Parliament’s inexperience with ISDS

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

Myron Brilliant [Youtube]

ISDS is not dead. Should members of the European Parliament vote this week to replace the Investor-State Dispute Settlement system, they will face an uphill battle convincing the rest of the world that they are right, argues Myron Brilliant.

Myron Brilliant is Executive Vice President for International Affairs at the U.S. Chamber of Commerce.

The European Parliament (EP) may vote this week to overturn 50 years of international law on the issue of Investor-State Dispute Settlement, or ISDS. This would be a mistake.

“It’s totally clear that the old ISDS is dead,” boasts German Socialist Bernd Lange, the Chairman of the EP’s International Trade Committee. The leader of the Progressive Alliance of Socialists and Democrats (S&D) group, Gianni Pittella, echoes him, claiming the EP is signing the “death certificate” of ISDS.

Of course, the non-binding amendment they support will do no such thing. ISDS will continue to exist, but it could well mean that the European Union, which only gained the right to negotiate investment agreements in the 2009 Lisbon Treaty, will choose not to avail itself of an established means to enforce international law.

The ironies run deep:

  • The EU is the largest source of foreign direct investment in the world, but in forswearing ISDS arbitration in its treaties, it would abandon the best tool for protecting those investments.
  • Investment treaties and ISDS were pioneered by European states such as Germany more than five decades ago, and EU member states have included ISDS in virtually all of their 1,500 bilateral investment treaties.
  • ISDS arbitration is a central tool for the enforcement of international law and practiced by the United Nations Commission on International Trade Law (UNCITRAL), the Permanent Court of Arbitration in The Hague, the International and Stockholm Chambers of Commerce and the World Bank’s International Center for the Settlement of Investment Disputes (ICSID).

It is difficult to fathom why the Socialists and Democrats are rejecting ISDS. As lawmakers, MEPs should know that ISDS gives foreign investors a right to file a complaint only when a government violates obligations it has undertaken in an investment treaty, that is, its obligations under international law. 

In an investment treaty, two governments promise each other that they will not discriminate against one another’s investors on the basis of their nationality, that they will provide those investors the minimum standard of treatment required by international law, that they will compensate an investor in the event an investment is expropriated for a public purpose, and that they will allow investors to move funds associated with an investment into and out of the country. 

While investors are of course subject to all the laws of the land where they invest, these four promises give them additional protections under international law for the simple reason that — as the S&D knows full well — foreigners can at times be treated less well than locals. 

EU member state governments and parliaments have freely entered into the 1,500 international treaties containing these investment protections because they reflect values democracies hold dear, and they do not expect to violate them. 

But treaty law, to be meaningful, must also be enforceable. This is where ISDS comes in.

Governments created ISDS because they recognize that investment is different from trade. Trade barriers stop the products of many suppliers from entering a country, whereas a government can adopt measures that affect a single investor who has put capital at risk in that country’s territory. ISDS allows an investor to bring a complaint about a treaty violation — and only about a treaty violation — to a neutral panel operating under UN, World Bank or other globally-accepted arbitration rules. 

The alternative to empowering investors to bring claims against alleged violations of an investment treaty is to have the investor’s home state take up the case.  Most governments, however, do not want to be lawyers for their investors around the world.  Indeed, this was one of the main reasons the Obama administration retained ISDS in US investment treaties after a three-year review of the issue. 

Some S&D members argue that investors should only have recourse to domestic courts. But in many countries, including in Europe, domestic courts do not enforce international law. Others argue there should be a “permanent court” or (as the amendment says) “publicly appointed independent professional judges” to hear these cases. 

This reflects a basic misunderstanding of investment treaties: governments enter into the obligations as they do not expect to violate them. Indeed, in more than 90% of the world’s 2,400 investment treaties, no complaint has ever been filed. If one does not expect to have disputes, an ad hoc approach makes far more sense than a “permanent” court. 

Further, as the respondent in an ISDS complaint is by definition a government (since only a government can enter into and thus violate a treaty), insisting that the potential perpetrators of alleged wrongs have the sole power to name the “judges” is far less fair than the normal and well-established arbitral process of having each side appoint one panelist and then having them, or an independent authority, name the third. The UN, World Bank and virtually all other arbitral rules allow both parties to ensure that the panelists hearing their dispute are professional, impartial and versed in international public and treaty law. 

The desire of some MEPs to “replace the (existing) ISDS system with a new system” is all the more curious as they have yet to identify a problem with a system that is so well-established in international law and practice. Governments have lost in only one-fifth of the more than 265 cases that have been decided in the 50 years since ISDS was first established. In virtually every case, the losing government clearly did violate its treaty commitments, and yet the judgments against them have yielded about 3% on the amount of damages initially claimed (not counting the $50 billion that Russia should pay for illegally expropriating Yukos in violation of the Energy Charter Treaty). 

Should members of the European Parliament vote this week to “replace the ISDS system,” they should know they face an uphill battle convincing the rest of the world that they, in their wisdom, are right and that 50 years of accepted international practice is wrong.

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