1989 Generation Initiative

The EU and Japan are set to agree a landmark trade deal that will see barriers lowered on almost all tradable goods between them. With the backdrop of Trump protectionism, this deal would serve as an affirmation of the inherent benefits of free trade-if it gets signed. Though all indications suggest a thumbs up for this partnership, there is still one major sticking point: investor disputes. While Japan is quite content with the status quo, the EU is looking to shake things up a bit.

EU-Commission President Juncker and Japan’s Prime Minister Shinzo

As it stands, disputes between investors and states are conducted through an ad hoc system of Investor to State Dispute Settlement (ISDS) cases. This system dates from the 1960’s, and the EU wants to modernise with something more impartial and predictable. Enter the Investment Court. Already established in Europe, the Investment Court facilitates consistent, more professional rulings through the employment of a permanent judiciary chosen by the member states. By and large it’s an improvement on the old model. The EU now wants to expand the concept by making the court a multilateral one, capable of settling disputes around the world. Canada has already signed up to the idea, and the EU is hoping this trade deal will get Japan on board too.
But Japan is more interested in the trading of cars and cheese than resetting the global order, and signing up to the Investment Court will mean more than just streamlined dispute proceedings. For starters, there’s the cost. Details on the size and scope of the proposed court haven’t been finalised, so it’s difficult to make a good estimation. But looking at other international courts, annual budgets range from €20 million (International Tribunal for the Law of the Sea) to €150 million (International Criminal Court). Not exactly small change. And whereas the costly ICC has only opened around a dozen investigations in its lifetime, there have been 767 investor-state dispute settlements around the world from 1987 to 2016. Even if the Investment Court addressed only a fraction of these cases, it would still surpass similar institutions in size. If the EU hopes to entice Japan to sign up, it needs to provide much more clarification as to the cost and capacities of this new court system.
There’s also the question of including the court in a trade deal to begin with. An Investment Court would certainly help should disputes arise, but it’s by no means integral. The answer, it would seem, is that the EU is exercising a degree of conditionality in these proceedings, and attempting to get it’s court recognised in exchange for more free-flowing trade. Now, given the success of conditionality in enlargement proceedings, it makes sense that the EU would try and apply it to its international negotiations. But there’s a big difference between a prospective EU member and a trade partner, and it’s a difference that’s not fully recognised when conditionality is employed. Allies need to be persuaded into collaboration, not have their arm twisted into compliance. Of course, there are some elements that can be combined with trade agreements with little to no adverse effect; the EU/Japan strategic partnership that’s also included is a case in point. But for something as big and multilateral as a new global court, it has to stand on its own merits. Otherwise it’ll just be a hard sell, pushed by the EU in all its subsequent trade deals.
There’s no doubt that an investment court would be beneficial in resolving investor-state disputes around the globe, but with no clearly defined framework, it’s a big ask for other countries to just sign up on trust alone; countries are investors too, after all. If a more comprehensive outline was presented, maybe the EU wouldn’t need to sneak the court into any and every trade agreement it brokers. So until a more detailed plan is thought out, Brussels should ditch the court and focus on cars and cheese.

This article was written by our member Niall Lane. It represents the opinion of the author.
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