BDI – The Voice of German Industry

Interessenvertretung der Industrie

Dr. Stormy-Annika MildnerForeign Economic Policy

Legal Stability and Predictability -The Investor PerspectiveInvestment Treaty Forum June 12th 2015

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Content

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1. Facts and figures on ISDS

2. Relevance of IIAs ISDS for Germany

3. The need for reforms

4. Conclusion

More Investments Require More Legal Protection

FDI Stocks and the Number of IIAs Are Rising

Worldwide Stock of FDI has increased eleven-fold since 1990 (2013).

IIAs have increased eightfold since 1990 (2014)

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More Investments Lead to More Investment Disputes

FDI Stocks and the Number of ISDS Cases Are Rising

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Worldwide Stock of FDI has increased eleven-fold since 1990 (2013).

ISDS Cases per year have continuouslyIncreased.

Significance of FDI for Germany

Twice the Volume of Foreign Turnover than Exports

2013 Abroad In Germany

FDI (Stock)

€ 918 billion € 458 billion

Firms withforeign ownership

35,143 15,560

Employees 6.7 million 2.8 million

Foreignturnover

€ 2,389 billion € 1,502 billion

Trade (Ex/Im 2014)

€ 1,133 billion € 916 billion

FDI creates jobs and revenue abroad.

In 2013, German firms employed 6.7 million workers through their investments abroad.

The German industry sells more than twice the volume of goods abroad through these direct investments than it exports from Germany.

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Germany Does Not Only Have IIAs with Developing Countries

Germany Has 129 IIAs in Effect

Germany was the first country in the world to conclude an international arbitration agreement when it signed a treaty with Pakistan in 1959.

Today, Germany also has IIAs with advanced economies.

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Objective of IIAs

The primary objective of IIAs and of investment protection chapters in free trade agreements is, and should be, to create legal certainty for investors.

Germany’s current IIAs provide German investments abroad with a high level of protection.

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ISDS Is also an Instrument for SMEs

99.6 percent of German companies are SMEs.

IIAs are particularly important for SMEs. Large companies can be more easily heard through diplomatic channels.

22 percent of ISDS complaints come from small enterprises and individuals.

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Geman Investors Complain Mostly against EU Countries

42 ISDS Cases in Total

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Proposals for Reforms: Substantive Investment Protection Provisions

Precise Definition of the Key Principles

The definitions of investment and investors should be more precise in future IIAs. The formulations should not prevent legitimate

complaints, but must prevent abuse (such as "treaty shopping").

FET should be defined more precisely in future IIAs. Investors must continue to be confident that they will be protected. Government action should

always be proportionate and moderate.

The definition of indirect expropriation should be as concrete as possible in future IIAs. The

definition has to secure the right to regulate, but must not block out legitimate complaints.

In CETA, the definition of investment and investor is broad.

The definition of FET in CETA is markedly different from the traditional, broad definition. The Treaty text lists concrete actions.

In CETA, measures aimed at the protection of public interests, represent only a compensable indirect expropriation if they are "manifestly arbitrary".

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Proposals for Reforms: Substantive Investment Protection Provisions

Non-Discrimination, Umbrella Clause, Right to Regulate

A strong non-discrimination (national treatment, MFN) is indispensable in future

IIAs. Exceptions should not be a gateway for the dismissal of justified complaints.

Future IIAs should include umbrella clauses. States should be encouraged to voluntarily

comply with commitments.

The regulatory sovereignty of States (right to regulate) must not be called into question

by future IIAs. But clauses to protect common goods must be sufficiently precise to maintain

investor protection.

CETA guarantees investors both national treatment and MFN.

CETA contains no umbrella clause, while the IIA between the EU and Singapore will have one.

CETA guarantees the right to regulate in the preamble. Furthermore, there are numerous exceptions in the treaty text.

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Proposals for Reforms: ISDS

Transparency and Frivolous Claims

Arbitration must be more transparent. The transparency rules of UNCITRAL are the benchmark for

future IIAs.

Future IIAs must allow for the early defense of frivolous claims. A

preliminary examination of the cases must be politically neutral. One

possible mechanism is the loser-pays-principle.

According to CETA, not only will all documents be published, but the hearings are also public and stakeholders (NGOs, trade unions) are allowed to make entries.

According to CETA, the unsuccessful party must bear the cost of arbitration and the costs of legal action to a reasonable extent (“loser-pays-principle”).

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Proposals for Reforms: ISDS

Independence of Arbitrators and the Appellate Body

Future IIAs must make high demands as to the qualifications and

independence of the arbitrators. Nevertheless, parties need an

appropriate number of arbitrators to choose from.

Future IIAs should provide for an appeals procedure. The model of a

court of appeal could be the Appellate Body of the WTO.

Under CETA, a binding Code of Conduct shall also ensure the independence and impartiality of the arbitrators. Furthermore, it provides for the creation of a concrete list of qualified referees.

CETA provides the possibility to develop an appeals process, but does not make a proposal concerning the concrete design.

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Problems within the CETA Text

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Significantly longer contract text compared to German IFVs.

Umbrella Clause is missing.

The narrow formulations of FET is a risk.Investors could have no prospect of success

even if they have justified complaints.

The requirement of exhaustion of national legal remedies can have a negative effect. Investors

could circumvent the national legal system.

The Gabriel-Proposal and its Challenges

Standing Court for ISDS cases

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The proposal is the BDI to be disclosed. However, such an institution would have to meet some criteria are:

The court would have to be anchored in TTIP

The process should continue to be an Investor to State procedure (not a State to State dispute settlement like in the WTO)

The court may not part of the jurisdiction of a contractual partner.

The court should be based as possible on existing international structures.

The consideration of a standing court may not be used for to remove from ISDS from TTIP.

Such a court must not undermine the multilateral process and should therefore be open to other parties on the US and the EU.

Conclusion

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IIAs and ISDS are necessary in a globalized world economy.

For the internationally oriented German industry IIAs and ISDS are particularly important.

However, the system of international investment protection has great need for reform.

CETA pointed to many fields, such problems can be solved. However, CETA also shows that

the development of IIAs must go on.

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Thank You for Your Attention!