U.S. investors are suing Honduras over special economic zones, and the dispute could bankrupt the country.
foreignpolicy.com
US crypto financiers are suing the nation of Honduras for repealing a law allowing for tax free economic “zones” in the country that are controlled by foreign corporations out of Honduran jurisdiction.
“…”Understandably, ZEDEs are highly unpopular in Honduras. The slogan “
No to the ZEDEs” featured prominently in Castro’s electoral campaign. Shortly after Castro’s inauguration, the Honduran Congress voted to
repeal the lawthat allowed for the creation of ZEDEs. A broad-based
National Movement Against the ZEDEs and in Defense of Sovereignty, which was formed under the prior government and includes unions, Indigenous groups, human rights organizations, and prominent academics, is also pressing Castro to shut the ZEDEs down.
However, investment provisions under the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) have provided ZEDE investors with a powerful means of fighting back against Castro’s proposed reform. Citing potential future losses, Honduras Próspera, a Delaware-based U.S. company that is operating a ZEDE called Próspera on Roatán island, off the northern coast of Honduras, is suing the Honduran government in an investor-state dispute settlement court located at the World Bank. Though U.S. President Joe Biden has announced his opposition to such investment-state arbitration in future trade agreements, the ZEDE investors’ claim has received a
potent boost from the State Department and the U.S. ambassador in Tegucigalpa”
“ICSID, established in 1966 as a means to resolve legal disputes between international investors and states, is an investor-state dispute settlement (ISDS) court under the World Bank. ICSID allows investors to effectively sue governments for investment losses, including future profits. Investors can claim damages for any regulatory decision—including
limiting fossil fuels or imposing restrictions on
cigarette packaging—thus making it very difficult for governments to put in place labor or environmental safeguards or, as in the case of Honduras, take measures to protect the country’s sovereignty and democracy.
These dispute settlements are designed to allow corporations to sue states—but not the other way around. Studies of ISDS mechanisms show that states win just
36 percent of arbitration cases. Plus, refusing to pay damages awarded to a corporation is rarely an option as arbitration cases are often executed in the jurisdictions of countries where the state may have assets. International reserves, a state-owned company, or even a state-owned aircraft or vessel
can be seized to make good on payment. Arbitration decisions can even end up tabulated as
part of a country’s foreign debt…
…Próspera, meanwhile, has not wasted any time in
hiring lobbyists and seeking political allies in Washington. In October 2022, Sens. Bill Hagerty and Ben Cardin sent a
letter to the Biden administration denouncing the Honduran government over the ZEDE law’s repeal. Any “direct or indirect expropriation of U.S. investments in Honduran [ZEDEs],” they wrote, “would be regarded as a direct assault on the guarantees of CAFTA-DR.” Some House Republicans, including Reps.
Paul Gosar, Mario Díaz-Balart, Michael Waltz, and Maria Elvira Salazar, have also
expressed support for Próspera and called for individual sanctions in response to attempts to shut down the ZEDEs—
condemning threats to U.S. investment and even alluding to Chinese influence in the region.
The U.S. ambassador to Honduras, Laura Dogu, who has made a
habit of
publiclycriticizing the Honduran government on domestic policy, has also rushed to the rescue of the Próspera ZEDE. A few weeks after the U.S. Embassy
tweeted about Dogu’s deputy meeting with Próspera investors in September 2022, the U.S. ambassador
slammed the Castro government for wanting to “reduce or eliminate investment incentives.” “Without a doubt,” the ambassador said, the Castro government’s “actions are sending a clear message to companies that they should invest elsewhere, not in Honduras.” The U.S. State Department, in apparent disregard for Biden’s opposition to ISDS, has also
voiced similar concerns, alleging that the Honduran government’s decision to repeal the ZEDE law “further contributed to uncertainty over the government’s commitment to investment protections required by international treaties.””
