Europe’s attempt to create a new court system for resolving investment disputes promises to be one of the most grueling policy battles of the year.
While President Donald Trump is rapidly surrendering U.S. leadership in global trade, European Commissioner for Trade Cecilia Malmström wants to make Brussels the new pacesetter in the international order.
If she can set up this new multilateral trade court, Malmström will be able to claim that the EU led the way in resolving a toxic problem that has fanned public opposition to trade deals worldwide. But she’s going to have to overcome U.S. opposition to make it happen.
The bogeyman she hopes to slay with her new framework is called investor-state dispute settlement, or ISDS.
For companies, ISDS is a vital plank of trade deals as it ensures that they can seek redress from governments over, for example, asset seizures. But green groups and other campaigners say opaque bilateral ISDS accords provide unscrupulous multinationals with a legal platform to undermine national courts, weakening environmental standards and workers’ rights.
Public opposition to ISDS was so intense over the last two years, particularly in Germany, that it effectively killed off a landmark EU trade deal with the U.S. and almost torpedoed an accord between Brussels and Ottawa.
Taking on Washington’s mantle will not be easy, however. Malmström faces a tough fight in her keynote plan to create a more open and publicly accountable framework for foreign investors to sue governments. Meetings in New York in April and July will determine whether she can convince 60 big trading nations to back this new trade court in the face of robust U.S. resistance.
The Swedish Commissioner has won international kudos for her attempts to replace ISDS with a more transparent model in the EU’s own deals with Canada, Singapore and Vietnam. Her Investment Court System has independently selected judges, open proceedings and an appeal mechanism.
Now she wants to establish the same kind of system at a global level.
Malmström says the EU is reaching out “to as many countries as possible to see if we can set up a multilateral court.”
Colin Brown, deputy head of unit in Brussels for dispute settlement, sought to play down expectations of a quick breakthrough, however. He said EU countries would probably only take a final position “somewhere” in 2018.
“We would like it done as soon as possible, but there’s no pressure that we have to have it done by such-and-such a date,” he said.
Recruiting the big players
Brussels secured an initial victory in July last year when it convinced the United Nations Commission on International Trade Law (UNCITRAL) to start discussions on reforms.
The big adversary is Washington. “We would strongly oppose any work [on multilateral reforms] going forward,” a U.S. official said at the July meeting, lambasting Malmström’s efforts as “neither necessary, desirable nor feasible.” A spokesperson for the United States trade representative declined to comment further.
Isabelle Van Damme, a lawyer with Van Bael & Bellis, agreed that the EU’s court plans were still in their infancy.
“Many countries raise concerns whether this court is feasible,” she said. Talks would take a long time and need to resolve many open questions, she added: “How will the awards be enforced? How should the judges be selected and the court be financed?”
Brown said both critical points were still undecided.
Nevertheless, the EU is winning support: Following Canada and Vietnam, Singapore — a regional hub for arbitration in Southeast Asia — also came out in favor of the mutilateral court in recent weeks. Moreover, Japan has shifted from sharing the U.S.’ outright opposition to taking a much more open stance.
Brussels wants to seize the momentum at UNCITRAL’s conference in July, hoping to win a mandate to establish the court. But if it fails, momentum could ebb.
“It is important that in July a decision is taken,” said Nele Eichhorn, a member of Malmström’s Cabinet, during a recent panel debate. Two Commission officials, speaking on condition of anonymity, raised hopes that fresh support from countries like Singapore could help convert other trade partners, like Australia, Argentina and Brazil.
“Singapore can become very important, Australia is also key influencer in UNCITRAL. You need the backing of such big players to move forward,” said Loukas Mistelis, a professor at Queen Mary University of London, who has been attending UNCITRAL meetings for over 15 years.
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Danger of dilution
The EU has ways to stop the U.S. from derailing its ambitious plan: Unlike in the WTO, where a single country can block reform efforts, UNCITRAL will allow talk on the multilateral court to push ahead even if some countries are opposed.
“Countries can decide to what extent they want to participate in the negotiations and whether they want to support the final outcome,” said a Commission official, adding that “they can also opt in at a later moment.”
The official stressed that the multilateral investment court was not an attempt to extend legal rights for foreign investors: “It only defines the procedures for a dispute” such as the independent selection of judges, he said.
Whether, and under what conditions, an investor can lodge legal action against a government remains defined in the bilateral investment treaties between countries, of which more than 3,200 exist worldwide. The court was merely “upgrading” those treaties, he explained.
Still, some civil society organizations remain skeptical: “If we go down that path of reforming investment protection on the global level, this has to go much further,” said Fabian Flues from Friends of the Earth Europe. He complained that the multilateral court did not change a fundamental problem: While foreign investors get a special tribunal to launch legal actions, most treaties don’t allow workers or NGOs to appeal to the same court if those investors violate labor or environmental rights.
Meanwhile, as the EU gets ready for the July showdown, trade lawyer and professor Mistelis warned of another challenge ahead.
“Brussels may have clear ideas [about] what this court should look like, but taking other countries on board requires making compromises,” he said, adding: “Be prepared for others trying to water it down.”
This article is part of the spring policy primer.