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09/12/2016

Failure on ISDS could risk EU trade deal with China, says diplomat

Trade & Society

Failure on ISDS could risk EU trade deal with China, says diplomat

Chinese President Xi Jinping secured a pledge from the EU to consider a trade deal , if an investment agreement proved successful.

[European Parliament/Flickr]

Failure to secure agreement on the controversial investor state dispute settlement (ISDS) clause in the Transatlantic Trade and Investment Partnership could derail a future EU-China trade deal, diplomats have warned.

The ISDS clause is a mechanism in the mooted free trade agreement between the bloc and the US. It allows investors such as multinational countries to sue governments in international arbitration tribunals rather than domestic courts.

There is significant public opposition to ISDS. A decision on the clause, which the US wants, was delayed to the end of the talks on TTIP because it is so controversial.

On 9 June, the European Parliament failed to agree a unified stance on a proposed trade deal with the United States, postponing a vote that was meant to cement its support for the biggest accord of its kind. TTIP will eventually need the backing of a majority of MEPs to come into force.

>>Read: Divided EU Parliament postpones vote on TTIP

The European Commission has suggested a move from the current ad hoc arbitration system towards an international investment court, with intermediary steps along the way. But MEPs were lukewarm over the idea.

>>Read: MEPs unimpressed with Commission’s ISDS proposal

ISDS important for China pact

The TTIP ISDS clause would be important to the success of any similar trade deal with China, EU diplomats said today (19 June) ahead of Monday’s (22 June) Foreign Affairs Council meeting in Luxembourg.

Negotiations on an investment agreement to make it easier for European companies to do business in China are in the early stages. In March 2014, the EU pledged to consider a multi-billion euro free trade pact with China if the investment agreement was successful.

“Whatever is done in the context of ISDS in TTIP will be the new benchmark for the EU to achieve in future trade deal, including with China,” an EU diplomat said on condition of anonymity.

While some argue ISDS is not needed for OECD countries like the US, the model could be rolled out for China, where investor protection could be more difficult.

“That’s a good argument for doing it with the US,” said the diplomat, “That’s one of the big risks in not doing ISDS with the US.”

British Prime Minister David Cameron has strongly backed a free trade agreement with China but some member states, including France, Italy and Spain are wary.

China and the EU have been embroiled in trade rows over, for example, steel, wine and solar panels.

But both sides could benefit from increased trade. The EU continues to suffer from sluggish growth and high unemployment, while China’s economy is slowing.

The meeting of EU foreign affairs ministers will debate the strengthening of EU relations with Asia. The region is a major market for European companies.

The EU has concluded free trade agreements with South Korea and Singapore and negotiations are ongoing with Japan, Malaysia, India, Vietnam and Thailand.

A joint study is being conducted on a possible free trade agreement with the Association of South-East Asian Nations (ASEAN) bloc.

Death penalty

Draft conclusions of the meeting have also made reference to the region’s use of the death penalty, which the EU opposes, and China uses.

In Indonesia, EU citizens were recently executed by firing squad. A British grandmother is also on death row.

EurActiv understands the conclusions will highlight that the death penalty remains a “key part of engagement” with the region, and “would remain an area of continued dialogue and importance”.

But, the diplomat pointed out, the US has the death penalty and there was no suggestion that TTIP should be dropped as a result.

Background

Negotiations on an investment agreement to make it easier for European companies to do business in China are in the early stages. In March 2014, the EU pledged to consider a multi-billion euro free trade pact with China if the investment agreement was successful.

British Prime Minister David Cameron has strongly backed a free trade agreement with China but some member states, including France, Italy and Spain are wary. China and the EU have been embroiled in trade rows over, for example, steel, wine and solar panels.

So far, nine TTIP negotiating rounds have been held, the latest in New York (20-24 April).

In June 2013, EU heads of state and government mandated the Commission to start negotiating a free trade agreement with the US, giving guidelines concerning what the negotiations should include.

The guidelines stated that the EU should seek to include provisions on investment protection and investor-to-state dispute settlement (ISDS) in the proposed agreement.

Member states already have 1,400 ISDS-type agreements with other countries, some dating back to the 1950s.

Read>>Special report: TTIP and the Arbitration Clause

The EU executive consulted the public on its approach to investment protection and ISDS in the TTIP, asking whether the EU’s strategy achieves the right balance between protecting investors, and safeguarding the EU's right and ability to regulate in the public interest.

Negotiations on investment in TTIP were suspended in January 2014. They will only resume once the Commission believes its new proposals guarantee, among other things, that the jurisdiction of national courts won’t be limited by special regimes for investor-to-state disputes.

The final decision, which must be ratified by both EU Council and Parliament in a full vote, will only be taken with the agreement of European Commission First Vice-President Frans Timmermans.

Commission President Jean-Claude Juncker gave Timmermans the veto. He will ensure ISDS complies with the rule of law, and principles of equality and transparency, according to a memo published by the executive.

Timeline

  • 22 June: Foreign ministers meet in Luxembourg
  • July: Tenth round of EU-US negotiations over TTIP

Further Reading

Council of Ministers

European Commission

Press articles