The Prospective Impact of the TTIP Agreement on the European Union’s Power to Regulate

Opening Statement of Prof. Giegerich at the Panel Discussion „TTIP: Prosperous future or endless dispute in Transatlantic Relations?“

By Thomas Giegerich  – a more extensive Jean-Monnet Expert Paper in German on the topic is available here

One major objection voiced against TTIP is that the Agreement would render it impossible to regulate foreign investments in the public interest. The argument is that investment treaties cause a “regulatory chill”, preventing democratically elected legislatures in Europe from giving priority to public interests such as the protection of public health and the environment, of consumers and workers over the private interest of U.S. investors in profit maximization.

I think that the “regulatory chill” objection is grossly exaggerated. Although we do not yet have any draft of the TTIP Agreement, we can extrapolate its prospective content from the existing draft of the EU-Canada Comprehensive Economic and Trade Agreement (CETA). Judging from the CETA draft, the TTIP Agreement will not eliminate the EU’s right to regulate. Instead, it will expressly confirm that right. The TTIP Agreement will only require that European regulators refrain from discrimination and strike a fair balance between European public interests and U.S. investors’ private interests. This is no more than what existing European Union law and German constitutional law already stipulate.

Let me be more specific. One usual free trade agreement standard which will certainly reappear in the TTIP Agreement is the prohibition of foreign investor discrimination in the double sense of the national treatment requirement and most-favoured nation treatment requirement. National treatment means that a U.S. investor in the EU can claim treatment equal to that of a European investor. In other words, when the Union or a member state legislature puts in force new rules for the protection of legitimate public welfare objectives, it must not impose a heavier burden on U.S. than on European investors. Fair enough! Most-favoured nation treatment means that a U.S. investor can claim treatment no less favourable than that of any other third-country investor in the EU (such as a Russian, Chinese or Indian investor). Also fair enough!

Concerning market access of goods and services, the TTIP Agreement will, like CETA and other free trade agreements, follow the country of destination principle and not the country of origin principle. In other words, U.S. goods and services can only gain market access in the EU if they fulfil the respective safety, environmental and other standards of EU law which are to be applied in a non-discriminatory manner. In this respect, EU lawmakers are already bound to respect the existing rules of WTO law (SPS and TBT Agreements) to which the TTIP Agreement will likely refer. This means that EU rules limiting market access must have a sufficient scientific basis and not impose unnecessary barriers to trade. With respect to the envisaged regulatory cooperation between the U.S. and the EU, the TTIP Agreement will, like CETA, expressly reserve the right of each party to determine their desired level of health, safety, environment, worker, and consumer protection. Moreover, any “race to the bottom” either on the regulatory or the enforcement level will be expressly excluded. Rather, like CETA, TTIP will envisage the enhancement of protection levels on both sides of the Atlantic.

Two usual investment treaty standards to be included in the TTIP Agreement are the “fair and equitable treatment” standard and the prohibition of direct and indirect expropriations. These two rules also limit the right to regulate. But they also do not go further than requiring that a fair balance between European public interests and U.S. investors’ private interests be struck. Like CETA, the TTIP Agreement will further clarify those two standards and thereby confine their scope and preserve European regulatory discretion.

The requirement that foreign investors be treated in a “fair and equitable” manner constitutes a very common and at the same time very general clause in investment protection treaties. Foreign investors are indeed sometimes tempted to invoke that clause in order to challenge any regulatory interference, trying to make us believe that everything which reduces their profit margins is per se unfair and inequitable. But neither CETA nor the TTIP Agreement will permit such kind of excessive capitalist broadsides against reasonable regulation. Both agreements will contain a catalogue of examples illustrating that the fair and equitable treatment clause has much more limited scope. In essence, it protects foreign investors from arbitrary interferences such as denial of justice, but does not in any way prevent reasonable regulation in the public interest.

A second standard clause in investment treaties protects foreign investors from direct and indirect expropriation unless accompanied by prompt, adequate and effective compensation. Regulation to protect public welfare objectives like the environment does certainly not amount to direct expropriation because it does not effect any formal transfer of title from investors to other persons. Foreign investors have, however, sometimes asserted that such regulation was tantamount to indirect expropriation because it reduced their expected profit. Because of that experience, both CETA and the TTIP Agreement will contain an explanation according to which the prohibition of indirect expropriations is much narrower: “… except in the rare circumstance where the impact of the measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations”.[1]

This clarification will make sure that the EU’s right to regulate is not unreasonably limited by the investment protection chapter of the TTIP Agreement.

On top of all that, the TTIP Agreement, again like CETA, will include a general exception to the chapters on market access of goods and services from the U.S. as well as investment protection which equals Art. XX GATT. This will permit the EU and member states to adopt and enforce measures necessary to protect human, animal or plant life or health, or the environment in general even in the unlikely event that those measures come into conflict with their obligations under the TTIP Agreement.

In conclusion, the TTIP Agreement will not cause any “regulatory chill” in the European Union. Non-discriminatory measures to protect legitimate public welfare objectives in a proportional way will remain possible without any liability of compensation in favour of U.S. businesses.

[1] Chapter X, Section 4, Art. X.11 (3) of CETA.

Suggested Citation: Giegerich, Thomas, The Prospective Impact of the TTIP Agreement on the European Union’s Power to Regulate, jean-monnet-saar 2015, DOI: 10.17176/20220308-164224-0