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The Investor-State Dispute Settlment (ISDS) final Blow to national Sovereignty

Nicola Spanu – One of the fundamental elements of the Transatlantic Trade and Investment Partnership (TTIP) is the investor-state dispute settlement (ISDS), which allows foreign companies to sue governments before an arbitration panel made up of corporate lawyers. This would give foreign corporations the possibility of bypassing the laws of the country in which they operate whenever these go against their corporate interests, inflicting a bad blow not only to the citizens’ rights to shape the legislation of the government they elect, but also to the rule of law itself: a tribunal external to the national judicial system of a country could actually overrule its national laws whenever it sees fit. As a result of the implementation of the ISDS, a tobacco company could, for example, sue a government which passes laws against the consumption of tobacco products.

The implementation of the ISDS would probably represent the final step in the process of gradual disempowerment of nation-states, which would be left powerless against international multinationals, whose turnover is sometimes as big as that of small states and, as a consequence, capable of having a big influence on the life of millions of people, be them consumers, workers or small and medium-size businesses.

The awareness of the risks of the TTIP in the form in which it is being currently discussed, that is, based on the ISDS, is growing more and more, and even economists who are not hostile to globalisation and free-trade are explicitly criticizing it. We will confine ourselves to two examples, both taken from the Anglo-Saxon world. In his speech at The International Trade Forum on Free Trade Agreements, hosted by two members of the American Congress and published in the website of the think-tank Campaign for America’s Future, Jeffrey Sachs, Professor of Sustainable Development at Columbia University, has pointed out that the secretive nature of the negotiations between the US and the EU on the TTIP bodes ill for the interests of the American people, because, ‘when things are managed in secret, as these negotiations have been, it’s the organized and powerful interests that by far dominate the proceedings.’

Sachs says that contrary to what the cheer-leaders of free-trade generally sustain, free-trade by itself is not a panacea for all evils; on the contrary, it can be positive for some sections of society but very negative for others, because it can have negative effects on income distributions, if it is not compensated by redistributive policies, which are not contemplated at all by the TTIP. After saying that the TTIP has an outdated approach because does not deal with the real contemporary issues that are now on the table, such as the financial, environmental or health crisis, he gives a negative judgment of it on the basis of four fundamental reasons:

  • The TTIP’s main goal is to defend the rights and privileges of international investors, not of all citizens of the countries which would sign it. This is a specific matter of worry because, Sachs says, ‘it’s not true that everything that is in the investor’s interest is in the worker’s interest.’ Moreover, given the limited improvement effects treaties like the TTIP have on trade, they are, ‘basically not trade agreements. They are investment agreements.’;
  • The TTIP would have no positive effect on ‘sustainable development’ (economic improvement, social inclusion and environmental sustainability);
  • The TTIP would be based on the mechanism of the investor-state dispute settlement, which is for Sachs such an unacceptable element of the TTIP that he comes to declare: ‘I regard that alone as reason to oppose both of these treaties’ (the TTIP and the Trans-Pacific Partnership or TPP). With regard to the ISDS he says : ‘And the problem with this is that it creates an extra-legal venue for arbitration that has proven in many investment treaties in recent years to be highly deleterious for basic government regulatory processes and especially around issues of health, safety, environment, and other issues. The idea is essentially that this new mechanism — rather, the mechanism proposed here which is already part of many bilateral treaties and some multilateral investment treaties — is giving more and more power to investors to challenge general government regulatory actions. Not breach of specific investment contracts, but general regulatory and legislative actions on the claim that those general regulatory or legislative actions are against the interests of the investors and somehow therefore violate the implicit standards or guarantees that these investors have vis-à-vis the host countries. In other words, standards of general applicability against smoking or for environmental protection, or for taxation of natural resources and so forth are now coming under challenge in these investor-state dispute arbitration panels and forcing governments — the host governments — to back down or rescind or, in the face of a lost arbitration, to cancel laws of general applicability, and therefore to lose the sovereign right to pursue national interest at the face of investor interest.’
  • Lack of transparency of the trade agreements negotiations between the US and the EU. With regard to this point Sachs says: ‘[…] we don’t know about the costs and benefits and implications of these proposed agreements. What would they mean? What would the implications be for jobs, sectors, income distribution, growth, trade’?

Sachs comes then to the conclusion that, ‘the investor-state dispute settlement clause should be dropped from these agreements.’

The second criticism of the ISDS comes from an unexpected source, that is, one of the most relevant cheer-leaders of free-trade, that is, the Economist, which, in an article published on October 11th 2014, declares itself explicitly against the investor-state dispute settlement. Even if the point of view from which the Economist deals with this issue is different from Sachs’ – since the British newspaper criticizes the ISDS because this would undermine the legitimacy of the TTIP, which it instead approves of-, its argument against the ISDS is substantially similar to Sachs’. The Economist writes: ‘Multinationals have exploited woolly definitions of expropriation to claim compensation for changes in government policy that happen to have harmed their business. Following the Fukushima disaster in Japan in 2011, for instance, the German government decided to shut down its nuclear power industry. Soon after, Vattenfall, a Swedish utility that operates two nuclear plants in Germany, demanded compensation of €3.7 billion ($4.7 billion), under the ISDS clause of a treaty on energy investments.’

The British newspaper also expresses doubts on the impartiality of the corporate judges that should adjudicate on issues that concerns the life of millions of European and American citizens; it writes: ‘Companies have learnt how to exploit ISDS clauses, even going as far as buying firms in jurisdictions where they apply simply to gain access to them. Arbitrators are paid $600-700 an hour, giving them little incentive to dismiss cases out of hand; the secretive nature of the arbitration process and the lack of any requirement to consider precedent allows plenty of scope for creative adjudications.’

In conclusion, the implementation of the ISDS through the approval of the TTIP could represent the final blow to national sovereignty based on a democratic consensus and establish a world in which nation-states are mere ‘implementators’ of decision taken behind closed doors and totally removed from democratic scrutiny. For this reasons, all people who have participative democracy at their hearts must stand up and fight against it.


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