THE BLOG
01/15/2015 04:45 pm ET Updated Mar 17, 2015

People Demand Answers in EU-US Trade Deal

Last summer, the European Commission consulted the public on controversial provisions of the Transatlantic Trade and Investment Partnership (TTIP) - the ambitious trade and investment deal it is negotiating with the US. It received an extraordinary reply, from nearly 150,000 people and organizations across Europe. To put that number in context, the largest consultation the EU's trade commission has conducted to date attracted just over a thousand responses.

On 13 January, the Commission issued its report and headline conclusions. The vast majority of the responses voiced opposition and scepticism to the inclusion of investment protection and investor-state dispute settlement (ISDS). As a result, the Commission has vowed to put negotiations of the investment chapter on hold while it consults with civil society and MEPs.

This is an enormous step forward for public participation in a trade agreement that will have scope to, in the words of the Commission's sustainability experts, create a de facto world standard.

It is also an opportunity for the Commission to reassess - this time with input from a range of stakeholders - the practical reasons for, and legal implications of, including investment protection backed by ISDS in specific investment agreements.

At the heart of this reassessment ought to be a simple question. Why include investment protections in TTIP at all?

TTIP is a new brand of agreement - negotiated between two of the world's most developed economies. Every chapter of TTIP will have implications and none more so than that on investment - where governments' potential liabilities toward investors are defined.

So the investment chapter in its entirety - not just ISDS, but also the need for protections granted to investors - must be justified as good law and good policy. Before looking at how the investment protections are defined, and how an ISDS mechanism is designed, we need to go back to first principles. Before we work to make the investor protection system more modern and more sustainable, we ought to look at why we are including investor protection in TTIP the first place.

The Commission has said that it wants to protect European investors abroad by ensuring permanent, stable rules for EU-US trade. While US law might not explicitly prohibit discrimination against foreigners, the Commission has not produced compelling evidence to show that existing US laws or practices have impeded trade. The Commission could argue that TTIP ought to include an investment chapter because it needs to be a model for all future investment agreements, including the dozen or so it is negotiating now - but given the different geopolitical concerns unique to each of those agreements, we should look at investment protection in TTIP on its own merits.

The main argument traditionally put forward in favour of investment protection and ISDS - and a main reason put forward by the EU - is that these provisions provide comfort to investors and as a result they promote foreign direct investment - traditionally in countries that lack robust legal rights for the protection of property, or which lack mature legal systems. But the evidence that investment provisions in bilateral investment treaties encourage foreign investment is weak. And an LSE study conducted for the British government in relation to TTIP indicated that the benefits of including investment protection backed by ISDS were negligible.

But while the benefits of including an investment chapter in TTIP have not been clearly enumerated by the Commission or the UK government, there are certain costs. Investment protections form the basis for possible legal challenges to government measures - including, government measures to protect public health or the environment.

Looking at potential government liability under an investment chapter from a climate change perspective, we can anticipate that climate change law and policy, which is in its infancy, could be particularly at risk. Climate change policy will increasingly require governments to take measures that could be interpreted as discriminatory against foreign investors - for example, the introduction of emissions standards that would lead to early closure of carbon-intensive facilities.

And there is unresolved legal complexity around the investment protection provisions, too. It is conceivable that investment protection provisions in TTIP as currently envisaged could allow foreign investors to claim compensation for a government action even where that action is legal under European law.

Fundamentally, the case for an investment protection regime - its possible costs, assessed transparently and honestly against any objective benefits, has not been made in the context of TTIP. It is not surprising that the UK House of Lords concluded in May that the advocates for investment protection enforced by an ISDS have yet to make a compelling case for their inclusion in TTIP or convincingly to dispel public concerns.

On 13 January, the report by the Commission on its consultations reflects these concerns, and represents a laudable step forward in engaging with the public - and continuing that consultation - in the development of a sustainable European trade and investment strategy.

To its credit, the Commission has acknowledged many of the faults of traditional investment protection provisions and ISDS, and its consultation reflected positive suggestions to modify and modernise them. But it is a necessary first step for the Commission - during the time it has now carved out for reflection and further consultation - to examine the underlying assumption that we include them at all.