Cashing Out: Ninth in a series on the secretive system disrupting climate action and forcing big payouts to fossil fuel companies.
The Biden administration announced a last-minute deal on trade this week, reaching an agreement with Colombia to limit protections for investors between the two countries. The move represents a small step toward reforming a system that has awarded multinational corporations more than $100 billion in taxpayer funds from countries around the globe.
Investor state dispute settlement, or ISDS, allows foreign companies to bypass national courts and sue governments before panels of arbitrators if they believe their rights have been violated. The system is built into thousands of treaties and contracts, and companies have used it to win hundreds of millions or even billions of dollars after governments have hiked taxes, implemented new regulations or rejected licenses for mining and oil and gas drilling.
The agreement, announced Thursday, comes in the wake of a multi-part Inside Climate News investigation that uncovered how companies have used ISDS to force big payouts from governments, even in cases where they have left behind pollution or been accused of violating human rights. The vast majority of claims are brought by foreign companies from wealthy nations against developing countries, and increasingly, Wall Street firms have been financing those claims for a cut of the awards.
The ISDS system has faced growing scrutiny from government officials, lawyers and human rights and climate advocates in recent years. They argue it prioritizes corporate profits over public interests and poses a threat to climate action by punishing countries that act to limit fossil fuels. A growing number of nations, including Bolivia, Indonesia, Italy, South Africa and Spain, have taken steps to exit the system or limit their exposure.
The agreement between U.S. Trade Representative Katherine Tai and Colombia Trade Minister Luis Carlos Reyes took the form of a “binding” interpretation of the U.S.-Colombia Trade Promotion Agreement, which took effect in 2012. The new agreement seeks to limit the types of arbitration claims that companies from each nation can seek and the amount of damages they can claim. In particular, it aims to cut off companies’ ability to base claims solely on speculative “future lost profits,” which has helped send the average award size soaring to $256 million from 2014-2023, according to United Nations data.
As of the close of 2023, one in 20 ISDS cases won by investors resulted in an award of $1 billion or more.
In a statement, Tai said the interpretation was consistent with government positions adopted in more recent trade agreements, including the U.S.-Mexico-Canada Agreement and an agreement with South Korea, and would help ensure that arbitration claims hewed to the governments’ positions.
“Like President Biden, I oppose the ability of private corporations to attack labor, health, and environmental policies through ISDS,” Tai said in the statement.
Critics of the ISDS system welcomed the news.
“ISDS mechanisms allow giant multinational corporations to sue governments in special, secretive courts that aren’t accessible to workers or consumers,” said Sen. Sheldon Whitehouse, a Rhode Island Democrat, in a statement to Inside Climate News. He called the agreement with Colombia “a small but positive step forward,” adding, “Ultimately, we must eliminate ISDS entirely to advance the interests of the public over the power of big corporate polluters.”
The administration’s lame-duck efforts on trade have drawn sharp criticism from business groups and many other lawmakers, however. The day before the agreement was signed, a bipartisan group of senators sent a letter to Biden asking him to halt the negotiations, saying that Congress had not been consulted.
“Trade policy is too important to keep Americans in the dark,” the senators wrote, urging the administration “to refrain from further negotiating text proposals with foreign trading partners unless and until meaningful consultations with Congress and stakeholders have occurred.”
The Colombian American Chamber of Commerce, which represents major multinational corporations, criticized the agreement, saying in a press release in Spanish that it is a “possible overreach” by the governments. The group said the limitations could unfairly restrict access to arbitration and would reduce legal certainty, and it questioned why the agreement was not approved by lawmakers in either country.
Many critics of the system had high hopes when Biden was elected. He had pledged as a candidate to exclude ISDS protections from any new trade or investment agreements. As president, Biden kept that promise if only by default—his administration has not negotiated any new agreements. But many human rights and climate advocates had hoped the administration would go further.
After a $15 billion claim brought by a Canadian pipeline company against the United States and an $11 billion claim brought by U.S. investors against Honduras, dozens of Democrats in Congress called on the administration to eliminate investor protections from existing agreements.
Activists, lawyers and lawmakers said the administration had also been in similar talks over the last month about trade agreements with Mexico and Honduras, though nothing was announced as of Friday afternoon.
The U.S. Trade Representative’s office did not reply to a request for comment about those discussions.
Instead of broader changes, critics of ISDS were left with the agreement with Colombia. It will apply only to companies based in the two countries.
Analysts point out that the Biden administration’s deal with Colombia does not aim to alter the original text of the nations’ trade pact. Instead, it seeks to limit future ISDS claims by clarifying provisions related to the rights of foreign investors.
One change explains that arbitrators do not have authority to review how domestic courts apply domestic law. Another says that companies claiming expropriation must show that “all, or virtually all” of the value of the investment was taken.
The agreement also aims to limit the use of a controversial provision that gives companies an expansive right to “fair and equitable treatment.” Companies have invoked that right to challenge a range of government policies, including ones aimed at protecting public health.
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Donate NowISDS tribunals have faced scrutiny for overriding domestic judicial decisions and claiming that government policies like mining restrictions or bans amount to “regulatory expropriations,” entitling companies to financial awards.
“ISDS tribunals often act as appeals courts over domestic legal systems, and that’s not what they were meant to be,” said Mario R. Osorio Hernandez, an international program fellow at the Center for Economic and Policy Research.
A recent case brought against the Colombian government by the Canadian mining company Eco Oro highlighted these concerns. Eco Oro turned to ISDS following a 2016 Colombian Constitutional Court ruling that banned mining operations in a sensitive, high-altitude wetland ecosystem that acts as a carbon sink and provides fresh water to millions of people. Two other Canadian mining companies brought ISDS cases against Colombia over the same restriction. Though the government prevailed in two of the three arbitrations, Colombia’s legal defense cost more than $11 million, which taxpayers will fund.
In November, a Spanish telecommunications company won a $380 million award against Colombia over the government’s imposition of a wealth tax on the company.
Colombia has faced at least 23 ISDS claims over the past decade, including seven from American firms.
Late last year, the administration of Colombian President Gustavo Petro announced that it would attempt to renegotiate its trade and investment agreements to remove ISDS. The agreement between the United States and Colombia fell short of that and failed to meet the expectations of ISDS critics.
Osorio Hernandez said he supported the new agreement, “but our expectations going into the Biden administration were higher.” He added, “We expected there to be more, and we think more can be done and more needs to be done.”
Nikki Reisch, director of the climate and energy program at the Center for International Environmental Law, said in an email that ISDS should be entirely dismantled, “stripping polluters of investment protections that lock in place climate-destructive industries.”
Experts are divided on whether significant changes to the ISDS system, like abolishing it, can be achieved through executive action alone or if legislative measures are necessary.
Osorio Hernandez warned that interpretive statements like the one between the U.S. and Colombia have been challenging to enforce. Arbitrators’ opinions are typically not subject to appeal.
Yet with Donald Trump regaining the presidency, Osorio Hernandez remained cautiously optimistic that liberal critics of ISDS can find common ground with some in the new administration. It was Trump who, during his first administration, largely removed ISDS from the North American Free Trade Agreement’s replacement based on concerns that the system infringed on U.S. sovereignty and encouraged American companies to move jobs overseas.
“There definitely is room for alignment between progressives and people who support Trump,” Osorio Hernandez said. “I would also add, though, that I don’t have any high expectations that this would be a priority.”
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Katie Surma
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Nicholas Kusnetz
Reporter, New York City
Nicholas Kusnetz is a reporter for Inside Climate News. Before joining ICN, he worked at the Center for Public Integrity and ProPublica. His work has won numerous awards, including from the Society of Environmental Journalists, the American Association for the Advancement of Science and the Society of American Business Editors and Writers, and has appeared in more than a dozen publications, including The Washington Post, Businessweek, The Nation, Fast Company and The New York Times. Nicholas can be reached on Signal at nkusnetz.15.
