The role of ISDS in contemporary EU trade agreements

By Jared Angle

BRUSSELS — Much of the recent debate over European Union trade negotiations, specifically regarding transatlantic trade agreements with Canada and the United States, has fixated on the inclusion of investor-state dispute settlement, commonly known as ISDS.

Incoming Trade Commissioner Cecilia Malmström said Sept. 29 that the ISDS chapter of TTIP negotiations is currently frozen, and will be revisited at a later date.

Outgoing Trade Commissioner Karel de Gucht initially stripped ISDS from TTIP negotiations due to German resistance to the legal mechanism, but he insists that ISDS is a crucial investment protection tool that belongs in a finalized version of TTIP, according to Martina Ferracane, a policy analyst at the European Centre for International Political Economy (ECIPE), a think tank based in Brussels.

American stakeholders believe that “without ISDS, TTIP would not make any sense,” Ferracane said.

The agreements in brief

The Comprehensive Economic and Trade Agreement (CETA) is a signed trade agreement between the EU and Canada, which has yet to be approved by Parliament. The agreement is expected to boost the EU and Canadian GDPs by €11.6 billion and €8.2 billion (CA$11.5 billion), respectively.

Canada is the EU’s 12th largest trade partner in terms of total trade volume, while the EU is Canada’s 2nd largest partner.

The Transatlantic Trade and Investment Partnership (TTIP) is an upcoming agreement between the United States and the EU. Although it is still in the negotiation process, the agreement will likely be finalized by the end of 2014.

The US is the EU’s largest trading partner, and the EU is the 4th largest US trade partner. Potential GDP gains through TTIP are expected to be very large, with gains of €120 billion for the EU and €90 billion ($112.5 billion) for the US. Additional residual economic gains are expected for other countries outside of the agreement.

Objections raised, alternatives proposed

Several members of Parliament challenged the role of ISDS in trade agreements during Commissioner Malmström’s Sept. 29 confirmation hearing in Brussels.

Saying that ISDS is a “tool of the last century, not the 21st,” MEP Helmut Scholz (GUE/NGL, Germany) asked if Malmström would reopen the recently concluded CETA negotiations to remove ISDS measures from the agreement.

Despite opposition to ISDS from Germany and left-wing groups in Parliament, modifying a concluded trade deal like CETA is not a step that can be easily taken.

Reopening the CETA deal would have significant consequences, both for the agreement and the EU’s credibility as a trade negotiator, Ferracane said.

According to outgoing Trade Commissioner Karel de Gucht (Belgium), reopening the negotiations to exclude ISDS would scuttle the deal.

While Germany has threatened that it will not sign the CETA agreement, it will likely sign it when the time comes, according to Ferracane.

“Among politicians, the general view both for Europeans and Americans is that ISDS is necessary and should be included in TTIP,” Ferracane said.

Furthermore, the prospect of including ISDS in some trade agreements while excluding it from others would make countries subject to ISDS feel discriminated against, and would make the inclusion of ISDS in future trade agreements less likely, according to Ferracane. 

ISDS: Potential for abuse, or a necessary tool?

The difference between legitimate ISDS cases and abusive ones can be subjective, according to Ferracane.

“All the cases can be seen either as abusive or not abusive, it depends how you see them,” Ferracane said.

In 2011, tobacco producer Philip Morris took legal action against the Australian government in response to the country’s anti-smoking legislation, which imposed new cigarette packaging rules.

Often cited as an example of abuse of ISDS mechanisms, the case claims that “Australia’s tobacco plain packaging measure constitutes an expropriation of its Australian investments,” according to the Australian attorney general’s office.

However, because the case has yet to be settled, it is too soon to determine if the case is abusive because the company is using its right to sue the Australian government, and could be responsible for legal fees if the case fails, according to Ferracane.

In other cases, investors have used ISDS as a last resort to recover losses when governments have seized their assets, such as Russian expropriation of energy companies, according to Ferracane.

Dissecting ISDS through facts and data 

A new study by ECIPE, which is currently pending publication, provides a range of statistics and background information on the history of ISDS and its contemporary applications in transatlantic investment.

According to the study, ISDS cases typically occur between investors from developed countries and the governments of developing countries.

To date, US investors have only filed nine cases against EU member states, all of which joined the EU during the 2004 and 2007 enlargements; the respondents include Poland, Romania, Estonia and the Czech Republic. One cause for the rarity of US-EU ISDS cases is the fact that the US only has bilateral investment treaties (BITs) with countries from the 2004 and 2007 EU enlargements, with the exception of Hungary, Slovenia, Cyprus and Malta, according to the study.

There are currently no BITs with any of the original 15 EU members, so US investors currently lack a mechanism to take action against those countries, Ferracane, one of the study’s authors, said.

One goal of TTIP negotiations is to replace BITs between the US and EU members with a common BIT, complying with the EU Common Commercial Policy (CCP), according to the study. The CCP requires EU members to take a common approach when negotiating trade agreements,[1] but following the 2009 EU Lisbon Treaty, there has been confusion over the fate of the several hundred BITs that EU members have signed with other nations.

Investors from EU members and the United States have initiated the most ISDS cases; together the two regions are responsible for 75 percent of all ISDS cases worldwide; most ISDS suits against EU member states are filed by investors from other EU members, or by investors from the European Free Trade Association, including Norway and Switzerland, according to the report and the United Nations database on ISDS cases.

A significant number of these cases concern the fossil fuel, electricity and mining industries, which together account for 40 percent of all ISDS cases, according to the United Nations Conference on Trade and Development.

[1] Neill Nugent, The Government and Politics of the European Union, 7th ed. (New York: Palgrave MacMillan, 2010), 371.

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