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TTIP threatens democracy

Nino DomazetovikjSeptember 20, 2016

The EU-US free trade deal is controversial in Europe as it includes a mechanism that seeks to settle disputes between investors and states out of regular courts. DW examines the issue with law professor Gus Van Harten.

Symbolbild Protest gegen TTIP
Image: Reuters/E. Vidal

DW: People in Europe expressed their concern regarding TTIP through number of demonstrations, most recently in Germany. The protesters say that the agreement will lower European standards on food and environmental protection, but little is being said about the Investor-State Dispute Settlement (ISDS) instrument. Can you explain what ISDS is?

Gus van Harten: ISDS is a special system to protect foreign investors from governments, legislators and courts of countries. It is a very powerful system at the international level that allows foreign investors to be compensated with public money when decision-making in the country doesn't go their way. The money is awarded after a dispute settlement process.

What do citizens stand to lose if ISDS is enforced under TTIP between USA and EU?

Citizens will stand to lose, to a degree, their ability to influence what their governments can do. When citizens have a different perspective from foreign investors, the power to bring an ISDS claim gives the foreign investor an ability to influence your own government and legislature that you will not have yourself. That means the government you elect may not be willing or able to do what it said it would. So your voting rights in that way are diminished.

Likewise, you will be disadvantaged in other ways when trying to influence your government that are in conflict with what a foreign investor wants. Behind the scenes, the foreign investor can make ISDS threats and raise a specter of very significant financial liabilities for your government and your country. It also means that you as a citizen and as a tax payer are assuming new risks because the taxes you pay may now have to be used to fund ISDS claims and payments for ISDS cases. So it impacts your position as a voter and tax payer.

Can TTIP or any other trade agreement exist without the presence of ISDS? Is it a necessary or unavoidable evil?

In fact, ISDS is out of place in a trade agreement because it has very little to do with trade as most people understand trade. It has to do with privileging very large companies who can set themselves up legally to be "foreign" and to qualify as foreign investors, at the expense of anyone who has a conflicting interest. There are lots of trade agreements that do not have ISDS. ISDS only started to be put in trade agreements by the U.S. around the early 1990s. There are many other trade agreements that do not have ISDS, most obviously the whole set of World Trade Organization agreements do not have ISDS.

Kanada Gus Van Harten
Gus Van Harten thinks It is possible, and indeed, desirable to keep ISDS out of trade agreementsImage: privat

Does the insisting of having ISDS under TTIP basically means that EU and USA do not trust each other in terms of their justice systems?

Implicit in ISDS is an assumption, that the courts and court systems in the relevant countries are not reliable. That is, they are so unreliable that foreign investors should never have to even explain what's wrong with the domestic courts before being able to bring an international claim. ISDS is highly exceptional in international law because it removes what's usually called the "duty to exhaust local remedies", whereby you have to show before going to the international level that there is something wrong with the domestic courts. Implicitly, the whole premise of ISDS in the TTIP, CETA, and other trade agreements with ISDS currently proposed by EU is that there is something systematically unfair about domestic courts, such that foreign investors should never be required to go to domestic courts before going on international level. In the construct of ISDS, there is an inherent distrust of all of the relevant countries institutions, including their courts.

How balanced is the ISDS system? Can governments bring claims against foreign investors?

Countries can't bring claims against the foreign investors. ISDS is fundamentally imbalanced because it gives extraordinarily powerful rights to foreign investors at the international level, without any actionable responsibilities that would allow the country also to bring claims against the foreign investor. That means that the risk of losing is much greater for the government than it would be for a large company. Additionally, the large companies that bring claims might risk paying millions of dollars in legal fees (like the government), but the government alone faces the risks of potentially huge awards of compensation against the public budget. For governments, it is the awards, the legal cost, and the opportunity cost. In that sense, ISDS is heavily sided in favor of the foreign investors and against anyone who may lose out in some way because of a foreign investor's misconduct. If ISDS were to be balanced, like in domestic law, foreign investors would have to have actionable responsibilities as well as rights.

In one of your articles you say that ISDS is a threat to democracy, courts and public budgets. Why?

ISDS poses major problem from the point of view of democracy because it constrains what elected governments can do. It gives a special and unique tool to foreign investors to frustrate the democratic choices of governments by threatening claims that create new financial risks that otherwise wouldn't exist for a government. So in that sense the government is forced to choose when faced with an ISDS claim by a big company. Does it betray voters by backing away from things the government has committed to voters that it will do? Or does it betray tax payers by exposing the public to new and potentially very damaging financial risks? That is how ISDS presents a threat to both democracy and public budgets.

Last September the European Commission proposed setting up an investment tribunal court (ICS) instead of ISDS, but soon after the proposal the German Magistrates Association stated that this could alter national court systems. Is ICS different or in any way an improvement of ISDS?

ICS is largely a rebranding of ISDS. When ICS was announced, some of the officials were saying "ISDS is dead, now we have ICS" and my reaction was: "If ISDS is dead, then ICS looks to me like a zombie movie because I can see ISDS walking around all over the ICS." For example, ICS does nothing to address the fundamental imbalance of ISDS; it does not incorporate actionable foreign investors' responsibilities that correspond to the powerful foreign investors' rights in ISDS. So really, it does nothing to address the lack of balance, it does not address the fundamental distrust of domestic institutions and domestic courts that ISDS is premised upon. It could do that very easily by incorporating the usual "duty to exhaust local remedies" but that option was not pursued in the ISDS model. The positive aspect of ICS is that some significant steps were taken to improve the lack of independence of ISDS, but without going into all the details I would say that those steps are still inadequate to constitute ICS as a proper court or judicial system. So even on that positive aspect the steps that were taken in my view are unfortunately incomplete.

Gus Van Harten is an international investment law professor at Osgoode Hall Law School in Toronto and a former international law professor at the London School of Economics. The interview was conducted by Nino Domazetovikj.