The EU, ISDS and a Failed Consultation

In the small pond of European trade and investment-policy wonks, the European Commission made some waves two weeks ago when it finally reported on the responses to its consultation over investor-state dispute settlement (ISDS) in TTIP. That reaction is indicative of the state of the debate over TTIP and investor-state dispute settlement, because the report had little, if anything, to offer on substance. Nor did it provide direction for realistic alternatives to reshape the traditional content of a Bilateral Investment Treaty (BIT). However, it fired off another round of trench battles over ISDS.

What can be said about the report and its reception?

First, the consultation is not – and never was – an opinion poll about sentiments toward investment-protection agreements or ISDS – in TTIP or beyond – among Europeans. To give the impression that the consultation result (or the big number of submissions) reflects the public opinion on TTIP or ISDS is simply wrong, and I fear many journalists that have made that twist to their reports have been inspired by the Trade Commissioner’s invitation to treat the consultation result as an indicator of huge scepticism against ISDS.

The simple fact is that no one knows if there is huge scepticism against ISDS. We know from polls that the public support for TTIP is generally high – and that the group in favour if TTIP is 30 percentage points bigger than the group against TTIP. In fact, all polls done in Europe and the United States since the launch of TTIP negotiations have shown very solid support for TTIP, an EU-US free trade agreement, or deeper trade relations across the Atlantic.

Second, while the support for TTIP is strong, people inside the Brussels bubble or close to the TTIP negotiations have far too often confused strong opposition to TTIP from anti-trade campaigners for genuine electoral resistance to TTIP. It is a generic problem in EU politics that officials as well as inside-bubble observers have problems applying normal standards of democratic politics when they gauge opinions around policy. This is partly because the EU still lacks a parliament-based political culture, notwithstanding efforts to improve the importance of the European Parliament. A remarkably high share of the pro-TTIP people involved in the debate that I meet feel they are on the losing side. While there are reasons to be somewhat worried about the speed and direction of the actual negotiations, there are no reasons to be pessimistic about the bigger debate over TTIP. In fact, optimism is a better reaction: when was the last time anyone could find a trade agreement where polls suggested such a big lead for those in favour? Pro-TTIP people are winning the debate.

Third, ISDS is to TTIP what the Tobin tax was to Attac and the anti-globalisation movement that rocked trade politics for a few years after the Seattle summit of the WTO in 1999. Taking the cue from the playbook of “entryism”, what Attac wanted was not really to introduce a 0.5 percent tax on financial transactions. They rather wanted to smash global capitalism. But the Tobin tax served the purpose of rallying a far bigger crowd that could amplify the message that there is something suspicious about capitalism, finance, trade, multinationals, or the WTO. Similarly, many of the prominent anti-ISDS groups in the debate now are making a general case against capitalism, world trade, and multinationals. Fine. But if pro-TTIP people think they can win the debate over ISDS with these groups by out-smarting them on facts about investment-protection policy, they are getting the debate badly wrong.

Fourth, the public debate have hardly made substantial contributions to the discussions that the Commission will have with member states and the European Parliament about the way they want to reform the content of the existing body of BITs that the EU effectively has inherited from member states. I am not an expert on all the aspects of BITs, but I did not pick up anything from the consultation report that has not already been discussed at length among experts. A good case can be made for some reforms of existing BITs – or for getting a transatlantic BIT that is somewhat different from other standard BITs. For sure, a good case can be made for having a multilateral accord on investment protection that could replace existing BITs. But I find a big gap between such substantive discussions and the fixes the European Commission need in order to manage its political problem of powerful member states playing for the anti-TTIP gallery. In my view, the consultation generated neither substantive nor political contributions that can be helpful in designing an ISDS policy for TTIP or generally.

Finally, I think the Commission has made the right call in asking for greater transparency of ISDS tribunals and their decisions, and for making improvements in some of the rules guiding the work of the tribunals. It is important to get a right of appeal – but not just for governments. I am far less convinced by arguments supporting changes with regard to “the right to regulate” or replacing recourse to arbitrational tribunals with domestic courts.

Every sovereign country has a “right to regulate” – that goes without saying. But every country that wants to make its way in this interconnected world also has to accept that it has to collaborate with other countries, sometimes by signing agreement about what a country should or could do, or what a country should not or cannot do under the terms of the agreement. Such agreements exist in many different fields of policy. A country is still sovereign if it negotiates membership of such agreements as long as it can departure from them, if this is preferred view of a government or parliament. Under such a scenario, it will of course has to accept that other countries will not allow it access to the advantages that membership of an agreement entails.

European countries have joined several agreements that constrain their right to regulate without having to take into account the desires of other countries. Their membership in the EU is one such agreement. A BIT is similar to such an agreement in that it has been signed by sovereign countries and that it allows private parties to bring complaints against a country for violating the terms of the agreement. Hence, the general claims about the right to regulate is either to kick in an open door, or a wholesale refutation against the notion of modern international cooperation.

There is a different texture in the argument that BIT should change in order to make clear when a private party can make a claim (or not) about a government violating a BIT. This is an argument about the coverage of an agreement, and it is likely that governments have signed BITs without knowing the full extent of the coverage. Consequently, if they want to re-negotiate BITs with the effect of limiting when a complaint can be accepted by a tribunal – that is fine. However, several voices supporting that view make claims about how the existing system works that are either exaggerated or wrong. Furthermore, if countries want to limit their own exposure, they will also have to accept that there will be consequences that they are unlikely to favour. BITs are not exclusive and separated parts of international economic rules; they are part of a web of agreements and existing BITs, or the prospect of signing them, have certainly informed decision of governments about what they want form other agreements.

The case between Eli Lilly and the Canadian government is an interesting case. Some people call it frivolous or illegitimate. I have no view on this. What I know, however, is that many countries have problems when it comes to the interpretation of politicians and courts in some countries about the meaning of international agreements with regard to patents, patentability and invalidation of granted patents. In my view, this is what the case is about – one country, signatory to several international agreements with relevance for decisions around patents, making a decision about patentability (or invalidation of patents) of drugs that is different from most other countries interpretation.

So the argument that the case should not be eligible for an arbitrational tribunal will not make the problem of different interpretations to go away. Countries will have to manage it in other ways. In my view, the practical consequence of limiting access to arbitrational tribunals is that governments will have to sign agreements that are more proscriptive and mandates a certain type of regulatory behaviour from signatories. That may or may not be a good development. But the consequence is certainly not that there will be easier ways for governments to regulate without having to take account of what other countries think about that regulation. On the contrary, more prescriptive agreements will limited the scope for regulation under the terms of membership.

The argument that national courts (or the ECJ) can replace access to arbitration tribunals is not credible. In many countries, a court cannot hear complaints if they do not concern the law of the land. The idea that referencing, in a national court, of obligations in an international agreement that has not been embodied in national laws, can be reliable is hardly convincing. The notion that other countries can bring complaints against the EU in the ECJ on the basis of an international agreement signed by the EU does not tally with the real practice of the ECJ or the ambitions of the EU.

Again, there are alternative approaches to investment protection, and the realistic one under the scenario of restricted access to arbitrational tribunals is that countries sign agreements that mandate specific regulatory behaviours, that a country as a consequence of signing a BIT will have to make its laws and regulations compatible with the BIT. This may or may not be a good development, but it is hardly the result expected by the voices calling for a “right to regulate” or for replacing tribunals with domestic courts. And this is the nub of the problem – BITs can be changed, but they will not change the fact that countries share a world with other countries and that they will have to find rules of behaviour that is mutually beneficial.