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U.S. Experience Shows Structural Incentives Favoring Corporations in Investor-State System Not Fixable via Changes to Trade Pact Terms

European Commission’s Proposed Changes to Investor-State Language Mirror Past Failed U.S. Attempts to “Fix” ISDS Provisions; One Proposed CETA Modification Would Enhance ISDS Threats

By Public Citizen's Global Trade Watch

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The European Commission’s (EC) claim that threats posed by the investor-state dispute settlement (ISDS) system can be fixed by “improving” ISDS provisions in trade pacts has already been proved false. Current EC claims mirror U.S. government assurances made after a string of outrageous North American Free Trade Agreement (NAFTA) ISDS rulings forced significant “reforms” to ISDS terms in U.S. pacts starting in 2005. Yet, new analysis of these past efforts to rein in foreign firms’ expansive privileges under ISDS reveals that changes to trade pact ISDS language cannot address the fundamental problem with the ISDS structure. ISDS tribunals issuing rulings under the “reformed” provisions in U.S. pacts have systematically ignored the changes and issued the same outrageous rulings against non-discriminatory domestic environmental, health, and other policies.

The analysis shows how this outcome is due to problems inherent in the very structure of ISDS: tribunals have a structural incentive to boost their caseload and increase their earnings by using broad interpretations of foreign investors’ rights to rule in favor of corporations, which decide if and when to initiate future cases, and against governments. This fraught history of ISDS cases suggests that European policymakers – including the European Parliament’s Socialists & Democrats bloc and the French, Dutch and Austrian Parliaments – are correct to dismiss the EC’s attempt to mollify ballooning ISDS concerns, and that the public outcry against ISDS across Europe is wise.

Worse still, the ISDS tweaks the EC included in the EU-Canada Comprehensive Trade and Economic Agreement (CETA) which it also proposed to include in the Transatlantic Trade and Investment Partnership (TTIP), would actually make it even easier for U.S. firms to successfully attack European policies before ISDS tribunals. Under past deals, ISDS tribunals have had to create novel interpretations of vague foreign investor rights to rule against government policies. But the EC CETA text explicitly lists new ‘rights’ for investors, including by echoing one of the most overreaching past ISDS tribunal interpretations – based on imputing investors’ expectations – as a new basis that foreign firms could use to mount ISDS challenges. One veteran ISDS tribunalist has praised this approach, saying, “I love it, the new Canadian-EU treaty…we used to have to argue about all of those [foreign investor rights]…And now we have this great list. I just love it when they try to explain things.” Were such terms included in either TTIP or CETA, tens of thousands of U.S. firms could use these extraordinary rights to attack European public interest policies before extrajudicial tribunals.