European Hypocrisy: TTIP and ISDS

I

For some, the Transatlantic Trade and Investment Partnership (TTIP) in and of itself has become in many European (and American) circles, the enemy: another manifestation of unchecked globalization, the march of Capital trumping social, environmental and other  rights, an unhealthy embrace of the Americans from whose clutches we have painfully managed to extricate ourselves, et cetera. Yes, there is some sarcasm or irony in the above, but visit the blogs and you will see where it comes from. My sarcasm should not be taken as a dismissal of all or any of these concerns. TTIP is far from Snow White. The concerns are not entirely fanciful. It is the final objective I oppose: a no-holds-barred attack on TTIP with the objective of tanking the whole agreement. If this is your view, do not waste your time here and skip to another item.

A wholesale defeat of TTIP, if achieved, will, I believe, be a big time Pyrrhic victory ̶ a hugely missed opportunity for the polities and the peoples of these polities.

I support the TTIP for two obvious and banal reasons. First, there is every reason to believe that on aggregate it will contribute significantly to an increase in welfare in both polities, enhance growth, contribute to stability and constitute another tool, in an embarrassingly empty toolkit, to combat future transatlantic-generated economic shocks. A large and often unspoken asset of TTIP rests not with the content of the various substantive disciplines but in establishing a culture of joint conversation, regulation and management. It will counter the litigious and confrontational culture of the WTO, where the EU and the USA find themselves typically as rivals and antagonists. Constructivist theory actually has something to say here as do the insights of Global Administrative Law scholarship.

To be sure, and let us state this for the nth time: the notable wealth creation effect of an agreement such as TTIP will not accrue evenly. The rich, Capital, will get a lot richer than the rest. But, and let us state this too for the nth time: how to distribute the bag of cookies produced by trade and investment treaties is the responsibility of the various partner countries, primarily with their fiscal and other forms of redistributive mechanisms. There is huge variation here and many countries have effective redistributive policies in place. Let us not alibi our non-progressive and ineffective wealth distribution mechanisms by scapegoating the mechanisms which create more wealth to redistribute if we are so minded.

Second, I support TTIP for a far deeper reason. I do think that the current circumstance  ̶  the post-Cold War era (though a new chill is about us), with a variety of growing threats to European and global security (do I really need to list the altogether new and menacing sources of danger?) in an era in which the Pax Americana has effectively come to an end – has produced a new set of daunting challenges to our objective of assuring security and prosperity to our peoples. Similar threats challenge not only European prosperity in fields as diverse as energy, supply routes or outlets for European food production but also deep values which underpin our political culture and political institutions. Ukraine, and our relative impotence in its regard, is emblematic for all of the above.

The TTIP, way beyond its immediate potential economic benefits, represents an important strategic asset (not the only one to be sure) in the forging of a relationship between Europe and the United States where, unlike the military area, Europe has an equal weight, equal leverage, and equal influence, including on American internal policies – a Partnership of Equals with a spillover to fields way beyond the specific obligations of TTIP. TTIP, as a strategic asset, is of an importance to Europe (and to Europe and the United States together) that cannot be measured with the predictions of euros or dollars and cents. Some things are priceless – for the rest there is …

One of the most common, frustrating and at times laughable aspects of the globalization debate is the notion that the institutions against which we throw stones ‘promote globalization’ – I have always seen it the other way round: those institutions, such as the WTO, (inadequately, at times) regulate it. And if stones need to be thrown it is to egg them on to do more, not less. Trade, for example, is so much better regulated than capital. A multilateral investment regime, given the composition of the stakeholders, would balance far better the interests of capital-exporting and capital-importing countries and would so much better balance and address the shameful exploitations and arbitral biases that are now part of the thousands (!) of bilateral investment treaties (BITs) which are for the most part offered on a take-it-or-leave-it basis between bilateral unequal partners. You do not need to be Machiavelli to guess the stakes and special interests which have thwarted progress in this area.

 II

Of all the roadblocks to a successful negotiation of the TTIP, the provisions of Investor-State Dispute Settlement (ISDS) loom largest. The tone is shrill and it comes in large part from the political classes and, at times, even from the highest echelons of government. The litany of complaints and objections is well known and articulated at different levels of generalization: ISDS constitutes an assault on sovereign institutions; a circumvention of the normal national judicial procedures; a privileging of private investor interests (American to boot) over European societal interests; an arbitral system which is elected by the parties, answerable to no one and for which there is but limited appeal possibilities. Much of this is correct and well founded.

The Economist, which I mention by name because like the Financial Times it enjoys  an importance that oft wildly transcends the intrinsic quality of some of the things they publish (this notwithstanding my addiction to both), acknowledges the problem but suggests a seemingly simple remedy: keep the substantive provision of investment, but move away from the investment treaty model of investor-state dispute settlement and ‘WTOize’ it by confining investment disputes to a WTO-style state-to-state regime – a counsel of Athitofel, as I shall presently explain. But the prevailing mood, and sadly this might be where the wind is blowing, would be to have the entire investment or ISDS dropped – a step, in my view, which throws the water out with the baby.

First, then, my claim of hypocrisy. The ISDS chapter in the TTIP is essentially modelled (for good and for bad) on similar regimes in thousands (!) of BITs in force all over the world. Almost all European Member States, among them the shrillest objectors to the ISDS in the TTIP, are not only signatories to such agreements but are heavy users thereof. In bilateral investment arbitration, European investors own the Champion’s Cup. All these agreements, with literally a handful of exceptions, are as flawed or worse than the proposals on the TTIP negotiating table – they are investor interest-skewed in their substantive provisions, and worse; the Bar that adjudicates them is of a limited range (as effectively illustrated in a recent article in EJIL vol. 25, no. 2),  and dominated by arbitrators from private practice rather than public interest backgrounds (which is not to say that I call into doubt either the good faith or professionalism of that Bar – I have been part of it myself, albeit from a different background, and have come to admire the professionalism of many of its practitioners); and most damning of all, the substantive provisions of the investment treaties, when it comes to protecting societal interests, are woefully defective and inferior when compared to similar public interest provisions in trade agreements such as the WTO itself.

NAFTA is a poster-boy example:  you find, in the very same Treaty itself, in its trade provisions, an altogether better and arguably adequate balance between the interest of free trade on the one hand, and public morality, public health, the environment, crime fighting and the like on the other hand, as compared to an altogether skewed and inadequate set of similar provisions in the Investment chapter. The dispute settlement provisions show a similar bias.

The European hue and cry at the ISDS of TTIP is ugly and self-serving when one considers that they themselves have imposed the very same provisions they find so otiose when applied to Europe (in the context of North American investment) in their bilateral investment relations with developing and other countries (where the fear of reciprocal action is negligible) and happily use them, extensively, when the boot is on their foot. These horrible provisions are, it appears, altogether Kosher when applied to others, but oh, so unacceptable when threatening us. It’s the NIMBY of international economic law: fine so long as it is not in my back yard.

The Gospel of Matthew says it all:

Thou hypocrite, first cast out the beam out of thine own eye; and then shalt thou see clearly to cast out the mote out of thy brother’s eye. (Matt. 7:5)

The Economist’s idea of correcting the situation by replacing investor-state arbitration with state-state arbitration is a medicine that is worse than the illness, and this for three reasons. First, anyone close to the WTO or Regional Trade Agreement (RTA) State-to-State Dispute Settlement knows that in many cases the private investment interest just goes underground – they lobby the government, in transparent and oft times less than transparent ways, (not all states have the legally controlled procedures of the EU and the USA), they depend on government discretion whether or not to take up their cause and initiate a state-to-state procedure introducing an arbitrary and skewed access-to-justice procedure for aggrieved investors. The bigger the economic stake, the more powerful the multinational, the more likely they are to get the ear of a government which will espouse their case. Just think, say, for more than five minutes of that celebrated case of Antigua v. the USA in the matter of internet gambling and you will get the picture: Res Ipsa Loquitur! Or consider the current tobacco packaging cases.

In addition, the remedy offered in WTO or NAFTA or RTA style government-to-government dispute settlement is almost always prospective, designed to bring a violation to an end, but offering cold relief, meaning no relief at all, to the individuals for past abuse and heavy loss suffered at any time. (In passing, raising in a WTO policy forum the notion that WTO dispute settlement should deal with past losses is equivalent to crying ‘fire’ in a crowded cinema.)

There is a third and final flaw to WTOizing ISDS in the context of the Investment chapter. One of the rationales for the creation of, say, the  International Centre for Settlement of Investment Disputes (ICSID) and moving towards the regime of BITs, was to de-politicize at a state-to-state level disputes regarding alleged and real maltreatment of investors in foreign countries. Under the old regime (pre-ICSID, BITs and all the rest) any dispute involved the need of one state bringing a claim against another, with at least two inimical results: governments and states, for their own reasons, which had nothing to do with the rights or wrongs of the actual investment dispute, were often reluctant to espouse even palpably just claims; governments espousing a claim and, by definition, creating a state-to-state dispute,  increased the stakes involving national honour in winning or losing an international claim –  inimical to pacific and functional international relations. Partially ‘privatizing’ ISDS removed in large measure these inimical results. As a political matter, do we really wish to make run-of-the-mill disputes between investors a matter of inter-state and inter-governmental dispute?

III

What, then, in my view is a rational and sober manner with which to deal with these not simple issues?  I think solutions are at hand and not only for the TTIP, Investment and ISDS but also as a model for a whole rethinking of the pathologies of BITs and perhaps as a micro-example for what may later be regarded as a ‘best practice’ for BIT reform and even, in the longer run, a model for a multilateral investment agreement. There would be poetic justice if the two greatest trading blocs, instead of walking away from the problem, charted an agreed functional way ahead.

Here are some tentative bullet points – a basis for discussion:

• One has to acknowledge that in current investment agreements on which the TTIP is largely based, the substantive protections of public interests range from the defective to the slim to the non-existent. A TTIP Investment chapter should have at least as robust a protection of societal state interests as do equivalent trade agreements – and at times even more robust. The substantive provisions must achieve and be seen to be achieving a better balance between private interests and the collective societal good.

• One should retain the option of direct Investor-State Dispute Settlement and not intergovernmentalize all such dispute settlement for reasons given above. One can consider tightening standing rules and justiciability rules but not to the extent that individual remedies become illusory. Access to justice is one of the solid gains of our understanding of contemporary justice – empty remedies serve neither individuals nor justice.

• No less important a change, in my view, should be in the bodies which entertain and decide investor state complaints and arbitration. The current patchwork of privately appointed panels (even if from state suggested rosters) is inimical both to certainty, the emergence of a coherent body of law as a guide for future panels and, above all, for future investments and contracts between investors and states. Hugely important would be the composition of the dispute settlement panels – there are plenty of mechanisms to ensure a different demography to the existing ones, both better representing and sensitive to the competing interests in investment disputes, and seen to be so sensitive. The degree of permanence or semi-permanence of such panels is a matter of negotiations with interesting trade-offs. Likewise, the desirability of having an Instance of substantive (not just residual as is the case now)  Appeal (maybe piggy backing on the Appellate Body of the WTO – is that sacrilege?).

Deal with the substantive justice issues in the investment regime and with the composition and permanence of the dispute settlement bodies and you have de-natured the real problem, at the same time providing a model to the entire world of bilateral investment regimes.

I hesitate to say that all this could be negotiated and agreed in a matter of months, but it should be, if there is a will to bring this to closure. The alternative, to tank the entire Investment chapter and ISDS, will not only remove one of the most promising aspects of the TTIP in terms of enhanced mutual investment and wealth creation but risks killing off the entire agreement – whilst leaving intact the highly problematic (with certain shameful aspects) BIT world scene with its thousands of agreements.