By Dr Evgeny Postnikov, Lecturer in International Political Economy, University of Glasgow

As the negotiations over the proposed Transatlantic Trade and Investment Partnership (TTIP) between the European Union and the United States are continuing, the question of Investor-State Dispute Settlement (ISDS) is becoming a major roadblock on the way to the agreement. No other trade agreement in general and its concrete clause in particular has generated so much public concern and even outrage. This is especially true in Europe where protesters across EU member states have rallied against the TTIP and ISDS. In Britain, the ISDS issue has firmly entered the general election debate with different politicians blaming it for the potentially negative ramifications for national sovereignty and public services, including the NHS. Some EU member states’ governments have indicated that they would not support an agreement with such a clause. What exactly is ISDS and can we, the people on both sides of the Atlantic, live with it?

An ISDS clause protects the rights of investors against a sudden expropriation by a government in a host country. Investors who believe their rights have been violated can bring a case before an international arbitration panel. In other words, ISDS is an additional mechanism of protecting property rights and is viewed very positively by the business community. Yet, it invites a diametrically opposite reaction from the public. The level of public engagement produced by the TTIP negotiations in Europe is unprecedented compared to previous trade agreements precisely because of the proposed inclusion of such mechanism. Various constituencies have grave concerns about the debilitating effect of ISDS on national sovereignty, worrying that it might enable investors to bypass the existing democratic procedures and sue national governments for their decisions to re-nationalise the provision of public services or protect labour rights and the environment. The opaqueness of arbitration panels comprised of corporate lawyers not accountable to the public, ruling in favour of commercial interests, is thought to be the main source of danger.

As a response to these concerns, the European Commission has held a public consultation on ISDS and suspended the negotiation of this clause until the agreement on its shape is reached. It also introduced a proposal for creating a template for all ISDS provisions in future agreements that would involve some clear criteria for selecting the judges serving on arbitration panels, opening their deliberations to the public, introducing a currently non-existent appeal procedure and guaranteeing the right of governments to regulate. Such a proposal is long overdue and should be seen as an important step towards reforming the existing extra-territorial legal mechanisms. Constructive engagement with it would ensure that it reflects the views of all stakeholders and civil society makes its voice heard. Democracy is achieved through procedural rules domestically and this should not be any different when it comes to democratising the institutions of global governance, including international economic agreements. Thus, in order to make the TTIP fair and democratic we need to espouse this procedural view rather than questioning the ISDS mechanism as such and scrapping the whole agreement.

In fact, ISDS clauses are not novel and have existed since the 1950s. The US has typically included ISDS in its trade and investment agreements. Perhaps, somewhat more surprisingly, EU member states, especially Germany, have traditionally been some of the most ardent proponents of ISDS in their bilateral investment treaties (BITs). To date, the EU and its members have concluded over 1000 BITs with such provisions. This fact has escaped public attention and a great deal of politicisation, unlike the same clause in the TTIP. Furthermore, the EU-Canada and the EU-Singapore trade agreements signed recently without as much public outcry both have ISDS clauses. Recent research shows that these clauses are increasingly used by investors in both the EU and the US. Some studies also show that they make countries attractive destinations for investment, helping their economies grow.

Thus, ISDS clauses have already become a reality of international economic cooperation. They are part of the broader trend known as legalisation – more and more international agreements include some formal dispute-settlement mechanisms transcending the boundaries of national jurisdiction. By resisting this trend, the EU and the US risk being left behind when it comes to designing new rules for the global system. It would be important to find ways not to reverse it but make it serve the interests of our societies better to increase prosperity for all without sacrificing fairness. Public anxiety over ISDS in the TTIP has been overwhelming and is hard to dismiss. However, this anxiety should not preclude the two leading economies from exercising their leadership in an increasingly competitive global system and missing much needed opportunities for growth and job creation the can TTIP provide. Instead, it needs to be channelled to become a source of constructive reform proposals to improve transparency and accountability at the international level – what is really needed in the twenty-first century where the erosion of national sovereignty is a fact of life and effective international governance mechanisms are in high demand. A recent proposal by the European Commission could become the first step in this direction and could serve as a starting point for the constructive engagement between the public and TTIP negotiators.