Rules relating to investment overseas and the investor-state dispute settlement (ISDS) are back in the news. This morning, I had the opportunity to join several experts to explain some basics that seem to get lost in debate that seems to suggest that the sky will fall any day now:
1. Businesses invest at home and abroad to reach customers and participate in international projects. Most investment by U.S. companies is in fact domestic, helping companies reach customers here in the United States, the largest consumer market in the world. But 95 percent of the world’s consumers and more than 80 percent of global purchasing power is outside the United States. And that is why U.S. businesses invest not just here at home but in overseas markets to reach foreign customers. Indeed, investing close to your customers (as foreign companies do here in the United States) is often the best way to make a sale, including through activities to set up dedicated distribution networks and to tailor products to local consumer tastes.
In some areas, such as energy, natural resources or foreign infrastructure development, foreign investment is the primary way American manufacturers can participate and grow opportunities because that is where the resources and activities must take place.
The actual data collected by the Commerce Department’s Bureau of Economic Analysis confirms this basic, but often overlooked, fact: Year after year, decade after decade, the vast majority of sales by U.S. foreign affiliates—more than 90 percent—are made to foreign customers not returned to the United States.
2. The United States, its workers and businesses benefit enormously from U.S. investment overseas. U.S. companies that invest overseas are outsized participants in the U.S. economy and are stronger because of their access to foreign markets that help grow economies of scale and boost U.S. activity and wages here at home. The facts are clear. U.S. companies that invest overseas are America’s:
- Largest exporters, exporting 47 percent of all U.S.-manufactured goods sold overseas ($660 billion in 2014);
- Biggest producers, accounting for $1.363 trillion or nearly 65 percent of all U.S. private-sector value-added manufacturing output in 2014;
- Most important innovators, expending nearly $269 billion on research and development in the United States in 2014 (of that, 68 percent (or $183 billion) was expended by manufacturers in the United States);
- Largest investors in capital expansion, expending $713.5 billion or 24 percent of all investment in new property, plants and capital equipment in the United States in 2014; and
- Highest-paying employers, paying U.S. manufacturing workers on average $96,030, or about 18 percent more than average U.S. manufacturing wages in 2014.
3. Having strong legal protections, backed up by ISDS, helps America win in a highly competitive global economy. For more than 30 years, U.S. administrations and Congress have strongly supported a pro-investment and pro-ISDS policy because it helps America, its businesses and its workers win. The investment rules—taken right out of the U.S. Constitution and other baseline U.S. laws for the protection of private property against discriminatory, unfair, expropriatory government action—set the basic rules to combat against foreign government market-distorting activities. For example, prohibitions on government forced localization measures and incentives (e.g., government mandates to buy local products or transfer technology in exchange for allowing an investment) help ensure that U.S. investment overseas can continue to support the growth of U.S. exports and jobs. And when governments violate these basic rules, ISDS is critical so that companies have access to a neutral venue to seek compensation.
4. The same anti-ISDS critiques have been leveled for decades, and the sky has not yet fallen. Those opposed to ISDS have been rehashing the same tired, false and discredited critiques for years, and they continue to be rejected by policymakers, including most recently in 2015 when a bipartisan majority strongly rejected Sen. Elizabeth Warren’s (D-MA) amendment to eliminate ISDS from Trade Promotion Authority; Consider the main critiques:
- Types of cases: The vast majority of cases are about individual permit authorizations and the treatment of individual investors, not broad public interest regulation.
- Types of claimants: Most claimants are individuals and small and medium businesses.
- Impact on government regulation: ISDS panels can only order compensation, not a change in government policy. And not one case has ever found a violation of the investment rules through a nondiscriminatory, broadly applied public interest regulation.
- Number of cases: Less than 20 cases have been filed against the United States in more than 20 years, even though the United States is the largest destination for foreign investment. Loud claims that the Korea–U.S. trade agreement would lead to hundreds of cases against the United States, for example, have continued to fall flat; not one case has been brought against the United States in the five years that agreement has been in force. Contrast that experience to the tens of thousands of cases filed in U.S. Federal Claims court every year on similar property claims.
- Alternatives: Political risk insurance is a highly limited approach, far too expensive for small business and does not even begin to combat the broader investment rules that are vital to discipline foreign government market-distorting forced localization and other measures. When official government risk insurance is used, it would be the U.S. taxpayer, not the foreign government, bearing the cost of a foreign government seizure of America’s own property.
- ISDS arbitrators: Arbitrators are chosen collectively by both sides in a dispute, are respected experts and held to strict ethical standards. If there is a bias, it is in favor of governments that win the vast majority of cases.
And as for letters, let us take a look at some from those who are experts in this field. Take a moment to look at this letter from academics whose actual expertise is in international law, arbitration and dispute settlement that strongly support the ISDS system. Or consider this statement of the International Bar Association, the world’s leading organization of international legal practitioners, bar associations and law societies, that felt the need to correct the record on ISDS because “erroneous information is subverting debate.”
As more than a hundred business groups representing millions of small, medium and large companies across every sector of the economy recently explained, investment rules and ISDS are very much in America’s interest as we all seek to grow manufacturing, well-paying jobs and U.S. competitiveness in the global economy.