Investor-State Dispute Settlement - Can We Get It Right in TTIP?
The European Union and the United States are both open to foreign investors, so why do we need an investment chapter in TTIP? And both the EU and US have robust judicial systems that basically give foreign investors fair treatment, so why do we need an investor-state dispute settlement mechanism (ISDS) in the investment chapter of TTIP? TTIP offers a chance fix problems in ISDS and set the stage for future agreements and expansion.
The primary reason to have an investment chapter and the ISDS mechanism is that the Transatlantic Trade and Investment Partnership is envisioned as a template for future trade agreements. The expectation is that in the future other countries, such as Turkey, will join TTIP, and it would be relatively easy to merge the North America Free Trade Agreement (NAFTA) with TTIP, since the EU has an FTA with Mexico and is concluding one with Canada. The EU and NAFTA alone account for more than half of total world trade, and many other countries will undoubtedly line up to be part of this enormous market; some of these countries likely will not be fully open to foreign investment and will not have robust legal systems.
As the Doha Round was being launched in the early 2000s, the EU pushed for investment to be part of the negotiating mandate. The US resisted this out of concern that investment negotiations in the Doha Round would be watered down by the many WTO members that do not want to be fully open to foreign investment, and the final mandate did not include negotiations on investment. However, uniform rules on foreign investment, including ISDS, are badly needed, given the confusing array of investment rules in the myriad bilateral investment treaties and free trade agreements that are in effect today. TTIP is the best opportunity to develop these rules and to provide a template for a 21st century trade system.
However, there are many concerns with how ISDS has operated in practice. For example, Germany appears to be opposed to including ISDS in TTIP. ISDS allows a foreign investor that believes there has been a direct or indirect expropriation of its investment to take a government to international arbitration that may result in a binding, non-appealable settlement. Many are concerned that this gives foreign investors a right not available to domestic firms.
Australia and many non-governmental organizations in Europe have expressed opposition to including ISDS in the Trans-Pacific Partnership agreement because of concerns that it may limit the ability of governments to implement laws and regulations to protect public health and the environment, concerns that Germany also seems to share. While the vast majority of cases brought under ISDS have been legitimate, there have been some abuses of the system.
The fact is that the World Trade Organization dispute settlement mechanism is vastly superior to ISDS. The WTO mechanism provides for an appeal process and it clearly allows governments to take actions to protect public health, the environment and national security. By contrast, there are a number of different venues for pursuing arbitration under ISDS, including the International Chamber of Commerce and the International Centre for Settlement of Investment Disputes, among others, so there has been some "treaty shopping" by investors. These venues do not have an appeals process and they do not have as robust transparency as the WTO.
The solution is not to abandon the Investor-State Dispute Settlement mechanism in TTIP, but to fix it. In fact the EU Commission has stated that it wants substantial improvements to the ISDS mechanism in TTIP including an appeals process, clarification that measures taken for protection of public health or the environment do not constitute indirect expropriation, and provisions against "treaty shopping".
Negotiating the details of how to do this is complicated and a careful balance of investor rights with the public interest is needed. The Australian-Korean free trade agreement has a number of these features that may provide a good benchmark for TTIP negotiators, such as Annex 11-B:5 that clearly states that governmental actions to protect health, safety and the environment do not constitute indirect expropriation. Annex II-E of the agreement envisions the establishment of an appellate mechanism.
To date, there has been a lack of transparency in TTIP negotiations. However, given the importance and the complexity of this issue, TTIP negotiators need to keep the general public informed of the actual language of the draft agreement.
Bill Krist is a Senior Policy Scholar at the Woodrow Wilson International Center for Scholars. He also served as Assistant U.S. Trade Representative for Industrial Trade in the Office of the U.S. Trade Representative, the White House Office responsible for formulating and coordinating U.S. trade policy.
This article was published in the first of three theme weeks for our project "TTIP: Myths vs Reality". An introduction of the articles for the week can be found here, and introductions of the other two weeks can be found at the top of the TTIP Forum.
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