Modern Pirates: How Arbitration Lawyers Help Corporations Seize National Assets and Limit State Autonomy

AuthorCecilia Olivet,Pia Eberhardt
DOIhttp://doi.org/10.1111/ajes.12223
Date01 March 2018
Published date01 March 2018
Modern Pirates: How Arbitration Lawyers
Help Corporations Seize National Assets and
Limit State Autonomy
By PIA EBERHARDT* and CECILIA OLIVET
ABSTRACT. Large-scale companies have worked for centuries with the
governments of powerful nations to extract wealth from the rest of the
world. Since the 1990s, one important method of continuing that legacy
has been the use of secretive legal proceedings known as investor-state
dispute settlements (ISDS). Through this innocuous-sounding practice,
transnational corporations (TNCs) are able to blame foreign
governments for their failure to extract as large a profit as they
anticipated from their operations abroad. Asserting that changes in
fiscal, environmental, or social policies have harmed them, TNCs have
claimed that foreign governments should compensate them for the loss
of potential revenues. ISDS tribunals have awarded billions of dollars as
a result of such claims, mostly made under the auspices of bilateral
investment treaties. Not only must governments spend millions of
dollars defending themselves against assaults and tens or hundreds of
millions if they lose their cases, but the ISDS system also has a chilling
effect on the adoption of legislation designed to protect the health and
safety of citizens.
As a result of all the lawsuits in which corporations collect damages
from governments under investment treaties, an array of groups in the
*Pia Eberhardt works with Brussels-based lobby watchdog Corporate Europe
Observatory (CEO, www.corporateeurope.org), where she focuses on the E.U. trade
and investment policy. In 2013, she co-authored “Profiting from Injustice. How Law
Firms, Arbitrators and Financiers Are Fueling an Investment Arbitration Boom,” a
report that triggered an intense public debate on the global investment regime.
†Cecilia Olivet is a researcher with the Transnational Institute (TNI) (www.tni.org),
where she coordinates the Trade and Investment program. She specializes in the
European Union’s trade and investment policy and the international investment
regime. Between 2013 and 2015, Cecilia was a member and chair of a commission,
known as CAITISA, established by presidential decree to audit Ecuador’s bilateral
investment treaties (BITs).
American Journal of Economics and Sociology, Vol. 77, No. 2 (March, 2018).
DOI: 10.1111/ajes.12223
V
C2018 American Journal of Economics and Sociology, Inc.
legal industry have profited substantially: law firms representing
corporate interests, arbitrators and other specialists in corporate
arbitration, and litigation funders. The arbitration industry is, as a
practical matter, the glue that holds the system together. The law firms
involved in this industry do not wait passively for cases to arise.
Instead, they actively pursue corporations to seek arbitration with
governments, proselytize for the legitimacy of the current international
investment regime, and block reforms that would limit arbitration
opportunities. By creating methods of insulating TNCs from normal
business risks and forcing host governments to bear the burden of
liabilities, the arbitration system has effectively reinstituted a neo-
colonial regime through the judicial system.
Introduction
Throughout history, merchants who traveled to distant lands incurred a
number of hazards. They might be attacked by bandits en route, or
their cargo might be seized by a local sovereign. Those were among
the many risks of foreign trade. Wise investors in such ventures would
balance the risksagainst the potential rewards and diversify their invest-
ments. In the 15
th
century, marine insurance companies began to issue
policies that allowed risk to be spread among all investors who insured
against loss (Leonard 2016). Risk sharing began entirely within the mar-
ket, without government involvement. When that occurred, risks were
internalized. Those who stood to gain from trade also took the chance
of losing their investment.
European investments after 1500 were different. The Spanish and
Portuguese conquests of the New World were public-private ventures.
Other European nations followed suit. Trading companies were estab-
lished in which some capital was at risk, but governments also pro-
tected companies against potential damage. Investors used their
political affiliations and connections to induce home governments to
provide military support to protect private cargo. Governments
rewarded pirates who seized or destroyed the cargo of other nations’
ships. For example, the infamous Captain Kidd was hired by some gov-
ernment officials—“two earls, two lords and the First Lord of the
The American Journal of Economics and Sociology280
Admiralty...who were rivals of the powerful East India Company”—to
loot ships on their behalf (Webster 2011). For several centuries, there
was no clear distinction between trade and piracy, since European
trade with Asia, Africa, and Latin America throughout the early modern
period was characterized as much by plunder as by exchange. As a
result, risks were increasingly transferred from investors to taxpaying
citizens, while the private sector remained the beneficiary. In the 18
th
and 19
th
centuries, the governments of England, Netherlands, and
France were so thoroughly involved in monitoring and protecting trad-
ing ventures that they created formal colonies and imposed European
laws on subjugated territories. Extracting wealth, including slaves, from
other nations was standard practice. The origin of that practice was the
protection of private investments outside the home country.
Textbooks on international trade continue to gloss over this history
and treat trade exclusively as reciprocal exchange betweenequals. That
sort of genuine trade has existed, of course. Not every international
transaction involved exploitation or infringement on the sovereignty of
other nations. But piracy, violence, and conquest were part of the story
of trade for many centuries, and a neglect of that history makes it
impossible to grasp how trade agreements function in the 21
st
century.
The event that most thoroughly disrupted the general pattern of one-
sided relations between European investors and host countries was the
Russian Revolution in 1917. When the USSR nationalized railroads, the
petroleum industry, and other foreign-financed enterprises in 1918,
European investors complained bitterly, even though many private
companies continued to trade with the Soviet Union after 1920 (White
1992). The idea of nationalization of key industries, however, became
popular as an instrument of resistance to colonialism and neocolonial-
ism. Investors in countries with potentially unstable regimes increased
their demands for state intervention to protect theirassets overseas.
The New Legal Regime:
Attacking Nations, Protecting Corporate Assets
Five centuries of combined trade and plunder is the background
against which the current set of international rules should be under-
stood. The end of colonial rule in the three decades after WWII led to a
Investor-State Arbitration and Corporate Power 281

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