Jul 25 2012
Invest in Development
Invest in Development
In the field of international trade there has been a flurry of activity since 2009 when the Parliament acquired new responsibilities under the Lisbon Treaty. The General System of Preferences (GSP) trade scheme with developing countries has been revised; the Parliament endorsed trade agreements with Morocco and with the Pacific region but rejected the Anti-Counterfeiting Trade Agreement; and the safeguard clauses in bilateral agreements with Colombia/Peru and Central America are being negotiated.
Perhaps less high-profile so far, but arguably even more important, is the upcoming agreement needed on investment rules.
Investment rules have wide-ranging implications for the treatment of European investors abroad as well as the environment we create for investors in the EU. Under the Lisbon Treaty, foreign direct investment (FDI) is now an exclusive competence of the Union. Currently a spaghetti bowl of over 1200 criss-crossing bilateral investment treaties (BITs) govern investment rules between an EU Member State and a third country, and the challenge is to transfer these to one comprehensive set of rules for the Union. Much of the focus so far has been on creating transitional measures and maintaining the rules of the bilateral agreements while a set of rules for EU investment is drawn up. But the focus now is shifting to the creation of the EU-level policy.
Looking at the bigger picture there is an opportunity for a fundamental re-think about what kind of investment rules we want. Attracting investment to the EU is of course a crucial part of our economic recovery, but there is little evidence that BITs in the past have been a major factor in investors choosing where they operate. Instead, investment rules come into play when a dispute arises, highlighting the need to look closely at who is really winning and losing in these agreements. The protection of European investors abroad and the creation of a stable investment environment within the EU should remain the central aim. Well-established principles which prevent states discriminating against foreign investors is key here. But increasingly there is a fundamental imbalance in the power investors hold over nation-states. Investors are challenging laws that protect our environment, our public health and access to land and water. And they’re winning.
The power these multi-national conglomerates are wielding over states is being done through the investor – state dispute settlement mechanism (ISDS). This clause, which already exists in most BITs, allows investors to challenge local laws which they believe violate the principles of fair treatment and non-discrimination. An arbitration panel then makes a judgment, and when they agree that the investment agreement has been breached, the state is liable to compensate the investor. Because previous attempts to regulate investment on a global scale through the WTO and OECD have failed, these challenges are operating without the main public spheres of trade rules and dispute settlements. Democratically adopted laws are being privately challenged, often in complete secrecy when the right to hold proceedings confidentially is allowed. In developed countries this circumvents opportunities to exhaust local remedies first in highly-developed legal systems.
This is not a hypothetical situation. Investor to state disputes have increased sharply over the past few decades, from 5 cases in 1995 to 375 in 2010. Investors are able to choose the country in which they launch the challenge, often initiating it from a country with favourable BIT terms for their cause. Cases have challenged laws on access to water and land, and have been launched through the multilateral investment agreement in the energy sector, the Energy Charter. At stake is a state’s ability to legislate in the public interest on environmental protection, access to essential services and public health, without being challenged by private investors. Of immediate concern is protecting the EU’s ability to uphold environmental legislation such as the Fuel Quality Directive, and in particular the ban on importing tar sands. In health policy, Philip Morris has recently launched arbitration against Australia from their Asian headquarters. The tobacco giant claims the recently-passed Australian law on plain packaging cigarettes, which is due to come into effect in December, violates the Hong Kong – Australia BIT. The outcome of this challenge will be watched with interest from the EU, both in terms of the launch of the EU Tobacco Framework Directive expected early next year, where many in Europe hope plain packaging regulations will be proposed, and in the adoption of investment rules in upcoming free trade agreements (FTAs) with Canada, Singapore and Malaysia.
Last year in the Parliament we adopted a report on the future of investment policy, and now is the time to defend these priorities in the investment chapters of FTAs currently being negotiated with developed countries.
In the Comprehensive Economic and Trade Agreement (CETA) with Canada, currently under negotiation, inclusion of the ISDS is not necessary, given the highly developed legal institutions which both parties can rely on. Indeed there are serious concerns that an ISDS clause could be used against the EU ban on tar sands, which Canada opposes. In the broader reform of investment policy with developed countries, our key principles must be included to begin to redress the balance away from transnational corporations to allow states to protect genuine interests in the public sphere. Indeed we have already seen such a clause in the EU – Cariforum EPA, which includes a commitment for parties not to lower environmental or labour rights standards, and a provision on the behaviour of investors to promote corporate social responsibility. A dual approach is needed to fairly balance the responsibility of the state to uphold fair and equal treatment of investors with investor responsibility to respect reform of the public sphere in the interests of citizens. Opening up the arbitration process to public scrutiny and including far more input from civil society and trade unions will begin to shed some much-needed light on the power struggles that are happening behind the closed doors of ISDS cases.
The creation of an EU investment policy is an important opportunity to learn lessons from the many BITs that Member States have been operating under and create a fair and effective set of European investment rules to govern trade in the 21st century. Central to this is the creation of binding clauses in investment agreements to allow states to regulate in the public sphere for environmental protection, public health and labour rights without being undermined by profit-driven litigation. Investors have shown they are headstrong in pursuing cases where pro-environment or pro-health legislation provides an obstacle to increasing their trade. We must have equally robust rules to allow the European Union to defend these interests.