March 23, 2015

International investment court plan threatens our democracy

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The European Commission investigates a permanent international investment court as a replacement of the controversial investor-to-state dispute settlement mechanism (ISDS). The plan for a court and the road map towards it are fundamentally flawed. To protect our democracy the European Parliament has to reject both ISDS and court.

Former vice-president of the European Commission in charge of justice and now member of the European Parliament international trade committee Viviane Reding proposed to replace ISDS with a permanent international investment court. Commissioner for Trade Malmström supports the idea. This plan creates a serious risk on expansionist interpretation and puts the EU at the mercy of other states. I will point out six flaws.

Specialised courts

First, specialised courts tend to become biased. An example is the centralisation of appeals in patent cases before the U.S. Court of Appeals for the Federal Circuit; this prompted an expansionist interpretation and application of the US Patent Act. The Supreme Court intervened and opposed a series of judgments of the Federal Circuit. Specialised courts need a general supreme court on top to correct expansionist interpretation. Reding’s proposal lacks such a general supreme court.

No voters at the supranational level

Second, democracies need a legislative feedback loop. We have to be able to change laws that do not work out well. Lord Steyn explained (regarding the UK): “in striking the balance the courts may arrive at a result unacceptable to Parliament. In such cases Parliament can act with great speed to reverse the effect of a decision. It has done so in the past. That is in the spirit of our constitution, and is wholly in accord with the democratic ideal.”

The EU legislative can not reverse court decisions, but they can change laws for the future. Changing an international treaty is much harder than changing national or EU legislation. There is no workable legislative feedback loop at the supranational level. Unless all treaty parties agree there is no way to correct expansionist or otherwise unacceptable interpretation. Reding’s proposal would place our democracy at the mercy of other states.

Flaws in agreement with Canada

Third, as part of the reform plan Reding wants to ratify the trade agreements with Canada and Singapore. She overlooks that the ISDS sections in these agreements are deeply flawed. The European Commission used the EU-Canada text as the reference text in the ISDS consultation. Over 110 scholars published a joint submission to the ISDS consultation; they show that the commission failed to solve a long list of crucial issues in the EU-Canada text.

Open to the world

Fourth, ratification of the agreement with Canada or the one with Singapore would be a game changer. Multinationals from the U.S. and other countries would be able to use the flawed ISDS sections in the agreement against the EU. Both agreements contain measures against forum shopping through post box companies, but not against forum shopping by multinationals.

Lock in

Fifth, ISDS in trade agreements would create a lock in, as it is practically impossible to withdraw from a trade agreement. Changes are possible, but only if the other party agrees. If we want to get rid of flawed ISDS provisions in the future we would be at the mercy of Canada, Singapore or any other country with which the EU would have concluded a trade agreement.

U.S. has an unfair advantage

Sixth, in 72 annulment appeals of ISDS cases the President of the World Bank appointed all three the arbitrators. This is problematic in itself and because this president of the World Bank has always been the candidate of the U.S. Moreover, this is only one example of procedural rules which give the U.S. an unfair advantage.

Surely the EU commission will not include rules, which would give the U.S. an unfair advantage, in ISDS agreements? Unfortunately in the agreements with Canada and Singapore they already did. After being alerted about this the commission kept silent and didn’t take action. This silence and inaction gives the U.S. a strong position. The U.S. now know that the commission will find cosmetic reforms sufficient (as they did in the agreements with Canada and Singapore) and will be silent about procedural rules which give the U.S. an unfair advantage. After ratification of the agreement with Canada or with Singapore the EU would be locked in – and the U.S. would know the Parliament is just as lenient as the commission. The U.S. can resist anything beyond cosmetic reform and demand inclusion of ISDS in TTIP. They have no reason to support a permanent international investment court unless it is just as rigged to their advantage as the ISDS system. After ratification of the U.S.-EU agreement (TTIP) the EU would be further locked in, this time directly by the U.S.. A complete failure of the EU’s diplomacy.

From 1 to 100%

Presently one percent of U.S. investments in the EU is covered by ISDS; this led to nine cases.

Coverage of 100 percent of U.S. investments in the EU may lead to dozens of cases a year, against the EU and its member states – to start with. ISDS arbitrators have so much discretionary power that they can twist cases to any side. The U.S. never lost an ISDS case; EU member states lost or had to settle many. If TTIP is a marriage, our democracy is the dowry.

Neither ISDS nor a court is needed. Contracts, local courts, state-to-state arbitration and insurance provide sufficient protection.

The plan for a court and the road map towards it are fundamentally flawed. To protect our democracy the Parliament has to reject both ISDS and court.