Economy & Trade, Europe, Headlines

EUROPE: Investment Treaties Undemocratic

Daan Bauwens

BRUSSELS, May 19 2011 (IPS) - A proposal to put an end to the highly anti-democratic nature of the European Union’s Bilateral Investment Treaties was heavily watered down by a plenary voting in the European Parliament. However, in their current form the treaties may pose a serious risk for European democracy.

Bilateral Investment Treaties (BITs) establish the conditions for private investment by companies of one state in another state. The treaty can be signed by any two nations but in most cases BITs are agreed upon by EU member states and developing countries. Without BITs, many investments would not be done in insecure environments that need economic development.

During the last couple of months, BITs have become the subject of heavy debate at the European headquarters here. Since the Lisbon Treaty came into force in 2009, foreign investment has become a European Union competence instead of a national one. Subsequently, the question had to be answered what should happen to the existing national BITs while Europe was developing its own investment policy.

INTA, the Committee on international trade, was commissioned to find a solution. As rapporteur of the Committee, Carl Shlyter of the European Greens (EGP) took the opportunity to try to change the highly problematic nature of existing BITs.

“BITs were invented to protect your investment,” Carl Shlyter tells IPS, “but in reality, they are much stronger: they are used throughout the world by companies to challenge democratic decisions of a state, whenever the company thinks this democratic decision could harm its profits.”

Nathalie Bernasconi-Osterwalder is an international lawyer and leads the investment programme of the International Institute on Sustainable Development (IISD). She was called upon by INTA in November 2010 as an international expert on investment. “In these cases the investor instead of a state implements the treaty,” she tells IPS. “Investors are less hesitant than stated to challenge a democratic decision because they themselves can’t be challenged for the same issues.”

According to recent UN data, last year 25 new investor-state cases were filed, bringing the total number of known investor-state cases before UN tribunals to 390. One emblematic case is the case of Chevron vs. Ecuador. In 2003, Ecuadorian Amazon residents sued Chevron because of environmental harm and personal injuries caused by the company’s operations.

Chevron filed a lawsuit against the state of Ecuador, based on a BIT between the United States and Ecuador, arguing that the Ecuadorian court’s handling of the lawsuit between the Amazon residents and Chevron was unfair. This would constitute a violation of Chevron’s rights under the BIT. The international arbitrary tribunal awarded Chevron 700 million dollars damages.

“Investor-state disputes have a chilling effect,” says Shlyter. “Politicians might not even dare to proceed with a new law out of fear they will be challenged by companies and will have to pay the compensation. They are very harmful for policy-making,” he tells IPS.

Shlyter suggests that the EU should have the power to challenge existing BITs when they are in conflict with the Lisbon Treaty provisions on equal opportunities, human rights, social and environmental development.

But there are more reasons why the current form of BITs is troublesome. “The cases are decided on by an ad-hoc arbitrary tribunal, not by a permanent panel of judges,” Nathalie Osterwalder-Bernasconi tells IPS.

“The arbitrators mostly are lawyers working for a private law firm. In one case, they can be arguing for the investor or the state. In the next case, they will be the arbitrators. In investment treaties, you just have a few recurring legal questions that keep coming up. If you’re an arbitrator, you can make a decision knowing that can help you in your next case you’re doing as a lawyer.”

Next to that, the decisions of the tribunal are not made public. “The investor-state disputes remain completely unknown to the public,” says Shlyter. “Not even the European Commission has access to the documents of the cases.”

Next to the conflict of interest and the lack of transparency, there is a reversal of the burden of proof. “While the investor can bring a claim, the state can never bring a claim,” Bernasconi-Osterwalder tells IPS. “States have no real rights under these treaties, only obligations.”

In the proposal Carl Shlyter wrote for the EU Commission on International Trade, he proposed that future BITs should should contain a clause to prevent the watering down of social and environmental laws. He also proposed to end the existing investor-state dispute system and suggested improvements in transparency.

Shlyter’s proposals were defeated at the Committee vote on Apr. 13. Because the Committee vote was very close, the Committee decided to put the report to a plenary vote in the European Parliament. But also in the plenary vote last week Tuesday, the proposals did not make it through.

However, in their current form, the BITs also pose a threat to European democracy. Seventeen percent of all known investor-state disputes are against EU member states. In 2009, Swedish energy giant Vattenfall sued the German government for 1.4 billion euros because of new environmental laws. According to the most recent U.N. data, the case has been settled. The terms of the settlement, however, remain unknown.

But it is the emerging economies Europe has failed to take into account while voting on the proposal. “Nowadays, there are big Indian and Chinese private investors,” says Nathalie Bernasconi-Osterwalder. “China will have more and more private investment in the future, I think that is part of their strategy. The investment flows are really going in both directions and I’m sure it will increase. In that sense, the danger exists European states will get increasingly challenged,” she tells IPS.