The Keystone Pipeline May be Dead, But Here's How it Could Blow up the TPP

So much for the U.S.-Canada honeymoon. With the election in October of the new Liberal prime minister Justin Trudeau, both Washington and Ottawa had hoped to put behind them several years of poor relations that had been soured largely by a single issue – President Obama’s dithering and then final rejection in November of the Keystone XL pipeline to bring Canadian tar sands oil to refineries in the U.S. Midwest and the Gulf Coast. Obama was so delighted to see the backside of Conservative prime minister Stephen Harper – an ardent supporter of the pipeline – that he quickly invited Trudeau for a state dinner in Washington in March.

Now it looks like Trudeau will be bringing some Canadian chill with him. TransCanada, the Alberta-based company that had hoped to build the Keystone pipeline, has filed a $15 billion lawsuit against the U.S. government under the North American Free Trade Agreement (NAFTA), alleging that the Obama administration violated its treaty obligations in blocking the pipeline. The damages claim is by far the largest in the history of NAFTA, and will reinforce widespread fears about what are known as the “investor-state dispute settlement” (ISDS) provisions of U.S. trade agreements. Environmentalists who had hailed the president’s action in blocking the pipeline said that the lawsuit shows that “the primary purpose of ISDS is to subvert democratic processes and the public interest, in the name of private profit.”

The timing could hardly have been worse for the Obama administration. The President is set to sign on February 5 and then send to Congress for approval the Trans-Pacific Partnership (TPP) trade agreement, a mammoth trade deal to deepen ties among the economies of the United States, Japan and 10 other Pacific Rim countries, including Canada. The TPP includes ISDS provisions that are largely modelled after NAFTA, though with some important tweaks to address concerns about abusive lawsuits. The Obama administration currently has just over two dozen Democratic supporters in the House for TPP, and will need every one of them on board to help approve the deal this year. But both of the party’s leading presidential candidates – Hillary Clinton and Bernie Sanders – have come out against the deal, and the TransCanada lawsuit will only reinforce the party’s meme that trade deals empower corporations at the expense of governments, consumers, and workers.

Are there any merits to the TransCanada case? Quite possibly. The NAFTA and other trade agreements require that governments offer “fair and equitable” treatment to foreign investors, which roughly translates to treatment no worse than a domestic company would receive. TransCanada may well have a legitimate case that the lengthy delay in the U.S. government’s decision – more than seven years versus two years or less for most pipeline applications – amounted to discriminatory treatment. And it has certainly cost the company dearly; TransCanada plans to take a write-down of nearly C$3 billion this quarter for the sunk costs of the pipeline development plan. On the other hand, the United States has never lost in any of the ISDS cases brought against it, so the odds are certainly against this one as well.

Regardless, it is highly questionable whether a NAFTA tribunal of appointed judges is the place to resolve such claims. TransCanada has also filed a separate lawsuit in a U.S. court in Houston, claiming that the Obama administration exceeded its constitutional authority in blocking the pipeline over the express wishes of the Republican Congress. Properly, that case should have to be heard and resolved before the company was permitted any recourse to NAFTA arbitration, but the NAFTA rules – and those of the TPP and other trade agreements – allow for this sort of forum shopping where companies can pursue their claims simultaneously in multiple venues. The case also shows the dangers of allowing companies to act independently in such disputes. At a time when Canada and the United States are trying to repair a frayed relationship and work together on issues such as trade and climate change, a single company has thrown a wrench in the works. These are some of the reasons that pressure for changing the ISDS rules has been growing.

What about the politics? There is no question that the case will be fresh ammunition for Democratic opponents of the TPP deal. The argument against ISDS has always depended on a handful of high-visibility cases, in particular the lawsuit launched by cigarette maker Philip Morris against Australia’s plain packaging rules for tobacco, and the $1 billion suit by Swedish nuclear power company Vatenfall against Germany over the government’s decision to phase out nuclear power. Not surprisingly, opposition to ISDS runs especially strong in both Australia and Germany – so strong indeed that Australia insisted on barring tobacco companies from using ISDS as part of the TPP deal. With the Keystone NAFTA lawsuit, U.S. critics will now have their own poster child as well.

The only silver lining for the president may be that Republican supporters of the Keystone pipeline will be delighted to see the Canadians taking a swipe at President Obama over the decision. Perhaps that will cause a few more of them to rally behind the TPP agreement as a vehicle for reining in what they see as the president’s abuse of his executive authority. But don't expect that to become a GOP campaign slogan anytime soon.