TTIP Gambit

A Free-Trade Sop to Germany

malmstroem gabriel dpa
Cecilia Malmström, the E.U. trade commissioner, and Sigmar Gabriel, the head of Germany's Social Democrats, pulling together on TTIP?
  • Why it matters

    Why it matters

    The new E.U. proposal for a reformed court to settle investor-state disputes could be what makes or breaks the prospects for a U.S.-E.U. free trade deal.

  • Facts

    Facts

    • The European Commission has proposed a more transparent and permanent court to settle disputes between companies and governments, which has been a key stumbling block in the U.S.-E.U. talks.
    • Social Democrats in Germany and Europe have been openly skeptical of a free-trade deal, but broadly welcomed the commission’s new proposal.
    • Both U.S. President Obama and German Chancellor Merkel have said they still want a U.S.-E.U. trade deal to be agreed by the end of this year.
  • Audio

    Audio

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It is being sold as an about-face from Brussels, and hailed as a breakthrough by German policymakers that could breathe new life into the stalled U.S.-E.U. free trade talks.

The European Commission on Wednesday toughened its stance on a key aspect of the free-trade talks with Washington, demanding that any new deal include a transparent, permanent and more restrictive court to settle disputes between transatlantic companies and governments.

On its surface, the offer represents a compromise of sorts for the Europeans, who fear supranational trade courts could undermine local laws and dis-empower voters. Until Wednesday, the E.U. had reacted coolly to U.S. demands for the courts, which would theoretically arbitrate trade disputes between foreign investors and European governments, businesses and regulators.

But the offer only appears to be another small step in what has been a difficult effort to lower customs barriers to create the world’s largest single trade zone, stretching from the California coast through Europe to the doorstep to Russia. In essence, Europe appears ready to accept a court – but it may not be the kind of court U.S. negotiators are seeking.

Some U.S. business groups immediately rejected the latest European offer, saying the reformed courts would do little to protect the interests of foreign investors. The U.S. government has yet to weigh in on the European proposal.

The gambit, coming after months of stalled talks, was seen as a way to bring on board Germany’s Social Democratic party, the junior partner in German Chancellor Angela Merkel’s government who wield an effective veto over the intercontinental agreement.

Germany’s Social Democrats have long been divided on the merits of a U.S.-E.U. free-trade agreement. Sigmar Gabriel, the head of Germany’s SPD, has pushed hard in favor of a deal and taken a big political gamble in the process, challenging the grassroots members of his own party. The new and reformed court process could be just enough to keep his shaky coalition in favor of TTIP alive.

After months of dispute, Germany’s skeptical center-left SPD may now be ready to endorse TTIP. On Thursday, in a statement to Handelsblatt Global Edition, the party took credit for the European Commission’s about-face on the court process.

“The Commission has finally recognized that it can’t be business as usual when it comes to the free-trade discussion. The step towards a fundamental reform the investor-state court process is the right one,” Hubertus Heil, the SPD’s deputy floor leader in the German parliament, said in a statement.

“Social Democrats pressured for a legitimate and transparent process as well as for proper judges and the possibility of appeal. This has apparently prompted some movement,” Mr. Heil added.

The European faction of the Social Democrat party also endorsed the deal, as did the German economy ministry, which is headed by Mr. Gabriel.

The support of German Social Democrats is critical to getting the trade deal passed in Europe, where all 28 of the European Union’s member states will have to approve any final trade pact. Ms. Merkel is unlikely to push for Germany to sign onto the deal if it means risking a break in her own ruling coalition.

“The E.U. Commission in this case deserves some credit for trying to save Germany from itself,” Pieter Cleppe, the head of the Brussels office of Open Europe, a think-tank, told Handelsblatt Global Edition. “This is completely oriented on getting the SPD on board. The SPD had a few concerns with TTIP, and investor-state dispute settlement I think was the most symbolic of all of that.”

The big question that remains: By appeasing Germany’s left wing, will Europe kill the chances for passage of the deal?

The ball is now in Washington’s court – and therein lies the problem. Mr. Cleppe said he expected U.S. policymakers may be tempted to go along with Brussels, but businesses from the United States are expected to lobby strongly against the E.U.’s latest proposal.

One business observer in Brussels said that new language that granted governments a right to regulate was “so broad it renders the commitments to protect investment meaningless.”

“This is a breakthrough. With this we have laid the foundation for a modern and transparent investor protection that has nothing to do with the court processes of the past.”

Matthias Machnig, Deputy economics minister

The U.S.-E.U. free-trade deal has provoked perhaps more emotion in Europe than any other trade deal before it. Supporters hail it as the chance to break down barriers to trade that would make business easier between the world’s two largest economic blocs.

Its European detractors, who have been loudest in Germany, Austria and Britain, fear the deal will let U.S. multinational companies undermine European standards in health and safety, such as genetically-modified foods or other consumer goods.

At the center of the dispute is a proposed international court linked to the World Bank, which would let companies big and small challenge governments if they believe they have been wrongly treated.

The “investor-state dispute settlement” court has been part of many global free-trade deals since the 1950s, but recently has become a flashpoint for some activists across Europe who claim the courts, as they exist now, are opaque and will open the door to U.S. multinational companies to water down European laws. U.S. companies see European protectionism behind the opposition to the settlement courts.

The European Parliament has made reforming the court process a condition for supporting the free-trade deal. On Wednesday, the European Commission proposed a more transparent, permanent U.S-E.U. court with 15 judges, whose deliberations would be open to the public and press. The report from Brussels fleshed out a vague outline that was first presented back in May.

 

Source: European Commission, Eurostat
Source: European Commission, Eurostat

 

Perhaps more importantly, the Commission is pressing for language to limit the kinds of decisions investors are allowed to challenge. European negotiators are pursuing a legal “right to regulate” by European governments. The European plan would also for the first time create a six-judge appeals court, and bars judges on the court from serving as lawyers.

It has been praised across much of the mainstream political spectrum. Matthias Machnig, a deputy minister in the German economy ministry, welcomed the new plan.

“This is a breakthrough. With this we have laid the foundation for a modern and transparent investor protection that has nothing to do with the court processes of the past,” Mr. Machnig said.

U.S. policymakers in Washington have to date resisted efforts to reform the court process, and businesses remain skeptical.

In a statement, the U.S. Chamber of Commerce rejected the European proposal for its reformed courts and argued that the debate over investor-state disputes in Europe had spiraled out of control.

“The E.U. Commission in this case deserves some credit for trying to save Germany from itself.”

Pieter Cleppe, Open Europe

“While we recognize the E.U. has a political problem relating to future investment treaties, the U.S. business community cannot in any way endorse today’s E.U. proposal as a model for the Transatlantic Trade and Investment Partnership (TTIP),” according to Marjorie Chorlins, the chamber’s vice president of European affairs.

“The recent European debate around investment treaties – the obligations governments accept in them and the methods they provide for dispute settlement – is not grounded in the facts, and the distortions in this debate cannot be allowed to trump sound policy,” she said in a statement.

Mr. Cleppe of Open Europe said he still believed Washington may go along with Brussels to keep the talks alive. A reformed court is better than no court at all. The danger, however, is that Washington may be less open to compromise on other issues close to Europe’s heart as a result, Mr. Cleppe said.

Europe’s business community reacted cautiously, welcoming the latest effort to relaunch talks. Some officials said they still had problems with the courts as envisioned by European lawmakers.

Markus Beyrer, head of Business Europe, called it an “important step” to get talks on TTIP back on track, but said there were concerns over details. He focused on a proposal for the loser in any court dispute to pay the costs, a measure he said may deter small- and mid-sized companies from taking their complaints to court.

The next step will be for the E.U.’s trade commissioner, Cecilia Malmström, to discuss the proposal with her U.S. counterpart, Michael Froman, the U.S. trade representative, later this month. The investor protection chapter of the complicated trade talks has been suspended for the past year, but may now be taken up once again.

U.S. President Obama and German Chancellor Angela Merkel have both said they want a U.S.-E.U. trade deal agreed by the end of this year.

Other left-leaning activists in Europe continue to withhold their support for a trade deal. The Green Party in the European Parliament issued a statement Wednesday rejecting the Commission’s proposal outright and saying they would continue to fight it.

“We cannot allow the Commission to simply put lipstick on the ISDS pig,” Greens/EFA vice-president and international investment spokesperson Ska Keller said.

Gabriel Siles-Brügge, a politics professor at the University of Manchester and critic of TTIP, conceded that opening up the court process should be “sufficient” for Social Democrats to back the broader talks, though Mr. Siles-Brügge said that he, too, remains skeptical of its merits.

Even with the court more open to public scrutiny, “it doesn’t make a lot of sense for me to have investor protections between developed countries…there’s no systematic discrimination against foreign investors,” he told Handelsblatt Global Edition.

Mr. Siles-Brügge also pointed out that, while the new court might be more transparent than the original, it remains a system “which systematically privileges foreign investors.” While it may protect a government’s right to regulate, it still includes language referring to the “fair and equitable treatment” of companies that allows plenty of room for interpretation, he said.

For the E.U. Commission, keeping some form of investor protection alive, rather than jettisoning the courts altogether, is seen as critical to keeping the U.S. on board with the talks. Brussels negotiators also hope that a deal on investor protections could make Washington more malleable to allow European companies access to government contracts in the United States – a key European demand.

 

Christopher Cermak is an editor at Handelsblatt Global Edition in Berlin, focusing on the financial markets. To contact the author: cermak@handelsblatt.com

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