Transatlantic Trade and the Case for Investment Protection

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The most controversial element of the Transatlantic Trade and Investment Partnership (TTIP), the comprehensive agreement that had been envisaged by the United States and the European Union, was the proposed mechanism of investment protection or investor-state dispute settlement (ISDS). This mechanism, which is a standard feature of many trade and investment agreements, allows foreign investors to commence proceedings before an international arbitration panel to claim damages if public authorities of the host state violate certain basic legal guarantees. In recent years, however, the system has come under heavy criticism from experts and civil society organizations on account of its alleged pro-corporate bias. In response, the European Commission has proposed to replace investment arbitration with an arrangement called the Investment Court System (ICS), which has now been adopted in the Comprehensive Economic and Trade Agreement (CETA) between the European Union and Canada. Moreover, a number of countries have recently started to discuss the idea of creating a single permanent multilateral investment court (MIC) that would deal with investment disputes in a more centralized fashion. Despite these innovative developments, a broad section of public and expert opinion remains hostile to the idea of investment protection and its future accordingly remains uncertain.

A closer look at the actual practice of investment dispute settlement today reveals that most of the public criticism is unfounded. However, if the United States and the European Union continue with negotiations to enhance their trade and investment framework, it is essential that the rationale for the introduction of such a mechanism in transatlantic trade relations is fully explained. Governments have so far been mainly on the defensive in public debate, largely assuming that the benefits of the ISDS system can be taken for granted. To gain greater public acceptance, it would therefore be necessary to replace the defensive approach in the presentation of investment protection — the “negative case” — with a “positive case” and demonstrate why international investment dispute resolution makes sense for developed economies with sophisticated legal systems.

In the context of transatlantic economic relations, investment protection can provide a framework for impartial assessment of legislative, administrative, or judicial decisions that adversely affect foreign investors. In particular, it can provide (i) a remedy against discriminatory treatment of foreign companies, (ii) a remedy against decisional anomalies, notably in the light of important regulatory and institutional differences between Europe and the United States, and (iii) a remedy against recognized institutional weaknesses in the respective legal systems that have important economic ramifications. However, taking into account the acknowledged deficiencies of the existing ISDS mechanism, the establishment of a permanent decision-making body rather than the continuation of the ad hoc arbitration system should be pursued as the most viable policy option. Moreover, proposals to establish a multilateral international investment court should be explored as the long-term objective.