It's been fairly quiet on the TAFTA/TTIP front recently. That's largely because Europe shuts down for its summer hols during August, and has only just got going again. Unfortunately (for TAFTA/TTIP), the next round of negotiations has just been cancelled because the US administration was busy being, er, not busy. But as a consolation prize, we have a couple of documents from the European Commission on the subject of Investor-State Dispute Settlement (ISDS), which by a happy coincidence was the subject of my previous TTIP Update.
In fact, those two documents turns out to be pretty much the same, just re-worded slightly. Both seek to defend the indefensible – that is, to convince people that ISDS is totally harmless, and nothing to worry our pretty heads about. Above all, they want to reassure us that ISDS is definitely not this years' ACTA....
This comes through most clearly in the document entitled "Incorrect claims about investor-state dispute settlement" [pdf]. So let's have a look at some of the claims about the claims:
Claim: Investor-state dispute settlement subverts democracy by allowing companies to go outside national legal systems.
Response: Untrue! To get a sense of perspective on this question it is important to remember that the EU itself, as well as all but one of our Member States, Switzerland, the United States, Canada, Japan, South Korea and India – to name just a few – are all party to many agreements which provide for investor-state dispute settlement. These countries, and many more that also allow investor state dispute settlement, have healthy, vibrant democracies.
More specifically, relying on the national courts of the host country to enforce obligations in an investment agreement is not always easy.
Firstly, the investor may not want to bring an action against the host country in that country's courts because they might be biased or lack independence.
Secondly, investors might not be able to access the local courts in the host country. There are examples of cases where countries have expropriated foreign investors, not paid compensation and denied them access to local courts. In such situations, investors have nowhere to bring a claim, unless there is an investor-state dispute settlement provision in the investment agreement.
Thirdly, countries do not always incorporate the rules they sign up to in an investment agreement into their national laws. When this happens, even if investors have access to local courts, they may not be able to rely on the obligations the government has committed itself to in the agreement.
All that sounds plausible, until you remember that TTIP is an agreement between the EU and US, nobody else. So let's look at the above "explanation" in that light:
"Firstly, the investor may not want to bring an action against the host country in that country's courts because they might be biased or lack independence."
So the European Commission is saying that the US courts are biased or lack independence? I do hope Karel de Gucht explains why when negotiating with his US counterparts.
"Secondly, investors might not be able to access the local courts in the host country."
So here the European Commission is saying that investor might not be able to access local courts in the US? Sure, that happens all the time....
"Thirdly, countries do not always incorporate the rules they sign up to in an investment agreement into their national laws."
So now the Commission thinks that the US will go to the trouble of negotiating this huge treaty – and then just ignore its provisions? Again, how plausible is that as an answer?
And notice that none of the three points actually addresses the central problem, which is that ISDS does indeed allow companies to go outside national legal systems, and thus subvert established democratic institutions like the local courts. Basically, ISDS is inappropriate for developed nations like the EU and US. Introducing it does one thing, and one thing only: it provides foreign investors with extra rights over and above what citizens and domestic companies enjoy.
So let's look at another:
Claim: Investor-state allows companies to sue just because they might lose profits.
Response: Wrong! Companies cannot sue successfully just because their profits might be affected. They need to have a case. That means they need to prove that one or more of the investment protection standards, such as non-discrimination or protection against unlawful expropriation have not been respected. The fact that a government changes a law, which increases the costs for a given company, is not on its own, sufficient to bring a successful case in investor-state dispute settlement.
Although it's strictly speaking true that companies cannot sue just because they might lose profits, in practice that's pretty much what happens, because the so-called "investment protection standards" are so vague and easy to invoke. Here's a good explanation from Public Citizen:
Investors and corporations can demand taxpayer compensation for policies that they allege as violating special "rights" granted to foreign investors by NAFTA-style FTAs. These "rights" are phrased in vague, broad language. Tribunals have increasingly interpreted these foreign investor "rights" to be far more expansive than those afforded to domestic firms, such as the "right" to a regulatory framework that conforms to a corporation's "expectations." This "right" has been interpreted to mean that governments should make no changes to regulatory policies once a foreign investment has been established.
Claim: Investor-state dispute settlement cases take place behind closed doors
Response: Many existing agreements do indeed provide, by default, that investment disputes are heard behind closed doors. The EU does not believe that is appropriate. We have championed transparency in international dispute settlement in general and in investor-state dispute settlement in particular. In future EU agreements, all submissions will be public, all hearings will be open, all decisions of the tribunal shall be public and interested parties will be able to make their views known.
So the response here is along the lines of "well, yes, that's true, but we'd really like to change it." Unfortunately, that overlooks the fact that it can't do that unilaterally: it needs to get the US to agree, and the current administration has shown itself a bigger enemy of transparency than any predecessor. Bottom line: it's not going to happen.
Claim: Investor-state dispute settlement undermines public choices (e.g. Vattenfall
challenging the German moratorium on nuclear power, Philip Morris challenging
Australia's plain packaging regime for cigarettes)
Response: It is important to note that only well-founded cases have a chance of being successful. The fact that a policy has been challenged does not mean that the challenge will be successful. The EU will negotiate in such a way so as to ensure that legislation reflecting legitimate public choices e.g. on the environment, cannot be undermined through investor-state dispute settlement.
Well, see comment above: the EU can negotiate until it's blue in the face, but if the US refuses to go along with the plan, then the situation remains the same. And here's what is currently happening: a wide range of health, safety and environmental regulations are being challenged through the ISDS mechanism:
foreign corporations have launched investor-state challenges against a wide array of consumer health and safety policies, environmental and land-use laws, government procurement decisions, regulatory permits, financial regulations and other public interest polices that they allege as undermining "expected future profits."
Claim: Investor-state dispute settlement is biased in favour of investors – they can threaten to bring expensive cases against governments and so scare them away from policies that the investors do not like.
Response: There is little real world evidence that this is the case. UN statistics on investor state dispute settlement cases show that a majority of cases are decided in favour of the government (Of all the cases concluded by 2012, 42% found in favour of the State, 31% in favour of the investor and 27% were settled).
This is an absolutely key issue. ISDS actions threaten to become the global version of patent trolls: by merely threatening to sue they can cause governments to change their plans in order to avoid the risk of huge payouts. It's been happening in Canada for over a decade, thanks to the ISDS chapter in the North American Free Trade Agreement, as a former government official in Ottawa explained:
"I've seen the letters from the New York and DC law firms coming up to the Canadian government on virtually every new environmental regulation and proposition in the last five years. They involved dry-cleaning chemicals, pharmaceuticals, pesticides, patent law.Virtually all of the new initiatives were targeted and most of them never saw the light of day."
Notice, too, how the European Commission quotes the figures for "all the cases concluded by 2012". That conveniently bundles together all the early cases where tribunals did, indeed, tend to find for the State more often. But unfortunately for the European Commission's argument, that's no longer the case. Here's what the UN statistics have to say about 2012:
In 70% of the public decisions addressing the merits of the dispute, investors' claims were accepted, at least in part.
Claim: Investor-state dispute settlement cases are decided by a small clique of lawyers, with considerable conflicts of interest, who seek to cream off public money.
Response: Like in any area of national or international law the number of true specialist lawyers in the field is not large. Some of these lawyers do combine roles as arbitrators in some disputes and advocates in others. This crossing over may create the risk of conflicts of interest.
In other words, this is also true, but we would like to change it (see above).
Finally, we have:
Claim: Investors should not be allowed to challenge governments directly in international law. Only governments should be able to act against each other, via state-to-state dispute settlement.
Response: It is investors who actually suffer the financial losses. Governments (including the EU) need to pursue the general interest, and that means that they have neither the time nor the resources to follow-up each individual alleged breach of the agreement.
The fact that governments (including the EU) have neither the time nor resources to deal with each alleged breach is precisely why ISDS is so pernicious: it forces governments (or the EU) to spend huge amounts of time and money dealing with claims made under it. The fact that tribunals are finding increasingly often in favour of companies means that more cases will be brought, because the odds of succeeding are going up, especially if speculative funding is available.
And here's another reason why that growth in ISDS trolling is likely to happen: last year saw the largest award made by an ISDS tribunal – a cool $1.77 billion in damages. And remember, that's money that the government concerned has to pay. If ISDS is included in TAFTA/TTIP, the people who will end up footing the not inconsiderable bills will be you and me. If the European Commission truly wanted to "pursue the general interest" as it claims in this document, ISDS would be the last thing it would allow in TTIP.