Clash of Ideologies – Is Transatlantic Trade the Right Battlefield? – Part I

I

WHAT IS INDEED TTIP?

1. Is it one of the most important efforts of our time to promote trade, growth, prosperity and employment by dismantling trade barriers in order to benefit more from the public good of international trade? Or is it a new, powerful weapon of globalists to make the world as flat as it can be, using and abusing trade liberalisation for the domination of the world by the biggest and the richest for their own benefit and to the detriment of the many, the small and the poor?

2. Is it a ground-breaking new instrument aiming to renew the liberalisation and regulation of international trade in a situation where progress in the multilateral framework seems not only to slow down, but to have stalled? Or is it the ultimate blow to a tolerably well-functioning multilateral world trading system by creating a preferential trade area for countries representing almost 50% of global output by discriminating against the many and the weak outside of this framework?

3. Is it an inventive experiment to establish regulatory cooperation and convergence and to reduce “behind the border” regulatory barriers not only prior to the conclusion of the treaty, but also in the future by establishing institutional mechanisms and processes to promote regulatory harmonisation and convergence between the parties by an in-built agenda (“living agreement”)? Or is it the final blow against state sovereignty, democratic legitimacy and accountability by brutally reducing policy space and regulatory powers of the parties and by interfering with the legislative and regulatory processes of sovereign nations not only as a result of negotiations, but because of the “in- built agenda” even after the treaty enters in force?

4. Is it after all a laboratory where the new principles and norms of global trade are being moulded and shaped, upon which the main “ordering norms” of an emerging new “world order” will be based? Or is it a vast transnational corporate conspiracy directed by hidden powers or a Trojan horse of US corporations to define the ordering norms of the new world order, to favour the big against the small, the producers against the consumers and interests against values?

5. Is it a necessary and justified construction to mutually promote foreign investment in both parties by significantly increasing the level of protection and legal guarantees investors are now enjoying and also by establishing either an old (arbitration) or a new (investment court) dispute settlement mechanism for disputes between the investors and the host state? Or is it a treaty which by including an investment protection chapter generates additional challenges and debates, further enhances undue privileges for foreign investors, makes discrimination against domestic investors worse and violates sovereign rights to regulate?

6. Is it a unique opportunity to reform and improve the overall system of investment law, including dispute settlement, and to lay down the groundwork for a future multilateral international investment protection law and dispute settlement forum? Or is it a treaty where rules on investment disputes settlement are redundant and harmful anyway, whether they refer disputes to arbitration (ICSID) or to a permanent international investment court (ICS) as proposed by the European Commission, a zombie ISDS¹ (Investor–State Dispute Settlement) as termed by some?

7. Is it a historic opportunity to include the protection of basic values and the interests of all in the field of health, environment, public safety and morals, finances, cultural diversity and thereby to create an inseparable link between trade and other public goods to be protected and risks to be averted? Or is it an agreement where possible references to values, to protection of health, environment, consumers, small business, public safety and morals are hollow, hypocritical and worthless and behind the lip-service to values the brutal interests of global capital as represented by transnational corporations will prevail?

8. Lastly, is it a means to serve the objective of reinforcing the historically proven transatlantic bond in a rapidly changing, turbulent, complex and unpredictable world full of regional and global risks and challenges? Or is it a conspiracy by the West against the emerging powers, indeed against the rest of the world to maintain its privileged position to deepen inequality resulting therefrom and to mould the future world order in line with its basic economic and geopolitical interests? Is it also an American conspiracy to reinforce economic and geopolitical domination of the United States over a weakening Europe in crisis?

***

As it is seen from the above TTIP has become the battlefield not only of economic philosophies and national interests, but also of political ideologies. It is now the preferred terrain of clashes between advocates and adversaries of globalisation (whatever it means for them) and also the representatives of the most diverse and opposing interests. Dividing lines are deepening both within and between countries and societies, interest groups, NGOs of all kind. Political parties cannot afford not to get involved in the fight and are tempted to instrumentalise the public concerns, aversions, fears and to maximise the eventual political benefits.

What should be the role of legal scholarship in this heated debate, in this “clash of ideologies”?

First, to inform, to explain, to communicate, to clarify and thereby to improve the knowledge on the subject, and to correct the views and voices that are not always “troubled by the mass of factual inaccuracies”.²

Second, “calmer les esprits”, try to calm down “les excités”, to take an objective, reasonable and balanced approach, distancing itself as much as possible from ideological and political motives and sentiments.

This does not mean that compromises always have to be searched for or can be reached. Diametrically opposing positions in most cases cannot simply be reconciled. But it is always possible to establish reliable data to make thorough empirical research, as well as impact assessments. It is also possible to make the whole exercise as transparent, as open, as emotion-free and unbiased as possible.

But sometimes in nature even the “absolutely” opposing theories might be reconciled with one another. As it is the case in the anecdote, when a dispute between two men in the community has to be settled by the wise rabbi. The rabbi listens carefully to the first man’s position and then says: “You are right.” Having heard the second man’s arguments the rabbi says: “You are also right.” The rabbi’s assistant is shocked and asks: “Rabbi, how can you say that both men are right when they have completely opposing positions?” The rabbi reflects, looks at the assistant and says: “And you are right too.”³

II

Law itself is both a device and a subject of these controversies. It reflects and represents the diverse economic and political theories and positions, but at the same time it is also affected by these positions. The legal techniques are themselves obliged to accommodate and to adapt to the changing economic, political, social, cultural and institutional environment. This is particularly true for international trade law becoming more and more global where boundaries of various types are becoming blurred. Global trade law can only be developed in an interdisciplinary manner building on the contribution of economics, geopolitics and international relations. At the same time the traditional dividing line between public and private is fading away both in technical and in sociological sense as private stakeholders, civil society, corporations play an increasing role in the decision-making process.

A new slogan appeared, “The world is flat”,⁴ reflecting these developments but not fully taking into account the complexities, uncertainties and the unpredictable and incidental nature of our present world. The world may be flat from a distance. But if you get closer, you will see the peaks and valleys and even the cliffs. Game theory teaches that because of the interplay of multiple actors outcomes are highly uncertain. Black (and grey) swans swim in (sometimes in the forms of unforeseen political explosions) and the course of developments takes an entirely different turn. Complexity, unpredictability and uncertainty are aggravated by the acceleration of processes of causality to the effect that what used to be called the “butterfly effect” is now called the “butterfly defect”.⁵ Globalisation is more complex and diverse than it looks like as it is intertwined with the elements of fragmentation, regionalisation and localisation, especially – but not exclusively – in the field of culture, governance and rule-making.⁶

This is not the most beneficial environment for the rule-maker in particular in international trade law. All the more so that the law, legal rules and regulations also undergo deep and wide-ranging changes in substance, methods, procedure and geometric structure. We now have a multilevel (global, regional, national, sub-national) system with increasingly blurred dividing lines and conflicts between the different levels. More importantly, non-state rules also appear on all these levels and compete with, sometimes out-compete rules adopted by legislation either on national or international level.

What used to be a fairly clear-cut hierarchic relationship between different levels of legal rules, in particular between international and national laws described as a geometric structure or pyramid, is now becoming more and more a diffuse cloud where legal norms of different nature, function and level compete, swirl and interact, mutually refer to, feed and exclude one another. Old categories like treaty, legislation, regulation, case law, principles, customs, commercial practice, public law, private law are no longer carved in stone and carry an increasingly relative meaning, and are amalgamated in what is now called global trade law.⁷

The progress of the multilateral trading system as established by a “provisional” agreement less than 70 years ago and developed spectacularly by what has become the WTO system, a network of a wide range of regulations has now at best slowed down, at worst come to a standstill. At the same time and also because of this, the original sacrosanct (but in reality never fully respected) principle of equal treatment and its legal instrument, the MFN (Most Favoured Nations) treatment continued to decline, regional and bilateral free trade agreements proliferated and cover now an ever increasing part of world trade. This tendency of the decline of MFN and the spreading of specific bilateral or regional trade regimes will no doubt continue also in the future.⁸

And here we are now with a large number of ongoing negotiations, among them two likely to change the overall picture of global trade law, with an impact upon the future world order. Negotiations on the Trans-Pacific Partnership have been concluded, although entry into force looks fairly uncertain and probably remote. TTIP negotiations are moving on, but expectations about the outcome are varied as regards its timing, coverage, substance alike.

Never before have ongoing negotiations on a trade, or even, “trade and…” agreements had such huge attention or unleashed such debates, excessive language, ideological and political infights. One might rightly say that both expectations and fears are overdone, and perceptions go far beyond realities. However, perception is reality, in fact not only in politics, but also sometimes in rule-making.

Nevertheless, the major part of the debates is not about the first generational or free trade dimension of TTIP, that is the dismantling of traditional trade barriers. Here only two questions have to be answered: Do we agree with the tenet “Trade is good” or with its former Pompeian version “Navigare necesse est”? Ample historical evidence proves that trade is, indeed, not only good, but also indispensable. For centuries international trade has been a major driver of economic growth, prosperity and employment. Progressive liberalisation of international trade in a multilateral framework was a decisive factor of growth as world trade increased at a significantly faster rate than the global output. (Except for the last four years, which saw a development that needs deeper analysis.)

Both multilateral and bilateral liberalisation demonstrates that free trade is even more efficient, provided an appropriate balance is established between trade liberalisation and rule-making to control abuses of freedom and assure fairness and compliance with the rules. Here is the answer to the second question, whether trade, in addition to freedom, needs rules as well. Again, history shows that liberalisation and rule-making have to go hand-in-hand, free trade and fair trade are not mutually exclusive, to the contrary they are conditional upon each other. They are as intertwined as freedom and order. The key challenge is, however, how to strike a balance, how to establish institutions and rules that, on the one hand, are in line with the “Konstituierenden und regulierenden Prinzipien” (Eucken),⁹ on the other hand, successfully assure fairness.

The impact of TTIP upon future global trade law is hard to be overestimated. (Although the language on the risks of this impact seems to be excessive.) But TTIP is just one of the large and steadily growing number of FTAs (Free Trade Area) and PTAs (Preferential Trade Agreement) which fundamentally change the structure and landscape as well as the substance of international trade regulations.

The ultimate objective remains, however, very much the same: to reduce, in the widest sense, trade barriers as well as the economic, financial and legal risks inherent in international transactions.¹⁰ If we add to these objectives the fairer (re) distribution of the benefits and gains from global trade we could hopefully arrive at a situation where the interests of all stakeholders would be better balanced and even the overheated debates would subside. The evolution of international trade regulations reflected to a large extent the overall economic, geopolitical and cultural changes of the world, in particular in the last 70 or 80 years. The steady development of the multilateral trading system, its progressive liberalisation and the expanding rule-making were in line with and promoted by the complex syndrome that is called globalisation. Since the development of the multilateral system seems to slow down, indeed, to be stalled, the question must be rightly asked, whether the gridlock of the multilateral system and the spreading of bilateral, regional and plurilateral agreements is not a signal or symptom of the slowing down, perhaps the exhaustion of the whole process of globalisation and the growing fragmentation, regionalisation and localisation of the globe. There are other indications as well, for instance as it has been referred to above, the ratio between the growth of the global trade and that of global output reversed as trade has now been growing slower than global GDP. Technology is, of course, one of the key drivers, such as 3D and trade in data, while economic factors, like the increase of labour costs in emerging economies also play an important role in pushing for a “reversed” globalisation.

At the same time, behind the fragmentation of the world trading system and the increasing variation of trade regulations there are remarkable common elements. A thorough comparative analysis of the FTAs and PTAs reveals not only differences between the agreements – representing different generations and each of them also reflecting a wide range of various economic and political factors – but significant similarities and commonalities as well. These common elements may foreshadow a renewed tendency towards a more universal system, for the time being not based upon a single multilateral framework but on a cloud of instruments anticipating universal principles and rules, yet leaving ample room for particularities of diverse situations. Was not GATT a reincarnation of the Lost World of the 19th century of booming liberalisation and internationalisation in the form of the multilateralisation of the vast network of bilateral commercial treaties based on equal treatment as implemented by the Most Favoured Nation clause? Again, history repeats itself? As usual: yes and no.

Whatever is the future – more unpredictable than ever – TTIP will have a major impact upon global trade law and also on the future global world order. However, for the time being it is difficult to foresee the outcome of negotiations, both as regards the provisions of the agreement and the actual impact it will have on future developments.

III

If TTIP were restricted to the dismantling of traditional trade barriers, including limited SPS (Agreement on the Application of Sanitary and Phytosanitary Measures) plus and TBT (Agreement on Technical Barriers to Trade) plus provisions and covering some of the trade and trade items now enjoying fairly widespread acceptance in FTAs and PTAs, the stakes would be, no doubt, lower and civil society opposition less vocal. The real sensitive issues are the regulatory convergence and investment protection, in particular investor–state dispute settlement.

In this part of the paper, in a concise version of a cost/benefit analysis,¹¹ an effort is made to strike a balance between the arguments for and against, taking duly account of the benefits and opportunities as well as the risks and challenges of regulatory cooperation. Regulatory cooperation aiming at regulatory convergence is undoubtedly a legitimate and efficient way of promoting trade, dismantling not only beyond, but also within the border barriers and reducing various techniques of disguised protectionism. Regulatory cooperation and harmonisation reduces differences which by themselves have a trade restricting effect and it also hinders the harmful regulatory competition aiming at attracting industries seeking less stringent regulations, that is lower environmental, health or financial standards (“race to the bottom”). It can also be presumed that much of the regulations strive for resolving or mitigating shared problems, ultimately reflecting shared values. The regulatory techniques are rooted in diverse legal systems, traditions and cultures widely differ, but the objectives to be attained often are, in reality, identical or close to one another.

So far, so good. But regulatory convergence, in particular homogenisation may also have negative effects. Comparative advantages are based on diversity, on a variation of the needs, circumstances and conditions locally prevailing. Homogenisation results in the losing of benefits of variation, such as the dividend of learning from other experiences and adapting to special advantages offered by the local circumstances.

The most serious – perceived or real – cost is something far greater and politically much more sensitive. It is the restriction of the policy space and the regulatory power of the sovereign state which is a serious challenge not only to sovereignty, but also to democratic legitimacy and accountability. The sovereign right of states to exercise regulatory powers with democratic control and within their constitutional framework may be particularly jeopardised with respect to the future mechanism of regulatory cooperation in the framework of the Regulatory Cooperation Body (RCB). Opponents of regulatory convergence also put forward that since the level of regulatory protection in Europe is substantially higher, regulatory convergence will inevitably lead to the lowering of more stringent European standards. On the other hand, many argue that the level of protection on the two sides of the Atlantic, in general, is basically in parity, while differences can be identified on a sectoral basis. There are also differences in the legal techniques and instruments, Europe preferring primarily an ex ante approach (precautionary principle), while in the US ex posteriori, private law institutions (e.g. product liability, punitive damages, class action) traditionally play a more important role. Even this distinction is disputed in legal literature in the light of recent regulatory developments in the US.¹²

However, concerns regarding the restriction of the regulatory powers of states or other political entities are to be taken very seriously. The “living agreement” concept is an ingenious and inventive device that must be put in place and implemented with utmost care. It has to be tied to unambiguous and stringent conditions, such as full transparency, respect of existing protection levels (no downward harmonisation or “race to the bottom”), respect for regulatory autonomy as well as for the constitutional rules and safeguards of the parties regarding their internal decision-making mechanisms and processes, including parliamentary involvement and oversight, inclusion of all relevant stakeholders, notably civil society, in short, full compliance with basic principles of democratic legitimacy and accountability.

The European Commission’s proposals¹³ essentially aim at meeting these conditions. If these conditions were fulfilled and proper rules were adopted and implemented, the concerns and fears could be alleviated and a reasonable balance could be established between the need for an increasing – albeit cautious – regulatory compatibility and the respect for policy space and regulatory autonomy of the parties.

IV

Undoubtedly, it is the letter “I” in the TTIP that engenders the most criticism and opposition, especially on the European side. The reason for this is that the widespread scepticism, mistrust and aversion vis-à-vis the transatlantic free trade is compounded by the growing criticism and concerns regarding the investor–state arbitration in general. Many of the critical observations and concerns seem to be growingly justified, in particular in the light of some of the highly controversial well-known ISDS (Investor–State Dispute Settlement) cases. Lack of transparency, conflicts of interests and suspected bias, exorbitant legal costs partially not reimbursed irrespective of the outcome, frivolous claims, disproportionate compensations, lack of generally followed principles or guidelines, unpredictability, just to mention some of the frequently heard and read objections regarding the investor–state arbitration procedures. All these arguments of procedural nature have a multiplied effect because of the underlying, fundamental political concern regarding the growing interference with and violation of the state’s sovereign rights to regulate.

The subject of ISDS is vast, multifaceted and rich in political sensitivities, huge economic interests and intellectually stimulating legal arguments. A widely disputed and discussed area both in theory and in practice, the importance of which goes beyond the TTIP. For this reason, this paper cannot cover or even touch on all or even the most important economic, political and legal aspects of this extremely important area of international or global trade law, indeed of international law in general.

Given that investor–state arbitration is in itself a highly controversial subject and given that in the case of TTIP the general – albeit largely unsubstantiated and ideologically driven – aversions against free trade (or in Europe rather against the United States of America) are cumulated with the widespread criticism – if not totally, but to some extent substantiated and supported by negative experience of ISDS – some questions arise. Is it wise to insist upon the inclusion of ISDS, and, more generally, on investment protection in the transatlantic partnership? Would it be more reasonable to drop the letter I, that is to exclude the investment protection chapter altogether, or alternatively, the ISDS provisions from the future treaty?¹⁴

Leaving out dispute settlement and retaining substantive provisions on investment protection would not make too much sense. As it has been rightly pointed out, “if there is a right, there should be remedy for violations of that right”.¹⁵

This question can only be, tentatively, answered on the basis of a thorough cost/ benefit analysis in the context of and restricted to the transatlantic relationship. The argument, therefore, is not about the role, function, mechanism, substantive and procedural rules of investment protection in general, but about the issue, whether the inclusion of an investment chapter together with ISDS in a treaty between, on the one hand, the European Union and its 28 member states (all being developed countries having a double layer of sophisticated system of safeguards and guarantees to protect foreign investments) and the United States, on the other, entails more benefits than costs.

The well-known and historically proven function of investment protection treaties is to promote foreign direct investments by providing security and safeguards through international law in addition to those of the host countries’ domestic constitutional and legal system. No one can deny the positive role played by the more than 3,000 BITs (Bilateral Investment Treaties) in encouraging foreign direct investments and thereby contributing to the economic growth and development of the host countries. (Out of the 3,000 BITs roughly 1,500 have been concluded by EU member states, including those between the member states themselves which are now deemed to infringe upon EU law by the European Commission.) However, when it comes to the relationship between countries with developed economies and the impact of treaties made between them, empirical evidence shows that the added value of BITs is fairly modest, in some cases close to nothing.

A brief case-study on the impact of BITs, or rather of the absence of BITs in one member state of the EU, Hungary, shows interesting and instructive results. Out of 28 member states of the EU 9 countries have BITs with the United States (most of them signed and ratified in the early 90s) containing in addition to the generally followed investment protection concepts and rules (in some respect even with wider coverage following the US model) dispute settlement provisions (ICSID) as well. All of these 9 countries are so-called “new member states”, that is countries from the CEE region. The only country of the region that declined to include investment protection provisions in a wider economic cooperation agreement with the United States negotiated in 1990–91 was Hungary. This happened at the time when Hungary was already conducting negotiations with the European Community on the conclusion of the Association Agreement and felt bound by the principle of “préférence communautaire” which prevented the associated country from granting the same treatment to non-EC investors as those granted to EC investors under the Agreement. The economic cooperation agreement with the US has never been concluded – to the dissatisfaction of the that-time US administration – and eventually it was restricted to an agreement on intellectual property.¹⁶ The negotiations with Japan in 1992 on a bilateral investment protection agreement were interrupted for the same reason: the Hungarian side refused to grant the same treatment to Japan as the one granted to EC investors in the association agreement. As a result Hungary has no BIT with either the US or Japan.

Interestingly, if we look at the data of US investment in the 10 CEE countries in the last 25 years (until the end of 2014), Hungary is by far the first, both for per capita and GDP per capita, in terms of US FDI (Foreign Direct Investment). In absolute numbers Poland is the first (151,361 million USD), Hungary is the second (73,200 million USD), but Poland has a population and GDP roughly 3-4 times higher than Hungary. (The figure for the Czech Republic having a somewhat higher population and roughly 25% higher GDP is 63,607 million USD, for Romania 17,380 million USD, and for Slovakia 7,924 million USD.)¹⁷

All that, despite (likely not because of) the absence of BIT. American investments have been and still are soaring in Hungary and the influx does not look like slowing down according to the latest data. (The same applies to Japanese investments. For example it was Suzuki that established the first car manufacturing company in Hungary about 25 years ago.)

Nothing demonstrates that US investments in the 28 member states have been promoted to any significant extent by the BITs with 9 member states. US FDI in the 18 non-EEC countries developed smoothly and unaffected by the absence of BIT. (The same goes for European investments in the US, otherwise altogether higher than US investments in Europe.)

What is then the added value of an investment protection chapter and provisions on investor–state dispute settlement, be it ICSID (International Centre for Settlement of Investment Disputes) or ISC (International Settlement Centre)? What are the benefits that can overweight the heavy legal costs and flaws (perceived and real) of the present investor–state arbitration system seriously exacerbated by the political concerns, fears and the animosity of a large part of civil society, public opinion, and even – to a lesser extent – of scholarship?

While the results of an economic (and political) cost/benefit analysis are not to be underestimated and the conclusion from the data relating to American investments in the 28, as well as in the 9+1 member states of the EU are particularly convincing, there are arguments of a different dimension that also support the non-inclusion of an investment chapter in the future treaty.

Do we trust our constitutional and legal systems both on national and on European levels? Do we have confidence in our legislative and regulatory powers and procedures both on national and on European levels? Do we believe in the safeguards guaranteed by our judiciary both on national and on European levels?

And last, but not least, do we trust the rule-making and the justice on the other side of the Atlantic, or we would prefer avoiding that system we have little confidence in?

Some suggest that the new proposition of the European Commission eliminates the flaws and fears connected to the present ISDS system and represents a reasonable compromise between the opposing positions. Some have a different view.¹⁸ This needs and merits a careful consideration and, again, a thorough analysis. But then, in addition to the questions and concerns already on the table, new ones will be raised: what will be the role and status of the European Court of Justice besides – under or above – a permanent international court? (Provided ISC ever becomes one, after several decades.) The relationship between European law and BITs already raises some thorny issues and not only with respect to inter MS BITs (Most Significant Bilateral Investment Treaties). These issues may then be compounded by procedural complexities not making the parties’ life easier and ultimately not serving the seminal purpose of international or global trade law: to reduce legal risks and costs, to promote trade and to improve the distribution of the gains stemming from it.

TTIP is not only a good thing; it is a huge step forward in attaining these objectives. We have to save it.

(Presentation delivered in Budapest at the XVIIth FIDE (Fédération Internationale pour le Droit Européen) Congress on 21 May 2016.)