An ironic aspect of the #MeToo movement is the revelation that mandatory arbitration clauses in women’s employment contracts have sometimes helped to keep sexual harassment claims secret. But in our daily lives, we all “agree” to similar mandatory arbitration clauses when downloading software, for example, or accepting a new credit card.
Big business forces us to “choose” arbitration rather than public courts to resolve disputes because they say arbitration is less expensive and more efficient. On a larger scale, international trade deals like the North American Free Trade Agreement (NAFTA) contain similar “mandatory arbitration clauses” that allow companies to sue foreign governments for changing rules that interfere with their future profit expectations.
Multinational corporations prefer these mandatory arbitration provisions — which are mind-numbingly labeled as Investor-State Dispute Settlement (ISDS) procedures. They say that ISDS provides “investment certainty,” and gives them confidence that they have a remedy when dealing with countries that may lack sound legal and regulatory systems.
But here’s a question: If you are a red-blooded American who is pro-business, shouldn’t you be glad that corporations can have “certainty of investment”? Not necessarily. Not if that “certainty” means companies investing overseas rather than in the United States. That’s because, in actual practice, ISDS simply helps to increase the attractiveness of investing abroad rather than at home.
Think about it this way: USA Widgets Inc. wants to build a new factory. It considers investing in a plant located in the United States — a country that maintains a solid legal and economic system, with contracts enforced and rights protected.
But they’re also considering Foreign Country A, which has low-cost labor and a low regulatory burden. The company is nervous, however, about the legal system in Foreign Company A because, for example, the judges are not independent. What if the country changes a law that puts USA Widgets out of business? It looks risky.
But trade deals like NAFTA give USA Widgets the ability to utilize an international arbitration tribunal made up of corporate lawyers, not the local legal system, to enforce its rights. As a result, the company decides to offshore its new plant in the cheap-labor, low-regulation country. And why shouldn’t it do so — since the risk is covered?.
In other words, NAFTA provides an incentive for USA Widgets to locate offshore rather than in the United States.
U.S. Trade Representative (USTR) Robert Lighthizer recently commented on exactly these types of ISDS provisions, which he sees as incentivizing investment in developing countries rather than in the U.S.
He explains: “I’ve had people come in and say, literally, to me: ‘Oh, but you can’t do this. You can’t change ISDS … You can’t do that because we wouldn’t have made the investment otherwise.’ I’m thinking, ‘Well, then, why is it a good policy of the United States government to encourage investment in Mexico?’”
As Lighthizer notes, ISDS is akin to corporate welfare providing “political risk insurance paid for by the United States government.”
This is not an insignificant issue, as evidenced by the extraordinary fervor of the multinational corporate community in lobbying to preserve ISDS kangaroo courts in NAFTA and other trade deals.
Lighthizer has proposed making ISDS voluntary. In other words, a new NAFTA would not include it, but signatory countries can separately decide to adopt ISDS, thereby allowing foreign companies to sue them.
It’s suggested that Mexico has indicated it would “opt in” to the ISDS arbitration system. Why would they do that? Because Mexico believes doing so would increase the chances of inviting new investors. Fine for them.
In contrast, the U.S. maintains a “certainty advantage,” with a legal and economic system that investors can trust — at least in relation to many other countries. That certainty should be a competitive advantage for investors seeking a good place to locate production.
Why is it in America’s interest to give up that investment certainty advantage by including foreign corporation arbitration provisions in a trade deal? Country-hopping companies with no national loyalty will want it. But why should it be U.S. policy to incentivize offshoring investment and the resulting loss of jobs? Trade deals should be about producing more at home, for export overseas.
Trade Ambassador Lighthizer and President Donald Trump are questioning large swaths of the conventional wisdom on trade. As they look to revamp U.S. trade policy, they should consider jettisoning the ISDS provisions and mandatory arbitration that have helped to encourage more offshoring of U.S. manufacturing.