EU Observer | 30 April 2019

Compatibility with EU law is not real issue with ISDS

By Anne-Marie Mineur

The European Court of Justice is about to decide whether the controversial investor-state dispute settlement (ISDS) mechanism in EU trade agreements is compatible with EU law.

But legality should not be our main concern here. There are much better approaches to international investment and we should be considering them.

For those who may have forgotten, ISDS is the controversial mechanism in EU trade agreements that allows international investors to sue states for compensation when they don’t make as much profit as anticipated - it’s the number one reason that millions of Europeans protested against the Transatlantic Trade and Investment Partnership (TTIP) and the Comprehensive Economic and Trade Agreement (CETA) with Canada.

On Tuesday (30 April), the European Court of Justice is expected to hand down its decision on whether ISDS is compatible with European law.

Regardless of the court’s decision, amidst all the controversy a whole range of alternatives that could be - or already are - more effective in addressing the kind of problems that arise around international investment have been completely overlooked.

The following are some of the alternatives that the EU must seriously consider.

Simple alternatives

First of all, international investors can simply use the existing legal systems in Europe if they encounter serious problems while investing here.

Member states are required to have fully developed legal systems in place and most require a much more solid legal foundation than an unmet expectation of profit in order for an investor to mount a court case against the state.

However, if the EU does persist with ISDS mechanisms, at the very least these should require that national legal remedies must be exhausted before any international arbitration can begin.

This would not only insist on the primary role of European law courts but also put pressure on investors to act according to national law, thereby reducing the potential for arbitration in the first place.

But respect for European legal systems is not the main issue here.

Bill in billions for taxpayer?

Moreover, such court cases would come at enormous cost to EU member states that could be forced to pay the lawyers and the millions or even billions in compensation to multinational investors using public funds collected from tax payers.

When the legal basis of the cases would be so doubtful and public budgets could be bankrupted, this is totally unjustifiable.

The EU Commission has claimed that ISDS mechanisms would bring income to the EU by encouraging foreign direct investment (FDI).

However, there are significant cases of countries receiving large amounts of FDI that do not have such investment treaties in place, which indicates that ISDS mechanisms are not the key to attracting foreign investment.

If attracting and protecting foreign investment is a primary concern for the EU, then there is also the option of investment insurance.

This is already common practice in the investment sector and, if managed responsibly by governments, can provide a way for investors to mitigate their risks.

If, similar to car or house insurance, investors pay for insurance and when a legitimate claim is made, the pool of funds collected is used to pay compensation, both the costs and the benefits of international investment would remain in the private sector.

This is in contrast to ISDS, which enables the private sector to reap all the benefits of investment while forcing the costs of court cases and compensation onto states.

So, if multinational investors can simply take out insurance, why are their lobbyists pushing so hard for ISDS?

The answer is that it’s not really about legal rights, court cases and compensation.

Court cases require significant resources from a company and are risky because they may not succeed.

Multinational investors stand to benefit in much bigger and easier ways: fear of large bills for compensation can prevent governments from adopting new laws that could trigger ISDS cases, thus removing these ’barriers’ to profits.

The EU’s trade and investment agreements are also ’living’ agreements that include clauses on ’regulatory cooperation’, which involves ongoing reviews and meetings to continue adapting these agreements to new circumstances.

This means that multinational lobbyists can continue meeting with the commission to push for even more advantageous conditions for their investments on an endless basis.

In stark contrast, if the EU were to reject this approach altogether and consider the alternatives, more balanced proposals such as including binding human rights and environmental sustainability clauses in trade and investment agreements could be adopted.

Alongside developing the binding treaty on business and human rights, this would conversely give states the right to sue and penalise investors when they commit human rights abuses and environmental damage.

By rejecting ISDS in favour of the alternatives, some of the most serious concerns of the millions of citizens who protested against ISDS would be addressed and governments could stop wasting time on this very unpopular proposal.

Multinational investors would lose the right to sue governments and weaken human rights and environmental legislation, but they were never entitled to this in the first place.

Anne-Marie Mineur is a Dutch MEP and member of the parliament’s international trade committee who has further outlined the options for the EU’s approach to international investment regulation in a GUE/NGL position paper.