Transatlantic Investment Protections: Convergence or Sticking Point for the TTIP?

In the spring of 2017, I was fortunate to have been a AICGS/DAAD Fellow at the American Institute for Contemporary German Studies at the Johns Hopkins University in Washington, DC. The purpose of that stay was to dig deeper into the rules governing foreign direct investment. The fruits of some of that research were just published on the AICGS website (linked here).

Below is a longer, more contextualized, version of the same piece.

This paper is about the controversy swirling around foreign direct investment rules generally, and

To TTIP or Not to TTIP?

recent U.S. and European experiences in helping reshape their design. When this research project was proposed in mid-2016, its purpose was to look ahead at how investment protection rules had evolved on both sides of the Atlantic as a window into how investment rules might have evolved in the proposed Transatlantic Trade and Investment Partnership (TTIP).

It’s normally ill advised to begin a paper by offering qualifications to what is about to follow. But the analysis below is being advanced at a unique moment in time that cannot be ignored—there’s a large, populist, elephant in the room.

The conclusions and point of this paper are that the United States and Europe were on a path toward convergence on investment rules that would have made them less contentious within the TTIP negotiations than many assumed. It’s a conclusion that remains valid, but one that has been overtaken by a much larger set of challenges to the politics of the global economy.

Into A Perfect Storm

The electoral tumult of 2016 on both sides of the Atlantic—June’s Brexit vote, and the election of Donald Trump in November—has shaken the foundations of the consensus around broad swaths of the postwar economic and political order. Not since the “Nixon Shock” of August 1971 that effectively ended the Bretton Woods system of fixed exchange rates has there been such an open reconsideration of patterns of global governance, U.S. and European leadership, or even the basic premise behind international cooperation.

International economic cooperation has historically been an easy target for populism. For two

Detroit: Rust Belt Poster Child

hundred years, economists have been making the case in favor of free and open markets. Indeed, David Ricardo’s 1817 articulation of comparative advantage remains one of the most powerful sets of ideas in all of economics. Yet, for two centuries, economists (and their political cousins) have done a lousy job convincing politicians, or those that vote for them, that such ideas are sound.[i] Moreover, one of the most straightforward ways to appreciate the impact of trade liberalization is that there are “broadly distributed winners, but also highly concentrated losers” created. Politicians love to hear about the “winners” but have, for most of the last two hundred years, not done enough to compensate the “losers.” David Ricardo referred to these “losers” as “released workers.” For too much of the postwar period, it has been assumed there would be so many “winners” from liberalization that “released workers” would simply be absorbed into an expanding economy. Some argued for a more robust redistribution of a portion of the gains from the “winners” should be more robustly used to help “compensate” the “losers” – the purchase of a kind of social license by governments to pursue more of the broad-based, positive effects of liberalization.

Unfortunately, there is widespread agreement that the implicit compromise between the “winners and losers” has been neglected for too long. In 2016, the standard xenophobic economic populism collided with the politics of that long-term neglect of the compromise. The results now challenge

broad swaths of the postwar economic and political order—Brexit risks undermining the stability of the European Union, President Trump’s cancellation of the Transpacific Partnership (TPP) and his threat to withdraw from the North American Free Trade Agreement (NAFTA) have America flirting with isolationism.

While no formal action has been taken on the part of the United States or European Union to stop TTIP negotiations (formally begun in 2013), the future of the TTIP is uncertain. A German official described the status of the TTIP this way: “In normal times, the TTIP would probably be in the refrigerator, being chilled until the politics were right to advance it. With Brexit and Trump, it’s in the freezer. Even it’s taken out, it will be a while before it’s thawed.”

Hence, a key assumption of this paper is the need to return to normal levels of controversy over trade liberalization. Not long after the formal launch of TTIP negotiations, it became clear the investment provisions were poised to be a major point of contention in the talks. Investment protections are not a new source of controversy. Indeed, investment rules in the NAFTA were a key source of anti-globalization sentiment in the late 1990s and early 2000s. Yet, the antecedents of contemporary investment rules—bilateral investment treaties (BITs)—have been around for decades and generated virtually no controversy.

The proximate source of controversy over investment was Europe, specifically Germany. In 2009 and again in 2012, the Swedish power company Vattenfall pursued investment arbitration against Germany under the terms of the Energy Charter Treaty alleging the expropriation of property as a result of Berlin’s decision to, in the first instance, phase out certain coal fired power generation (Vattenfall I), and, in the second, shutter it’s nuclear power generation in the wake of Japan’s Fukushima nuclear disaster (Vattenfall II). 

The controversy over investment rules that erupted in Germany, hijacked the EU’s virtually completed free trade negotiations with Canada (CETA) in 2014, forcing Brussels to re-think its approach to investment. It was a re-think that added to the assumption that the United States and Europe were on divergent paths and that investment would be a major sticking point in the TTIP talks. 

BITs, BITs, and More BITs

Although foreign direct investment is widely viewed as an important potential source of economic development, very little FDI flows toward the developing world. According to the United Nations, in 2015 there were nearly US$ 3Trn worth of foreign direct investment flows globally. Unfortunately, the lion’s share of those flows are between wealthy OECD countries, accounting for more than 70 percent of all outflows and more than 50 percent of all inflows (see Table I).

Table I: Global Flows and US, EU Shares

	2015 (in millions $US)
Global Outflows	1, 474, 424
Global Inflows	1, 762, 155
Hi-Income OECD Outflows	1, 098, 527 (74.5% of total)
Hi-Income OECD Inflows	698, 064  (55% of total)
US Outflows	316, 549
EU (28) Outflows	487, 150
US Inflows	379, 894
EU (28) Inflows	439, 457
US + EU(28) Outflows	803, 699 (61% of Global Flows
US + EU(28) Inflows	819, 351 (54% of Global Flows)
LDC Outflows (- China)	701, 090 (47% of global total)
LDC Inflows (-China)	335, 121 (19% of global total)

Source: UNCTADstat

Moreover, if we take away the large flows into and out of China, investment flows into the developing world represent a paltry 19 percent of all global inflows. Economic theory suggests that capital ought to naturally flow from regions in which capital is abundant (rich, industrialized, OECD countries), and therefore inexpensive, to those regions in which it is scarce (poor, developing countries) and therefore expensive. The reasons for this discrepancy are multifold and include things such as poor infrastructure, the lack of market proximity, or access to a skilled labor force.

However, one of the most important historical challenges concerns the rule of law, or lack thereof. Unlike official development assistance (ODA) from governments and institutions, FDI is held by publicly traded firms. A major hole in international law historically has been the lack of “standing” or “personality” for private actors. The challenge for private actors contemplating the commitment of investment capital in parts of the developing world is simple; the potential for discriminatory treatment, including expropriation, by host governments. Private actors can complain to home-country governments about their treatment abroad, but the sovereign state remains paramount.[ii]

Since the late 1950s, states have sought to fill this legal vacuum through the use of bilateral investment treaties (BITs) setting the legal terms under which private capital flows will be treated by host nations. Such legal mechanisms have a utility for all involved; the home government negotiates a secure legal framework for its firms operating overseas, the firm can invest knowing it will not be subject to arbitrary measures based on its national origin (“national treatment”), and the host country establishes a degree of credibility regarding the rule of law as applied to foreign investment that will (in theory) stimulate needed capital inflows.[iii]

According to UNCTAD, there are currently nearly 3000 BITs and more than 350 other treaties with investment provisions, the very first of which was the Germany-Pakistan BIT in 1959.

1994 Was a Very Big Year

For most of the postwar period, BITs generated virtually no controversy. Indeed, in 2015, Germany and the United States had more than 300 BITs between them and developing countries.[iv] However, two things happened in 1994 that would bring investment rules out of relative obscurity, making them a focus of broader opposition to economic liberalization. In January 1994, the North American Free Trade Agreement (NAFTA) entered into force. One of the most consequential elements of the NAFTA was the incorporation of U.S. BIT Model language (Chapter 11), effectively creating the world’s first trilateral BIT. Yet, doing so soon generated some unintended consequences. The NAFTA negotiators assumed that Mexico, with its 20^th Century history of expropriation, was the natural target of investment rules and that the so-called investor-state dispute settlement (ISDS) provisions would, if invoked at all, likely be deployed as a defense against discriminatory treatment by Mexico. Starting in 1997 with Metalclad’s claim that Mexico failed to live up to its contractual obligations over the firm’s investment in a hazardous waste project, it appeared the NAFTA was working as intended.

However, that same year, The Loewen Group, a Canadian funeral services firm, challenged an adverse Mississippi court ruling under the terms of NAFTA Chapter 11, significantly altering the political dynamics of investment protection rules. Never before had such rules been used by a firm from a developed country to challenge treatment of an investment in another developed country.

Such cases under the NAFTA began to pile up. As of 2017, there were 50 Chapter 11 cases alleging discriminatory treatment at the hands of a NAFTA government. Interestingly, only 14 of the 50 have been filed against Mexico; Canada and the United States have had 18 each filed against them. It wasn’t supposed to be this way, yet controversy flowed as the NAFTA experience with Chapter 11 lead critics to conclude investment rules were being used to undermine (not enhance) the rule of law by giving firms a pathway for challenging the state’s sovereign power to regulate through a legal process unavailable to domestic firms. The perception that ISDS provisions in Chapter 11 were being used to attack the state’s regulatory power was compounded in late 1999 when Methanex Corp., a Canadian petrochemical firm, challenged a California regulation banning a fuel additive proven to be toxic to groundwater supplies. For critics, Chapter 11 had provided a set of legal tools for foreign firms to challenge a host of regulatory measures, including those protecting the environment.

Across the Atlantic, the European Energy Charter was expanded, renamed the Energy Charter Treaty in late 1994 and, like the NAFTA, infused with ISDS provisions. Much as Mexico was the assumed target of investment protections in the NAFTA, it was those with checkered histories of property rights protections—such as Russia or former Soviet republics—who were assumed to be the likely defendants in ISDS cases. Indeed, as the charts below depict, ISDS cases within the Energy Charter Treaty unfolded with much the same pattern as the thousands of BITs the world over; private, developed country litigants, developing country defendants.

Yet, in recent years, Energy Charter Treaty ISDS cases have spiked, and increasingly included measures in ostensibly developed countries with stable histories of property rights. A case in point is Spain that had 16 new filings 2015 alone under the Energy Charter Treaty arising from reduced domestic subsidies to the renewable energy sector. Again, like the NAFTA, most of these suits allege state measures have been tantamount to the expropriation of private property; the state moved the regulatory goal posts.

Source: Dr. Dorte Fouquet, Becker Buttner Held Consulting AG, “Current Arbitration Cases Under the Energy Charter Treaty,” Vienna Forum on European Energy Law, April 15, 2016.

Source: International Energy Charter

Table 2: International Energy Charter Case Distribution

Spain 32 Italy 7 Germany 2 Czech Republic 7 Poland 1 Slovakia 1 Russia 6 Ukraine 4 Romania 1 Hungary 5 Slovenia 1 Croatia 2 Bosnia Herzegovina 2

Albania 3 Macedonia 1 Bulgaria 4 Romania 1 Moldova 2 Turkey 6 Georgia 1 Azerbaijan 2 Kazakhstan 5 Uzbekistan 1 Tajikistan 1 Kyrgyzstan 1 Mongolia 2 Total: 101 Cases

An ISDS Earthquake and Tsunami in Germany

The ISDS provisions of the Energy Charter Treaty have recently generated mountains of controversy in Europe, nearly derailing an important trade liberalization negotiation with Canada (CETA) in 2016.[v]  Yet, the controversy initially erupted in Germany, not Spain.

In 2009, the Swedish power company, Vattenfall, invoked the ISDS provisions of the Energy Charter Treaty alleging Germany was unfairly and arbitrarily phasing out certain kinds of coal-fired power generation; generation Vattenfall had only recently invested in. Yet, in 2012, Vattenfall set off alarm bells all over Europe when it again invoked Energy Charter Treaty provisions to challenge Germany’s decision to rapidly phase out all nuclear power generation in the wake of the Fukushima nuclear disaster. The political consequences of the Vattenfall cases could not have been worse. Canada and the EU were actively negotiating a broad-based economic liberalization agreement that included an investment chapter complete with ISDS provisions. European civil society’s objections to the Canada-EU Comprehensive Economic and Trade Agreement (CETA) included typically controversial issues such as agriculture, intellectual property, and culture, but ISDS became a lightning rod of controversy capable of drawing tens of thousands of protesters into the streets of European cities.

Most importantly, the controversy flowing from Vattenfall and into the CETA forced the EU into a rapid rethink about its position on ISDS, ultimately making the CETA a test-bed for reforms. The CETA’s rapidly growing importance for Europe in 2015-2016 was not about trade or investment with Canada, per se, but the looming TTIP negotiations with the Americans.

The Big Investment Fish

As noted above, global investment flows have overwhelmingly been between advanced industrial countries (see Table I), and the lion’s share of that has flowed between the United States and Europe. Moreover, large stocks of existing U.S. and European investment are already present in each other’s jurisdictions. As depicted in Table II, in 2015 nearly 60 percent of all U.S. investment abroad was located in Europe and nearly 70 percent of all overseas European investment is located in the U.S.

Table II: US-EU FDI Flows

	2015 (in millions of $US)
US Direct Investment position abroad, all countries	5,040,648
Direct Investment Position in US, all countries	3,134,199
US Direct Investment position in EU	2,949,235 (59% of US FDI abroad)
EU Direct Investment Position in US	2,162,845 (69% of all FDI in US)

Source: US Bureau of Economic Analysis

With such large volumes of investment across the Atlantic, formalizing investment protection rules has, to some, seemed an obvious goal. Indeed, investment was to have featured prominently in the proposed Transatlantic Trade and Investment Partnership. However, it was not the first time developed countries have tried to agree on a common set of rules. In 1995, the members of the Organization for Economic Cooperation and Development (OECD), essentially a group of developed economies, began talks aimed at concluding a multilateral set of investment rules known as the Multilateral Agreement on Investment (MAI). By early 1998, the talks had collapsed in spectacular fashion. Civil society, alarmed by the early experience with the NAFTA, breathed a sigh of relief and declared victory. The OECD membership, on the other hand, was deeply divided over what the terms of those rules ought to be.[vi] Indeed, the failure of the MAI forms part of the backdrop for what it is assumed investment within the TTIP would be so contentious.

But is it really destined to be so?

Transatlantic Shock and Awe

There are many interesting parallels in the contemporary experiences with investment protections in North America and Europe, starting with the fact that the agreements from which controversy over ISDS has flowed on both continents were implemented in 1994; respectively, the NAFTA and the Energy Charter Treaty. In the case, off-the-shelf investment provisions, complete with ISDS, were simply inserted into new agreements. There had never been cause for excitement over investment when such agreements were between developed and developing countries.

One reason for little controversy is that in the context of most BITs, the FDI that is stimulated continues to flow mostly in one direction; from rich to poor countries. There simply isn’t a lot of FDI flowing from developing countries into developed countries over which an investment dispute could be filed.

Yet, when negotiators inserted stock ISDS provisions into agreements covering flows of investment between developed states, the volume of investment flows among them inherently suggests the potential for disputes. Negotiators for both the NAFTA and Energy Charter Treaty should have seen this coming. They did not.

Instead, governments were taken aback by the incidence of disputes attacking regulatory measures developed states with strong property rights protections, but claiming those measures amounted to expropriation. Similarly interesting has been the response of the United States and Europe to these challenges. Indeed, although the surprise and response on both sides of the Atlantic was separated by nearly two decades, they have been remarkably similar in terms of sparking reforms to investment protections.

In the United States, the 1999 Methanex case under Chapter 11 of the NAFTA rattled nerves inside and outside government. Methanex prompted the three governments to intervene that summer with a ministerial “interpretation” of the meaning of parts of Chapter 11.[vii] Yet, as worrisome NAFTA cases advanced, the Department of State launched a review of the U.S. BIT program in 2004, the first revision of the U.S. BIT Model since it was inserted into the NAFTA in 1994. The 2004 BIT Model formed the template for subsequent U.S. trade and investment agreements until 2009 when yet another revision exercise made further changes, resulting in the 2012 Model BIT.

                                                                                                                    

In Europe, the furor arising from the Vattenfall cases prompted German officials to press the Commission for changes to how the EU pursued investment. In March 2014, German officials signaled that the CETA negotiations could be imperiled without significant changes to the investment chapter.  Largely at the behest of Germany, the Commission surveyed member state governments via the Council of the European Union (government ministers) about whether ISDS should even be a part of future European trade agreements. Hearing that the answer was “yes,” the Commission initiated an online public comment period seeking views on changes to future investment chapters.

A number of those suggestions were inserted at the 11^th hour as a way to save the CETA from being rejected. More importantly, many of those comments made their way into EU proposals on investment to be tabled in the context of the TTIP negotiations with the United States.

Hence, on separate tracks, the United States and Europe responded to the unfolding case histories arising from ISDS and civil society’s pointed criticisms of those provisions. It would be a stretch to suggest that the evolution of ISDS cases in North America and Europe were, by themselves, enough to alarm governments to take action. Civil society critiques were undoubtedly influential in raising the profile of the “threat” to state sovereignty represented by a number of cases. However, the states’ responses amount to a significant set of reforms that have modernized ISDS, reasserted state power, enhanced protections for labor and the environment, and moved both sides of the Atlantic far closer to one another than many analysts have acknowledged.

What follows is a side-by-side comparison of the respective reforms to ISDS on each side of the Atlantic. They are reforms borne of near-misses, controversies, and surprises with ISDS provisions as crafted in 1994, but hitherto never applied to developed country groupings with significant levels of cross-border investment. The United States has been through two reform processes, the most significant of which was in 2004, and most clearly reflected anxieties about emergent patterns of legal argumentation in the NAFTA’s case history. However, the most up-to-date language in the 2012 BIT will be highlighted here. In Europe, controversy over Vattenfall v. Germany galvanized public opposition, threatened the viability of the CETA, and forced the Commission into an accelerated reform process, the results of which represent an emergent EU model investment proposal for TTIP. Highlighted below are elements of the EU approach that found their way into the CETA text as well as formal proposals that go beyond and were aimed at TTIP.

Models of Convergence?

       E.U. Investment Proposal 2015                                 U.S. BIT Model 2012

Right to Regulate

EU ·      Environment (CETA 8.4.2.4) ·      Affirms right to regulate in public interest (CETA 8.9) ·      No “forum shopping” or “mailbox companies”

U.S. ·      Environment: race to bottom inappropriate. State maintains right to regulate (Article 12) o   State-to-State consultation ·      Labor: Race to bottom inappropriate. State maintains right to regulate (Article 13). o   State-to-State consultation ·      Waive rights to all other legal proceedings- No U-Turn, “forum shopping”

Easily one of the most potent public critiques of ISDS provisions is that they afford foreign investors a set of mechanisms for challenging the state’s regulatory power. Moreover, because those mechanisms are unavailable to domestic firms, critics also allege ISDS creates an unconstitutional legal forum with no domestic judicial review. Indeed, in both the NAFTA and Energy Charter Treaty contexts, private firms have alleged regulatory measures adversely affecting revenue streams amount to forms of expropriation. In multiple instances, the measures being challenged were environmental in nature.

Reforms in Europe and the United States have strongly affirmed the state’s right to regulate in the public interest. Moreover, that power is explicitly upheld where labor and environmental regulation is concerned—State Parties may not weaken labor or environmental laws to incentivize FDI flows.  Moreover, reforms now severely limit the capacity to abuse ISDS provisions as part of  “forum shopping” or the establishment of “mailbox companies” to seek damages.

Definitions

EU ·      Expropriation, direct and indirect (CETA 8.12, Annex 8-A) ·      Clearer boundaries on “fair and equitable” and “indirect expropriation”—withdraw of state aid/subsidy is NOT expro.

U.S. ·      “Investment” clearer, more detailed. Includes financial assets. ·      CIL standard for “minimum standard of treatment,” “fair and equitable,” and “full protection and security.” ·      “Expropriation” defined. Clearer about it being allowed for public purpose, with fair compensation. ·       “Essential security” – National security exceptions to expro and transparency (Article 18) ·      Financial Services—State power to regulate cemented. Tough language on capacity to use ISDS to challenge State measures (Article 20)

Another important area for reform of investment rules is simply definitional. In the NAFTA context, firms began exploiting an absence of definitive language over what an “investment” actually was, what were “fair and equitable” or “minimum standards” or treatment, what was the state’s obligation to provide “full protection and security,” and, of course, “expropriation” itself.  Whereas NAFTA Chapter 11 was just 22 pages long, the 2012 BIT Model is over 40, in part, because of far more attention paid to definitions in an effort to limit the use of ISDS to all but clear-cut violations of property rights. Europe has also moved in the direction of definitional clarity setting out much clearer boundaries on many of the same issues.

Transparency

EU ·      CETA 8.36 ·      Documents to be made public; request for consultations, determination of respondent (EU competent authority), Amicus,  open hearings, ·      Proprietary info can be withheld ·      Tribunal rules on issues on proprietary info. ·      Committee on Services and Investment (CETA 8.44) Interpret anything within.

U.S. ·      Transparency—proprietary info can be withheld, but only at discretion of Tribunal. Open public hearings (Article 29) ·      State Parties get to rule on all transparency issues. ·      Non-disputing Parties can make submissions to a proceeding (Article 28). ·      Amicus curaie submissions can be accepted (Article 28).

One of the most basic critiques of ISDS has been the lack transparency. One of the challenges here has been the sensitivity of proprietary information held by private litigants; in short, open arbitration proceedings would expose proprietary information to competing firms. However, the absence of public scrutiny over a process used to challenge state measures has become politically untenable. On both sides of the Atlantic, public access to ISDS proceedings through amicus submissions, public hearings, publication of government pleadings, and a much stronger preference for releasing even proprietary information to the public are helping to improve the perceived legitimacy of ISDS. 

ISDS

EU ·      Arbitration process: o   Replace case-by-case selection of panellists with permanent roster of judges. o   Addresses ethics concerns re: lawyers in one case serving as arbitrators in another.

U.S. ·      Arbitrators selected—1 each, and chair by mutual agreement (Article 27). ·      Conduct of Arbitration, incl. capacity for quick and early dismissal by State (Article 28 (4)) ·      Parties also get to rule on definition of Customary International Law (Annex A) and Expropriation (Annex B).

The ISDS arbitration process itself was thought to be one of the most important sources of disagreement between the U.S. and Europe within the TTIP negotiations. Indeed, some advocates on both sides of the Atlantic have argued ISDS should be scrapped entirely. After all, they argue, why do you need an arbitration mechanism for investments in developed country jurisdictions with virtually no history of nationalization or expropriation for reasons other than the public interest? Moreover, while there is some variability in the domestic property rights regimes among developed states, virtually all have a strong commitment to fair compensation of rights owners in the event of expropriation in the public interest; say for a major public infrastructure project. Hence, it is curious that EU member states were unanimous in their support for including ISDS in future EU trade negotiations.

The major difference remaining between the U.S. and EU in ISDS is with respect to the process by which arbitration proceedings are populated with jurists. The United States continues to favor an ad hoc process of selection of panelists, none of who need necessarily be lawyers, whereas Europe would like to establish a permanent roster of possible panelists comprised entirely of judges.  Proponents of the U.S. approach argue the character of investments may necessitate sector-specific, rather than purely legal, expertise. Moreover, they argue, an ad hoc system is no more susceptible to ethics problems than the permanent roster of judges proposed by the EU.

Institutions

EU ·      WTO-style Appellate system o   Currently only “set aside” or “annulment” of awards possible. o   7 permanent members (2 from each Party, 3 non-nationals) ·      ISDS and Appellate system Stepping stones toward a multilateral system—one permanent international investment court (opt-in membership).

U.S. ·      State-to-State arbitration (Article 37). ·      Openness to “appeals process” (Article 28 (10))

Both the EU and U.S. have put the idea of some kind of “appellate system” on the table for future investment chapters, the EU proposal going furthest in suggesting it be modeled on the WTO’s appellate mechanism. Historical skepticism about such institutions in the U.S., particularly some Congressional factions, might make this difficult no matter how it’s designed. However, the U.S. hand in first designing and using the WTO’s appellate mechanism suggests an appeals process for ISDS cases is possible. Moreover, an appeals process would directly address one of the most pointed critiques of ISDS; that proceedings are both secretive and lack oversight.

Yet, it is over the EU’s proposals for an “international investment court” that the biggest divisions with the U.S. could develop. The traditional U.S. aversion to binding institutions is usually strongest in instances where pooled sovereignty is proposed. The EU’s proposal calls for a multilateral court and roster of judges to rule on investment disputes between member states and their private sector investors. It raises a set of long-standing issues that, in part, contributed to the failure of the Multilateral Agreement on Investment back in 1998.

The substantive differences between the EU proposal and existing multilateral mechanisms for investment arbitration in the World Bank (ICSID) or United Nations (UNCITRAL) is unclear. It’s also unclear whether the EU’s proposal is designed to supplant those institutions, or work in conjunction with them. The United Nations Commission on International Trade Law (UNCITRAL) and the International Center for Settlement of Investment Disputes (ISCID) were created in 1958 and 1968, respectively, and have long track records of facilitating the resolution of investment disputes. Indeed, under the terms of both the NAFTA and the Energy Charter Treaty, ICSID and UNCITRAL are enshrined as locations dispute resolution.

Conclusions

The foregoing isn’t meant to suggest U.S. and EU investment negotiators would join hands and sing Kumbaya with respect to the investment chapter of a revived TTIP. In the context of the contemporary populism roiling global politics, no trade liberalization agreement, particularly one as large as the proposed TTIP, is going to be straightforward.

However, this analysis highlights that the respective experiences with investment protections in the United States and Europe have paralleled one another in many ways, starting with the insertion of previously innocuous, uncontroversial BIT-like provisions into the terms of the NAFTA and Energy Charter Treaty in 1994. In both instances, and for the first time, formal investment protections were being applied to developed country jurisdictions into and out of which there were substantial flows of FDI. Controversy ensued, first in the NAFTA area, as foreign firms creatively availed themselves of ISDS mechanisms, exploited the NAFTA’s linguistic vagaries, and seemingly challenged the state’s power to regulate in the public interest. A decade later, the terms of the Energy Charter Treaty generated a similarly surprising set of cases.

The parallels multiply in examinations of the state responses to the challenge of ISDS. In both the United States and Europe, the apparent shortcomings of early 1990s investment models prompted reforms over the same issues on both sides of the Atlantic. In both cases, the reforms maintain the utility of investment protections, but recalibrate the state’s relationship to the private firms in the context of robust flows of FDI.

 Finally, this paper argued that the respective experiences of the United States and Europe with respect to investment was driving them toward a convergence of views, particularly on issues of transparency and assertion of sovereign regulatory power, that may shift contention within TTIP negotiations away from investment.

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[i] See Irwin, Douglas A. Against the tide: An intellectual history of free trade. Princeton University Press, 1996.

[ii] See Salacuse, Jeswald W. "BIT by BIT: The growth of bilateral investment treaties and their impact on foreign investment in developing countries." The International Lawyer (1990): 655-675; Salacuse, Jeswald W. "The Treatification of International Investment Law." Law & Bus. Rev. Am. 13 (2007): 155; Graham, Edward Montgomery. Fighting the wrong enemy: Antiglobal activists and multinational enterprises. Peterson Institute, 2000.

[iii] See Swenson, Deborah L. "Why do developing countries sign BITs." UC Davis J. Int'l L. & Pol'y 12 (2005): 131.

[iv] Germany, 203; the United States 114. Source: http://investmentpolicyhub.unctad.org/IIA/IiasByCountry#iiaInnerMenu

[v] Formally the Canada-EU Comprehensive Economic and Trade Agreement.

[vi] Graham, Edward Montgomery. Fighting the wrong enemy: Antiglobal activists and multinational enterprises. Peterson Institute, 2000.

[vii] The July 2001 Free Trade Commission Interpretation made minor clarifications in the areas of transparency and the meaning of “fair and equitable treatment,” while being unable to agree on important others, such as “expropriation,” “national treatment.” http://www.iisd.org/pdf/2001/trade_nafta_aug2001.pdf.

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Looking for Insight into the Future of Transatlantic Economic Ties? Watch What Happens to the NAFTA.

Greg Anderson

2016 was a tumultuous year in the political economy of trade. Populists have been on the march nearly everywhere—slowed, perhaps temporarily, by Dutch elections two weeks ago. At times, the target has been nothing less than the entire postwar order. More proximately, it's the global economy, and the agreements that undergird it, that fuel the populist rage.

Last June, Great Britain voted to exit the European Union—Prime Minister Theresa May on Wednesday triggered Article 50 to begin with withdraw process, a process some predict could be an ugly divorce. In November, a similarly populist, anti-immigrant, anti-globalist electorate brought Donald Trump to the White House. President Donald Trump has made good on a lot of his anti-trade rhetoric; one of his first acts after taking the oath of office was to pull America out of the Trans Pacific Partnership—effectively leaving the other TPP countries at the altar.

Since 2013, the United States and Europe have been working on a much larger liberalization project; the Transatlantic Trade and Investment Partnership (TTIP). Trump has yet to formally suspend the TTIP negotiations, but given the chill he’s cast over the future of America’s economic relationships, he doesn’t have to. TTIP is unofficially in limbo.

Scholars, pundits, and America’s trading partners are scrambling to make sense of Trump’s economic agenda. Yet, insight into the future of transatlantic economic relations may come from—to continue with the marriage metaphors—the impending divorce in North America.

In addition to taking a wrecking ball to the TPP, Trump has promised to formally withdraw from NAFTA. Most now expect a “renegotiation” of North America’s economic relationships to begin in earnest later this year. For now, Canada and Mexico seem to be playing along—initiating their own domestic stakeholder consultations in preparation and, in an unusual display of unity, last month signalling a strong preference for trilateral talks.

Yet, it’s far from clear what will end up on the North America 2.0 negotiating table, including whether there will be one table with three chairs—one each for Canada, the United States, and Mexico—or if there will be two separate tables with entirely different sets of issues. In February’s press conference with Canada’s Justin Trudeau, President Trump said things would be “tweaked,” that it was a “...much less severe situation than what’s taken place on the southern border. On the southern border, for many, many years, the transaction was not fair to the United States. It was an extremely unfair transaction.”

Will the Canada-U.S. trading relationship get “tweaked” while U.S.-Mexican trade gets turned on its head? What will the practical difference mean? What parts of the existing NAFTA structure will survive a “renegotiation”?

A “hard divorce” (a la “hard Brexit”) would have consequences for all three countries. In 2015, Canada and Mexico combined took in just 33 percent of America’s exports—not small, of course. But for Canada and Mexico, the consequences are dire, each dependent on U.S. market access for, respectively, 77 percent and 81 percent of their export earnings. Regrettably, the signs are that the divorce settlement with Mexico could be bleak. Donald Trump has used Mexico as the poster-child for everything that’s wrong with America’s economic relationships. Moreover, I suspect Ottawa will quickly abandon the show of unity with Mexico City if more favorable terms with Washington are on offer. Hence, my bet is that divorce court in North America will actually be two separate courts; one for Mexico, the other for Canada.

Observers of transatlantic relations might want to pay a bit more attention to the terms of divorce with Canada. Apart from Canada being a “less severe situation” in Trump’s mind, any changes to the relationship with Canada will effectively set the agenda Trump pursues with other developed states; that includes a post-Brexit UK and the remaining 27 members of the EU.

NAFTA is devoid of the supranational pooling of sovereignty we see in Europe. Given Trump’s brand of nationalism, it’s not hard to imagine scrapping the limited institutionalization that does exist in the NAFTA area; dispute settlement on dumping and subsidy cases (Chapter 19), investment protections (Chapter 11), the NAFTA Commission (Chapter 20).

Will Canada and the United States take the opportunity to harmonize regimes in intellectual property protection and product testing or find ways to liberalize each other’s government procurement markets? Will there be strong investment protections, new disciplines in services, enhanced mobility for professionals, e-commerce, or competition policy? Or, will it all go the other direction with North America 2.0 fostering a narrowing, rather than an expansion and deepening of the agenda, even with America’s closest ally, Canada?

Whether we optimistically call it a “renegotiation” or lament the demise of NAFTA like a “divorce,” North America will be the first real test bed for Trump’s economic policy. Atlanticists ought to pay attention to how it all unfolds.

In Appreciation of the Imperial Captial

The Imperial Capital

Washington, D.C. is a city Americans love to hate. Years ago, on a flight from Dallas to Washington, I struck up a conversation with a fellow from Texas. It was friendly enough, but when the reason for our travels to D.C. came up, his tone changed as he delved into his bottomless pit of grievances about the city. Honestly, he was a bit of a caricature, but the knee-jerk reaction to Washington has always struck me. Moreover, Texans hardly have a monopoly on that vitriol-- there is plenty to be found in my home state of Utah, particularly when faceless "D.C. bureaucrats" (a pejorative term) impose new programs, or designate federal lands closed to development.

President Trump currently sits in the White House having generally promised to "drain the swamp"-- another pejorative denoting broad broad-based corruption, favouritism, and insider politics. Indeed, to admit to someone outside Washington hat you live inside the Beltway (Washington's ring-road) is, in some quarters, an admission that you are part of a lazy, corrupt, elite, and entitled class of parochial "insiders" that likes to tell everyone else around the country how to live.

Donald Trump is hardly the first presidential candidate to have played upon the diffuse national animosity toward Washington. George W. Bush did it. Bill Clinton did it. Ronald Reagan did it. Hollywood has been pretty good at it too; how about the mystery and faceless power of the Emerald City in the Wizard of Oz.

I have the opportunity to call D.C. home again for the next little while (link to what I'm doing here). D.C. isn't perfect. No city is. But I love this town!!!!

... and its softer side

There, I said it. Let the vitriol rain down!!!!!

Rachel Notley Goes to Trump's Washington

Over the life of this blog, I have offered some unsolicited advice to Canada's federal (here and here) and provincial (here, here and here) leadership about their relationships in the United States. Washington is a tricky minefield for any foreign government to navigate, never mind a sub-federal government like Alberta. Last week, the Premier announced that she would soon be headed to Washington for the first time since Mr. Trump took office.

Not in Alberta Anymore

I have been thinking about what I might tell Ms. Notley if she happened to call seeking my advice (I'm not waiting by the phone). So, I returned to those same blog posts and tried to read them in light of Trump. I'm pleased to say that I think much of what I had to say still holds. Indeed, one of the great things about Canada-U.S. relations is that it's generally pretty boring. The finer points of administrative cooperation over border security or supply-chain management in the private sector might be a bag of snores for many, but the fact that the relationship is boring has always been an asset for Canada. It's a relationship that is so deep that it will always take a lot of work for the occupants at 24 Sussex or 1600 Pennsylvania to unravel it.

Yet, Trump is,.... well,... Trump. President Trump's demonstrable willingness to throw established convention under the bus has left just about everyone scrambling to make sense of the road we are on.

I wish Ms. Notley well in the Imperial Capital, but my guess is she'll leave Trump's Washington with the same lack of clarity on issues of importance to Alberta as when she arrived.

Fixing the NAFTA?

President Trump is proving to be someone that keeps his word. As a candidate, he promised to take a wrecking ball to broad swaths of American policy at home and abroad. In his first weeks as president, Trump appears to be making good on that promise.

In this post, I'd like to address one of these promises: Scrapping the NAFTA. Earlier this week, the Washington Post reported that Mexico had put its domestic stakeholder consultation wheels in motion in preparation for negotiations with the Trump Administration on a new post-NAFTA economic relationship.

I want to address three big points here: 1) the claim that the NAFTA is the "worst trade agreement ever concluded" and that foreigners have been taking advantage of the United States for decades; 2) what are the actual complaints about the NAFTA (no one is ever clear on this); and 3) what does "fixing the NAFTA" actually mean for President Trump?

Let the Great Theater Begin....

Tuesday was the first of many Senate confirmation hearings for nominees to the incoming Trump Administration. First up, Trump's nominee for Attorney General, Alabama Senator Jeff Sessions. Needless to say, the Senate is going to be very busy with the confirmation process for the next several weeks.

Team Trump is scrambling to fill more than 4000 jobs. Of those, more than 1200 need Senate confirmation-- an enormous task for Trump's transition team and for Senators trying to vet them. If you want to keep score, the Partnership for Public Service has set up a "confirmation tracker" that will help you follow the progress of nearly 700 of those appointees as they work their way through the confirmation process.


Rather than try and handicap any of the confirmation hearings, I thought I'd take a stab at suggesting you watch a lot of it as through it is Great Theater.