The Investor-state dispute settlement could jeopardize the EU-US negotiations.
Something changed in EU-US transatlantic trade and investment negotiations when German Chancellor Angela Merkel received a request for €4.7 billion in compensation from Swedish energy giant Vattenfall after she ordered the gradual shut down of all nuclear power plants in Germany in the wake of the Fukushima disaster. The Swedes are complaining about the loss of capital invested in two German facilities and have invoked a clause in an energy agreement ratified by Berlin which protects private investments in another state.
The provision — known as the Investor-State Dispute Settlement, or ISDS — is included in more than 3,000 international agreements. It allows for the resolution of disputes between investors and states through international arbitration tribunals rather than the competent national courts, which are not considered impartial when having to rule on expropriation or damaging discriminatory treatment involving foreign investors.
In this particular case, Vattenfall believes it is the victim of an arbitrary expropriation, even though the decision to close the nuclear plants was made by a legitimately elected government to address environmental issues of great concern to Germany public opinion.
After this blow, Germany has become the fiercest opponent of the inclusion of the ISDS clause in a possible free trade and investment agreement – the Transatlantic Trade and Investment Partnership (TTIP) – between the US and the EU. “We’re not interested in improving the clause. We want it removed from the agreement”, said German MEP Bernd Lange, chairman of the powerful European Parliament Committee on International Trade.
His view echoes German public opinion. And yet this position smacks more of opportunism than a call for consistency. Indeed, according to figures from the UN trade and development body UNCTAD, German multinationals are among those who invoke the ISDS clause the most against countries where they have invested. One of the recent, more conspicuous cases was the Deutsche Telekom lawsuit filed against India in 2013 after New Delhi cancelled a contract to develop broadband by satellite, deemed too expensive for India’s public purse.
What’s more, Germany was the first country in the world to introduce the ISDS clause in an international agreement in its 1959 bilateral investment pact with Pakistan. And it has been one of the main promoters of the mechanism and has included it in dozens of treaties. Clearly, Berlin fears American multinationals might use the same prerogatives in Germany that Germany’s own industry giants use elsewhere. However, Germany’s obstinacy over this issue risks becoming the main logjam in the negotiations over the EU-US transatlantic trade deal. For the Americans, protecting investors through international arbitration is a non-negotiable condition of the TTIP.
“The ISDS clause must be part of the agreement. It is a crucial guarantee mechanism for investors who would otherwise not invest in a foreign country”, explains the US ambassador to the EU, Anthony Gardner, one of the key players in the current negotiations.
The US position is quite straightforward. While the Germans originally pioneered the ISDS, the Americans have made the most of it. Roughly a quarter of all worldwide disputes invoking the ISDS have come from North American multinationals, with 85% of cases brought against developing countries. Someone should perhaps start kicking up a fuss, but certainly not in Europe. In 2013, the clause was most used by investors from the Netherlands, Luxembourg, the US and Germany. And recourse to this mechanism has increased tenfold of late, going from an average of fewer than five cases a year in the 1990s to an annual tally of more than 50 today.
Lawyers who work for multinationals are increasingly aware of the powers the clause grants them. In 2013, roughly 90% of judgements handed down by arbitration tribunals ruled in favour of claims filed by investors. The amount of compensation is also rising. In 2012, Ecuador was sentenced to pay record damages of $1.7 billion (€1.46bn) to the American Occidental Petroleum Corp. for having terminated an oil exploration contract. Some recent suits have caused an outcry because of their controversial nature. Uruguay and Australia have been sued by the tobacco giant Philip Morris for introducing laws to deter people from smoking cigarettes, thus indirectly damaging the multinational’s investments. Canada is fighting a multi-million-dollar suit brought by the US-incorporated oil company Lone Pine Resources following the Quebec government’s introduction of a moratorium on the extraction of shale gas through fracking in its territory.
Not all ISDS cases are so controversial. Small-scale Italian investors holding “tango bonds” (as the Italian press had taken to calling Argentina’s government bonds) believe justice was done when an international arbitrator decided they had a case against Argentina – filed thanks to an ISDS clause – for having restructured its public debt following its 2001 financial crash, turning Italian investments into junk. And environmental groups are not always up in arms when recourse is made to the ISDS mechanism.
The recent decision of the Italian authorities to retroactively cut investments in solar power could be challenged by foreign investors through international tribunals with the support of pro-renewables green groups. Case histories show that while this clause has been abused of late, it does serve a purpose. Nonetheless, there is an apparent need for reform which could entail restricting its sphere of application and allowing appeals against private arbitrators’ decisions, ideally in a tribunal that only handles these specific issues.
The reform agenda is where European and American interests could come together, thus ensuring that the transatlantic trade deal does not get bogged down. As long as the issue is not exploited by those who oppose the TTIP on principle.
The Investor-state dispute settlement could jeopardize the EU-US negotiations.