It’s a make-or break issue for the proposed U.S.-E.U. free-trade deal, and possibly, for the future of global trade.
A competition is underway between the United States and European Union, the world’s two biggest economic blocs, to convince the world that they have the best system to protect investors, governments and consumers in the global market.
The odds are stacked against the 28-nation European Union, which wants to set up a new type of global court to arbitrate disputes between investors and governments.
But the E.U. will first have to convince the rest of the world the current system for settling these types of disagreements, a system that has been part of free trade deals for nearly five decades, is broken.
The E.U.’s argument got a boost earlier this year when Canada agreed to incorporate a new type of permanent investment court into its own free-trade deal with the European Union.
But the dealmaker probably won’t be Canada, but China, the world’s second-largest economy.
As the world’s rising economic power, whatever model China supports could end up prevailing. If China were to express a preference for the E.U. trade court model over the U.S. position — which it hasn’t done so yet — it could tip the outcome of the E.U.-U.S. trade talks, which have stalled on the issue, one expert said.
“It would change the dynamic,” said Gary Hufbauer, a former U.S. trade negotiator with the Washington-based Peterson Institute of International Economics. “Maybe even the Canadian agreement could go some ways in that direction. But China would be a big step.”
“In trade agreements, you have to be sure that they don’t do what opponents fear they might. That’s why the investment chapter is so important for me.”
Canada was the first big country to support the E.U.’s demand for a new trade court, where the interests of consumers and individual national laws could be better protected from corporate legal challenges in a globalized market.
When E.U. trade negotiators approached Canada to propose a new global court for settling disputes between investors and governments, they expected pushback – not least because the United States opposed the judicial panel as an extra-territorial infringement that could adversely affect U.S. businesses abroad.
The E.U.’s case gained a sympathetic ear when Canadians elected a left-leaning government last November.
“I think it was an interesting moment for our European counterparts,” Canada’s trade minister Chrystia Freeland, who came to power in the government of Prime Minister Justin Trudeau, told Handelsblatt. “They had felt that this was … something they were pushing us for. But once we formed the government, we looked at it, and said: ‘We actually would like to join you in this project.’”
Ms. Freeland said the European Union may actually be on to something. With an anti-trade tide sweeping across much of the globe, she said a more transparent court system to mitigate disputes that could have an effect on local health and food safety laws might allay critics’ fears.
“In trade agreements, you have to be sure that they don’t do what opponents fear they might,” she said. “That’s why the investment chapter is so important for me.”
Europe’s goal of a permanent court is too grand for the United States, which is pushing its own model for settling investor disputes in the Trans-Pacific Partnership, a trade agreement it reached earlier this year with 12 Asia-Pacific nations.
The United States, historically suspicious of international agreements, has little interest in overhauling the current arbitration system, or installing a new form of permanent international court that many U.S. congressional leaders in Washington would view as ceding national sovereignty.
The United States is lobbying to maintain the status quo, namely the “investment settlement dispute system,” or ISDS, which has settled most free trade disputes for half a century.
U.S. supporters argue the ISDS process is necessary for companies to feel confident doing business abroad. While it may need tinkering, the system is sound, they argue.
European critics say ISDS courts are opaque and favor the rights of multinational companies over local governments, which U.S. supporters dispute.
While some free-trade deal critics oppose the courts on principle, E.U. negotiators are offering a compromise: A court with an appeals process to inject more transparency into the process.
“China welcomes free trade agreements, as long as they are open and transparent.”
Canada’s willingness to back the E.U. position has emboldened its negotiators in Brussels, who hope to convince the United States that Europe has developed a new global standard for settling international investment disputes.
But will other countries sign on too?
Leon Trakman, a professor of law at the University of New South Wales in Australia, said that while Europe’s reforms have “some appeal,” they face an uphill battle.
“Current indications weigh against the global adoption of an International Investment Court,“ he said, noting that the existing arbitration system “has already been adopted in several thousand active bilateral investment and free trade agreements.”
Many countries also like that it gives them the flexibility to tailor the court process to their liking – something a permanent international court wouldn’t let them to do.
China could prove to be the wild card in the debate.
Both the United States and European Union are lobbying China: Each is separately trying to negotiate its own bilateral investment treaty with China.
E.U. Commission trade spokesman Joseph Waldstein told Handelsblatt Global Edition that the 28-nation bloc hopes to push through its dispute resolution framework in the China deal: The Commission “has also recently started to explore the new Investment Court System in the negotiations for an investment agreement with China,” he said.
If China signs on, it could pressure the United States to sign on too. While many in the U.S. won’t say so publicly, privately they acknowledge that China could force the United States’ hand.
That’s because businesses in the United States are intent on having arbitration panels remain part of new trade deals – especially with developing countries such as China, where the domestic court systems are more suspect. If Europe can convince China that its model is best, the U.S. business community may be forced to accept it rather than nothing at all.
“I think if that scenario happened … the U.S. business community would then go for the European version,” Mr. Hufbauer, the former U.S. trade negotiator, said. “They would lean heavily on those congressional people who are concerned with sovereignty issues, and they would have a full press campaign to be pro-Europe. It would be so much better than the current situation.”
Axel Berger, a member of the German Development Institute who wrote his doctorate on China and its views on investment, says there’s a real prospect China may back the European Union. The trouble is, nobody knows exactly where China stands.
“We imagine that China is this economic giant that knows exactly what it wants. That is often not the case,” Mr. Berger said. More important for China is being a part of the global trade discussion as a market-based economy.
China doesn’t really care about the details of the dispute, which could play into Europe’s hands. Mr. Berger said China tends to negotiate on the basis of model texts proposed by other countries. If another country comes along with a new proposal – Europe, for example – there’s a good chance China will take it on board.
It’s also a proposal that could play into China’s hands. Beijing has an interest in rebalancing trade deals towards the power of the state, said Mr. Berger. And it’s a proposal that could allow China to stand up to its archrival, the United States.
That China could actually play a role in the outcome of the U.S.-E.U. free trade talks is ironic – given that the Asian powerhouse probably wants to see the negotiations fall flat on their face.
Officially, China welcomes everything that could further international trade: “China welcomes free trade agreements, as long as they are open and transparent,” said a spokesperson for the trade ministry in Beijing.
Away from the public eye, however, Chinese diplomats have attacked the U.S.-E.U. free trade deal as well as the United States’ free-trade deal with Asia-Pacific nations.
China, which has been excluded from both deals, is wary of Washington weakening Beijing in global trade: “The negotiations are driven by strategic, not economic interests,” argued Professor Jiang Yang of Tongji University in Shanghai.
From China’s point of view, the United States and Europe are trying to shape international trade in a manner that could leave China out in the cold. This is something that China cannot allow.
One answer for China has been to corral neighbors into its own free-trade deal – the Regional Comprehensive Economic Partnership or RCEP. While the U.S.-Asian free-trade deal includes 12 members, China is negotiating with 15 nations in the region. That includes seven members that are also in TPP, including Japan.
RCEP could actually gain in strength from the fact that it includes India – another country left out of TPP.
The U.S. and Chinese-led regional deals don’t really differ too much in details. Both attempt to unify rules for trade, improve economic and technical cooperation, rules on patents and piracy.
Both, at least for now, also have ISDS protections for investors written into the agreements. If Europe has its way, however, that might be about to change.
Christopher Cermak is an editor at Handelsblatt Global Edition in Berlin, focusing on the financial markets. Donata Riedel, Torsten Riecke and Stefan Scheuer of Handelsblatt also contributed to this article. To contact the author: firstname.lastname@example.org