Wednesday 25th September 2014, Recent months have seen an acceleration in progress towards the ambitious Transatlantic Trade Partnership Agreement (TTIP) between the EU and USA. Since negotiations began on TTIP in 2013, it has been described as the “most ambitious trade agreement” ever. US – EU business accounts for 40% of all world trade. Removing trade barriers could generate up to €119 billion per year to the EU and €95 billion a year to the US.
TTIP will move to reduce, if not abolish completely, not only tariff barriers but also non-tariff barriers. These are already at a low level but will be liberalised further. The main focus of TTIP, however, will be the removal of non-tariff barriers. This will entail, in part, a drive to remove unnecessary regulations, increasing mutual recognition of regulatory standards to make regulatory regimes compatible.
Investor protection: A corporate bill of rights?
For many, however, TTIP evokes significant concerns. The principal ones surround the rights which TTIP will grant to foreign investors and the effect these will have on governments.
TTIP will indeed confer rights and protections on EU companies who make investments in the US and vice versa. Most importantly, signatory states will be obliged to treat its counterpart’s investors no less favourably than companies from other states.
It is also likely that the final version of TTIP will contain an obligation on contracting states to treat investors from the other state in a way which is “fair and equitable.” Fairness and equity are subjective concepts with considerable latitude. Similar provisions have spawned a raft of claims from investors under other free trade agreements. The EU moved to address this problem in the recently signed Canada EU Trade Agreement (CETA). CETA spells out that a breach of the fair and equitable treatment obligation can only arise in one of five prescribed situations, amongst these “fundamental breach of due process,” “manifest arbitrariness” or “targeted discrimination on manifestly wrong grounds.” Whilst preserving important investor protections, CETA also sets the threshold high enough to prevent frivolous claims based on subjective perceptions of unfair or inequitable conduct. It is this model which TTIP will likely follow.
ISDS: Striking the right balance?
Whilst by no means certain, it appears likely that TTIP will include some form of Investor State Dispute Settlement mechanism (ISDS). This allows investors to invoke a dispute resolution mechanism against national governments before a panel of arbitrators.
Although many international investment treaties already make provision for ISDS, this is highly controversial. Investors have used them to commence high-value claims against governments for introducing regulation which has harmed the interests of foreign investors. Germany has been sued by the Swedish-based energy company Vattenfall for €3.7 billion under an ISDS provision in the International Energy Charter, following Germany’s decision to phase out nuclear power.
Further suspicions arise as most international arbitrators are drawn from the ranks of corporate lawyers, considered by many to favour corporations over governments. There are also concerns that ISDS lacks transparency (it is conducted under confidentiality), creating a heightened risk of inconsistent decisions.
The EU has sought to strike a sensible balance. As stated above, it has narrowed the scope of the duty to behave “fairly and equitably,” which will reduce the number of disputes. The EU is also pushing for tighter controls over arbitrators’ conflicts of interests, a decisions appeal process and greater transparency and consistency in decision making.
These checks and controls are necessary. In the context of a free trade agreement, ISDS is too. Many national courts refuse to enforce rights under investment treaties and are therefore inappropriate forums. Within the EU, the speed of national judicial systems is highly variable. From the perspective of business, the prospect of having to fight cases in some of these jurisdictions would have a chilling effect on investment.
What effect will TTIP and ISDS have on the NHS and on fracking policy?
Two frequently raised concerns regarding TTIP are that it will lead to forced privatisation of the National Health Service and lift bans on hydraulic fracturing practices (“fracking”).
In the case of the NHS, there are mistaken concerns that TTIP will lead to the wholesale privatisation of the NHS. The likely effect of TTIP is that the NHS will need to avoid discriminatory or unfair treatment of US-based companies when purchasing services or goods (such as drugs) or when considering the termination of contracts held by US suppliers. There will be no forced privatisation but, where governments do seek the participation of private enterprises within the NHS, they will need to guarantee equality of opportunity for US businesses. New health policies will need to be even-handed. For example, NHS commissioners would be at risk if they banned a US drug on health grounds while buying medicines of comparable safety from EU based producers.
The concerns over fracking and TTIP have been accentuated by a €250 million arbitration commenced against the Canadian government after it introduced a moratorium on fracking. However, this was pursued under the North American Free Trade Agreement, an example which TTIP need not follow. TTIP is, however, likely to allow claims against governments which pursue protectionist licensing policies in favour of national industry. If new fracking bans are brought into force by EU member states, they will need to apply equally to both EU- and US-based operators. As a matter of general principle though, the EU has been clear that where national or regional fracking bans exist in the EU, they pursue a legitimate public purpose and ought not be overridden by TTIP.
Conclusion: good for EU, good for you?
There is a long way to go before TTIP becomes law, but the benefits could be substantial and provide a significant economic boon to all parties. The elimination of unnecessary obstacles to trade will not only assist big corporations, but also small ones. Moreover, these benefits need not come at the cost of democracy or regulation. Investors will not be compensated with taxpayers’ money just because of a fall in profits due to a change in the law.
If, however, the benefits of a free trade area are to be realised, not least in the form of multi-billion dollar transatlantic investment and job creation, these must be underpinned by a rapid and effective system of legal redress to protect investments when these are threatened by unfair or discriminatory regulatory intervention. ISDS provides that system. After all, investor confidence and legal certainty must go hand in hand.
From 1 November 2014, Speechly Bircham merged with Charles Russell to become Charles Russell Speechlys LLP. Charles Russell Speechlys is a top 25 UK law firm headquartered in London with offices in the UK, Europe and the Middle East. The firm provides transactional, regulatory, advisory and litigation and dispute resolution services to major corporates, privately owned businesses and individuals.
Paul Henty is a Partner in the firm’s Trade and Compliance team based in London. Paul specialises in all aspects of UK and EU Competition Law and EU trade regulation.