Can States Still Effectively Regulate With ISDS?
TTIP, TPA, ISDS, the list can go on about the various acronyms used in the trade negotiations between the EU and the US. For this #TTIPTuesday, we look at the debate surrounding the Investment State Dispute Settlement (ISDS). Focused on the issue of states' ability to regulate after implementing an ISDS agreement, we have chosen three articles to illustrate the many sides of this debate, including an alternative proposal to ISDS put forth by the French Minister of State for Foreign Trade.
Perhaps one of the most contentious issues in the Transatlantic Trade and Investment Partnership (TTIP) negotiations surrounds the third word, investment. Investment State Dispute Settlement (ISDS) was originally creating in the 1960s as a way to secure investments made in risky countries. In theory, it grants the investor the right to use dispute settlement proceedings against a foreign government traditionally through a neutral arbitration but not all people agree on the nature of this mechanism. Below is a selection of the arguments regarding the regulatory ability of states under an ISDS clause.
Quotes are from the following sources:
Laguna, Diego Zuluaga for EU Observer
For a fair, transparent and effective ISDS in TTIP.
Bonnitcha, Jonathan; Poulsen, Lauge; and Yackee, Jason for the Centre for European Policy Studies
Transatlantic Investment Treaty Protection
Barbière, Cécile for EurActiv
Matthias Fekl: ‘The EU should have its own arbitration court'
The Pro ISDS (EU Observer)
"ISDS does not hamper a state's ability to regulate. It is strictly about establishing mechanisms for impartial arbitration and, possibly, compensation of foreign investors for unexpected and arbitrary government action. It gives investors an avenue for recourse when they face legitimate losses due to government policy. In the specific case of TTIP, the Commission's mandate includes safeguards to protect Member States' right to regulate.
The alleged pro-investor bias in ISDS is a myth. Arbitral tribunals are agreed to by both parties to ensure a fair ruling. It is worth noting that, as of June 2014, 50 percent of concluded ISDS cases against EU Member States had been won by the Member State concerned, with another 26 percent of cases settled, according to the United Nations Conference on Trade and Development (UNCTAD).
The extent of frivolous cases is overblown. Most disputes arise from policy changes that seriously endanger investors' capital and expected returns. Claims typically concern the revocation of licenses, the termination of contracts, and/ or significant changes to energy, healthcare and public-procurement markets. Heavily regulated sectors like agriculture, utilities and real estate predominate."
The Con ISDS (CEPS)
"The inclusion of ISDS-backed investment protections in the TTIP would impose costs on the EU to the extent that it prevents the EU and its member states from regulating in the public interest. This potential cost encompasses both the effect of TTIP on legislative decision-making (e.g. if the existence of ISDS-backed investment protections dissuaded a state from enacting new tobacco control laws) and the effect of TTIP on executive decision-making (e.g. if the existence of ISDS-backed investment protections dissuaded a regulatory agency from shutting down a foreign-owned hazardous waste facility on account of the investor's failure to comply with environmental conditions attached to its operating permit).
…Given the sheer size of the stock of US investment in the EU, the likelihood of disputes between US investors and the EU and its member states is high. The composition of US investment in the EU is also potentially relevant because investments in particular sectors have proven more likely to result in investment treaty disputes in the past. We note that there are substantial stocks of US investment spread across almost every sector of the EU economy, including sectors that have proven particularly prone to investment treaty claims in the past.
… There are other ways in which the treaty could affect EU policy space. We have noted the size of US outward FDI stocks in the EU and the fact that US investors seem particularly likely to rely on their legal rights as a bargaining tool. If TTIP did include ISDS, we expect that the EU and its member states would be regularly faced with US investors opposing new policies on the grounds of the treaty. This opposition could be expressed either through lobbying, through submissions to government inquiries or by initiating arbitration proceedings under the treaty. To the extent that these activities encouraged EU decision-makers to modify or abandon preferred measures, it would count as a political cost of the treaty."
The Alternative Proposal (EurActiv)
"France proposes the creation of an international dispute settlement court in several stages. The first stage is European. We recommend that this court should be established and should have authority over all the EU's future trade deals.This court could then become the forerunner of a permanent international and multilateral court....
It is unacceptable that states could have their democratic and sovereign decisions called into question by private tribunals. It is unacceptable that conflicts of interest can exist, that someone can be a judge one day and an advocate the next, in the same trial. The balance of power must be redressed in favor of the public.
This court would lead to the creation of a new institutional framework. It would oversee a list of judges authorized to settle disputes between investors and states by examining them against ethics and transparency standards. One measure we suggest is the implementation of a five-year "quarantine" period – before and after a judge's service in this court – during which a judge may not work as a private attorney, to avoid the conflicts of interest that are so common under the current system.
An investor should think twice before attacking a state: hence the idea of sanctions and potentially hefty fines for abusive complaints. We suggest that the future court should be able to impose penalties of up to 50% of the value of the damages claimed by investors.
Also, simple changes in the law that leads to variations, even very significant variations, in a company's profits, are never an adequate reason to take legal action against a state. The aim is to preserve a state's sovereign right to implement public policies without being dragged before a court.
We hope to pass very strong regulations on indirect expropriation, and it must be the states, and they alone, that have the power to interpret treaties when ambiguities arise."
Here are the current official stances on ISDS:
Which article do you find most compelling? What do you think of ISDS?
This article is part of our project TTIP Review supported financially by the US Embassy in Berlin. Click on the link to read more articles and our governance rules.
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