In light of a looming trade deal, the dominant system of international trade arbitration between investors and states may be reformed. Prudence requires those involved in the discussions to come to agreeable terms, setting a global standard that would increase net foreign investment and trust between nations.
Background
If the West wishes world governments to forego legal jurisdiction over commercial disputes, then it must address, in some capacity, the demands of its critics.
There is a concern that the Trans-Atlantic Trade and Investment Partnership (TTIP) will not improve upon the recently passed Trans-Pacific Partnership (TPP). For example, Adam Posen has argued that TPP strengthens the democratic and market-based development of Asian economies, but EU member states are already democracies with market economies, so the same argument does not extend to TTIP. The external arbitration provisions would add little investment appeal to EU member states as most are already, comparatively speaking, strong market economies with stable court systems.
Similarly, one cannot claim that TTIP will raise environmental or labour standards in Europe as TPP could in Asia. What Europeans fear, in fact, is that their high standards will be lowered by the trade treaty. One can also hardly claim that an Investor-State Dispute Settlement (ISDS) mechanism is needed to protect U.S. companies from expropriation in Europe as one could argue in the case of some Asian countries. ISDS is one of the most controversial aspects of TTIP in Europe, where citizens worry that the tribunals lack transparency and force governments to make concessions to corporations.
Moreover, though not directly related to trade arbitration, there is a real worry for Atlanticists. Fears about TTIP, whether rational or irrational, are already fueling anti-Americanism in Europe — particularly in Germany, where there is a massive “Stop TTIP” movement. Critics say the leaked TTIP papers have confirmed their worst fears about genetically modified food, a lowering of consumer protection standards in Europe is likely to further strengthen opposition. In particular, the papers show U.S. negotiators putting their European counterparts under pressure to ease restrictions on genetically modified food in exchange for a reduction in barriers to the export of European cars — hardly surprising, but alarming to Europeans who distrust GMOs. According to a new poll, 70% of Germans oppose TTIP.
It is understandable, even natural, for potential parties to an agreement to start with high demands of their partners but TTIP negotiations will not benefit from an unflinching US position. The Americans should not be dedicated to a system in need of reform. In light of the recent leak of documents and the background of the Ethyl case (discussed in Part 2), there is a real risk that legislation tackling safety, GMO-foods, or environment-damaging additives will be scrapped through the current ISDS processes.
A Politicized trade treaty
As mentioned, America is least interested in moving away from the status quo for international trade arbitration. Jeffrey Schott of the Peterson Institute reckons that America’s insistence on an arbitration clause in its deal with the EU does not stem from any concern about the strength of property rights in Europe. Rather, it is a foundation for a future bilateral trade deal with China. “America wants to set a precedent for China by creating a world-class template for trade agreements,” he says.
It would be a mistake for supporters of the American position to suggest TTIP is essential to the future of the West. Considering the firm lines on both sides of the Atlantic regarding ISDS, the debate may have to be prolonged or postponed. As the economic case for TTIP has failed to convince people, supporters are seeking to make a “strategic” case for the Atlantic trade treaty. Although it is true that the transatlantic relationship needs to be reinvented, and that Europe and the United States must deepen their ties, a flawed trade agreement is the wrong vehicle for this project.
A New Fair Order
An international arbitration system will only be appealing, and consequently likely to increase net foreign investment, if it is seen as fair. With President Obama’s time in office running out, an agreement may still be salvaged. It should not, however, be rushed.
Stating reservations of its member states, the European Union (EU) prefers replacing ISDS, the dominant method for resolving investor-state disputes, with an institutionalized mechanism for resolving disputes, similar to the WTO’s Dispute Settlement Mechanism, which includes an appellate body.
The American side prefers maintaining the status quo: a system of dispute resolution presided over by a panel of arbitrators, guided by loose rules, and no ability to appeal. While the Obama administration is willing to concede an important tweak: stricter language around arbitration that would lead to more predictable decisions, but it must go further by allowing appeals to decisions.
The EU, dissatisfied with the current system, favours a system where states would appoint judges to settle disputes. A potential issue with this arrangement is that states would choose judges favouring their governments. Providing for independent arbitrators is one of the fundamental benefits of ISDS. In countries with a long-established commitment to the rule of law, a judge’s impartiality should not be doubted. In Canada, judges weigh merits of the crown’s argument against those of private actors in every Constitutional law case. The possibility of error and prejudice would further be reduced by the creation of an appeal body within this new framework.
Conclusion
ISDS is at the centre of activists’ opposition to TTIP. The commission in charge of analyzing EU trade agreements has in the past suspended talks with the US on investor protection. With TTIP negotiations, the investor dispute settlement has again resurfaced.
Sincere and forward-thinking negotiations may lead to a trade arbitration system that promotes trust, respect, and extension or trade relations. In this way, TTIP is about more than connecting both sides of the Atlantic, it has the potential to promote the rule of law where it is missing and allow states to regulate in areas crucial to their citizens’ safety as needed.
Photo courtesy of Deval Kulshrestha (WikiCommons).
Disclaimer: Any views or opinions expressed in articles are solely those of the authors and do not necessarily represent the views of the NATO Association of Canada.
