Trading and being treated fairly: Why European industry needs investment protection

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

CREDIT [openDemocracy/Flickr]

France's foreign trade minister is demanding greater transparency in TTIP negotiations. [openDemocracy/Flickr] [openDemocracy/Flickr]

Clauses similar to the Investor-State Dispute Mechanism (ISDS) being discussed as part of EU-US trade negotiations have existed for well over 30 years, and has only ever been used as a last resort, writes a coalition of business organisations. Above all it cannot, and has not been used, to overturn governments’ ability to regulate, they claim.

The following opinion article was co-authored by AmCham EU, BusinessEurope, the European Services Forum, the Transatlantic Business Council and the European Round Table of Industrialists.

The Transatlantic Trade and Investment Partnership (TTIP) and in particular its inclusion of an Investor State Dispute and Settlement (ISDS) provision have generated a great deal of misconception. To set the record straight on one point immediately:  ISDS does not give companies the right to limit governments’ rights to regulate. As long as governments do not regulate in a discriminatory manner against a foreign investor in that country, ISDS will not allow companies to ask for compensation.

Countries want investment and work hard to attract it. Anyone putting money in a bank or an investment fund wants some assurance that their money is safe.  A company investing in a foreign country is no different: not only is it taking a commercial risk, but it also runs the risk of losing its investment through discriminatory or arbitrary treatment by a foreign government, including having its assets seized. 

If this happens to a small company, it may not only threaten the investment, but also its very survival, and thus the jobs of its employees at home. This is the common-sense basis of investment treaties providing protection for foreign investors, including, as a last resort, dispute settlement by neutral arbitrators.

Some critics would have us believe that large companies regularly use ISDS to pressure governments across the globe into doing their bidding. That’s not so: of the 3,236 bilateral investment agreements worldwide, less than 3% of those agreements have ever seen any action taken under ISDS.

What’s more, UN Conference on Trade and Investment (UNCTAD) figures show that ISDS is resorted to only rarely – the 800,000 foreign-owned affiliates investing abroad have raised no more than 568 cases – on average 20 a year over the 30 years it has been in existence. Two thirds of those cases were brought by EU companies – almost all against EU states.  Outside Europe, EU companies are again the most active, particularly in countries with unreliable legal systems discriminating against foreign investors and a record of seizing foreign assets.

ISDS use has grown, but again it is worth looking at the figures before jumping to negative conclusions.  In 1990 there were 5 ISDS cases brought globally; in 2013, around 60 – a 12-fold increase.  But the stock of global FDI in 1990 was $2 trillion – and in 2013, $25 trillion (more than 12 times larger). Simple maths shows that the number of disputes almost exactly tracked the rise in overseas investment. 

ISDS has not stopped governments regulating: in the last 50 cases brought to independent arbitrators, 54% were found in favour of the State, and just 16% for the company. A further 30% were settled before going to arbitration. When there was any award, it was usually well below the company’s claim. The average award amounted to no more than 1/30th of the amount being sought.

ISDS only allows companies to seek compensation, if and only if their assets are seized or discriminatory regulation makes those assets near-worthless. ISDS cannot make a country change its policy, however unfair or discriminatory. Earlier this year the US Trade Representative Mike Froman stressed that “The US won’t negotiate away its right to regulate, and we don’t ask other countries to do so either”. EU Trade Commissioner Malmström has made it clear that the EU is neither looking to undermine other governments’ right to regulate, nor see the EU’s ability to do so constrained, through TTIP.

So, not only is ISDS unable to stop governments from regulating, but no one wants it to. If it could, we would have seen much of the regulation purportedly at risk under TTIP being challenged and disappear under the hundreds of agreements in force since 1987. It simply hasn’t happened.

And what about those mega-corporations exploiting ISDS? The size of US (and EU) companies seeking compensation holds another surprise. Of the 105 cases filed by US entities, 66% were from individuals or companies with less than 500 employees, and these did not do too well – 65% were found in favour of the State. A recent OECD survey of arbitration cases showed that only 8% were brought by large multinationals.

But is ISDS necessary under TTIP given that both the US and EU have well-functioning legal systems? Individual EU countries have 1,557 bilateral investment agreements, most with ISDS or similar arbitration. Furthermore some EU countries already have investment agreements with the US that include ISDS. If TTIP does not include ISDS, these old agreements and their shortfalls will remain in force. Both sides in TTIP are negotiating major improvements to make ISDS more transparent and fair to all.

To sum up, ISDS has existed for well over 30 years, and has only ever been used as a last resort. Above all it cannot, and has not been used, to overturn governments’ ability to regulate. ISDS is thus a rather different animal from the raging beast it is portrayed as by some.

Europe needs investment now, more than ever. We want European companies to be able to invest responsibly – and be treated responsibly – abroad, not least to create and secure workers’ jobs in Europe. TTIP, including a fair and improved ISDS, can do that, and we should not let the opportunity slip away.

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