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Diego Zuluaga Laguna

Diego Zuluaga Laguna is External Outreach Officer at the Institute of Economic Affairs.

A report from the House of Commons Environmental Audit Committee released yesterday called for stricter environmental protections to be included in the free-trade deal currently being negotiated by the EU and the US.

In particular, MPs expressed concerns about the potential for a “chilling effect” on regulation by governments if a chapter on investment protection is included in the Transatlantic Trade and Investment Partnership, or TTIP.

The parliamentary report comes in the wake of a heated debate in recent months over the need for an investor-state dispute settlement, or ISDS, clause in TTIP. Much has been claimed about this clause, but little of it was accurate.

ISDS is strictly about compensation, and it cannot result in the blocking or reversal of regulatory measures on the part of governments. It is intended as a way for foreign investors to demand compensation before an international tribunal for state policy that is harmful to their investments.

Most ISDS cases result in either a ruling in favour of the state, or in a settlement between the parties. There is no evidence that arbitration courts have a pro-investor bias.

Opponents of ISDS also highlight the alleged public opposition across Europe to its inclusion in the free-trade deal. They cite the results of the 2014 European Commission consultation on the subject, in which 97 per cent of the 150,000 submissions expressed opposition to a mechanism for investor-state dispute settlement in TTIP.

Yet it is worth looking at the submissions a bit more closely: Nearly half were submitted through just eight NGOs and contained “identical or very similar” answers, according to the Commission. Another 50,000 were submitted via one NGO, replying with “no comment – I don’t think ISDS should be part of TTIP” to all but the last question.

Fewer than one per cent of respondents had actually made an investment in the United States.

In other words, a handful of activist groups – many of whom, ironically, receive a large proportion of their funding from the European Commission – co-opted the consultation, drowning out the voices of those actually affected by the presence or absence of ISDS in TTIP.

These NGOs should, of course, be free to express their opinion about ISDS and free trade in general – but they should not claim that European public opinion is on their side.

How about the claim that having ISDS as part of TTIP could have a “chilling effect” on regulation?

If this were so, one would expect those countries which are signed up to a large number of these types of agreements to have lower levels of regulation than other countries (all other things being equal).

Furthermore, governments which have previously been challenged through the ISDS mechanism would be expected to be less likely to intervene in the future.

Looking at the figures, the evidence seems to point in the opposite direction: about half of the 2,800 bilateral investment treaties (BITs) worldwide, which almost always contain ISDS provisions, are between EU countries and developing countries. This has not prevented individual Member States, or indeed the EU, from passing the strictest environmental standards in the world over the past few decades.

It is worth noting that Germany and the UK, which are party to 147 and 94 BITs respectively, have been at the forefront of environmental regulation, with the UK routinely gold-plating EU directives. It is thus hard to argue that ISDS curbs governments’ regulatory appetite.

How about those states which have been challenged by investors before international arbitrators?

According to the United Nations Conference on Trade and Development, as of 2013 Argentina and Venezuela were the top respondent states in ISDS disputes. And recent headlines by no means suggest that this has led to a U-turn in their propensity to intervene in domestic markets (with disastrous consequences for their economies, one might add).

The typical home state (of investors suing) is a developed, usually high-regulation jurisdiction such as the Netherlands or Germany, while the typical respondent state is a developing country lacking in rule of law, like Venezuela or Egypt.

For better or worse, ISDS has little impact on a government’s tendency to regulate, which is shaped by domestic politics, public opinion and interest groups. It certainly has no bearing on a state’s right to regulate, which remains squarely in the hands of public authorities.

We may or may not end up with an ISDS clause in the final TTIP agreement, but so long as the negotiations are taking place concerns about investment protection should be based on an accurate understanding of what ISDS is, and whether it has had any measurable effect on states’ regulatory activity (it has not).

For too long the public’s perception of ISDS, and by extension of the EU-US free-trade agreement, has been driven by the outrageous claims of a small number of environmental, labour and public-health interest groups whose stance on international trade does not reflect the general population’s views (as surveys show).

These NGOs have effectively used ISDS to present TTIP as a back-room deal between corporate interests on both sides of the Atlantic. Yet if they have their way, effectively bringing down the TTIP negotiations, it would be a giant missed opportunity for both the European and the American economies, failing to remove long-standing barriers to the free exchange of goods and services.

The “chilling effect” would then be on negotiations for future international free-trade deals, given the clout – economic and political – of the US and the EU.

It is high time for the EU and the UK government to stand up for trade liberalisation and against protectionism. Without their strong backing, the comprehensive TTIP deal that both parties seek is unlikely to come true.

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