Negotiating the Transatlantic Trade and Investment Partnership Agreement (TTIP) between the US and the EU was never going to be easy – not with so many countries, industries, workers, professionals and parochial interests looking to guard their own interests. Fierce public opposition to the inclusion of an investor-state dispute settlement mechanism within the treaty has made the process even more complicated. 

Feelings about the matter are so strong that when, in January 2015, the European Commission polled the public on the issue of investor protection, it received 150,000 responses online. The UN has also held meetings on the topic.

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Weakest links

Bilateral investment treaties (BITs), such as TTIP, are intended to protect the rights of private investors when they invest in another country. They require that foreign investors receive fair and equitable treatment in a host state, and are protected from expropriation. Most contain investor-state dispute settlement (ISDS) provisions, allowing for independent arbitration tribunals made up of three independent arbitrators to resolve disputes. In 2013, at least 57 ISDS claims were initiated, mainly by investors from developed countries.

The fact that the arbitration takes place outside of the court system, and that the awards against governments can be quite high, is one reason that ISDS has come under fire, says Karl P Sauvant, the former director of the UN Conference on Trade and Development (Unctad) investment division.

While there could be a case for arbitration relating to FDI in countries with weak judicial systems, Germany is among those that argue that it has no place in countries with resilient legal systems and independent judiciaries.

Another objection to BITs is that the strong protection they offer foreign investors “limits the policy space of host countries in terms of policies they want to pursue”, says Mr Sauvant. “Any legislation, environmental or social, that limits the profitability of firms can be considered to be against the legitimate expectations of the foreign investor coming into a country.”

Mr Sauvant uses the example of Australia, whose government, hoping to discourage smoking, passed a law in 2011 requiring all tobacco products to be sold in plain packaging. Cigarette maker Philip Morris Asia promptly invoked BIT protections to claim that Australia was effectively “expropriating” its investment and treating the company unfairly. Arbitration is still ongoing, but Australia later became the first country to refuse to include ISDS provisions in future BITs.

Once bitten...

A wave of countries have since followed suit. South Africa has made a policy decision to terminate the majority of its BITs, though existing investors will continue to be protected under them for up to 15 years, as well as by the protocols of the inter-governmental organisation, Southern African Development Community. Meanwhile, Indonesia has announced that it will terminate its BIT with the Netherlands, with existing investors protected for a period of 15 years. The south-east Asian country has plans to eventually terminate all of its 67 bilateral investment treaties.

Bolivia, Ecuador and Venezuela have withdrawn from the International Centre for the Settlement of Investment Disputes, the dominant international convention governing ISDS. Despite this, the countries would still be subject to the BITs in force, according to judge Charles N Brower, a US judge who has become a prominent figure in the field of arbitration.

“Arbitration is the critical part of the BIT,” he says. “If you don’t have the right to commence an arbitration, you have to convince the US state department to go to bat for you against the host state, and it is not guaranteed the government will espouse your claim.”

Meanwhile, Unctad data shows a continuing increase in BITs. But whether countries enter them or withdraw from them, experts almost unanimously agree that FDI will continue to flow if there are profits to be made.