In this third post, we consider the proposed Transatlantic Trade and Investment Partnership (TTIP) rules about foreign direct investment (FDI). In 2013 the governments of all European Union member states presented guidelines to the European Commission to include provisions for investment protection in the TTIP negotiations. These rules have been heatedly debated in the EU’s public discussion of the negotiations. Under particular scrutiny is the Investor-State Dispute Settlement (ISDS) system.
The ISDS system is an instrument defined by international law and generally included in trade agreements. EU member states already have signed hundreds of current bilateral trade agreements that employ the ISDS system. The ISDS mechanism grants foreign investors the right to initiate dispute settlement proceedings against host-country governments. The ISDS system is considered to be key to the enforcement the investment protection in oil, gas, and renewable energy sectors.
Here are two examples:
Proponents of the ISDS system argue 1) that by offering increased legal predictability for firms, investment protection is also a tool for states to attract and maintain FDI to underpin their economy; and 2) that the system will not significantly increase the ability of foreign corporations to circumvent various EU and Member State regulations:
This system allows an investor to directly bring a claim against the authorities of the host country in front of an international tribunal. This means that an investor who brings a case because his profits have been reduced following a regulatory change by a state (for instance, stricter regulations on a food additive) cannot get compensated on this basis alone. The investor would need to demonstrate that the investment provisions have been breached (for instance, discrimination, denial of justice…) (European Commission)
Opponents of TTIP within the EU have strongly criticized the ISDS system, and expressed grave concern that it will enhance the abilities of foreign corporations to circumvent government regulations by suing or threatening to sue in an international tribunal the EU and its Member State governments for claimed regulatory expropriations. For example, in a recent report the Ecologic Institute of Berlin argued that an ISDS provision in TTIP would pose significant risk to environmental regulations:
Although investment tribunals never invalidate environmental regulations, nor have any similar direct impact on national environmental policies, they have – in some cases – awarded considerable compensatory payments to investors for a violation of the above clauses. The inclusion of any of these norms in TTIP would not automatically prevent the US or the EU adopting environmental measures in the future, nor would they necessarily have to pay compensation to investors whenever doing so. However, the results of ISDS proceedings are unpredictable. Some arbitration tribunals have taken a restrictive approach to governments’ regulatory freedom; others have deemed government regulation not to violate investment law. These uncertainties result in considerable risks for environmental regulation which are exacerbated by the fact that investment-related provisions tend to be interpreted broadly in ISDS proceedings. (Ecologic Institute Berlin, 2014)
This argument emphasizes that ISDS provides foreign investors with additional judicial help that is not available to domestic competitors; this is seen as an additional support of legal redress which discriminates against domestic companies and has the potential to distort competition.
After considerable public criticism within the EU on these counts, onJan. 21, 2014, the European Commission decided to postpone negotiations on the ISDS mechanism in the context of TTIP, with the stated intention of providing a forum for public comment and consultation (Euractiv, 2014):
The key issue on which we are consulting is whether the EU’s proposed approach for TTIP achieves the right balance between protecting investors and safeguarding the EU’s right and ability to regulate in the public interest.
The call for consultation received almost 150,000 comments, with over 99.5 percent of those coming from individual EU citizens. No doubt partly in consideration of this public response, in late August 2014 the EU rolled out a comprehensive new EU investment policy, with the publication of regulations setting out new rules for managing disputes under the EU’s investment agreements with its trading partners. The major emphasis of the new rules is increased public transparency of the investment dispute process:
As part of its investment policy, the EU aims to implement extensive improvements to the already existing investor-to-state dispute settlement mechanisms by requiring increased transparency, accountability and predictability. In its agreements, the EU is including firm transparency obligations, so that all documents and hearings are public, provisions against the abuse of the system and provisions ensuring the independence and impartiality of arbitrators. The Regulation published today will help to ensure transparency in investor-to-state disputes that arise under future EU agreements, by foreseeing close consultations and information-sharing between the Commission, Member States and the European Parliament.
Given the staunch opposition within the EU to the ISDS provision, it is somewhat ironic that the majority of ISDS cases in recent years have been brought by EU-based investors. According to a recent UNCTAD report, 214 ISDS cases were registered worldwide from 2008 to 2012. EU investors brought 53 percent of those cases. Investors from the Netherlands, Germany and the United Kingdom were principal users. In 2012, EU investors were behind 60 percent of all ISDS initiations, while US investors accounted only for 7.7 percent.