Fear or Facts: the Case for ISDS in Modern Trade Agreements

Image by Alex E. Proimos

Image by Alex E. Proimos

At the stakeholder briefing during the ninth round of negotiations of the Transatlantic Trade and Investment Partnership (TTIP), U.S. chief negotiator Dan Mullaney quipped that everyone was discussing Investor to State Dispute Settlement (ISDS) systems except the negotiators. The latter have not discussed the issue since January 2014, when the European Commission launched a public consultation, the results of which were presented in early 2015. The Commission negotiating mandate includes ISDS, as does the 2012 U.S. Model Bilateral Investment Treaty and the proposed Congressional trade promotion authorization. A majority of EU member states have also restated their support. Yet critics of ISDS abound, dominating the public debate by referencing investor-biased provisions that governments have already agreed to change, and making false assertions regarding the ISDS process while failing to address the issue of establishing precedence, a key goal with TTIP. There are numerous logical, legal, and political arguments for why a reformed ISDS should be part of modern trade and investment agreements.

First, the vague language ubiquitous in ISDS clauses within existing bilateral investment treaties (BiTs) – over 1,400 BiTs with ISDS – has been removed in recent agreements such as the European-Canadian Economic and Trade Agreement (CETA), and will be further refined in TTIP (and in the Transpacific Partnership). Though agreements signed through the mid-2000s are admittedly heavily skewed to favor investors, the Commission’s revised proposal for TTIP specifically defines contentious legal terms such as ‘fair and equitable treatment’, prohibits simultaneous pursuits (in domestic courts and an international tribunal), and allows democratically elected government approved lists of acceptable judges to sit as arbitrators (addressing concerns of ‘private’ arbitration courts with a revolving door of lawyers alternating between pursuing and hearing cases). Furthermore, prudential government measures are explicitly allowed (preventing a repeat of the Muculu case in Romania), ‘mail box’ companies (shell companies erected in a favorable jurisdiction) are banned from filing claims (preventing the Philipp Morris-type case against Australia which was filed out of Hong Kong), and tribunals are provided enhanced authority to dismiss unwarranted cases. Arbitrators may only rule on what is explicitly included in the treaty, document disclosure requirements apply to all but trade secrets, and the losing side in a case pays all legal expenses for both parties. Finally, if disagreement arises over the terms in ISDS, the government has the final say. The Americans endorse the same provisions.

Pursuing a claim through the dispute settlement system under current rules is time consuming (cases average several years) and are very expensive ($6-10 million). The state still prevails in the vast majority of cases, both in the EU and globally, and the average award in the roughly 30% of cases investors win (loosely defined) equals pennies on the dollar; aforementioned revisions will further reduce the prospects of a successful challenge.  90% of existing BiTs have never experienced challenges, and though the number of cases globally have risen over the past decade, the rise corresponds to increased investment levels, and the percentage of cases filed by an actor correlates with their investment stock. Contrary to European perceptions, EU investors also use ISDS roughly four times more than their American counterparts, and then most often against European governments; most cases involving American firms are mid-sized companies which have run out of domestic options.

Leaving cases to domestic courts or establishing a state-to-state (U.S.-EU) system of dispute settlement becomes legally challenging given differing domestic obligations and benefits ascribed to nationals and foreigners. Domestic legal contexts continuously change, making it extremely difficult for courts, and resulting in further uncertainty for investors. EU states and the U.S. have clearly indicated that while ISDS in TTIP would over time replace existing BiTs, omitting ISDS would not lead to the repeal of exiting BiTs. The latter currently leave European companies greater legal recourse against a fellow member state than with the U.S. government. It is also false to uphold all EU states and the U.S. as paragons of legal virtue. The Italian and Romanian court systems are rife with delays and corruption; Alabama courts are not necessarily appealing, and several European business representatives I have spoken with express doubts about many of the state court systems in the U.S.. The state-to-state proposal, in addition to being rejected by the U.S., also leaves unaddressed the funding costs to be borne by tax payers.

There have only been six ISDS cases between an American investor and an EU government – all with post-2004 EU member states – but the value of a precedent setting agreement is high. Australia referred to ISDS as ‘A Modern balanced mechanism with explicit safeguards for legitimate pubic welfare regulation,’ when signing its trade agreement with South Korea, and with China it was deemed essential in order to ‘enable Australians to invest in China with greater confidence’. EU and U.S. companies want guaranteed resort to international arbitration should they fall out with Chinese courts. Furthermore, China has for years sought to be classified as a market economy by the U.S. and EU, thereby making it legally much tougher to charge China with unfair trade practices; excluding ISDS from developed states’ agreements weaken western negotiators’ positions in negotiations with China, and sets a dangerous precedent if/when China achieves its desired status but retains a weak judiciary. Relations with China are fraught, and few trust their legal system, but leading ISDS opponents cannot explain how it can be required with less developing states if we refuse to accept it ourselves.

Despite contestable arguments and weak evidence, opposition to ISDS show no signs of abating, especially in Europe. Though the U.S. insists on ISDS, there is a small chance it could be scrapped in TTIP, most likely as a part of an elaborate compromise, or a quid pro quo exclusion of sectors of keen interest to the EU, such as greater access to the U.S. public procurement market. This would not benefit European or American workers, consumers, or firms, and could jeopardize the entire agreement. That in turn would weaken the EU’s international credibility and strengthen America’s pivot to Asia, while bringing relief to Beijing.

Image courtesy of Alex E. Proimos

Leif Johan Eliasson

About Leif Johan Eliasson

Leif Johan Eliasson is an associate professor at East Stroudsburg University, Pennsylvania. He has published books and articles on various aspects of European integration and transatlantic relations, and is currently working on a book on TTIP.

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