November 13, 2015 | Issue Brief on Trade
The proposed Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union, if negotiated successfully, will certainly contain a mechanism for resolving disputes related to the treaty. The current model for Investor-State Dispute Settlement (ISDS) panels is widely used, but also wrongly controversial, particularly in Europe.
The European Commission (EC), the executive body of the European Union (EU), has proposed that the TTIP create a new Investment Court System (ICS) to resolve such disputes. The U.S. should firmly resist this proposal, which departs radically from the well-functioning ISDS system.
The EC’s proposed ICS would be composed of a Tribunal of First Instance with fifteen judges and an Appeal Tribunal with six judges. On the Tribunal of First Instance, the judges would come from a pool appointed jointly by the United States and the governments of the EU member nations: Five judges would be from the EU, five would be U.S. citizens, and five would be citizens of other nations.
Panels adjudicating TTIP disputes would be made up of random selections from the pool, purportedly to eliminate the possibility that the disputing parties could influence the composition or deliberations of the panels. Only the ICS would be empowered to hear TTIP disputes.
The EC claims ICS judges would have “very high technical and legal qualifications comparable to those required for the members of permanent international courts such as the International Court of Justice.” The creation of the ICS heralds the start of a broader EC effort to create a permanent International Investment Court for all trade agreements involving the EU.
Much of the EC’s proposal differs substantially from the established ISDS system. ISDS panels are created by trade and investment treaties between nations. Developing nations care about attracting investment, while developed nations care about protecting the private property and investment rights of their nationals residing or working abroad. The treaty signatories and investors alike seek flexibility and autonomy. Both groups are concerned about protecting the rule of law, but wish to avoid twisting that rule into a wooden, bureaucratic apparatus.
ISDS panels secure all of these objectives. For the following reasons, however, the EC’s proposed ICS fails to be a flexible, reliable, or secure means of protecting investors:
The EC’s proposal appears to be aimed not at remedying any of the actual problems with the ISDS system, but at assuaging the baseless criticism of it that is common in Europe. It is a solution seeking a problem. Ironically, the ISDS system was invented in Europe, and is widely used both in Europe and in the United States. The ISDS system was not seriously controversial in Europe before the negotiations with the U.S. attracted public attention. The agitation against the ISDS system has a distinctly anti-American flavor.
The primary point of the proposed ICS seems to be to reassure Europe that a TTIP ISDS mechanism will not inhibit the creation of further EU regulations. This concern is patently groundless: Because each ISDS system is created separately by a particular treaty, an ISDS can do no more than its parties want it to do. Additionally, the concern is revealing: While the TTIP is supposedly about reducing regulatory restraints on trade, the EC is advancing a proposal that is avowedly designed to enshrine “governments’ right to regulate.”
Although Europe is home to nine of the world’s 20 freest countries as ranked by the 2015 Index of Economic Freedom and the vast majority of the region’s countries are considered at least “moderately free,” the European region as a whole still confronts a variety of policy barriers to dynamic economic expansion, such as overly protective and costly labor regulations, higher tax burdens, various market distortionary subsidies, and continuing problems in public finance management resulting from years of expansion of the public sector. The EC’s proposed ICS would be yet another such policy barrier.
The ISDS system is not perfect: A co-author of this paper has set out comprehensive proposals for reform. But these proposals are intended to remedy actual problems with the ISDS system, not to scrap it. The EC’s proposed ICS purports to resolve non-existent problems. In the marketplace of ideas, it is a notion the U.S. should reject.—Ted R. Bromund, PhD, is Senior Research Fellow in Anglo–American Relations in the Margaret Thatcher Center for Freedom, of the Kathryn and Shelby Cullom Davis Institute for National Security and Foreign Policy, at The Heritage Foundation. James M. Roberts is Research Fellow for Economic Freedom and Growth in the Center for Trade and Economics, of the Institute for Economic Freedom and Opportunity, at The Heritage Foundation. Riddhi Dasgupta, PhD, is the author of International Interplay: The Future of Expropriation Across International Dispute Settlement (Cambridge Scholars Publishing, 2013) and an expert on international dispute settlement. He earned his PhD at the University of Cambridge, MSc at the University of Oxford, and BA at Columbia University, and is now earning his JD at the University of California at Berkeley.
 “Transatlantic Trade and Investment Partnership. Trade in Services, Investment and E-Commerce, Chapter II—Investment,” European Commission, September 16, 2015, http://trade.ec.europa.eu/doclib/docs/2015/september/tradoc_153807.pdf (accessed November 10, 2015).
 “Reading Guide,” European Commission Fact Sheet, September 16, 2015, http://europa.eu/rapid/press-release_MEMO-15-5652_en.htm (accessed November 10, 2015).
 “Commission Proposes New Investment Court System for TTIP and Other EU Trade and Investment Negotiations,” European Commission Press Release, September 16, 2015, http://europa.eu/rapid/press-release_IP-15-5651_en.htm (accessed November 10, 2015).
 The EC’s proposal prohibits any judge on the Tribunal of the First Instance or the Appeal Tribunal from “taking on work as legal counsel on any investment dispute.” In short, it prevents practitioners from serving as judges, and thereby ensures that the ICS bench will never be enriched by any practical experience with the complex issues that will come before it. “Commission Proposes New Investment Court System for TTIP and Other EU Trade and Investment Negotiations,” European Commission Press Release.
 Haley v. Ohio, 332 U.S. 596, 602 (1948) (Frankfurter, J., joining in reversal of judgment).
 Riddhi Dasgupta, Ted R. Bromund, and James Roberts, “The Proposed Investor-State Dispute Settlement (ISDS) Mechanism: U.S. Should Oppose EU Demand to Abandon It,” Heritage Foundation Issue Brief No. 4432, July 14, 2015, http://www.heritage.org/research/reports/2015/07/the-proposed-investor-state-dispute-settlement-isds-mechanism-us-should-oppose-eu-demand-to-abandon-it.
 “Commission Proposes New Investment Court System for TTIP and Other EU Trade and Investment Negotiations,” European Commission Press Release.
 Riddhi Dasgupta, International Interplay: The Future of Expropriation Across International Dispute Settlement (Cambridge: Cambridge Scholars Publishing, 2013), pp. 86–87.