Although international arbitration has long been praised as a “fundamental” safeguard for foreign investors, the future of ISDS appears in doubt, especially in the context of the Americas Partnership for Economic Prosperity (APEP), a Biden administration initiative in the Western Hemisphere. Ahead of this week’s trade ministerial, hundreds of leading academics, several NGOs, and 47 Democrats in Congress have called on the Office of the United States Trade Representative (USTR) to seek the dispute settlement mechanism’s removal from all international investment agreements (IIAs) among the 12 APEP member countries. Their arguments include the mechanism’s alleged failure to facilitate increased foreign direct investment (FDI), the restriction of governments’ “policy space,” and obstruction of the clean energy transition. Meanwhile, congressional Republicans have been silent on the APEP ISDS debate, an indication that the historically business-friendly party may have adopted the Trump administration’s views on the mechanism—namely, that the mechanism cedes U.S. sovereignty and eliminates the risk premium associated with offshoring. Now, as USTR embraces this bipartisan antipathy, the debate on the future of ISDS among APEP members is ostensibly a binary one: maintain or eliminate the mechanism.
The current ISDS debate overlooks the mechanism’s many benefits. Its facilitation of increased FDI is real. Moreover, as discussed in a previous Scholl Chair commentary, ISDS mechanisms can play an important role in facilitating, rather than hindering, the clean energy transition. They may also bolster U.S. government efforts related to the nearshoring and de-risking of critical supply chains, from which APEP countries are well positioned to benefit. However, for those convinced that IIAs must be more environmentally friendly, the elimination of ISDS is not the only pathway, nor is it the right one. There is a vibrant ISDS reform debate and several proposals, including a carve-out to exclude climate-related cases from the jurisdiction of ISDS tribunals, are lauded for their alleged favorable environmental impact. This paper discusses such a carve-out in light of the APEP debate on ISDS.
