The special protection that investors based in the United States have long enjoyed when they do business abroad seems to be on its way out, and it’s about time. Unlike other private parties, including workers and consumers, foreign investors have access to special arbitration arrangements to protect their businesses in partner countries that sign bilateral investment treaties or preferential trade agreements with the U.S. This mechanism, known as investor-state dispute settlement, or ISDS, has attracted increased scrutiny since the U.S. insisted on including an expanded version of it in the North American Free Trade Agreement in the 1990s. Now, both President Donald Trump and presumptive Democratic presidential nominee Joe Biden have expressed opposition to, or at least deep skepticism about, this relic of the mid-20th century.
ISDS procedures began to be included in bilateral investment treaties, especially those negotiated by European countries, in the 1950s and 1960s, when a number of newly independent countries, many of them former European colonies, adopted nationalist economic policies. Their governments sometimes expropriated foreign investments that they viewed as exploitative and refused to pay compensation. Even though those treaties and others since then are between sovereign governments, the ISDS system allows private corporations to bring complaints about government behavior before independent international tribunals that can order the government to pay compensation if it is found to be in violation of the treaty.
The U.S. never relied on investment treaties as heavily as many European countries. But beginning with NAFTA, U.S. trade negotiators began incorporating ISDS panels in the investment chapters of bilateral and regional trade agreements. Controversially, the NAFTA model expanded the traditional model—which typically focused on expropriation or other blatant discrimination against foreign investors—to include “regulatory expropriation.” That allowed corporations to bring complaints against governments for regulatory actions that were allegedly arbitrary or capricious and that lowered the value of the investment.