Columbia FDI Perspectives
Perspectives on topical foreign direct investment issues
No. 132 October 13, 2014
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Adrian P. Torres ([log in to unmask])
Germany, the Transatlantic Trade and Investment Partnership and investment-dispute settlement: Observations on a paradox
Ralph Alexander Lorz*
The Transatlantic Trade and Investment Partnership (TTIP) currently being negotiated between the European Union (EU) and the United States (US) could become the most comprehensive international agreement on free trade and investment protection. The negotiations have mostly been met with the usual criticism that accompanies attempts to expand free trade, despite overwhelming evidence that free trade fosters global economic development.
But the debate, especially in Germany, has taken a surprising and critical turn, focusing on the investor-state dispute-settlement (ISDS) provisions that are envisaged to give the TTIP procedural teeth. Various non-governmental organizations (NGOs) argue that TTIP would establish an extrajudicial mechanism for settling disputes that would subject Germany to the caprice of the US and its multinational enterprises, while undermining its political sovereignty.[i] This criticism has had an impact on the political scene. For example, the Federal Ministry of Justice has voiced grave concerns about the inclusion of ISDS provisions in TTIP, and the Federal Council has recently followed suit, pointing to the high risks allegedly associated with ISDS.[ii] Even agreements that seemed to be uncontroversial are called into question. For example, the EU-Canada free trade agreement (FTA), the wording of which was basically finalized in 2013 and which contains a progressive ISDS system designed to address critical issues discussed in the recent debate,[iii] is now the subject of reservations raised by Germany (a move that could jeopardize the agreement if Germany insists vis-à-vis the Commission that its final ratification requires the assent of the national parliaments of the EU member states[iv] - an issue the European Court of Justice would eventually have to decide).
Given Germany’s contribution to the development of ISDS, the country’s current stance belies its longstanding attitude toward ISDS. It was Germany that spearheaded bilateral investment treaties that form the basis of ISDS; it is Germany that has concluded more of these agreements than any other country—and with good reason: as an industrialized nation dependent on exports and, therefore, on the existence of free and legally-protected trade and investment, German investors, and thus Germany itself, would benefit most from the inclusion of ISDS provisions in the TTIP. Other EU countries would similarly benefit, as European claimants accounted for more than half of the investment arbitration cases registered between 2008-2012. The Loewen case[v] demonstrates that reliance on the US legal system alone is not a dependable safeguard for foreign investors there. On the other hand, the concern of a “regulatory chill” that would endanger European environmental and health protection standards seems exaggerated: notwithstanding the difficulty in assessing the impact of settled cases, only 31% of the almost 300 cases concluded so far have yielded an award in favor of the investor, with only a tiny fraction of these cases concerning legislative measures, as opposed to individual decisions by the executive.
So what explains Germany’s about-face on ISDS? The easiest explanation is the change in government. Whereas the negotiations on TTIP were initiated by the old coalition of Christian Democrats and Liberals, Chancellor Merkel now governs with the Social Democrats; practically all the voices cited above come from Social Democrats, who control the Ministry of Justice, as well as the Ministry for the Economy and the Federal Council. But the roots of this change go much deeper, as the Social Democrats themselves have reversed their stance on FTA’s since they last held the Chancellorship ten years ago. Accordingly, Germany’s current stance appears to be infused by a contentious mix of anti-American sentiment, most recently fueled by the NSA affair;[vi] a general aversion against globalization and international capitalism, also as a result of public perception of the US; and the confident, albeit misguided, feeling that Germany is sufficiently well-off so as not to need an agreement like TTIP. In sum, these sentiments foster indifference toward strengthening international economic relationships in general and with the US in particular -- a hazard that must be addressed seriously. Otherwise, the further build-up of a consistent international investment law regime, and perhaps the liberalization of world trade -- for which TTIP is a cornerstone -- could grind to a halt. If it becomes necessary for negotiators to abandon ISDS to save the material contents of TTIP, this would only produce a second-best solution, if any at all.
* Ralph Alexander Lorz, LL.M. (Harvard), Attorney-at-Law (New York), is Professor of Law at Heinrich Heine University in Duesseldorf (Germany); he is currently serving as Secretary of Public Education in the State Government of Hesse (Germany). The author is grateful to Andrea Bjorklund, Marc Bungenberg and Federico Ortino for their helpful peer reviews. The views expressed by the author of this Perspective are strictly personal and do not necessarily reflect the opinions of Columbia University or its partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
[v] Loewen Group v. USA, ICSID Case No. ARB(AF)/98/3, award of June 26, 2003.
[vi] The latest survey by the Allensbach Institute shows a so-called “cross pressure” of conflicting loyalties in many Germans when assessing the US. The US appears more than ever like the big brother, triggering aversions by his rudeness but representing the only reliable force when bad boys surface along the way. See “Der Groll ueber den grossen Bruder”, Frankfurter Allgemeine Zeitung, September 17, 2014, p. 8.
The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Ralph Alexander Lorz, ‘Germany, the Transatlantic Trade and Investment Partnership and investment-dispute settlement: Observations on a paradox,’ Columbia FDI Perspectives, No. 132, October 13, 2014. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [log in to unmask].
For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Adrian Torres, [log in to unmask] or [log in to unmask].
Most recent Columbia FDI Perspectives
- No. 131, Kenneth P. Thomas, “How to deal with the growing incentives competition,” September 29, 2014.
- No. 130, Catherine Kessedjian, “Good governance of third party funding,” September 15, 2014.
- No. 129, Armand de Mestral, “The Canada-China BIT 2012: Perspectives and implications,” September 2, 2014.
All previous FDI Perspectives are available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/.
Other relevant CCSI news and announcements:
- On December 5, 2014, CCSI is offering a one day workshop with CLE credit on investment arbitration and human rights. This workshop will examine which human rights issues may be implicated in investment disputes, as well as how and to what extent the issues have been handled by parties and arbitrators. Philippe Sands (Barrister in the Matrix Chambers, Professor of International Law at University College London; and frequent arbitrator in investor-State disputes) will deliver the Keynote.
- On November 12-13, 2014, CCSI will host its Ninth Annual Columbia International Investment Conference, entitled “Raising the Bar: Home Country Efforts to Regulate Foreign Investment for Sustainable Development” at Columbia University. More information about the Conference, including the current program, information about logistics, and the registration link, is available at: http://ccsi.columbia.edu/2014/01/01/raising-the-bar-home-country-efforts-to-regulate-foreign-investment-for-sustainable-development/. Registration for the conference is free, but required.
- Call for Papers: The Yearbook on International Investment Law and Policy is currently accepting submissions for the 2014/2015 edition. Papers will be accepted on a rolling basis up to the deadline of October 15, 2014. For more information, please download our complete call for papers. Please also adhere to the citation guidelines posted here.
Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
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