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 Proposal
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.
Problems with the EC’s Proposal
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 North American Free Trade Agreement (NAFTA) was signed in 1992. Its ISDS provision (Chapter Eleven) requires a 45-judge roster. But the three NAFTA signatories—the United States, Canada, and Mexico—have yet to agree on its composition. The 29 TTIP nations will find it correspondingly harder to agree on the composition of the ICS, particularly its paramount Appellate Body.
- The United States should not agree to, let alone champion, the establishment of yet another permanent international court, particularly if that court is to have the authority to award pecuniary damages. Once endowed with permanence, invested with a modicum of power, and lacking any check on their authority, such institutions tend to take on a life of their own. The EC’s desire to grow an even larger International Investment Court from the seed of the ICS is an excellent example of this tendency.
- If at any time the ICS obviously and resolutely leans one way or another, the signatories and the investors (upon whose trust the structure relies) will lose their confidence in the entire, permanent system. This problem does not exist with the ISDS system, which is ad hoc.
- Under the ICS, the signatories will abdicate their interpretive control to a permanent judicial organ. While consistency might be a desirable value, nations rightly will not want a permanent court to cut off debate, which is what will happen once the ICS decides a question. Unless the nations amend the treaty, they will be burdened—perhaps in perpetuity—with the precedents set by the ICS.
- Signatory states are both the defendants and the homes of investors: in one case, they may wish to take actions; in another case, their investors may criticize those actions. Under the ISDS system, nations enjoy the flexibility to be fluid in their positions. The creation of a permanent court will make that difficult. As nations realize that their arguments in one case will have implications for their own investors in another case, the sincerity, integrity, and quality of the arguments made to the ICS by the State Parties will become impoverished.
- If the signatory governments select the judges, the investor is the only party in a dispute who will remain on a lower playing field. This is hardly equitable. In today’s ISDS system, most of the arbitrators are chosen by the disputing parties, because party autonomy is an indispensable feature of ISDS. The investor will be the long-term loser if the ICS comes into existence, because the ICS, by its very nature, privileges nations, which pick the judges.
- When the signatory governments are picking their judges, they will look for reliable allies. If homogeneity is the safest proxy for reliability, governments will choose a homogenous bench. Such a move is regrettable because it will rob investors and the wider community of a bench with varied perspectives through which problems might be better resolved. Meritocracy and unbiased, judicious judgment might be the real loser.
- The EC’s proposal implies that today’s ISDS arbitrators are less than conscientious and judicious. This is patently unfair. In practice, the new arbitrators, assuming that they are chosen on merit, are likely to be the old arbitrators in new robes: no large and currently untapped group of sagacious and erudite jurists exists. However, if the ICS takes a narrow view of who qualifies as a permissible arbitrator, this would do violence to the professional diversity and richness of experience that today’s arbitrators bring to the table. It would also allow the governments to stack the ICS with compliant arbiters, not impartial and dedicated servants of the law.
- The European Union is not a monolith. Sooner or later, intra-EU interests will clash. France may well prefer to have a French judge, while Ireland might want an Irish one. The ICS purports to make it impossible for nations to sway judges, but it is the nations that will select the judges from which ICS panels are drawn.
- In preventing practitioners from serving as judges, the EC proposal assumes that engaging with a complex issue is the same as being biased. This is tantamount to forgetting the late Justice Felix Frankfurter’s reminder that a “lifetime’s preoccupation with [a particular subject] naturally leaves one with views.” The Justice then went on to explain that it is the authority of the law, not private preferences, that must govern the disposition of the cases. Today’s ISDS arbitrators tend to behave in a similarly unbiased fashion.
- If nations are responsible for selecting the judges from which panels are drawn, they will seek to consider the interests of their own investors. Under the ISDS system, a nation does not have to advocate for its investors, and the ISDS system affords nations no such opportunity. The permanence of the ICS would compel nations to take up this advocacy role when they select judges, because all of its investors, those with weak and strong claims alike, would fall under ICS jurisdiction.
- Under the existing ad hoc ISDS system, nations cannot horse-trade between cases: each one is considered on its merits. Under the permanent ICS, one nation could offer to help investors from a second nation in a case if the second nation helped investors from the first nation in another case. Trades of this sort would almost certainly reflect the political and economic prominence of the investors, not the justice of their cases.
What the U.S. Should Do
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.