Donald Trump has thrown a hand grenade into the global economic architecture, destroying some things that are working well. But amid the devastation, some things seem to be surviving that really should be taken down. Among the most notable of these is an arcane set of international agreements by which private investors can sue governments, known as ISDS: investor-state dispute settlement. These disputes are litigated not in public courts with impartial judges but in private arbitration – behind closed doors, and rife with conflicts of interest.
Early on, when they were snuck into many trade agreements, no one paid much attention. For instance, these provisions in Nafta, the so-called free trade agreement between the US, Mexico, and Canada, never got a discussion within the cabinet while I served in the Council of Economic Advisers under President Clinton when Nafta got adopted.
What is it?
Investor-state dispute settlement (ISDS) was created to help companies protect investments abroad. It allows companies to sue countries for lost profits caused by government action including corruption, seizure of assets or the introduction of health and environmental policies.
The system was created in the 1960s by the World Bank. It was intended to give companies confidence to invest in poorer countries with weak political systems where they might not get a fair hearing in domestic courts.
How does it work?
The foreign company must put forward a case showing that the state has damaged its profits. Most international investment treaties and free-trade deals include ISDS clauses. Cases are heard by a private arbitration tribunal, and typically decided by a panel of three arbitrators – one chosen by the company, one chosen by the state and the third selected jointly.
How much are the cases worth?
Awards regularly amount to hundreds of millions of dollars, and some are in the billions. In 2024 the average amount awarded was $385m (£304m). The average sum awarded is increasing and these payouts can make up a sizeable chunk of poorer countries' annual budgets.
Who is involved?
The fossil fuel and mining industries are the most litigious in the ISDS system, accounting for more than 30% of known cases.
Most claims are brought by companies based in rich countries against the governments of developing countries. Companies registered in developed countries file 81% of ISDS lawsuits, according to UN data, while developing countries have faced 62% of cases.
How common is it?
ISDS began as an obscure legal mechanism, averaging about one case a year for its first decade. Now, dozens are brought every year, with Guardian analysis finding more than 900 since 2013.
The provisions were sold as protecting property rights from expropriation – but that was nonsense: few expropriations occur today, and the World Bank and governments around the world provide insurance against expropriation. They were sold, too, as encouraging investment – but in the decades since they began to be a feature of international agreements, there is little evidence that they make much or any difference, which is why today some countries that have signed such agreements have given notice that they are terminating them.
What the agreements do is provide companies with opportunity to sue for compensation when there is a change in regulation which they claim might impair their future profits. That compensation is not based only on what they lost – say their investment, that is no longer so profitable – but on what they might have received in profits: an entirely nebulous amount. In my view it has become a form of legal terrorism, that rich companies use to discourage countries from addressing the needs of their citizens and protecting the global environment.
Uruguay was sued when it proposed requiring cigarette companies to disclose that cigarettes are dangerous to one’s health – a disclosure that most advanced countries require. The labelling would, admittedly, discourage smoking – that was the point – and that in turn would hurt these companies’ profits. Fossil fuel companies around the world have sued as governments have undertaken actions to curtail emissions. As one of the lawyers specialising in these disputes said of the provisions: “It wouldn’t matter if a substance was liquid plutonium destined for a child’s breakfast cereal. If the government bans a product and a … company loses profits, the company can claim damages.”
Claim damages – and win them – they have. Because of the secrecy in which much of these actions are cloaked, it has been hard to assess the magnitude. Investigative reporting by the Guardian has given us a glimpse into exactly how large and consequential these suits have become, showing more than $120bn (£94bn) of public money has been awarded to private investors since 1975, $84bn to the fossil fuel industry alone.
The world faces a debt and development crisis, and many countries have burdens of debt so high that they are encroaching into expenditures on health, education, climate, and development itself. These payouts are adding massively to this debt burden – and risk doing so even more. Globally, they are an impediment to climate action: countries are afraid if they pass a carbon tax or a carbon regulation they will be sued. Even if they eventually win, they will be tied up in courts for years. The deep pockets of the suing corporations have been enriched further by a new industry: investors in these litigations, who see these suits as just another gamble from which they might win. The fiscal heft of the suers often outweighs that of a poor developing country. The trading and financing of these suits by hedge funds may have fundamentally changed their nature: from a judicial way of compensating someone for a particular class of harm, to just another gambling instrument.
These are not the only inequities: US courts have consistently ruled that one does not have to pay compensation for a change in a regulation that adversely affects the profits of a company – good regulations are part of the fundamental rights and obligations of the government. But with these agreements, foreign companies can sue the US government: they are given more rights than American companies!
It’s time to end this travesty on justice. We need an overarching international agreement ending ISDS. In the meanwhile, individual countries should give notice that they are exiting such agreements and leaving ICSID, the International Centre for Settlement of Investment Disputes.
Ending this system is imperative: if we don’t, we’ll face a whole new set of barriers to preventing climate change; and developing countries and emerging markets will face ever-growing debt burdens– from increasing payouts to companies that ruin the health of citizens and the sustainability of the planet.
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