Elvire Fabry and Giorgio Garbasso (Notre Europe – Jacques Delors Institute)
Will the Investor-State Dispute Settlement (ISDS) be part of the Transatlantic Trade and Investment Partnership (TTIP)? While the answer to this question is still a big unknown, it is certain that the ISDS is currently arousing great concerns with regard to TTIP. What is its essence and what are the arguments for and against it?
ISDS is a legal mechanism which should guarantee the foreign investor the right to seek an independent international court of arbitration in case when the host state imposes direct or indirect expropriation, creates obstructions for the free movement of capital and discriminates against the foreign investor, who is subjected to unfair and inequitable treatment, while favoring a domestic investor. The delivered judgment is coercive in nature and cannot be appealed. ISDS is usually a part of Bilateral Investment Treaties (BIT) which are entered into with respect to those economic sectors that are highly regulated and subsidized or are partially state-owned.
As of now, the United States have signed 57 agreements which include the ISDS, whereas the EU Member States have altogether signed 1356 agreements with this mechanism, though only 9 of the Member States have signed a BIT with the US. Moreover, there are many different ISDS models and the question is which one is going to prevail. If one compares the ratio of the US and the EU foreign direct investments (FDI), the EU investments account for 62 percent ($1600 billion) of all the FDIs in the US while the US investments account for a 38 percent share ($1900 billion) of FDIs in the EU. Their position is therefore essentially equivalent.
If the United States and the European Union finally reach an agreement concerning the ISDS, this would open up a path to other multilateral investment agreements which have previously ended in failure. The agreement could also bring a geostrategic advantage for both the EU and US since this model could thus become – in light of their high investment share around the world – a precedent for other similar FTA agreements (e.g. EU with China or Vietnam).
Conversely, critical voices claim that the benefit of the ISDS for the expansion of FDIs cannot be proven as the investors make their decisions according to other criteria. Furthermore, one could suggest that by agreeing with the ISDS, the state sovereignty in its regulatory role is being violated (hitherto the verdicts point to the fact that the arbitrators take into consideration the right of the state to change the law). It is also pointed out that the investors have also other instruments in order to protect their investments. Last but not least, those opposing the ISDS voice their discontent about the lack of transparency in the decision-making process, about the inequality between foreign and domestic investors, where the latter do not have the right to take a case to the court of arbitration, as well as between small and big investors where arbitrations become inaccessible to many due to their high costs.
(The study can be downloaded here)