TTIP and ISDS: The Obscure Trade Clause Threatening to Tear European Politics Apart

On 29 September 2014, Cecelia Malmström took the stand in the European Parliament to answer questions – a formality en route to the role of European Trade Commissioner.

Unbeknownst to her, Martin Selmayr, the chief of staff for incoming European Commissioner President-elect Jean-Claude Juncker, was alleged to have changed her written testimony, in a section in which she wrote about the Transatlantic Trade and Investment Partnership (TTIP).

Selmayr inserted the following line: "…this clearly means that no investor-State dispute settlement mechanism will be part of that agreement."

We know this because the document was subsequently leaked, with Selmayr's "track changes" – that Microsoft Office tool so cherished by editors the world over – had been left in.

Last week, an article appeared in the Dutch publication NRC Handelsblad suggesting that Juncker, whose election was vehemently opposed by the UK government, had decided to remove the ISDS clause from the TTIP negotiations, in a bid to show the European public that he has "heard them".

"There's a fundamental conflict inside the commission," Jude Kirton-Darling, the Labour MEP for North East England told IBTimes UK. "You saw that in the document with the tracked changes was leaked. It was incredible. At that level nobody forgets to take it out. They wanted us to see it. It's part of the politics."

An esoteric – if common – tenet of international trade law is threatening to topple the incoming European Commission even before it's been finalised. In the slow-burning and scrupulous world of global trade bureaucracy, this is as close to a soap opera as it gets.

"It's clear as mud," Keith Taylor, a Green Party MEP for South East England told IBTimes UK. "Juncker is saying 'no' to ISDS. Malmström started out agreeing with him, but has changed her tune. And now we're in an ongoing state of confusion. Juncker wouldn't be maintaining this line if he wasn't well aware of the public opposition to ISDS."

ISDS grants a foreign investor the right to initiate dispute settlement proceedings against a foreign government. It is commonly included in free trade agreements, but opponents say it could leave local level policymakers vulnerable to libel proceedings from overseas investors, should local laws interfere with their ability to turn a profit.

Earlier this year, a public consultation the commission launched into the clause's inclusion in TTIP attracted 150,000 responses, with citizens fearing their governments could be sued by multinational corporations for loss of profit.

The first ISDS clause appeared in an agreement between Germany and Pakistan in 1959, with Germany seeking to protect its companies from loss of investment due to the volatile political and economic environment in Pakistan. In cases such as this, it is certainly an important tool. Ironically, it's now the Germans that are leading the calls to remove ISDS from TTIP.

One high profile and ongoing ISDS tribunal case is the Uruguayan government versus Philip Morris, the Swiss-based tobacco giant. Philip Morris has accused Uruguay of violating the bilateral investment treaty between Switzerland and Uruguay, saying that anti-smoking legislation (such as Uruguay's 'single presentation' ordinance and its requirement that health warnings cover 80% of a cigarette pack) devalues its cigarette trademarks and investments. The company is seeking financial compensation.

The View from the UK

Most UK Conservatives support ISDS, suggesting that British investors deserve all the help they can get when they take their money overseas. The Conservative Party Whip in Brussels, Ashley Fox, tells IBTimes UK that any fears over ISDS's inclusion are the product of scaremongering.

"I think as a matter of principle there's nothing objectionable to this arbitration system. When Poland left the Warsaw Pact, they signed a free-trade agreement with the US which included ISDS. Between then and joining the EU in 2004, Poland was never taken to court. I think there's a lot of scaremongering around this provision. It will protect investors against arbitrary acts of government," he said.

He fears that removing ISDS and kowtowing to French demands of removing their cultural sector from the TTIP agreement will water down the bilateral benefits of any agreement.

"My fear is that we'll end up with a very small package, but a very big package would be a great benefit for society," Fox said.

He cites the example of a government seeking to break a long-term railway privatisation contract without compensating the private company. And this is certainly an argument for inserting investor protection in any kind of trade agreement.

The Labour politicians we speak to, however, harbour reservations. They commonly say that the legal systems in both the US and EU are advanced enough to be able to absorb any requirement for investor dispute settlement, without needing to revert to private tribunals. Why, goes the argument, allow companies to take governments to private and opaque courts when we've spent hundreds of years developing respected courts of our own?

According to Kirton-Darling, this view isn't exclusive to the (centre) left.

At a tripartite meeting of MPs, MEPs and Lords last week, she said that Conservative Lords were raising the same concerns as Labour and Liberal Democrat Lords. It's a pattern that's repeated in Europe – there is concern across all sides – and one which could see any EU free trade agreement, be it with Singapore, Canada or the US, derailed, due to confusion and tentativeness over ISDS.

"There are widespread concerns, not just on the left of the parliament, but also from voices in the Liberal Group and the Christian Democrat Group, which are raising issues about ISDS as a system. Conservative Lords were raising the same issues. It's not cut and dry. The debate is there. It's not a done deal," she said.

Chinese Whispers

One of the common arguments for ISDS involves China. If the EU and US can't come to a trade agreement including ISDS, even given their relative cultural and economic harmonisation, then what hope do they have of persuading China to agree on it in any future trade deal negotiated with Beijing?

However, there is evidence to suggest that if there is an ISDS case brought between the EU and China, there's every chance it will be driven from Beijing.

In one high-profile case from 2012, the Chinese insurance company Ping An filed an ISDS charge against the Belgian government in an effort to recoup the losses it made after investing in Fortis, the Belgian-Dutch financial services group that was renationalised after its collapse in 2012.

Equally as China's influence grows, experts suggest it is less likely that investors will launch arbitration cases against it.

In a 2012 paper entitled China and Investor-State Arbitration, Leon Trakman of the University of New South Wales wrote: "Few investor claims have been initiated against it [China] and none has concluded with an award. This does not necessarily mean that foreign investors will not make such claims in the future, but rather that proceeding against China from an economic rationalist perspective, is likely to be contentious, costly and dilatory.

"However, these concerns are not peculiar to China. Economically and politically powerful states, not least of all the United States, are less frequently subject to investor-state arbitration than poorer states for much the same reason."

Most people agree onthe basic value of trade for a society (although this is a statement which comes loaded with its own encyclopaedia of caveats). The EU and US are the two most successful trading blocs in history. That the very governance of the former is being threatened by a clause that many claim is unnecessary is astounding.

Equally astonishing would be a situation in which the biggest trade deal in world history is derailed because negotiators pursue – with Faustian vigour – an agreement on this relatively obscure piece of trade legislation.

Note: This article was updated on 21 October to amend an error in reference to the case of PMI vs Uruguay. It originally read that PMI was suing Uruguay because of "indoor smoking ban, advertisement and sponsorship bans", this has been updated to read "Uruguay's 'single presentation' ordinance and its requirement that health warnings cover 80% of a cigarette pack".