recently, Australian Clive Palmer has hired a former Attorney-General to demand nearly A$341 billion from state governments after moving his major mining companies to Singapore in 2019. His two ISDS claims invoke the Australia-New Zealand-ASEAN Free Trade Agreement (ANZAFTA).

The first seeks about A$300 billion in compensation and for ‘moral damages’ after Australia’s highest court ruled in favor of the Western Australian (WA) state government.

Palmer is challenging the 2022 WA legislation to indemnify the state, ensuring he would get nothing.

He is also demanding A$41.3 billion in compensation for rejecting exploration permits for the Waratah coal mine in Queensland. The licence was refused on environmental grounds, including increasing carbon emissions.

Palmer is expected to take a third ISDS case against Australia’s Federal and Queensland government decisions to reject his coal mine licence application due to its likely adverse impacts on the local environment, including waterways, and the Great Barrier Reef.

Even if the governments win these cases, they would still incur millions in legal expenses. The Philip Morris cases against Australia took five years, and cost A$24 million in legal expenses, of which only half was recovered by the government.

Evading ISDS?

After such costly experiences, almost a decade ago, Australia successfully demanded a ‘tobacco carve-out’ to the Trans-Pacific Partnership’s (TPP) ISDS provisions.

Australia’s new Southeast Asia Economic Strategy to 2040, announced on 6 September 2023, promises to review existing free trade agreements (FTAs) with the region.

This will include agreements containing ISDS clauses, including the ANZAFTA and other bilateral and plurilateral agreements.

Using side-letters, Australia has already opted out of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) ISDS provisions with both the UK and New Zealand.

In an ISDS case, the World Bank Group’s International Centre for the Settlement of Investment Disputes ruled Pakistan had to pay over US$5.8 billion to an aggrieved investor. This is equivalent to its entire US$6 billion new IMF loan, about an eighth of its annual budget.

Other ISDS second thoughts

The New Zealand government is now also against ISDS.

While ISDS is part of several of its FTAs–e.g., the CPTPP and China-New Zealand FTA–its government has opposed ISDS provisions in FTA negotiations since 2018.

Hence, there is no ISDS in the Regional Comprehensive Economic Partnership (RCEP), the New Zealand-United Kingdom FTA, and the New Zealand-European Union FTA.

While it was considered too late to exclude ISDS entirely from the CPTPP at a late stage in negotiations, New Zealand has secured side letters with Australia, Brunei, Malaysia, Peru and Viet Nam.

This means ISDS does not apply between New Zealand and these countries.

The current Chilean government is also concerned about ISDS. Hence, it has asked all other CPTPP governments for side-letters excluding ISDS between them, but only New Zealand has agreed so far!

Rich nations wary of ISDS

The US removed most ISDS provisions when the Trump administration replaced the old North American Free Trade Agreement (NAFTA) with the US-Mexico-Canada Agreement (USMCA) in 2020.

ISDS was in the TPP because Obama administration negotiators wanted it. But most 2016 presidential aspirants to succeed him, including Democrats, rejected the TPP.

Trump’s US Trade Representative (USTR) Lighthizer specifically cited ISDS as the reason for US withdrawal from the TPP.

Biden and his USTR have maintained Trump’s anti-ISDS stance instead of reverting to Obama’s position. ISDS is not in Biden Administration ‘economic cooperation’ agreements such as the Indo-Pacific Economic Framework.

Meanwhile, the EU is urging withdrawal from the Energy Charter Treaty (ECT) as its ISDS provisions will block needed European climate policies.

Several EU and non-EU countries have already begun withdrawing  from the ECT, arguing it constrains their ability to act against global warming.

Developing countries saying no

Many developing countries have already been withdrawing from their BITs while the RCEP does not include ISDS.

So, the CPTPP, other BITs and FTAs’ ISDS provisions are out of date. Worse, they block addressing emergencies, such as the COVID-19 pandemic and global warming.

Countries should reject and even withdraw from BITs and FTAs with ISDS. After all, there is no evidence ISDS attracts foreign direct investment. More and more developing nations–including India, Indonesia, Pakistan, Ecuador, South Africa, etc.,–have already withdrawn from such BITs.

Governments should urgently review and remove ISDS provisions in all existing BITs and FTAs, or withdraw from them, to avoid more costly ISDS cases.

They must be more critical and careful in ensuring future economic cooperation agreements to ensure they really serve their current and future best interests.

(Jomo Kwame Sundaram was an economics professor and United Nations Assistant Secretary-General for Economic Development.)