The European Union's negotiations with the United States over the investment chapter of the Transatlantic Trade and Investment Partnership propose a more balanced text than many earlier treaties. But the EU has not made a compelling case for including an investment chapter in the first place.
On 13 July an online public consultation on the proposed Transatlantic Trade and Investment Partnership (TTIP) closes.
TTIP is a comprehensive economic partnership agreement, covering both trade and investment. Negotiations have already taken a year.
Campaigning groups say TTIP bypasses national courts, because its investment chapter would allow investors to sue if government actions, often taken for the public good, affected business prospects. Disputes would be decided by investor-state arbitration tribunals.
Investors have previously used investor-state arbitration to seek compensation for losses suffered as a result of a wide range of measures – including legislation to discourage smoking or to protect the environment.
So the European Commission is running a public consultation on the investment chapter, structured as an online questionnaire.
A timid start on transparency
Most investment treaties are negotiated behind closed doors, so this public consultation is welcome. It shows that more inclusive approaches to investment treaty making are possible – even amid an ongoing negotiation.
But sadly, the consultation has major limitations. Importantly, the online questionnaire has seven questions on specific aspects of investor-state arbitration, but not one on whether TTIP should include investor-state arbitration in the first place, even though public concern over this was a major trigger for the consultation.
A more balanced approach to treaty drafting
The consultation invites comments on the overall approach proposed for the negotiation, and on 'reference text' drawn from another treaty that the EU is negotiating with Canada — which the EU presumably hopes to use as a starting point for TTIP.
And there is progress. The reference text and the commission's approach do show concern to balance protection for investment against freedom for public authorities to act in the public interest. Examples include a more careful definition of where good faith regulation ends and expropriation requiring compensation begins.
There is also a more precise list of what violates the standard of 'fair and equitable treatment' for investors. This is important because, where fair and equitable treatment clauses are unspecific, they give arbitral tribunals significant discretion, sometimes exposing states to substantial liabilities for action taken in the public interest.
The Commission also proposes other advances: greater transparency, more stringent pre-conditions and new appeal mechanisms in investor-state arbitration; and giving government authorities more control over treaty interpretation.
There is much potential for further improvement, and IIED's submission to the consultation suggested several ways the text can be tightened up. But while the text is broadly in line with treaties concluded by the US and Canada, it already represents a major change for most EU member states.
A step towards systemic change?
Before the Lisbon Treaty, European member states used to negotiate their own investment treaties. Over the years, European governments have concluded over one thousand succinct treaties — mostly with third countries, including many developing countries. These treaties often award rights to investors with no counterbalances to protect the public good. They account for over a third of the global stock of investment treaties.
So the prospect that, over time, the EU might replace these succinct treaties with more balanced texts signals potentially far-reaching changes in the global investment treaty landscape.
However, it is no coincidence that the EU's balanced approach has emerged in negotiations with 'peers'. The US and Canada are experienced treaty negotiators and investment flows are genuinely 'two way' — so each party has an interest in both protecting investment overseas and maintaining its own public authorities' ability to act without being sued.
How far the EU will adopt a similarly balanced approach in negotiations with developing countries remains to be seen. In those negotiations, investment flows are often one way, so the EU's interest is largely in maximising protection for its investors. Such major asymmetries tend to affect the balance of negotiating power between two parties.
Does TTIP need investor-state arbitration?
The commission has tried hard to communicate its careful approach to framing the TTIP. But it has not actually made a compelling case for including investor-state arbitration in the first place, or even more generally a chapter on investment protection.
Conventional justifications for investment treaties and arbitration do not hold. These mechanisms were historically developed for contexts where national law and courts were deemed unreliable. But the US and the EU have well-functioning legal and judicial systems based on the rule of law.
There are already extensive stocks of EU investments in the US, and US investments in the EU, and the vast majority of these have so far managed perfectly well without the protection of an investment treaty. Although there are nine bilateral investment treaties between the US and individual EU member states, these are with former socialist countries, and were concluded before their accession to the EU. According to UNCTAD, these investment treaties cover only one per cent of US FDI stock in the EU and 0.1 per cent of the EU FDI stock in the US.
I have not seen any empirical evidence unequivocally showing that prospective investors are held back by the lack of an investment treaty or investor-state arbitration. In fact, a survey of general counsels from leading US companies found that many of them either knew little about investment treaties or said that the legal protection treaties afford did not significantly affect their companies' investment decisions.
Risk to the public purse
On the other hand, the proposed investment chapter will most likely increase governments' exposure to investor-state arbitration. According to UNCTAD so far only nine known claims (some pass 'under the radar' completely) have been brought under bilateral treaties concluded between the US and a EU member state. All were submitted by US investors.
Even with tighter treaty drafting, the sheer volume of US and EU investments makes it very likely that TTIP will expose authorities to many more investor-state arbitrations.
To get an idea of likely future trends, we can check figures from the Investment Treaty Arbitration database. They show NAFTA states as respondents in at least 47 known arbitrations since 1994 (Canada: 23, Mexico: 13, the US: 11). In contrast, France, Germany and the UK have faced very few claims (1, 2 and 1 respectively). Several EU member states have never faced known investor-state arbitrations.
The European Commission should thoroughly assess the costs and benefits of including an investment chapter in TTIP. Arbitration can entail major costs for the public purse, so citizens are entitled to expect a clear, transparent, compelling case as to why investor-state arbitration is needed.
Lorenzo Cotula leads IIED's legal tools team.
Download a copy of the submission:
Additional IIED resources include: