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Investor court in CETA does not fix problems with investor-state dispute settlement

November 3, 2016

3-minute read

Last week, the Belgian region of Wallonia ground the signing of the Canada-EU Comprehensive Economic and Trade Agreement (CETA) to an unexpected halt. Although the Walloons have since won some concessions that persuaded them to let Belgium sign CETA (which is now proceeding to the ratification phase), their intervention was, or at least should be, sobering for proponents of CETA and other far-reaching trade deals, including the Trans-Pacific Partnership.

Wallonia’s biggest objection to CETA, shared by the governments of three other Belgian regions, was the inclusion of a highly controversial investor-state dispute settlement (ISDS) mechanism. In fact, the four Belgium parliaments have given notice that they do not support CETA’s investment chapter, as negotiated, and will not allow Belgium to ratify the deal unless their concerns are addressed.

ISDS is a private arbitration process that allows foreign investors to sue governments over actions—even public interest regulations designed to protect citizens and the environment—that allegedly threaten their investments. These corporate challenges to government measures occur with increasing frequency across the globe through existing bilateral investment treaties. The recent Belgian backlash to ISDS in CETA is not new or isolated and is grounded in very serious criticisms.

ISDS lawsuits can be used to pressure governments into reversing or watering down actions taken in the public interest. Developed and developing countries alike have faced challenges to government policy in areas as diverse as resource management, public health, and auto insurance. Governments that stay the course in the face of these threats can be forced to compensate investors for their alleged losses, including reasonably expected lost profits.

In fact, due to NAFTA, Canada is one of the most-sued countries in the world under ISDS and a large number of those cases have challenged national and provincial regulatory autonomy. Overall, the immense power of unaccountable arbitrators to shape international law and domestic regulation through the ISDS system has provoked worldwide concerns about the legitimacy of investor protection rules in trade treaties.1

CETA’s investment protection chapter has already been renegotiated once in response to public protests and the Wallonian bargain may necessitate further changes. At present, CETA’s ISDS mechanism takes the form of an Investment Court System (ICS), a first-of-its-kind approach that attempts to respond to long-standing concerns about the inconsistency of arbitral rulings and the process by which arbitrators are selected.

Unfortunately, the new ICS model is a largely superficial improvement over ISDS. The ICS system does not alter the extensive substantive protections afforded to foreign investors in CETA or address the fundamental asymmetries between investors and states under ISDS, which gives investors rights, without corresponding obligations. CETA’s affirmation of the “right to regulate” only provides guidance to arbitrators, and does not change the fact that regulation, even to protect human health and safety or the environment, must still be consistent with CETA obligations.

The European Commission hopes the proposed ICS will become a template for other trade and investment agreements and is already negotiating a similar model in its free trade agreement with Vietnam. The politically charged CETA ratification process will influence the ongoing negotiations toward the EU-Australia free trade agreement and the EU-U.S. Transatlantic Trade and Investment Partnership (TTIP).2

Even if CETA is ratified by the Canadian and European parliaments (likely in December), and provisionally put into place, its ICS system will not come into immediate effect. As a so-called mixed agreement, CETA will need to be ratified by all EU member states and several regional governments before it can fully come into force. Due to legal uncertainties, the European Commission decided this year that the ICS and several of the more problematic sections of the investment chapter—including its “fair and equitable treatment” and “expropriation” clauses—will not apply until that point.

And it’s not clear we will ever get to that point. Canada and the European Commission have made the minimum concessions necessary to get CETA signed. The setting aside of ICS is an important but partial victory—one that can be made permanent if opposing EU member states and regional governments block the deal’s ratification.

Sadly, even in the absence of ICS (or ISDS), there is little to cheer in CETA. The potential social and environmental costs are significant and the potential economic benefits are meagre (or even negative). Challenges to the investor protection regime are welcome, but there is still much work to do if the global trade regime is really going to serve workers, citizens and the environment in the long term.

Amy Wood is a PhD student in political science at the University of Toronto and an international trade researcher at the Council of Canadians. Follow Amy on Twitter @amywood59.

Hadrian Mertins-Kirkwood is an international trade and climate change researcher at the CCPA. Follow Hadrian on Twitter @hadrianmk.

1 To rub salt in the wound, there is little clear evidence that ISDS provisions in trade agreements independently lead to increased foreign direct investment, which is one of the main reasons why governments consent to ISDS in the first place.

2 The fate of TTIP is uncertain—some already consider it dead—but it would be nearly impossible to conclude if CETA is not ratified. The Canada-EU deal was expected to lay the legal and political groundwork for the U.S. deal.

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