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Embattled T-TIP Negotiators Consider Ditching Investor-State Dispute Clause

Evidence that the Transatlantic Trade and Investment Partnership (T-TIP) negotiations are now navigating rocky terrain, a gathering chorus of participating ministers are calling for the outright elimination of a controversial “investor-state dispute” clause out of fear that it could upend the entire process.

The power of an obscure legal codicil to potentially stymie a historically significant free trade agreement between the U.S. and the E.U. underscores the fragility of the discussions. Launched last June, T-TIP negotiations have included provisions that permit E.U. and U.S.-based corporations to forward legal challenges directly against sovereign governments to various international tribunals. This would allow those corporations to litigate national restrictions regarding public health, environmental protection and social compliance that potentially places undue constraints on their ability to conduct business.

The debate over the clause became so heated, and eventually attracted the attention of activists already suspicious of T-TIP, that in January the European Commission decided it would temporarily postpone negotiations over investor-state dispute settlement. E.U. Trade Commissioner Karel de Gucht said the postponement of the investor-state negotiations was intended to ensure that European corporations have adequate recourse to pursue grievances while also protecting the prerogative of governments to establish their own laws independent of external interference. “I know some people in Europe have genuine concerns about this part of the EU-US deal. Governments must always be free to regulate so they can protect people and the environment. But they must also find the right balance and treat investors fairly, so they can attract investment,” de Gucht said.

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Karel de Gucht also acknowledged that investor-state clauses have led to difficulties in past free trade arrangements. “International investment agreements like TTIP should ensure they do both. But some existing arrangements have caused problems in practice, allowing companies to exploit loopholes where the legal text has been vague,” he said.

Adding fuel to the fire, Daniel Ikenson, director of the Cato Institute, authored a paper arguing that T-TIP discussions should simply abandon the investor-state dispute clause. “ISDS is not even essential to the task of freeing trade. So why burden the effort by carrying needless baggage? Meanwhile, what now appears to be an angry mob protesting trade generally will be thinned out, exposing the unsubstantiated arguments of the professional protectionists who benefit by impeding Americans’ freedom to trade.”

Ikenson claimed that the investor-state dispute clause has not traditionally been a common feature of free trade arrangements, surfacing fewer than 100 times between 1959 and 2002. He also claimed that the clause is, more often than not, merely a strategic device used by businesses to circumvent local regulation and law. However, he did acknowledge that it has become more standard, rearing its head more than 400 times between 2003 and 2012.

There is certainly no shortage of detractors who share Ikenson’s misgivings. Yannick Jadot, Green Party trade spokesperson in the European Parliament, painted a darker picture. “The investor-state dispute settlement mechanism is a massive Trojan horse, which could be used by multinational corporations to whittle away E.U. standards and regulations across a range of policies from the environment to food safety to social protection,” he said. He expressed cautious optimism regarding the postponement of negotiations, saying, “This announcement by the European Commission is an important development in the ongoing battle against the controversial EU-US trade negotiations. However, it is only a first step.”

Ilana Solomon, trade specialist for the Sierra Club, voiced concerns that investor-state provisions impinged upon state sovereignty, placing corporations on a par with them. She said, “These provisions elevate corporations to the level of nation states and allow them to sue governments over nearly any law or policy which reduces their future profits.”

Some, however, still insist it is a crucial precedent to set for the establishment of a massive free trade agreement. Alex Stubb, the Finnish trade minister, said, “We cannot go on and negotiate an investor protection agreement with India, which clearly has big problems right now, if we don’t have a precedent from somewhere else.”

The historical rationale for investor-dispute resolution was to protect corporations from arbitrary governmental fiat, especially in developing nations where major industries are often state run and courts lack independence. Some say this makes investor-dispute resolution irrelevant in both the E.U. and the U.S., where neither of these conditions maintain.

Investor-state resolution has been a common feature of U.S. negotiated free trade agreements since its inclusion in the North American Free Trade Agreement (NAFTA) in 1994. However, in that case, investor-dispute litigation can only begin with the imprimatur of the government sued. In other words, under the WTO rules that currently govern both the U.S. and the E.U., a corporation must first solicit permission from a sovereign nation it believed committed an injustice prior to filing suit, allowing the nation in question to ultimately decide if it will allow the dispute to be arbitrated by WTO officials.

The escalation of the debate over investor-state dispute, from calls for a tabling of the issue to its elimination entirely, points to the halting progress the T-TIP discussions have been making. Many consider this especially disconcerting since a swift and painless settlement of the agreement was once widely interpreted as a foregone conclusion. Now, however, opposition to the T-TIP has sprung from every quarter. Stubb said, “We are grappling with people who are anti-European, who are anti-American, who are anti-free trade, who are anti-globalization and who are anti-multinational corporations. We have an uphill battle to make the argument that this EU-U.S. free-trade agreement is a good one.”