Comment and Analysis

European Union does a double take on investment treaties

Xavier Carim

Is the EU's pause in investment treaty negotiations with the US a case of double standards or a shift in protection policy, asks Xavier Carim.

EU chief negotiator Ignacio Garcia Bercero (left) and US chief negotiator Dan Mullaney during discussions in late 2013. (Georges Gobet)

Many South Africans saw the irony, to say the least, in the January 21 announcement by the European Commission (EC) of its intention to pause investment treaty negotiations with the United States under the Transatlantic Trade and Investment (TTIP) Partnership Agreement to address what it termed "unprecedented public interest" in the European Union (EU) on the matter of investment treaties.

The acknowledgement of these legitimate concerns follows the EC's stinging rebuke to the South African government just six months earlier, in July last year. It protested against our efforts to address the very same concerns. Is this a case of double standards, or does it mark a real shift for EC investment protection policy, bringing it closer to South Africa's thinking on the matter?

Whatever the outcome of the wide consultations that will now unfold in the EU, the issues are genuine and arise from growing awareness of the deep malaise in the current international investment protection regime, with respect to both the legal provisions contained in the treaties and the current arbitration system designed for their enforcement.

The EC's January 21 announcement identifies many of the issues. In reaffirming the right of governments to regulate in the public interest, the EC is now acknowledging that the current regime has not struck the correct balance between that sovereign right and the rights of investors to protection.

The call to "close loopholes" in treaties is a recognition that unscrupulous companies have exploited this flawed system for unfair financial gain at the expense of taxpayers.

The proposal that there be a code of conduct for arbitrators is particularly telling because it confirms the lack of fairness, transparency and even-handedness in the system as it stands.

Only a major overhaul will extinguish growing calls for an outright rejection of the current regime.

These issues do, indeed, need to be tackled but other questions also need to be answered. Foremost is the question of a compelling rationale for an investment treaty under the TTIP.

There is no evidence that such an agreement will have any impact on already significant bilateral investment flows between the US and the EU. In insisting on retaining provisions that allow for recourse to international arbitration, the EC is inadvertently suggesting that existing investment protection law in the EU (or the US) is inadequate.

But if the motivation is to set a new precedent and new standards of protection for treaties with other governments, we will see a deepening of global divisions on investment treaty policy that will confound the search for a consistent and inclusive arrangement in the future.

In clarifying a more progressive investment policy approach, the EC will also need to address, in a more decisive manner than it has to date, the growing inconsistency between its new thinking and the continued existence of the old-style, varied and risk-prone bilateral investment treaties maintained by its individual member states.

The widening differences in standards of investor protection in the EU that this creates results in greater uncertainty and heightened risks both for governments and for foreign investors in the EU.

Fortunately, South Africa has shown a way out by moving to terminate those outdated treaties and by relying on robust national legal frameworks for investor protection. An inclusive multilateral dialogue – not negotiations – on all these matters is increasingly urgent.

Xavier Carim is the deputy director general for international trade and economic development in the department of trade and industry.

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