Uniting citizens across Europe, bashing TTIP has been a welcome unifier for a continent in chaos. TTIP, the Transatlantic Trade and Investment Partnership, is a trade treaty the European Union is currently negotiating with the US. Whatever our internal differences may be, Europe is united in its dislike of extreme American capitalism. Conservative, liberal or socialist, in the US we would all be shades of Democrat. Right? Well, maybe yes, but US capitalism and its horrors are only a part of the problems inherent in TTIP. We Europeans are to blame for its real problems.
Since the EU-US relationship is already pretty close, the mainstay of the deal is the elimination of already subtle trade barriers, including, for example, the standardisation of different tests for assessing product safety. Although many people worry this will lead to Europe losing its high standards on food regulation and the like, the commission is unlikely to go this far and give way to the dumping of US chlorine chickens (2).
More concerning however, is TTIP’s ISDS (Investor State Dispute Settlement) clause. ISDS is not new, but has existed for half a century. It is a secretive tribunal, usually hosted by the World Bank through ICSID (International Centre for Settlement of Investment Disputes). They settle disputes between corporations and countries they sue, resulting in fines of up to billions of dollars.
Trade deals with ISDS clauses have in the past allowed companies like Vattenfall, a Swedish organisation running several German nuclear plants, to sue Germany after it decided to phase out nuclear power. Philip Morris, the tobacco giant, sued Uruguay over the introduction of anti-smoking laws (3). Italian investors got South Africa summoned to court over black empowerment policies (9). Furthermore, ISDS allows companies all around the world to impose their will on governments by only threatening with a lawsuit. This has led to ISDS being described by some as continued colonial politics with legal means (8).
By now, I should have convinced left-wing anti globalists to be angry. For the free market liberals, a bit of history.
The idea behind ISDS when it was invented 50 years ago was simple. German businessmen wanted to protect their investment in countries that had gained independence from their colonial powers. The World Bank turned the reasoning around. Not investors, they argued, but the developing countries would benefit. With their assets protected by ISDS, businesses would be more willing to invest money in developing countries, allowing them to grow faster. This turned ISDS into a new tool for the World Bank to end poverty. At least, so it thought. Even though many developing countries opposed the plan, the World Bank incorporated tribunal ICSID into its arsenal in 1965(5).
Slowly more and more treaties involved ISDS, but for 30 years or so it was rarely used. In fact, in the first 10 years it wasn’t used at all. Since 1994 however, the number of cases has risen drastically, using ever-broader interpretations of the confusing definitions used in the treaties (1). That year, 1994, the trade agreement between Canada, the US and Mexico (NAFTA), came into force. Over the last twenty years Canada, a developed country with excellent rule of law became one of the most regularly sued countries in the world (6). Shrewd lawyers and wealthy investors found themselves a new pastime.
Canada is not the kind of country that needs extra protection, nor one where you would hesitate to invest in were there no secretive tribunal in New York watching your back. Canada is, however, very rich. Together with its high environmental standards (bad for business), lawyers found ways to sue Canada for billions of dollars.
This is not what the founding fathers of ISDS had in mind and nowhere near the World Bank’s ideas. In fact, new research proves the World Bank’s original argumentation to be wrong; ISDS does not increase foreign investment (6). Investors look instead at the size and growth of the market, infrastructure and education of the labour force.
ISDS is merely a nice backup option for rich multinational corporations.
TTIP is still not yet fully negotiated or agreed to, and the public outrage came just in time to start a discussion about the ISDS clause. However, there are already over 1,400 trade deals made by EU countries incorporating ISDS. The Netherlands is especially proficient at the art of ISDS, being home to one of the highest numbers of trade treaties in the world. It is second only to the US in the number of ISDS cases it opens. Using holding companies in the Netherlands allows multinational corporations to sue half the world, as well minimising their tax bill (4).
Now that Europe may end up on the receiving end of these claims, rather than benefiting from them, all hell breaks loose. Very few people seem to see this as hypocritical or opportunistic. What it is, is a chance to undo the wrong ISDS has done.
What corporations need to understand, is that on many levels investing in foreign countries demands a different approach than in one’s own. There are different customs, traditions and legislative powers. This can be difficult. However, as they create jobs and economic growth, foreign investors are readily welcomed in most countries.
This poses particular problems for smaller companies, who do not have the resources to circumvent or mitigate many of these customs. Manufacturing your produce abroad can be cheap, but it involves a lot of knowledge about local language, culture, contracts and deal making. Actually expanding abroad is even more difficult, as people have to be hired, with difficulties in terms of local employment policies, minimum wages and their ilk.
Large corporations are much more proficient at this, being able to hire the right people with the right knowledge. These companies are often hardly foreign anymore, as they employ a large number of local people running a semi-independent business unit. Perhaps their overall strategy is formed in another country, but on a day-to-day basis the company is run as a local one.
This is where it becomes tricky. Under ISDS, local companies don’t have any legal protection against their own government. The definition of a foreign company is purely based on the location of the headquarters. And with an ever-globalising economy, this headquarters can shift location easier than ever. Furthermore, it is the small internationally operating companies that can need some extra help. The cost and time span of court cases, however, means that ISDS is only a valid option for the very largest corporations.
ISDS therefore, is an out-dated method that infringes upon national sovereignty and benefits only large investors and law firms. It does not increase investment nor help small international companies that need it the most. It must be banned.
In case of a severe infringement into the rights of the company, the alternative is already there. Any country can start a trial on their companies’ behalf at the World Trade Organisation (WTO). The difference is that companies and lawyers can’t do as they please, but need to convince their own government that they have been mistreated (7).This is how it should be.
Joris Bucker, Business & Economics Editor