By Lambert Strether of Corrente.

In this post, I’m going to take what might at first sight look like a deep dive into the text of the TPP. However, as I’ve discovered, international law, and international trade law, are both insanely complex, and so, in reality, this dive is very shallow.[1] (Of course, in finance, we know what complexity means: Opportunities for accounting control fraud and looting. But that is a topic for another post.)

Deep dive or no, however, I hope to show that coverage of TPP in the financial press after the complete text of the TPP was released has hitherto been abysmally shallow and naive, not so say counterfactual. Since, in my view, the Financial Times (FT) is the best of breed, I’m going to take its coverage as a proxy for the press as a whole, and I’m going to look at how the FT presented the Investor-State Dispute Settlement (ISDS) mechanism in Chapter 28. (Many of the TPP’s chapters cover, as it were, vertical markets, like intellectual property, agriculture, or the environment, but the ISDS is horizontal, in that it provides a facility for dispute resolution that applies across all the verticals. If you believe that the TPP is part of an emergent global apparatus superseding sovereign states and tuned to the needs of global trans- and post-national elites, then Chapter 28 is the chapter to read.)

Coverage of ISDS from the Financial Times

Here’s how the Financial Times (FT) summarized chapter (28) of the TPP in its initial coverage (“Breaking down 5 big sections of the TPP”):

Foreign investors will be allowed to ‘sue’ governments but the TPP makes the process harder {1} A big criticism of the TPP is that it will allow foreign companies to challenge governments and their decisions before opaque arbitration panels. By including an “Investor State Dispute Settlement” mechanism, the TPP’s investment chapter in effect undermines democracy, critics charge. {2} That is open to debate. Business groups insist ISDS provisions are crucial to protecting foreign investors from rogue local courts and governments and are already a feature in thousands of bilateral investment treaties. Sceptics argue that the world has moved on since investment treaties first began including such mechanisms in the 1960s. {3} But there is no doubt the TPP tightens the rules. It establishes a code of conduct for arbitrators and requires all proceeding in ISDS cases to be public. It also contains provisions intended to limit the ability of companies to challenge government regulations, such as those meant to regulate tobacco use. {4} In the preamble to the agreement the TPP members . . . “Recognise their inherent right to regulate and resolve to preserve the flexibility of the Parties to set legislative and regulatory priorities, safeguard public welfare, and protect legitimate public welfare objectives, such as public health, safety, the environment, the conservation of living or non-living exhaustible natural resources, the integrity and stability of the financial system and public morals”.

I’ve numbered the paragraphs in squiggly brackets. And I’m going to skip paragraph 2, because on the FT’s own showing, ISDS mechanisms are already embedded in a multitude of bilateral treaties, so there’s no need for an extra dollop of ISDS goodness from TPP. That said, does ISDS “make the process harder”? The FT argues that the answer to the question is “yes.” I believe that the corrrect answer is “no.” To show this, I’ll cover the topics the FT covers — the TPP’s Preamble, the ISDS code of conduct, ISDS proceedings, and tobacco — in that order. In each case, the FT’s coverage is wrong, or misleading.

The TPP’s Preamble is Toothless

A literal-minded Martian reading paragraph 4, above, would notice that the FT makes no actual claim that the TPP’s Preamble has any effect whatever; it merely quotes it. However, the last sentence of paragraph 3 starts “[The TPP] also contains provisions intended to limit the ability of companies to challenge government regulation” and is juxtaposed with paragraph 4, which starts “In the preamble to the agreement,” and so a less literal-minded reader might be forgiven for assuming that the TPP’s Preamble is such a provision.

But if the FT meant to imply this, it’s wrong. Here’s why. (And here let me take a moment to thank, again, readers Synoia and marxmarv for making the chapters and annexes of the TPP available both as PDF, for reading, and as text, for searching. It’s important to be able to grep the entire text, and, at least so far, the tools available online are miserably inadequate for that purpose.) From TTP’s Chapter 28, “Dispute Settlement, Article 28.11, “Functions of Panels” (“panel” is TPP’s word for ISDS tribunal):

3. The panel shall consider this Agreement in accordance with applicable rules of interpretation under international law as reflected in Articles 31 and 32 of the Vienna Convention on the Law of Treaties (1969).

The International Investment Law Centre of the University of Cologne has been “putting together, in the form of a digest, the decisions and awards of international arbitral tribunals” since 2011. Here’s the digest of the Vienna Convention, and what it has to say about preambles in Article 31 (“General rule of interpretation”):

An IIT’s [International Investment Treaty] preamble is relevant for its interpretation

However:

Although a statement in a preamble does not create legal obligations , it sheds light on the object and purpose of the treaty

So, fine words like “recognise their inherent right to regulate” butter no parsnips, if they’re included in a Preamble.[3] They do not “create a legal obligation.” (The preamble is not even a “provision,” as the FT seems to imply in paragraph 3, if provisions are contained in the articles of the agreement proper, as opposed to its preamble.) “Shedding light” and “relevant to its intepretation” make the FT’s “process” “harder” only in the most tenuous sense; in particular, since interpretation can take place only after a suit is brought, the Preamble does nothing to protect States from the chilling effect of corporations simply threatening to sue them, for billions, before extremely expensive panels.

The ISDS Code of Conduct Is Weak

In paragraph 2, the FT claims that TPP “establishes a code of conduct for arbitrators” (though the TPP itself uses the word “panellist”). Let’s grep “code of conduct”:

ls$ pwd /Users/ls/www.nakedcapitalism.com/TPP_text ls$ grep "code of conduct" *.* TPP-Final-Text-Dispute-Settlement.txt:9. If a disputing Party believes [...] TPP-Final-Text-Dispute-Settlement.txt: comply with the code [...] ls$

So, that’s easy. Two mentions, both from TTP’s Chapter 28, “Dispute Settlement.” Let’s go find them. The first mention is from Article 28.9, “Composition of Panels”:

9. If a disputing Party believes that a panellist is in violation of the code of conduct referred to in Article 28.10(1)(d) (Qualification of Panellists and Roster Members), the disputing Parties shall consult and, if they agree, that panellist shall be removed and a new panellist shall be selected in accordance with this Article.

That’s not very encouraging; when I hear “Code of Conduct,” I think of the code being enforced by some entity outside the dispute (for example, the ABA or a medical society disciplining a member). Not so here. So let’s go to Article 28.10(1)(d). It reads:

d) comply with the code of conduct contained in the Rules of Procedure.

So let’s go to the “Rules of Procedure,” which is “Article 28.12: Rules of Procedure for Panels.” It’s not that long, and so I’m going to quote the article in its entirety (and as you will notice, we’ve seen some of it already):

Article 28.12: Rules of Procedure for Panels

1. The Rules of Procedure, as established under this Agreement in accordance with Article 27.2.1(e), shall ensure: (a) a right to at least one hearing before the panel at which each disputing Party may present views orally;

(b) that, subject to subparagraph (f), any hearing before the panel shall be open to the public, unless the disputing Parties agree otherwise;

(c) an opportunity for each disputing Party to provide an initial and a rebuttal written submission;

(d) that, subject to paragraph (f), each disputing Party shall make its best efforts to release to the public any written submission, written version of an oral statement, and written response to a request or question from the panel, as soon as possible after they are filed and, if not already released, will release all such documents by the time the final panel report is issued;

(e) that the panel shall consider requests from non-governmental entities located in the territory of any disputing Party to provide written views regarding the dispute that may assist the panel in evaluating the submissions and arguments of the disputing Parties;

(f) the protection of confidential information;

(g) that written submissions and oral arguments shall be made in English, unless the disputing Parties agree otherwise; and

(h) that unless otherwise agreed by the disputing Parties, hearings shall be held in the capital of the responding Party.

Does this look any a code of conduct you’ve ever seen? Here’s how the Code of Conduct for United States Judges begins:

The Code of Conduct for United States Judges includes the ethical canons that apply to federal judges and provides guidance on their performance of official duties and engagement in a variety of outside activities.

No “ethical canons” to be found in Article 28.12, am I right? No “guidance” on “engagement in a variety of outside activities” either, am I right? MR SUBLIMINAL Ka-ching! These lacunue are especially important for the ISDS panels, since, as NC readers know:

First, the ISDS tribunals, putatively courts, are completely unaccountable. Public Citizen: TPP ISDS tribunals would be staffed by highly paid corporate lawyers unaccountable to any electorate or system of legal precedent. Second, the ISDS tribunals are riddled with conflicts of interest and open invitations to corruption. Public Citizen: Many of [the corporate lawyers] involved rotate between acting as “judges” and as advocates for the investors launching cases against governments. Such dual roles would be deemed unethical in most legal systems. The leaked text does not include new conflict of interest rules, despite growing concern about the bias inherent in the ISDS system. Third, there is no appeal from the judgements of these putative courts. Public Citizen: There is no internal or external mechanism to appeal the tribunal members’ decisions on the merits, and claims of procedural errors would be decided by another tribunal of corporate lawyers. Fourth and finally, the discretion of the ISDS tribunals is so great that they can write the rules, as well as interpret them. Public Citizen: There are no new safeguards that limit ISDS tribunals’ discretion to create ever-expanding interpretations of governments’ obligations to foreign investors and order compensation on that basis.The leaked text reveals the same “safeguard” terms that have been included in U.S. pacts since the 2005 Central America Free Trade Agreement (CAFTA). CAFTA tribunals have simply ignored the “safeguard” provisions that the leaked text replicates for the TPP, and have continued to rule against governments based on concocted obligations to which governments never agreed. In the first three points, the ISDS tribunals are acting as putative courts, albeit conflicted, potentially corrupt, and anti-democratic and unaccountable courts. However, in the fourth point, the tribunals are, functionally, legislatures. Here is what Madison had to say about mixing judicial and legislative power. Federalist 47: The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, self-appointed, or elective, may justly be pronounced the very definition of tyranny. … Were the power of judging joined with the legislative, the life and liberty of the subject would be exposed to arbitrary control, for the judge would then be the legislator. So, what Madison warned of is exactly what ISDS does: The judge is the legislator, leading to “arbitary control.” And arbritary control is absolutism, just as surely as it was in the age of the divine right of kings.[2] And for bonus points, the judges and the legislators are conflicted, open to corruption, and accountable neither to the voters nor to any system of precedent.[3]

The FT is, again, at best deceptive. The TPP’s “code of conduct” is like no code of conduct I’ve ever seen, and it opens the door to an arbitrary and corrupt process.

ISDS Proceedings Are Not Required to Be Public

Also in paragraph 2, the FT claims that ISDS “requires all proceeding in ISDS cases to be public.” Let’s go to the text: from TTP’s Chapter 28, “Dispute Settlement, Article 28.12, “Rules of Procedure for Panels”:

1.The Rules of Procedure, as established under this Agreement in accordance with Article 27.2.1(e), shall ensure: (b) that, subject to subparagraph (f), any hearing before the panel shall be open to the public, unless the disputing Parties agree otherwise; […] (f) the protection of confidential information;

In no sense whatever, then, does TPP require “all proceeding in ISDS cases to be public.” First, the parties may collude. Second, we’ve already seen grossly abusive claims of confidentiality by powerful corporations; there’s no reason at all to think ISDS cases will be any different, or that ISDS panels will curb any abuse. The FT is simply and shockingly wrong.

The TPP Tobacco Carveout May Still Allow Challenge

Recall that in paragraph 3, the FT claims that the TPP “limit[s] the ability of companies to challenge government regulations, such as those meant to regulate tobacco use.” Simon Lester, at the The International Economic Law and Policy Blog, has this to say about the tobacco carveout clause, which is in TPP’s Chapter 29, “Exceptions and General Provisions:

Analyzing the TPP should keep us all busy for the next year or so. I’ll start with one of my favorite subjects, the tobacco carveout: […] Article 29.5: Tobacco Control Measures12 A Party may elect to deny the benefits of Section B of Chapter 9 (Investment) with respect to claims challenging a tobacco control measure13 of the Party. Such a claim shall not be submitted to arbitration under Section B of Chapter 9 (Investment) if a Party has made such an election. If a Party has not elected to deny benefits with respect to such claims by the time of the submission of such a claim to arbitration under Section B of Chapter 9 (Investment), a Party may elect to deny benefits during the proceedings. For greater certainty, if a Party elects to deny benefits with respect to such claims, any such claim shall be dismissed. 12 For greater certainty, this Article does not prejudice: (i) the operation of Article 9.14 (Denial of Benefits); or (ii) a Party’s rights under Chapter 28 (Dispute Settlement) in relation to a tobacco control measure. 13 A tobacco control measure means a measure of a Party related to the production or consumption of manufactured tobacco products (including products made or derived from tobacco), their distribution, labeling, packaging, advertising, marketing, promotion, sale, purchase, or use, as well as enforcement measures, such as inspection, recordkeeping, and reporting requirements. For greater certainty, a measure with respect to tobacco leaf that is not in the possession of a manufacturer of tobacco products or that is not part of a manufactured tobacco product is not a tobacco control measure. Here’s my first question: Is this provision self-judging? In other words, who decides whether a measure is a “tobacco control measure”? The language about a party “electing” to deny benefits suggests maybe it is self-judging. The whole provision depends on what governments “elect” to do.

“Self-judging” is a term of art in international trade law. A presentation titled “Self-Judging Clauses in International Dispute Settlement: Overview and Context” from the Max Planck Institute for Comparative Public Law and International law explains how to spot self-judging clauses, and what they mean:

What is a self-judging clause? Definition: “provision in an international legal instrument by means of which States retain their right to escape or derogate from an international obligation based on unilateral considerations and based on their subjective appreciation of whether to make use of and invoke the clause vis-à-vis other States or international organization What makes a clause self-judging? Subject matter (national security, essential security interests) Relevant wordings: “it considers”, “it determines”, “in the state’s opinion”, etc.

Residue of sovereignty-centered international law in a modern system of inter-State cooperation

(“Residue.” Hmm.) So, it looks to me, if “elect” is relevant wording, that the tobacco clause is indeed self-judging, that is, states retain the right to regulate. But not so fast! That doesn’t mean that their regulation isn’t open to challenge. First, it depends on what the meaning of “tobacco control” is. Back to Lester’s post:

On the other hand, you need some oversight of these things, or a government might claim that any ordinary regulation is a tobacco control measure because of some distant relationship it has to tobacco control. A party can “elect” to use the exception, but only, of course, if the measure is a tobacco control measure. So perhaps the investment tribunal would need to decide this question?

Next, what about expropriation?

Next up, let’s say a government wants to eliminate production of tobacco, and to do so, it expropriates a foreign tobacco company’s factory. Would that fall under this exception?

The author concludes:

It would be a lot of fun [!!] if some day there is a case that explores some of these issues. So far there have only been two ISDS challenges of this kind of measure, so it seems unlikely any such cases are coming, but you never know.

So the FT is at least partially correct on this; the power of corporations to challenge tobacco regulation is in some sense “limited.” But notice that the tobacco regulation can still be challenged under any of the theories presented by Lester, and if corporations have the right to challenge, they have the power to intimidate, as we have seen. Notice also that the Lester says it’s going to take a year to figure out what the language of the tobacco carve-out really means. However, TPP, if it is to be passed, can be passed in less than a year. So, once again, we might have to pass a bill to find out what’s in it (and in this case, we’ll be informed by the decisions of unaccountable international tribunals with no ethical canons. What could go wrong?).

Conclusion

In summary, then, the FT coverage of the ISDS chapter of the TPP ranges from outright wrong to weakly mis- or disinformative.

1) The Preamble is only, as it were, informative. It is not normative, and in itself does not establish the rights of states to regulate for the welfare of their citizens;

2) The ISDS “Code of Conduct” is no such thing, since it does not include ethical canons or guidelines for outside activity;

3) ISDS proceeedings are most definitely not required to be public; the parties can agree that they be secret, and the confidentiality clause is a loophole even a bad lawyer could drive a truck through;

4) The so-called tobacco carve-out still permits challenge, and hence does not change the power imbalance between rich and threatening corporations and states that are small or poor.

In other words, if NC were WaPo, it would be awarding the FT multiple Pinocchios for its coverage of the ISDS.[4] Could do better!

The TPP is a major international agreement. Is it too much to ask that the financial press take this story seriously?

NOTES

[1] I can only hope my shallow dive isn’t a belly flop. If we have any readers who are international trade lawyers or subject matter experts, I hope they will correct or expand these points in comments.

[2] I found a few other Easter Eggs in the digest of the Vienna Convention:

Negotiation records are a well recognized category of interpretative material in international law

Well and good, but the TPP’s negotiation records are secret, and will be kept secret for, IIRC, a decade.

And then there’s this:

If a national law has effect on the international plane, e.g. a state’s unilateral offer to arbitration, that law has to be interpreted according to the rules of interpretation of international law, not the state’s national rules of interpretation

And here’s a pleasingly wonky post on “multiple permissible interpretations under the Vienna Convention.” International law is complicated. No wonder the ISDS panellists are paid so well.

[3] Dylan Matthews makes this argument for the Preamble in the TPP’s Development chapter, but doesn’t generalize it to apply to the entire agreement.

[4] Yes, as of today, November 8, the story I have analyzed, from November 5, is the only significant story on TPP from the FT.