April 24, 2015

ISDS Mantra

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“Debating Europe” asked the Commissioner Malmström:

Can #TTIP negotiations proceed without the #ISDS mechanism?

It is a very good question which the Commissioner did not answer. Here is my answer:

ISDS is just an enforcement layer and does not affect substantive elements. Thus we could do without.

Historically, lack of enforcement layers was an academic critical talking point against the GATT process. Lobbyists always stressed the need for enforcement which became a mantra. GATT was a great success, without these enforcement tools it achieved massive progress towards a free trade agenda.

Malmström’s argument for ISDS is another mantra
– investment protection clauses were invented by the Germans
– there are thousands of investment protection agreements
– IS tools may be useful for SMEs

It’s all fine to raise these points in defence of the proposed system but it seems the Commissioner became a victim of their own (or their negotiating partners) propaganda. It is completely irrelevant who first applied IS protections. It is irrelevant what other IS protections are applied. ISDS is a special breed and it is pretty fresh in the European Commission policy portfolio. One could argue about investment protection as follows “Bombing Iraq is no argument for bombing Brussels”. You cannot put investor protection mechanism out of context.

What is more interesting to me are the implicit allegations about weaknesses the arguments seem to address:
– ISDS is not in the EU’s interests.
– ISDS is something new
– ISDS is specially designed for larger players.

If we want an investor protection element in the agreements we have to address these implicit issues, and also analyze which kind of investor protection mechanism would be appropriate. In any case, an enforcement layer as investor protection mechanism is not conditional on progress in actual trade dispute resolution. There is a delicate financial trade case where Europe does not trust US rule of law, the Helms-Burton Act that resulted in heavy fines against European banks recently and which the European Union explicitly branded a violation of the law of nations. But except odd cases like these, subject to state to state abitration, I can’t see why the US and the EU should not trust the legal system of the negotiating partner. A fundamental requirement for ISDS or investor protection measures is distrust in impartiality of the legal system.

Malmström raises another point: ISDS is in the mandate for negotiations of the member states. Mandates, also called negotiating directives, are drafted by the Commission herself for the Council, and then adopted by the Council. The Mandate describes what fields the Trade Commissioner may negotiate with an external nation. No one forces the Commission to invent new beasts of investor protection or even to exercise all options that stem from the mandate.

What actual problems would an ISDS mechanism resolve and how to design it that it achieves its objectives?