A U.S.-EU deal may simultaneously reverse important trends governing international investment. Most bilateral trade and investment treaties include investor-state dispute clauses (ISDs). Unlike traditional dispute settlement mechanisms, ISDs allow firms to sue states directly, usually within the context of an international arbitral board such as the International Centre for the Settlement of Investment Disputes (ICSID). ISDs are controversial primarily because there is a widespread fear that multinational corporations with deep pockets will engage in litigious wars of attrition. Furthermore, when investors can sue states directly, governments no longer have access to diplomatic tools to smooth over disputes. And, to the extent that the long-term viability of open goods and capital markets requires some flexibility to deal with domestic resistance, the removal of states as arbiters—of which investment disputes are worth pursuing and which are better left ignored—could have lasting negative implications for the political viability of economic openness.
While ISD clauses are widespread, they usually exist within the context of treaties between states characterized by economic asymmetries. For instance, of the more than 2000 bilateral investment treaties (BITs) worldwide, none exist between two advanced industrial countries. The United States generally embraces investor-state dispute clauses; both their model free-trade agreement (FTA) and BIT contain such language. However, it is far from certain that a US-EU treaty would include an ISD clause. Generally, advanced industrial countries have shown they are more interested in promoting legal regimes that protect "their" multinationals while they are less willing to cede jurisdiction over investment disputes in which they might be defendants. For instance, Australia has decided to drop ISD clauses from its BITs and FTAs after it was sued by Philip Morris, who used an Australia-Hong Kong BIT to establish ICSID jurisdiction. In an economic version of mutual deterrence, the economic strength of the US and EU provides incentives for both to avoid these clauses.
There is growing dissatisfaction with the costs of ISDs: India and South Africa recently announced broad reviews of such clauses. Thus, it is unlikely such clauses could persist if the U.S. and EU decide to not subject themselves to such extraterritorial juridical measures. A lasting legacy of a U.S.-EU agreement, then, could be the dismantling of foreign investor-led suits against states. Such a movement away from ISDs may actually prove beneficial to long run economic integration, since ISDs tend to create duplicated layers of juridical authority that generate confusion and make it harder for governments to intercede in investor-state disputes in ways that support for deep economic integration. Further, there is some evidence that states with ISDs tend not to pursue meaningful domestic legal reforms. If ISDs contribute to the persistence of partial economic reforms that ultimately impede broad-based growth, then removing them may spur economic development.
In sum, a U.S.-EU FTA may simultaneously reverse normal aspects of domestic trade politics, multilateral trade negotiations, and international investment law. Because of the centrality of the United States and EU in the international economic system, a treaty between the two will set the agenda for future bi- and multilateral economic treaties, and have significant ramifications for the global economy. Unlike the situation in previous periods of economic distress, the politics for getting a new trade deal appear to be favorable.
Sarah Bauerle Danzman is a doctoral candidate in the Department of Political Science at the University of North Carolina at Chapel Hill.
W. Kindred Winecoff is doctoral candidate in the Department of Political Science at the University of North Carolina at Chapel Hill, and will join the faculty of Indiana University at Bloomington at the rank of assistant professor in August 2013.
Image: Wikimedia Commons/Danny Cornelissen.