ISDS clause: a gateway to future trade deals

Container ship enters San Francisco Bay. Marin Headlands, June 2013. [John Morgan/Flickr]

This article is part of our special report TTIP and the arbitration clause.

SPECIAL REPORT: Trade officials negotiating the ISDS arbitration clause within the EU-US trade agreement have half an eye on their next deals, since the wording is likely to shape other key trade treaties on the table.

Asia and the lucrative Chinese markets are at the top of policymakers’ minds as Brussels and Washington engage in talks over the Transatlantic Trade and Investment Partnership (TTIP), which started in July 2013.

The future shape of the arbitration clause in the EU-US trade talks will be paramount in this global context.

The US and EU are holding separate talks with China, with a view to future bilateral trade treaties. The Trans-Pacific Partnership is a trade agreement covering the Pacific countries that the US has prioritised for completion. The European Union is also negotiating with Asian countries such as Japan and Vietnam, with a view to future trade deals.

Arbitration would be a key a chapter in any such deals, and would probably play a more crucial role than in TTIP.

The investor-to-state dispute settlement (ISDS) is an arbitration clause in TTIP designed to protect investor rights but which critics argue would allow companies to sue governments and limit their ability to regulate in the public interest.

Investor-state arbitration is often the only means for companies to obtain redress, especially in countries with weak judicial systems. The US and EU court systems are largely seen as reliable in the business communities, whereas in many Asian countries, they are viewed as politicised or erratic.

“A government could expropriate an investor (e.g. through nationalisation) or pass laws which render their investment worthless, for example, by suddenly banning a product,” the European Commission argues in a briefing note about the ISDS.

In a position paper published in May 2014, BusinessEurope, the European employers’ group, said that “the separation of powers and judiciary independence and impartiality is not always evident in some states”. Arbitration, it said, “provides an opportunity to seek for independent and impartial judicial decisions, based on technical and legal grounds.”

Including ISDS within the landmark TTIP would therefore serve as much as anything as a benchmark, according to BusinessEurope.

“It would seem inconsistent, arbitrary, unjustified and unreliable from the part of the EU to view ISDS as a central element in an investment treaty with emerging and developing countries while insisting on not having such a mechanism in a treaty with OECD members,” the BusinessEurope paper added.

“Such a precedent would weaken the ability of the EU to include ISDS in future [bilateral investment treaties and free trade agreements] with non-OECD countries, for instance with BRICS (Brazil, Russia, India, China, South Africa),” the group claimed.

An existential struggle for market capitalism

According to Jan Kleinheisterkamp, an academic from the London School of Economics, “international commitments by the US to European investors can very well be made applicable in US courts and even confer right of action to individuals.”

So, it is possible that EU investors could enforce the rights granted to them in TTIP by suing the US government in US courts.

But if the EU signs an investment arbitration clause in TTIP, “this would move the world a significant step further towards a global corporate super-constitution, enforced by corporate ‘courts’,” according to the Corporate Europe Observatory (CEO), a corporate accountability watchdog.

Corporate Europe claimed that – faced with challenges from combating climate change to preventing another financial crisis – this would leave our societies “stuck in a legal straight-jacket, with the constant threat of multi-billion corporate disputes against policy changes”.

A deal with China along the same lines would be just as dangerous, it claims, “allowing Chinese corporations to sue EU governments – and vice versa – when they change their laws.”

“It is precisely because of negative impacts against the public interest that more and more countries are disengaging from investor-state arbitration globally,” CEO said.

Wider ideological battle at play

Proponents of ISDS point out that the impact on future trade deals of not including an arbitration clause would be twofold: economic and theoretic.

“The competitiveness of EU investors in third countries, especially in sectors with high government involvement, is likely to be damaged,” said the The European Centre for International Political Economy (ECIPE), a think tank.

In a recent paper, ECIPE said there would be strong consequences if EU member states pull out of their existing bilateral agreements – many of which already include ISDS clauses.

Bruno Maçães, Secretary of State for European Affairs in Portugal, said removing ISDS clauses from trade deals would have a chilling effect on the economy. “Why aren’t critics of ISDS in TTIP demanding the repeal of ISDS-clauses in general?” he asked.

Aside from the predicted economic effects, all sides agree that there is a wider ideological battle at play.

“ISDS is an outdated instrument from post-colonial times, when the unreliable judiciary systems in developing countries somewhat justified the inclusion of a mechanism that would protect foreign investors,” according to German Green MEP Reinhard Bütikofer.

“This has changed, and important emerging economy countries such as Brazil, South Africa and Indonesia are either repealing ISDS-clauses or are refusing to include them in their bilateral trade and investment agreements,” Bütikofer added.

However, proponents of ISDS claim that allowing treaties with emerging countries to develop without a recourse to arbitration is a recipe for trade ungoverned by rule of law.

Here, the EU and US have expressed common goals through the Transatlantic Economic Council.

These “demonstrate that the EU and the US still share the same goal in terms of global trade: free and open investment regimes governed by the rule of law”, according to Elena Bryan, the senior trade representative of the US mission to the EU.

Such broader shared objectives and common values matter to the ISDS, Bryan stated, adding that “being able to have a discussion about this issue is of course the beauty of living in a democracy; everyone is entitled to their own view”.

“In fact, the core investment protections and investor-state enforcement are about ensuring the rule of law and baseline protections that all individuals and enterprises should be accorded,” Bryan claimed.

Leopoldo Rubinacci, the EU executive’s senior official within the European Commission’s trade department (DG Trade), has expressed puzzlement at the criticism of the EU’s broader aims in this context.

At a forum in Brussels organised by the European Policy Centre last month, he said that fairness, equity and compensation for expropriation – key-elements in any ISDS-procedure that would be included in TTIP – were key founding principles of the EU. He wondered why their translation into law under an international trade agreement caused so much uproar.

Critics, such as Bütikofer, have attempted to take some of the ideological sting out of their positions.

“We don’t want to frame the debate as a conflict between the US and the EU/ It is more a struggle between corporate and public interests,” he said.

But for proponents, the faultline lies not between between the Western democratic capitalist model, and how it trades, as against the more dirigiste, emerging economies.

This was what the US Council for International Business and Danish and Swedish Industry Federations alluded to in a joint letter to the Financial Times in March this year.

“We have a unique possibility of making a modern ISDS agreement which can balance the legitimate needs of governments to regulate public priorities with the legitimate needs of businesses to have reasonable and predictable protection of investments,” it said.

Such an agreement, they argued, would “create a global gold standard” which other countries would look to as a model.

To some extent, the fate of the ISDS clause in TTIP will determine the weight that is accorded to a US-EU model of trade agreement, as against models emerging from the developing world.

“The level of attention attracted by TTIP’s inclusion of a special arbitration system for foreign investors is fully justified. Our courts have a longstanding reputation for fairness and investments between the EU and US have flourished without this mechanism. Conceding special rights to companies and risk reducing governmental readiness to protect consumers are nonsensical”, said Monique Goyens, director general of The European Consumer Organisation (BEUC) and EU co-chair of the Transatlantic Consumer Dialogue (TACD). “Having said that, dropping ISDS from the EU-US trade deal would be only half the battle if US companies go on to use the recent EU trade agreement with Canada to sue European governments.

“It’s little surprise that European policymakers – most recently the French Parliament – are rejecting the proposal to subject European policies to an unprecedented degree of ISDS liability via CETA or TTIP,” said Robert Weissman, president of Public Citizen. “Why would any EU member state want to allow these deals to empower literally tens of thousands of U.S. firms – the world’s most aggressive ISDS users – to go before extrajudicial tribunals and demand compensation for common-sense consumer protections?”

Celeste Drake, Trade and Globalisation Policy specialist at the US trade union, AFL-CIO said: "ISDS injures rather than supports the rule of law by undermining trust in government, socialising costs paid by taxpayers, while privatizing gains." 

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.

Negotiations for an agreement – the Transatlantic Trade and Investment Partnership (TTIP) – started in July 2013.

The EU executive consulted the public on its possible approach to investment protection and ISDS in the TTIP, asking 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.

This consultation was extended over the summer on account of the high interest and the Commission intends to publish a report probably early next year.

Subscribe to our newsletters