Legal Issues In the News

Protection and the TPP


If you’ve been paying attention to the news recently, you’ll know that the text of the treaty establishing the Trans-Pacific Partnership was released last week by the Office of the U.S. Trade Representative.  This historic agreement is designed to facilitate trade between countries on both side of the Pacific which already account for about 40% of world GDP.  The list of potential members includes the U.S., Canada, & Mexico (already bound together by NAFTA), Japan, Australia, Chile, Peru, Singapore, New Zealand, Malaysia, & Vietnam (but not South Korea or China).

Paul Heald

University of Illinois College of Law

One section of the agreement that has tongues wagging on both the right and the left provides protection for firms that make an investment outside their own home country.  The agreement would provide for private mandatory arbitration of all investment disputes, usually by ICSID, the International Center for Investment Disputes.  Disappointed investors will have the ability to sue host states that mistreat their investments. Some conservatives complain that this is a catastrophic giveaway of US sovereignty, while some liberals complain that it empowers US corporations to pillage developing.

As a well-known contrarian, I would like to disagree with both sides.

First, the provision of protection for foreign investments is virtually the same as that found in the 47 bi-lateral investment treaties that the US has already signed.  We been signing agreements of this sort since 1981 and have never lost an arbitration, having only been sued six times.  It’s hard to see that the investment protection provisions are some sort of massive giveaway of US sovereignty.

What the provisions promise foreign investors is non-discriminatory treatment—along with “fair and equitable treatment” and “full protection and security” for investments.  “Fair and equitable treatment” requires observing due process when dealing with investments, and “full protection and security” means that our regulatory and security agencies must provide minimally adequate services consistent with international law. 

It’s no surprise that we haven’t been successfully sued. These standards are already built into U.S. law.

But does investment protection grant US firms excessive power overseas?  The most criticized instance is probably Metalclad v. Mexico, a 1997 case involving a U.S. firm trying to site a toxic waste dump close to a small Mexican town.  Siting a toxic waste dump is heavily regulated both here and overseas, and Metalclad obtained all the relevant permissions, permits and reassurances from the Mexican government before beginning work.  Having satisfied all Mexican laws, they were surprised when a local zoning board declared the waste site an ecological preserve and blocked completion of Metalclad’s facility.

Metalclad brought an arbitration under NAFTA arbitration rules (very similar to the TPP provisions) and was able to show that under Mexican law, the local government lacked the power to overrule the permission granted by the federal government.  It’s easy to see why the locals didn’t trust the central government in Mexico City, and it’s easy to understand why they didn’t want a toxic waste dump on their doorstep. However, it’s also easy to understand the frustration of Metalclad after they had invested millions of dollars in reliance on the permits issued by the proper legal authority.  An illegal action unfairly cost them a large investment.

We can take a couple of lessons from the case.  First, the result of the arbitration was an award of $17 million to Metalclad, NOT an injunction requiring the dumping of toxic waste in Mexico. States do not cede that sort of sovereignty in these investment treaties. Second, note that the behavior of the local government in Metalclad cost the central government a pile of cash.  These investment protection treaties apply not only to the federal governments but also states, counties, municipalities and political sub-divisions, like the University of Illinois.

That’s right!  The U of I research park shouldn’t kick out a Malaysian start-up without giving it due process. Of course, the good news is that the feds will be picking up the tab for any misbehavior!

I'm Paul Heald