Investor-State Dispute Settlement: Update

An earlier post outlined the controversy surrounding investor-state dispute settlement (ISDS) on both sides of the Atlantic. It also speculated on whether the issue would be taken up in a renegotiation of the North American Free Trade Agreement (NAFTA). This post looks at the current positions of the NAFTA parties on this issue, as well as its treatment in the European Union.

In the renegotiations of NAFTA, launched in August, all three parties have indicated an interest in reforming or improving NAFTA’s existing investor-state dispute system. Canada wants to reform the ISDS process, and is reportedly advocating the inclusion in NAFTA of an investment court system, like the one in its trade agreement with the EU – the Comprehensive Economic and Trade Agreement (CETA). Mexico included the modernization of all NAFTA dispute resolution mechanisms, including investor-state, in its objectives, with the aim of making them more nimble, transparent and effective.

The United States wants to reform the investor-state system, but has not indicated how it would do so. According to Inside U.S. Trade, the Administration is considering an “opt-in” approach, which would allow each country to decide whether to use the ISDS mechanism. But, it has not provided details on how such an approach would work, or whether the U.S. would “opt-in”. The U.S. business community strongly supports ISDS, and has indicated that without an acceptable system in a renegotiated NAFTA, it might not be able to support the final agreement.

The EU is still working its way through the ISDS issue, but it has made clear that it will no longer include the traditional ISDS mechanism in its trade agreements. In its place, the EU incorporated an Investment Court System in its trade agreements with Canada and Vietnam. However, it has yet to persuade Japan to include the investment court in the trade agreement, on which they reached a political deal in July.

In a May 2017 ruling, the European Court of Justice determined that the EU must share competence with the member states relating to investor-state dispute resolution. That means that any trade agreement with such provisions must be approved by the parliaments of all 28 member states, as well as several regional parliaments. Such approval cannot be taken for granted, and at a minimum can significantly delay implementation of a trade agreement.

Since CETA includes investor-state provisions, and the EU promised to treat it as a “mixed agreement”, sharing competence with the member states, the EU and Canada cannot fully implement it until all parliaments ratify it. As a consequence, its implementation, which is set for September 21, will be only on a provisional basis, without the investment provisions. It could be years before it is fully implemented, or its implementation could be torpedoed by a single parliament’s veto.

As a consequence of the challenges of obtaining ratifications of trade agreements, the EU is considering jettisoning ISDS provisions from future trade agreements. The first test of that approach is expected soon in its negotiating mandates for trade agreements with Australia and New Zealand. If ISDS is left out of trade agreements, the EU might be able to pursue separate bilateral investment treaties to handle investor-state disputes.

The EU may leave investor-state dispute settlement out of future trade agreements in order to “fast-track” them and obviate the need for approval by member state parliaments. But,  that may not be an option for the NAFTA negotiations, given industry’s insistence on the inclusion of an ISDS process.

One of the questions in NAFTA will be whether Mexico and the U.S. would have any interest in the EU’s Investment Court System, which the EU hopes to develop into a multilateral investment court. The Obama Administration refused to accept the court system in the negotiations of the Transatlantic Trade and Investment Partnership. It is doubtful whether the Trump Administration would consider such a multilateral court, given its preference for bilateral solutions. The ISDS issues are not likely to be resolved soon.

Jean Heilman Grier

September 13, 2017

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