The U.S and the European Union are about to begin the latest round of negotiations towards the proposed Transatlantic Trade and Investment Partnership. Many argue that the agreement could have considerable economic and political benefits on both sides of the Atlantic. Controversy has erupted, however, over plans to include investment protections provisions typically used in agreements with developing countries. The House of Lords yesterday released its recommendations to the British government about the agreement. It is largely sympathetic to including investor-state arbitration in the agreement, but only on one condition. Lauge Poulsen, who gave evidence to the House of Lords’ hearing process, reflects on the report

Poulsen, Lauge

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blo gs.lse.ac.ukhttp://blogs.lse.ac.uk/usappblog/2014/05/14/there-is-no-need-for-the-transatlantic-trade-and-investment-partnership-agreement-to-include-investor-state-arbitration/There is no need for the Transatlantic Trade and InvestmentPartnership agreement to include investor-state arbitrationThe U.S and the European Union are about to begin the latest round of negotiations towardsthe proposed Transatlantic Trade and Investment Partnership. Many argue that the agreementcould have considerable economic and political benefits on both sides of the Atlantic.Controversy has erupted, however, over plans to include investment protections provisionstypically used in agreements with developing countries. The House of Lords yesterdayreleased its recommendations to the British government about the agreement. It is largelysympathetic to including investor-state arbitration in the agreement, but only on one condition.Lauge Poulsen, who gave evidence to the House of Lords’ hearing process, reflects on thereport. Should it be up to three private arbitration lawyers to determine whether the Brit ish government should paycompensation to American investors f or public regulation? Should Brit ish investors dissatisf ied with f ederalor state level regulations in the United States be allowed to avoid American courtrooms? The UK’s Houseof  Lords thinks so. That was the message in a report issued yesterday about the Transatlantic Trade andInvestment Partnership, which is currently under negotiation.But there is a caveat. The most passionate proponent who appeared bef ore the House of  Lords sub-committee was a representative of  the arbitration community. Although the report shares some of  hisviews, it goes on to say that proponents of  investment arbitration have “yet to make a compelling case.” Even if  the American government agrees to water down its provisions f rom previous investment treaties,proponents still need to provide “evidence that the UK could attract more investment from the US by signingup to such provisions.” As I noted during the hearing process and discuss below, no such evidence seems toexist. But f irst some background.Thousands of  investment treaties already allow f oreign investors to f ile claims against sovereigngovernments in f ront of  international tribunals. As a result, governments around the world have f oundthemselves subject to of ten f ar-reaching international arbitration claims about their environmentalregulation, public health regulation, f inancial services provision, and other areas of  sensit ive governmentintervention.Most claims are against developing countries. But in recent years, developed countries have been sued aswell. Phillip Morris has f iled a claim against Australia f or its plain packaging regulation based on the Hong-Kong Australia investment treaty. Whereas Australian courts init ially dismissed the claim, private arbitratorsnow get a chance to second-guess the decision – this t ime based on separate treaty rights rather thanAustralian law. As a result of  the claim, New Zealand decided to postpone plain packaging regulation.Cre d it: ki l le rturnip  (Cre ative  Co mmo ns BY NC ND)Swedish energy giant, Vattenf all, has f iled two suits against the German government based on the EnergyCharter Treaty. The f irst claim was settled by allowing Vattenf all to proceed with operating a coal- f iredpower plant based on less stringent environmental requirements than intended by the German authorit ies.In the second claim Vattenf all is asking f or about €700 million in compensation f or Merkel’s decision tophase out nuclear power.Canadian and American governments have been subject to numerous investor claims based on the NorthAmerican Free Trade Agreement. In one claim against Canada, the settlement involved compensation of  $16million to an American investor along with a retraction of  the environmental measure targeted in thedispute. These may be exceptional cases, yet they illustrate the breadth of  the system and its ability toresult in liability even f or countries widely considered as business-f riendly and well-governed.Not surprisingly, the regime has attracted its f air share of  crit ics. Questions arise whether arbitral tribunals,which typically consist of  corporate lawyers, should have authority to rule on f undamental areas of  publicregulation. Even staunch supporters of  f ree trade have questioned the prudence of  providing f oreigninvestors greater rights than domestic investors. Unlike the global trade regime, which is based on non-discrimination, investment treaties provide posit ive discrimination to already powerf ul multinationals andother international investors. This is more than dif f icult to justif y on economic terms.But at least proponents of  investment arbitration have had a plausible justif ication f or investment treatiessigned between developed and developing countries: f oreign investors occasionally need an independentf orum to settle disputes with host governments, and in some corners of  the world domestic courts are notup f or the task. Few f oreign investors would expect a f air hearing in local courts in Z imbabwe. No onewould be willing to invest hundreds of  millions of  dollars in a Russian gas f ield if  the only recourse to settledisputes with Putin were Russian courts. In such cases, some f orm of  international recourse can besensible.But while courts in Western Europe and the United States may not always be perf ect, they do not suf f erf rom lack of  independence and polit ical interf erence. So why displace them with ad hoc arbitration panelsconsisting of  private lawyers with no real opportunit ies f or appeal? Although the risk that developedcountries lose investment treaty disputes may not be large, why run it in the f irst place?In Washington, it seems, concerns exist about the investment climate in poorer members of  the EU. Yet theUnited States already has bilateral investment treaties with most Eastern European member states andAmerican investors can always be encouraged to take up an insurance against polit ical risks or negotiateindividual contracts allowing f or international arbitration.In Europe, some of f icials realize investment arbitration is unnecessary in a transatlantic deal but believe itis important as precedent f or f uture negotiations with China. Yet, Beijing has been one of  the staunchestpromoters of  investment treaties in recent years to protect outward Chinese investments. So it is hard topromoters of  investment treaties in recent years to protect outward Chinese investments. So it is hard tosee why the investment climate in China justif ies giving American investors alternatives to European courts.The same can be said about the argument that it is hypocrit ical to ask only developing countries f orinvestment arbitration. The main justif ication f or investment arbitration has always been the need tosubstitute f or dysf unctional domestic legal systems. The provisions in NAFTA, the North American f reetrade agreement, were init ially intended f or f oreign investors operating in Mexico – not the United States orCanada. The provisions in the Energy Charter Treaty were intended to provide added protections toinvestments in Eastern Europe and Russia – not a country like Germany.Investment treaties between developed countries remain rare. This is not surprising, as you need verystrong justif ications f or displacing tenured judges with private lawyers. In well-developed legal systemssuch justif ications are not there, as there is no systematic discrimination against f oreigners. That is whyproponents of  investor-state arbitration have yet to provide a “compelling case” f or including investmentarbitration in the transatlantic agreement.Instead, the House of  Lords is now calling f or strong economic arguments. Don’t hold your breath if  sucharguments don’t come anytime soon. American investment treaties have not even had a signif icant impacton promoting investments into developing countries. American lawyers say the treaties are hardly everimportant f or investment decisions in practice.  Polit ical risk insurance providers say the treaties are veryrarely relevant f or the pricing of  investment risks. Even American negotiators themselves have tradit ionallyargued that American investment treaties are not going to have a signif icant impact on American outf low ofinvestment. This f ollows the general f inding that investment treaties are more than unlikely to promoteinvestment f lows, and when they do the ef f ect is very small. And again, this is f or countries withquestionable legal systems – not a country like the United Kingdom, which quite clearly should not expectgreater inf lows of  investment f rom signing an investment treaty.The gains of  a f ree trade and investment area across the Atlantic do not depend on investor statearbitration. When the United States and Australia negotiated an investment agreement they agreed toexclude provisions f or investor-state arbitration. Washington was hesitant, but couldn’t argue against theAustralian posit ion that no American investor would f ind Australian courts inherently biased or subject topolit ical involvement. Australia also recently entered into an investment treaty with Japan without recourseto investor-state arbitration. Why not f ollow the same example in the transatlantic agreement? Why is itnecessary to give f oreign investors the right to evade European and American courts?Note:  This article gives the views of the author, and not the position of USApp– American Politics and Policy,nor of the London School of Economics. The author would further like to stress that while some of thecomments here are based on a co-authored report to the Department of Business, Innovation and Skills, theyshould not be taken as reflecting the opinion of BIS. Please read our comments policy before commenting.             Note:  This article gives the views of the author, and not the position of USApp– American Politics and Policy,nor of the London School of Economics. Shortened URL for this post: http://bit .ly/T2KxR1 _________________________________ About the author Lauge N. Skovgaard Poulsen – Nuffield College, University of OxfordLauge N. Skovgaard Poulsen is a Postdoctoral Fellow at Nuf f ield College, University ofOxf ord, and a Senior Research Fellow at the University of  London SOAS. At the Universityof  Oxf ord, he is also a Research Associate at the Global Economic GovernanceProgramme. His recent publications are listed here.CC BY-NC-ND 3.0 2014 LSE USAPP

There is no need for the Transatlantic Trade and Investment Partnership agreement to include investor-state arbitration

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