TTIP, Property Rights and Investor State Dispute Settlement (Part 1)

Recently increasing attention has been paid to the Transatlantic Trade and Investment Treaty (TTIP) and the Comprehensive Economic and Trade Agreement  (CETA), two trade trade agreements between the EU and, respectively, the USA and Canada. The agreements do not only aim to abolish tariffs (that is, taxing imports), but also to bring American, Canadian and European regulation in line. It is rather hard to find anyone who is particularly in favour of these agreements. The Independent is scared, protests are held all over Europe, and even the Economist (!) has spoken out against TTIP in its current form. The debate seems to revolve around several issues, the advantages of trade and transnational investment as such, the secretive way in which the negotiations have been held, the large difference in regulatory standards in the EU and in North America, and, lastly, the Investor State Dispute Settlement (ISDS) clause, which allows corporations to sue countries in order to get compensated for losses due to policy changes, using an arbitration court existing of private lawyers. The country and the company both appoint two arbitrators, who in turn appoint a third arbitrator. If they fail to do so, in many treaties a World Bank subsidiary called ICSID gets to appoint the third arbitrator. Generally, ISDS has been portrayed as if it has no purpose at all, except to give companies unlimited power over governments. The Guardian, used the headline: ‘The Obscure Legal System That Lets Companies Sue States,’ the Independent is scared, Tegenlicht, a Dutch documentary program, thinks the best way to analyze ISDS is as a form of neocolonialism. While not wanting to defend ISDS, because I guess it is fair to say it gives excessive power to companies, ISDS does exist for a reason.

ISDS is meant to protect property rights, in other words, the right of individuals and organizations to hold property. One of the biggest debates in the social sciences used to be whether individuals should have such a right. For communists the answer is clear, they abolish property rights as soon as they get the chance. For libertarians the answer is also clear, for them property rights are always more important than the interests of the community. Liberals (in the European sense) are somewhat closer to the anarcho-capitalists, and social democrats are somewhat closer to the communists, but both see taxation as a legitimate method to expropriate people, to use these public funds for the common good, such as public safety, roads and education. So there can certainly be reasons to take people’s property, and use their money on other things. Much of political debate is exactly about what the right level of taxation is.

Nevertheless, even if many journalists do not seem to think property rights matter, the word is not mentioned once by any of the earlier mentioned sources, they really do. Imagine, on the one hand, you have an orchard with apple trees. Now, if you know in advance that the government will let you keep 40% of the income you receive by selling the apples, you are quite likely to work hard all year long, to make sure you can sell as many apples as possible. Welcome in the average economically developed country. Imagine, one the other hand, that the government could at any moment take 80% of the apples, steal your orchard, and murder you and your family if you dare to protest. Welcome in many of the world’s economically less developed countries. Of course there are many shades of property rights protection in the real world, ranging from very low to high taxation, and from transparently set taxation to random expropriation. Nevertheless, it is not very surprising that the protection of property rights is extremely important for creating economic growth.

Property rights are indeed undemocratic. Just like any human right, such as freedom of expression, freedom of congregation, majorities do not get to decide over whether you have them. Having property rights means that even if the majority of the people wants my bike, I can keep my bike. Of course, in practice majorities do get to decide on whether I can keep my proverbial bike, however, then they have ignored my property rights. So if a majority of the population of a country decides to nationalize a company, that is very democratic, but not necessarily just, legitimate or fair. Unless we want to propagate communism, we cannot simply say that governments always have the moral right to expropriate people, it depends on the case, whether we find expropriation just or not.

Even with rule of law, a change in laws can expropriate investors, or harm foreign investors in an unfair way compared to domestic investors. Looking at the map above, we can see that many countries fail to protect property, including several members of the European Union. (Also note that this is independent of ideology, the Nordic countries excel at protecting property, which is one of the reasons they actually can sustain an elaborate welfare state). In these countries, it is not very strange that companies seek protection from governments.

That is why in countries where the rule of law exists, companies can already sue democratically elected governments, in English this is referred to as public law, in Dutch it is called bestuursrecht. This is exactly meant to protect companies against the executive or legislature, by giving them a chance to appeal to decisions made by these branches of government, by using the judiciary. Several media have nevertheless shown their disagreement with the fact that ISDS allows companies to sue governments, as if suing governments is anything new or scary. I think it is a perfectly normal, even vital, part of any liberal or social democracy, because politicians are no angels. This is why we have a trias politica, because quis custodiet ipsos custodes, who guards the guards?

For countries where the rule of law has not existed before, or only a long time ago, it is extremely difficult to convince investors that you will uphold their property rights. Of course a government can say that it will protect property rights, but will it still do so in case of an economic crisis? Or if a ‘socialist’ leader, like Hugo Chávez, gets elected? Seeing the power politicians have, in many countries there really is no one who can tell them to not steal property, it is always tempting to renege on earlier made promises about respecting property. Of course, they will disguise it as social policies for the people against big scary corporations, but then you might wonder, why does Hugo Chávez’s daughter have $4.2billion on her bank account? What ISDS does, is tying the hands of the leaders of a country. They can no longer renege on their promises, because then they can get sued. Even if Tegenlicht wanted you to believe that third world countries are led by complete idiots, who sign thousand pages treaties without knowing what they are signing (around the 20th minute, talking about neocolonialism), these leaders knew perfectly well what they were doing. They were tying their hands exactly so that investors knew they could trust them.

In short, property rights matter for economic growth, and can also be defended on principles of fairness. They are indeed undemocratic, because property rights allow people to do with their property what they want, regardless of what the majority in the country wants to do with it. So they are important, but many countries fail to protect them properly. This is the reason why Investor State Dispute Settlement mechanisms exist. No proper discussion of ISDS is possible without keeping in mind that property rights matter, and that it is a good thing that companies can sue governments. However, this does not automatically mean ISDS is great, and should be part of TTIP.


Bottom Line: Property rights matter, and are enormously important in the discussion on Investors State Dispute Settlement systems. However, that ISDS is the best way to protect property rights, given other concerns we have about democracy, does not follow. More on that next week.

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