An Unnecessary Tradition – The Origins of Investor State Dispute Settlement (ISDS)

The Transatlantic Trade and Investment Partnership (TTIP) is an expansive Free Trade Agreement (FTA) currently being negotiated between the European Union (EU) Commission and the United States of America (US). If negotiations are successful and the deal is ratified by the European Parliament, the agreement would create the world’s largest free trade area, covering over 50% of global trade. TTIP’s backers believe the deal will create economic growth, new jobs, and ultimately more disposable income for citizens on both sides of the Atlantic.

However, since negotiations began in July 2013, TTIP has been repeatedly criticised by civil society and numerous politicians. There has been a range of reasons for this opposition, but the most consistent and vociferous disapproval has focused on the inclusion of an Investor State Dispute Settlement (ISDS) clause. In previous FTAs, ISDSs have provided a mechanism for investors (often large, multi-national corporations)  to take legal action against governments when they have disagreed with legislation. For example, the tobacco firm Phillip Morris are currently pursuing the Australian Government for billions of dollars (AUS) over regulation of cigarette packaging, using an ISDS established in a 1993 FTA between Australia and Hong Kong. In Canada, Lone Pine Resources Inc. are pursuing the national government for  $250 million (Can)(€165million) in compensation for not being allowed to extract shale gas in Quebec. This is possible because of an ISDS included in the 1994 North American Free Trade Agreement (NAFTA). In the short term, this form of “justice” could see governments incur substantial financial losses simply for enacting legislation. In the long term, the legislative process could end up being dictated by corporate powers as politicians avoid, or are blocked from, making crucial laws because the state could have to pay billions in compensation.

German Anti-TTIP Protest

An anti-TTIP protest in German, June 2013. (Jakob Huber, C.C)

As ISDS agreements are so clearly against the interests of democracy, why are they included in any EU FTAs? The original logic for the inclusion of an ISDS was to protect investments in another country, to ensure treaties are enforced, and to prevent conflict. In the past (and present), many FTA and bilateral trade agreements have been signed with countries where the rule of law and application of justice are neither independent nor stable. Prior to the development of ISDS, disputes remained unsolved or could only be addressed through diplomatic efforts or, sometimes, through the threat or use of military force. Political interference in justice was (and remains) common in many countries, impacting on the rights of investors to receive equitable treatment. While QCEA does not support the values behind globalisation, universal access to an open and transparent justice system is one of our key principles. It is also a key principle of the EU.

ISDS mechanisms were originally put in place to reassure investors that they would have access to justice, to ensure that the terms of the treaty could be enforced through the courts and to prevent the use (or threat) of military force. However the inclusion of an ISDS is not necessary for the TTIP deal. Both the EU and the US have long-established, well-structured, and independent legal systems which would equitably enforce the terms of a ratified treaty.

Therefore the original rationale for the inclusion of an ISDS is no longer relevant. It seems reasonable for negotiators to remove this potentially dangerous mechanism. Instead of providing justice, an ISDS could in fact cause an injustice, as one section of society, corporations, could exert more influence on legislation and gain exclusive privileges. So not only are the original reasons for including an ISDS no longer there, but this mechanism could in fact become a dangerous threat.US nor EU investors needs the reassurance of an international arbitration court: their own national or, in the case of the EU, supranational courts could serve as a point of mediation. In addition, they are close military allies and both part of NATO; it is very unlikely that US and the EU would go to war with each other over investor relations. A third argument against an ISDS is that both regions already have large sums of money invested in the other’s economy without need for international arbitration ($2.6 billion in goods and services flows between their economies each day). In fact, this investment already makes conflict unrealistic: the EU-US markets are so interwoven that to go to war would have serious and enduring negative economic effects.

After considerable public pressure, in January 2014, EU Trade Commission Karel de Gucht announced that a public consultation on the inclusion of an ISDS mechanism for TTIP would take place for three months, starting in early March 2014. This could provide the perfect opportunity for the EU to rid TTIP of this unnecessary tradition which gives one section of society unique privileges and creates a loophole for attacks on democracy.

The EU Commission’s public consultation is now open can be accessed by clicking here.  You can also sign up for QCEA’s action alerts by clicking here to receive updates and more information about the consultation or if you have a question you can email You can also follow me on Twitter @chrisdiskin87.

About Chris Diskin

Chris is the current Economic Justice Programme Assistant. He joined QCEA in September 2013 after completing a range of internships in political intelligence and economic equality. Chris is particularly interested in the impact of international trade deals on economic inequality. However, he can be contacted about any aspect of economic inequality.

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