Member of the European Parliament Marietje Schaake used harsh words on Wallonia for (temporarily) blocking the signing of the EU-Canada trade agreement (CETA): unbelievable, shameful political opportunism, really incomprehensible. In the press release she also defended the inclusion in CETA of investor-to-state dispute settlement (ISDS), a parallel legal system for multinational investors. In this blog I will argue that Schaake supports an approach that puts at risk democracy and the rule of law. Schaake is the liberal groups’s (ALDE) spokesperson on trade.
Wallonia has seriously looked at CETA for years. Here is the Walloon parliament’s resolution (EN). 1 As Wallonia has genuine concerns, Schaake’s harsh words seem unjustified. The most contentious issue in CETA is investor-to-state dispute settlement. The CETA proposal contains an ISDS variant known as ICS. Schaake wrote on ISDS / ICS in CETA:
“CETA is the only way in which we can modernise and reform the controversial investment protection system.”
There is no alternative, according to Schaake. But, of course, there are alternatives. EU member states ratified stand-alone investment treaties. They can withdraw from them, or renegotiate them. The possibility of doing the former gives leverage to do the latter. And leaving it to member states keeps decisions close to people.
In contrast, adding ISDS variants to EU trade agreements makes the situation worse. CETA (a) expands exposure as it expands coverage of foreign investments, including investments of many US companies; (b) includes EU decisions, and ISDS / ICS damages can be based on EU wide expected profits; (c) codifies expanded investors’ rights; 2 and (d) locks in EU and EU member states, as EU member states can withdraw from their investment treaties, but not from EU treaties. Locking in greater exposure, larger scope, and expanded rights, makes the situation worse. Schaake:
“Member States have 1300 of those clauses and they must be amended. CETA is a vital step towards a transparent, fair and legitimate international court. Those who say ‘no’, including the Walloon government, have no solutions for the existing ISDS mechanisms.”
Many people are critical of the ISDS variant in CETA. I mention 101 professors, associations of judges (one, two), NGOs and citizens. 3 Schaake sweeps them together under the label “Those who say ‘no'”, and disregards their arguments. They are supposed to not have solutions. But, as noted above, the EU member states can act. 4
Schaake mentions an international investment court as a future option. This is not an obvious solution, as it still is a parallel legal system for multinational investors. Furthermore, a court would not solve the four issues we saw above that make the ISDS variant in CETA worse than the current situation – lock in, greater exposure, larger scope, and codified expanded rights. A court itself could be more independent, but it would suffer from two systemic issues.
First, supranational adjudication is always specialised adjudication. Specialist courts and tribunals “tend to become over-enthusiastic about vindicating the purposes for which they were set up”. 5 Note that the supranational level does not have a supreme court to step in.
Second, local systems have a legislative feedback loop; parliaments can update laws if they dislike the interpretation by courts. In other words, they can influence the development of law. This is not possible at the supranational level. As we can not expect the EU to withdraw from deep integration trade agreements, the addition of adjudication to trade agreements creates a lock in to development of law outside democratic scrutiny – with a high chance on expansive interpretation of trade and investment rights due to the specialised character.
Untrustworthy systems provoke predatory rent-seeking. Giving private parties access to supranational investment adjudication creates risks which are not or hardly controllable due to the specialised and supranational character.
Moreover, all EU attempts to reform ISDS have shown that offensive interests impede meaningful reform. Setting up and maintaining a court would suffer from this as well. In sum, Schaake supports an approach that puts at risk democracy and the rule of law. 6
2 Investment tribunals have interpreted the substantive rights expansively, beyond the interpretations of local courts. For instance, investment tribunals have (a) seen the exercise of discretionary power by enforcement agencies as discriminatory, and (b) interpreted legitimate expectations in a broader way than local courts. Such interpretations are still possible. See footnotes 2 and 3 here.
4 The right approach is to improve weak aspects of domestic legal systems. Domestic legal systems can combine equal access to the law with democratic scrutiny of the development of law. Investors are not obliged to invest in countries with weak legal systems. This may create an incentive for states to improve their legal system. In addition investors can take out political risk insurance. Also note the related “there is no obvious reason why the incorporation in TTIP of a simple norm of non discriminatory legal protection and equal access to domestic courts could not address the problem perfectly adequately”. (Statement of Concern)
5 Justice Heydon quoted at MRLegal blog; see also Brian Kahin: “The Federal Circuit quickly became a champion of its specialty, making patents more powerful, easier to get, harder to attack, and available for a nearly unlimited range of subject matter.”; and Josef Drexl on the Unified Patent Court, quoted at FFII; other examples are ISDS’s “widespread expansive interpretations of nearly every provision found in investment treaties” and WTO, see Public Citizen.