How Corporations are Holding Governments for Ransom

Bilateral investment treaties threaten democracy

A nuclear power plant

The threat to democracy posed by this growth in corporate power has generated its own backlash, with several countries now seeking to abandon investor-state dispute settlement altogether.

Photo by Fotolia/Aneese

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In May 2011, the German government announced that it would terminate the country’s nuclear power program in 2022. The decision was in response to the mass protests that burst onto German streets following the Fukushima nuclear plant disaster in Japan, and reflected the deep opposition to nuclear power that has existed within German society for decades. Legislation to phase out nuclear power passed through parliament with an overwhelming majority.

Shortly afterward, the Swedish energy company Vattenfall announced it was suing the German government for a staggering €3.7 billion ($4.6 billion) in “compensation” for losses arising from the nuclear phaseout. The company had already been successful in a previous suit against the German government over environmental regulations for the River Elbe, which Vattenfall argued made its proposed coal-fired power station there unviable. That case was settled in 2011 with Vattenfall being granted a new permit to construct the power station under less demanding environmental conditions.

At the same time, on the other side of the world, the government of Australia was introducing a new law to combat the social costs of smoking, including the requirement that all cigarettes must be sold in plain packaging from December 2012 onward. Even before the new measures had come into effect, U.S. tobacco giant Philip Morris announced that it was suing the Australian government for billions in damages and seeking to have the legislation repealed. Philip Morris had also brought a case against the government of Uruguay for measures designed to reduce smoking in that country, where graphic health warnings must now cover 80 percent of all cigarette packaging. Both countries are fighting the cases on public health grounds.

The past 30 years have witnessed a proliferation of investment agreements through which capital can hold social and environmental policy ransom in even the strongest states. Chief among these are the bilateral investment treaties (BITs) that enshrine the rights of transnational corporations in foreign markets. The first BIT was signed in 1959 between Pakistan and Germany, but it was during the 1990s and 2000s that their numbers increased most dramatically. There are now more than 3,200 international investment agreements in force worldwide, the overwhelming majority of which are BITs.

BITs have established a host of new powers for transnational corporations, such as the right to enter new markets and repatriate profits at will. Most of all, BITs grant foreign companies the right to bypass domestic courts and sue host states before international arbitration tribunals over public policy decisions that might “unfairly” affect their bottom line. This provision for investor-state dispute settlement is unprecedented in that it elevates transnational capital for the first time to a legal status equivalent to that of the nation state.

The arbitration tribunals themselves are no more than kangaroo courts. Arbitrators are not tenured judges with public authority, as in domestic judicial systems, but a small clique of corporate lawyers who are appointed on an ad hoc basis and who have a vested interest in ruling in favor of business. The tribunals sit in secret, and the arbitrators have been found guilty of so many misapplications of the law that even those who support the idea of the tribunals admit they have lost credibility. A public statement issued in 2010 by more than 50 law professors and other academics called for the system to be abolished and the right to adjudicate returned to domestic courts.

The threat of investor-state dispute settlement first came to public attention with the North American Free Trade Agreement (NAFTA) between Canada, Mexico and the United States. The earliest case was brought in 1997 by U.S. company Ethyl Corporation against the Canadian government, which had introduced a ban on the fuel additive MMT on public health grounds. The government argued that Ethyl had not waited six months from the passing of the legislation before filing its claim, as it was required to do, yet the tribunal ruled that the case should go ahead regardless. The Canadian government settled the claim by paying out $13 million to Ethyl and revoking the ban on MMT.

Such precedents opened the floodgates to a mass of other cases brought under individual country BITs. No state has been worse hit than Argentina, which has been targeted by dozens of European and U.S. corporations over the years. One of the most infamous cases concerned the 30-year water concession for Tucumán province, granted in 1995 to the Argentinean subsidiary of French transnational Vivendi. The privatization led to a doubling of water tariffs almost overnight, but the company failed to maintain the level of investment required under the concession. When the water in Tucumán turned brown, eight out of ten households stopped paying their bills altogether. Yet an arbitration tribunal still awarded Vivendi $105 million for having its contract terminated.

Even those damages pale in comparison to the $1.77 billion (plus interest) awarded to Occidental Petroleum against the government of Ecuador in 2012, the most extensive damages to date. The arbitration tribunal confirmed that the oil giant had broken Ecuadorian law in selling off part of its interests without ministerial approval, but rejected Ecuador’s argument that it was justified in terminating the company’s contract. By contrast, a separate tribunal threw out the claim by Ecuador for $19 billion in damages against Chevron for its contamination of the Amazonian rainforest over a period of two decades.

The threat to democracy posed by this growth in corporate power has generated its own backlash, with several countries now seeking to abandon investor-state dispute settlement altogether. Bolivia, Ecuador and Venezuela have withdrawn from the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), while countries such as Brazil and Mexico refuse to sign up to it.

Yet under the new Transatlantic Trade and Investment Partnership, U.S. corporations will win the right to challenge European states directly before international arbitration tribunals for the first time. Reports suggest they have every intention of doing so. You have been warned.


John Hilary is the executive director of War on Want, an organization that fights poverty in developing countries. His recent book The Poverty of Capitalism includes fuller details on BITs. Reprinted from Red Pepper (February/March 2014), a bimonthly magazine and website of left politics and culture based in the U.K.