Making Sense

License to Sue

The Sordid History of Investor-State Dispute Settlement Tribunals

By Sam Knight | March/April 2024

This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org


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This article is from the
March/April 2024 issue.

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It sounds like viral fake news, but it’s true: Donald Trump reined in shadowy authorities that exist solely to help multinational corporations. In 2018, Trump fulfilled his earlier campaign promise to renegotiate the North American Free Trade Agreement (NAFTA), and the resulting accord narrowed the power of so-called Investor-State Dispute Settlement (ISDS) tribunals, arbitration panels established to give corporate lawyers their own special venue to sue governments.

In the case of NAFTA, ISDS litigation had led to large payouts to corporations challenging laws and regulations that sought to uphold basic public health and safety standards. The Canadian government, for example, paid $13 million to Ethyl, a U.S. chemical company, to settle charges over a proposed ban on MMT, a known neurotoxin, as a gasoline additive. And Metalclad, a U.S. waste management firm, won $16.2 million from the Mexican government over a municipality’s refusal to issue a construction permit for a toxic waste dump. But thanks to Trump, awards like these will mostly be a thing of the past in North America. The United States–Mexico–Canada Agreement (USMCA), which was ratified in July 2020 as a replacement for NAFTA, has substantially narrowed industry access to ISDS.

But Republicans have expressed little interest in eliminating ISDS in other trade agreements, despite the party’s efforts to rebrand itself as populist. The most likely explanation for this is that ISDS tribunals allow contemporary industrialists to force their will on poorer nations, enabling capitalists in the United States to pick up where European colonialists left off. Some of Republicans’ favorite industries benefit immensely from the system, much to the detriment of the planet. Coal, oil, gas, electricity, and mining companies have won $100 billion challenging environmental protections through ISDS, according to a report published in June 2023 by the U.N. Special Rapporteur on Human Rights, and the number of such cases “skyrocketed” in recent years, to 126 between 2011 and 2021, up from 36 between 2000 and 2010.

The right’s ideological commitment to ISDS is best illustrated by an ongoing dispute involving the government of Honduras, with its genesis in a 2009 U.S.-backed coup. The overthrow of left-wing populist President Manuel Zelaya led to a series of right-wing presidents with dubious electoral mandates, ties to drug traffickers and death squads, and substantial support from Washington. At the heart of the dispute are generous concessions made by the Honduran narcostate to extractive industries, in particular those bestowed through a law passed in 2013 creating autonomous zones for foreign investors. In 2019, a Delaware-based company employed the autonomous zone framework to establish a fully privatized city on the island of Roatán. Prospera, as the project is called, is a veritable libertarian fiefdom, relying on Bitcoin as its currency and including at least one investor who said in an interview with the Ludwig Von Mises Institute of Germany that he was in favor of banning “serious criminals, communists, and Islamists” from the territory. Locals, who said they were duped into supporting the project, are outraged by the plans. In November 2022, Prospera was dealt a major setback when left-wing candidate Xiomara Castro, Zelaya’s wife, won the Honduran presidential election. The narcostate likely couldn’t stop the outcome by then because the incumbent president, Juan Orlando Hernández, had fallen out of favor with the U.S. government, after being named by the Department of Justice as the subject of a federal criminal investigation in 2019. Castro campaigned in part on repealing the autonomous zone law that chartered Prospera’s crypto fiefdom. By April 2022, Honduras’ national legislature unanimously approved the repeal.

But Prospera sued Honduras in an ISDS tribunal, claiming that the repeal violated the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR). The company is seeking $11 billion in damages, a sum equal to two-thirds of the Honduran government’s annual budget.

Langley’s Law Firm

Unsurprisingly, the law firm representing Prospera has a history of representing some of the U.S. government’s most unsavory Cold War-era friends. The firm, White & Case, built its global practice, in part, by embracing one of the most notorious U.S. Cold War proxies: the Indonesian military dictatorship under the rule of Suharto, who rose to power in a 1966 coup, fully backed by the CIA, that led to the slaughter of up to one million communists and suspected communists.

White & Case took on the Indonesian government as a client in the spring of 1975, to help the country restructure its unmanageable debt. Months later, in December 1975, Suharto ordered the invasion of Indonesia’s neighbor, East Timor, with U.S. foreknowledge and support. The campaign was genocidal, leading to the killing of one-fifth of East Timor’s population by Indonesian forces.

The firm’s own official history notes that “No history of White & Case would be complete without reference to the enormous significance of the mandate won in 1975 from the government of Indonesia on a major debt rescheduling,” boasting of a long relationship with Indonesia that followed, but failing to note its client’s penchant for horrific massacres. White & Case subsequently attracted a number of other sovereign clients, including U.S. Cold War allies notorious for their brutality. Zaire, Turkey, and Morocco were among the firm’s clients, as was Panama under the narco-state of General Manuel Noriega, a friend of the United States before he became its enemy and the target of an invasion and regime-change operations. And White & Case’s interests have also been closely bound with the Saudi monarchy; the firm represented Saudi energy company Aramco both when it was owned by U.S. oil companies and after its sale to the Saudi government in 1988.

White & Case was also active in Boris Yeltsin’s Russia, as lucrative public assets were sold to well-connected individuals for a fraction of their value, resulting in U.S. government applause and plummeting life expectancy for ordinary Russians. The firm advised “on Russia’s first privatization, of the Bolshevik Biscuit Factory,” and on the privatization of the country’s phone system in 1997, according to White & Case’s official history, which brags that the firm “dominated the privatization league tables for years in terms of the number and value of privatizations completed.”

As one would expect with this history, White & Case has drawn on the Republican Party’s talent pool to fill its staffing needs. Past White & Case attorneys include Liz Cheney and Rudy Giuliani, and a gaggle of bureaucrats who served at federal agencies under Presidents Nixon and Reagan. White & Case attorneys were also among those responsible for some of President George W. Bush’s most infamous work. George Terwilliger III, a White & Case partner from 2000 to 2012, led Bush’s Florida election recount legal team. Daniel Levin, a White & Case partner since 2007, was one of many legal advisors to President Bush who authorized the CIA’s use of torture despite agreeing to be waterboarded himself and subsequently describing the practice as akin to a mock execution.

Today Guatemala, Tomorrow the World Bank

Hermann Josef Abs at the Kreditanstalt f&uumlaut;r Wiederaufbau

Hermann Josef Abs at the Kreditanstalt füaut;r Wiederaufbau (Credit Union for Reconstruction), Frankfurt, Germany, in 1949.

Credit: Deutsche Bank AG, Kultur und Gesellschaft Historisches Institut, Frankfurt, CC BY-SA 3.0 DEED license (via Wikimedia Commons).

ISDS panels themselves are relics of the Cold War in another way: They were created out of a fear of socialism with the help of a Nazi banker. Hermann Josef Abs had been the head of Deutsche Bank’s foreign department from 1938 to 1945. In that position, he was responsible for integrating “under German hegemony” economic assets of countries occupied by Germany, according to his declassified U.S. intelligence file, including the liquidation of Jewish-owned companies. Abs was on more corporate boards than any other man in Nazi Germany, in a portfolio that included the directorship of IG Farben, the notorious petrochemical company that manufactured Zyklon B, a chemical used in Nazi gas chambers. The company also maintained its own concentration camp and profited from more than 35,000 slave laborers.

The U.S. government initially put Abs’ name on a list of Germans to be prosecuted at Nuremberg for crimes related to Nazi atrocities, but he was released by British authorities after three months in prison. His legal record wasn’t so sterling elsewhere: Abs was sentenced in absentia by a court in Zagreb to 15 years in prison for war crimes. But as a skilled businessman, Abs was seen as redeemable by Western Allies, and by 1948, he would be administering Marshall Plan aid in West Germany, his first of many duties shaping the postwar German economy.

In 1957, as Western capitalists fretted over decolonized countries asserting control over their own natural resources, Abs drew up plans to integrate the economies of former colonies into the legal systems of Western powers, which are protective of capitalists’ property rights above all else. In a speech before business leaders in San Francisco, Abs said:

There is only one means apt to implement such protection, and that is an International Convention...to treat foreign capital and other foreign interests fairly and without discrimination and to abstain from direct or indirect illegal interferences with such investment. He called his idea “a Magna Carta for the protection of foreign interests.”

But his inspiration seemed to come from the 1940s more than the 1210s, denouncing “the well-known attitude of some less developed countries, according to which the Western world is actually obliged to pay for the advancement of their economies, out of its own pocket.” Abs mentioned the cases of Iran and Guatemala attempting to nationalize the Anglo-Iranian Oil Company and United Fruit Company respectively—actions used by the CIA to justify agency support for coups d’état in 1953 and 1954—and denounced their “strange attitude,” which would “have serious consequences.”

The idea for the “international convention” Abs had proposed was embraced by other Western intellectuals, and by 1966, the World Bank, above the vociferous objection of the Global South, established the International Centre for the Settlement of Investment Disputes (ICSID), an ISDS tribunal. The development gave poorer countries little choice but to accept the legitimacy of ISDS, with the World Bank acting as their de facto lender of last resort. Since its establishment, the ICSID has ruled on hundreds of cases with hundreds more pending as of September 2023, including Prospera’s case against the government of Honduras. It’s not a power that will likely be relinquished anytime soon by those who believe in U.S. hegemony, no matter what the Trump campaign says about NAFTA in the coming months.

is a freelance journalist based in Washington, D.C.

Nathalie Bernasconi-Osterwalder, “USMCA Curbs How Much Investors Can Sue Countries—Sort of,” International Institute for Sustainable Development, October 2, 2018 (iisd.org); United Nations Special Rapporteur on human rights and the environment David R. Boyd, “Paying polluters: the catastrophic consequences of investor-State dispute settlement for climate and environment action and human rights,” United Nations Office of the High Commissioner on Human Rights, July 13, 2023 (ohchr.org); Beth Geglia and Andrea Nuila, “A Private Government in Honduras Moves Forward,” North American Congress on Latin America, February 15, 2021 (nacla.org); Sarah Lazare, “U.S. Pressuring New Left-Wing Honduras Government,” Workday Magazine and The American Prospect, October 28, 2022 (workdaymagazine.org); Dan Coggin, “Indonesia—An Oil Nation Under the Gun,” New York Times, June 8, 1875 (nytimes.com); Yale University Genocide Studies Program, “East Timor” (gsp.yale.edu); The National Security Archive at George Washington University, “Ford and Kissinger Gave Green Light to Indonesia’s Invasion of East Timor, 1975: New Documents Detail Conversations with Suharto,” December 6, 2001 (nsarchive2.gwu.edu); Pamela Brogan, “The Torturers’ Lobby: How Human Rights Abusing Nations Are Represented in Washington,” The Center for Public Integrity, 1992 (publicintegrity.org); White & Case, “White & Case: The First 100 Years & Beyond,” Chapter 6, 2016 (history.whitecase.com); OpenSecrets, Employment histories for Charles Brower, Linda Carlisle, Roger Mentz, and Robert Paul (opensecrets.org); George J. Terwilliger III LinkedIn profile (LinkedIn.com); Archived White & Case partner profile for George J. Terwilliger III (whitecase.com); David Cole. “They Did Authorize Torture, But...,” Georgetown University Law Center, 2010 (georgetown.edu); ABC News, “Bush Administration Blocked Waterboarding Critic,” February 10, 2009 (abcnews.go.com); Department of State Division of Biographic Information, File on Herman J. Abs, declassified and released by the Central Intelligence Agency under the Nazi War Crimes Disclosure Acts of 2001 and 2006 (cia.gov); Ben van der Merwe, “How two businessmen wrote the rules of globalisation,” The New Statesman, April 2, 2021 (newstatesman.com); Edmund L. Andrews, “I.G. Farben: A Lingering Relic of the Nazi Years,” New York Times, May 2, 1999 (nytimes.com); Ingo Venzke and Philipp G√ľnther, “International Investment Protection Made in Germany? On the Domestic and Foreign Policy Dynamics behind the First BITs,” European Journal of International Law, November 2022 (researchgate.net); The Economist, “The Art of the Obituary,” December 24, 1994 (economist.com); Time Magazine, “The Capitalist Challenge: The Capitalist Magna Carta,” October 28, 1957 (content.time.com).

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