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ISDS mechanism in TTIP: myths vs reality

Christofer FJELLNER
07.05.2015 - 09:30
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This week, Trade Commissioner Cecilia Malmström presented the new model for investment protection in all EU trade and investment agreements. I welcome the initiatives to make the investment dispute mechanism more transparent, more accountable and more robust. Now we should focus on giving the Investor-to-State Dispute Settlement (ISDS) mechanism the support it deserves, and debate on the basis of facts instead of myths and misconceptions.

Evidence shows that ISDS, environmental protection and workers rights are not mutually exclusive

Out of the around 3000 investment treaties worldwide, the EU is party to 1400 of these investment agreements. And for good reason. The mechanism, which allows an investor to challenge a State that has not lived up to its obligations, is fundamentally a means of making sure the parties honour agreements. Put more concisely, it is about defending the principle of pacta sunt servanda (“agreements must be kept”).

ISDS has existed since the 1960s, but since then only about 650 cases have been brought forward. The critics are trying their hardest to prove that investors sue States as they please, whilst in fact only 31 percent of investors win their cases against the State

Recently, we have encountered harsh criticism of the investment dispute mechanism. But despite the investment protection opponents’ best attempts to present us with examples of the frivolous use of investment protection, they fail to quantify their concerns. ISDS has existed since the 1960s, but since then only about 650 cases have been brought forward. The critics are trying their hardest to prove that investors sue States as they please, whilst in fact only 31 percent of the investors win their cases against the State, according to the UN Commission on Trade and Development, UNCTAD.

The EU has the highest number of investment treaties with ISDS in the world, and at the same time the highest level of protection of workers and the environment

Furthermore, critics often claim that ISDS undermines sovereignty by threatening the right to regulate in the area of environmental protection and workers’ rights. However, reality provides stark evidence against such exaggerations. The EU has the highest number of investment treaties with ISDS in the world, and at the same time the highest level of protection of workers and the environment.

Clear rules for solving investment disputes crucial to promoting the international rule of law

Fundamentally, having clear rules for how to solve investment disputes is one of the most effective tools for managing political risk and promoting the international rule of law. It is about strengthening legal principles and minimising the risk of expropriation, discrimination and unfair treatment of foreign investors, who create jobs and growth at home and abroad.

It is easy to show how the investment protection critics’ allegations are unfounded, but the mere criticism itself, no matter how irrelevant, carries another message. It sends the message that the rule of law only applies to the State’s subjects, but not to the State itself. I find that absolutely unacceptable.

It is about strengthening legal principles and minimising the risk of expropriation, discrimination and unfair treatment of foreign investors, who create jobs and growth at home and abroad

The simple truth is that States are not above the law and must, like all citizens, respect the law, regardless of whether it is national law, international law or the Universal Declaration of Human Rights. An international treaty, such as a trade agreement or investment agreement, is no different. Without the investment dispute settlement mechanism, the realm of trade policy and investment policy becomes the lawless environment the critics are already accusing it of being. It would degrade into “might is right”, where powerful leaders and States can act according to their own whims.

Without the investment dispute settlement mechanism, the realm of trade policy and investment policy would degrade into “might is right”, where powerful leaders and States can act according to their own whims

Investment protection is a fascinating topic. There are many areas within ISDS that could be explored, such as the interpretation and definition of fair and equitable treatment and indirect expropriation, and the prospects of strengthening the International Centre for Settlement of Investment Disputes under the World Bank. But sadly the debate has for a long time been dominated by myths. The debate is stuck at the wish to scrap the court, instead of improving the laws. Let us start a new chapter, and create a state-of-the art investment dispute mechanism in the free trade agreement with the US.

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