ISDS Provides Necessary Protection, not a New Avenue to Corporate Profit
Investor-State Dispute Settlement provides necessary protections for companies who have been treated unfairly by foreign governments. Rather than allowing companies to bypass national laws, the mechanism provides protection for companies whose options within a national system have been unfairly limited. Concerns should be addressed, but it is important to note that the protections are necessary and the idea that companies see ISDS as a profitable avenue is false.
The Trans-Atlantic Business Council (TABC) is a cross-sectoral business association representing 70 companies headquartered in Europe and the US. Since the launch of the negotiations, TABC has been advocating for a comprehensive TTIP that includes the "I" for "investment". Our member companies employ 5.6 million people in the EU and the US. Each of our member companies has made significant investments on the other side of the Atlantic. These investments have been undertaken under the assumption that they are subject to the laws of the host country, in other words being subject to "national treatment".
In the past months a broad public debate about investment protection in TTIP talks has evolved. In particular, the investor-state dispute settlement (ISDS) mechanism has been the subject of criticism. We support this broad debate, but remain convinced that all who support the basic principles of the rule of law should be able to understand why Germany created this mechanism over half a century ago. Simply put, ISDS is a means to enforce promises governments give to each other in a treaty about how they will treat investors from the other country. The promises they make reflect basic principles that every citizen of democratic countries in Europe can understand:
- they will not discriminate against an investment because of the nationality of the investors
- they will provide the minimum level of treatment required under international law, including "fair and equitable treatment" such as access to courts and due process
- they will only expropriate an investment on a non-discriminatory basis, with due process and against prompt, adequate and effective compensation
- they will allow the free transfers of funds related to the investment
An investor can only bring a case before neutral international tribunal under ISDS if it believes the host government has violated one of these four promises. They cannot take cases against general laws of the land, which is the national treatment they have been promised.
ISDS and the substantive protections to be provided in the investment chapter of the TTIP will therefore increase legal certainty when investors assess whether to invest in a foreign market. Accordingly, the debate on the TTIP investment chapter's protections and ISDS should focus on how existing mechanisms can be improved, rather than whether to include them at all. In this context it is worth noting that without investment provisions in TTIP other investors with bilateral investment treaties (BITs) with the EU or the US enjoy higher protection than European or American investors. In the following we address some of the claims made in the discussions about ISDS:
Claim: ISDS allows for secret courts to bypass national law.
ISDS provides a neutral platform as an alternative to national courts for a foreign investor who has been discriminated against, i.e. treated less favourably than a domestic investor. If a state expropriates an investment without compensation or otherwise discriminates a foreign investor, the host country can limit the investor from making claims at local courts. A neutral platform with defined procedures is needed to protect an investor. A well governed state has little to fear – examples are France, Germany, Britain and the US, who have never lost a case.
Claim: ISDS is not transparent and little information is available on ISDS cases.
We agree that transparency in the previous ISDS process can be improved. TTIP is an opportunity to achieve this objective. Earlier this year the United Nations Commission on International Trade Law (UNCITRAL) agreed on improved transparency measures for all future trade and investment agreements. The new rules would cover TTIP and provide for greater transparency than many civil legal proceedings. The EU has endorsed increased transparency in the CETA, even going beyond requirements under UNCITRAL. At the same time, it is crucial to strike the right balance between the public's "right to know" and legitimate concerns about confidentiality.
Claim: ISDS is not necessary in advanced judicial systems such as the EU and US.
Protecting foreign investment from discrimination by a developed state is equally important as protecting foreign investment by a developing state. So-called developed countries are developed because they promote the rule of law, a critical consideration for any investor. That's why the US and the EU are both the largest sources of and hosts to foreign investment. Every single investment treaty signed by a developed EU member state government – there are 1400 of them – accepts that an investor from any of the countries with which they have signed investment treaties can use ISDS to sue that developed EU country if it violates one of the pledges in the treaty. If Germany, the UK, France and many others can give that right to Chinese, Russian or Jamaican investors why shouldn't they give the same to investors from the United States?
It is important to note that ISDS is not considered a profitable avenue for businesses to bring claims. Instead, it is a last resort for investors who have been harmed by the host government. The majority of investors prefer to maintain their foreign investments without considering ISDS since they are aware of the costs associated with these proceedings. They further recognise that the initiation of ISDS may not only be the end of the specific investment in question, but also the termination of all investment in their host country. Companies with large investments therefore aim to maintain a constructive relationship with the host country. Investment treaty cases are often long and costly processes and there is no guarantee of success for the investor. Investors thus typically prefer to preserve their relationship with the host government and to reach an amicable resolution. As such, regardless of whether the host state is "developed" or "developing", it is a relatively rare circumstance in which investors chose to undertake ISDS. TTIP provides an opportunity for the EU and US to improve the existing system of BITs through carefully measured reforms in a dynamic global economy.
Hendrike Kuehl is the Head of TABCs Brussels Office. She previously served as Policy Director and coordinated initiatives in a variety of trade policy areas with the members of the Council.
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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