Innovative ISDS regulations in CETA
To what extent can a "two-level game" approach explain their accomplishment?
Term Paper (Advanced seminar) 2016 10 Pages
Table of Contents
Introduction – CETA, ISDS and two-level games
The European Union’s win-set
From hardened fronts to a “clear break from the current ISDS system”
Putnam’s two-level game – a useful tool to analyse European trade policy?
Introduction – CETA, ISDS and two-level games
In June 2009, the EU Commission and Canada began talks on a bilateral trade agreement named Comprehensive Economic and Trade Agreement (CETA). The (preliminary) content of the deal was finalised in September 2014. However, due to modification requests by EU member states, CETA was only signed in October 2016. Yet, its final ratification is still pending.
One critical issue – and therefore one reason for CETA’s late signing – has been the question on how to regulate investor-to-state dispute settlement (ISDS). ISDS “allows an investor from one country to bring a case directly against the country in which they have invested”, for example when a foreign investor is discriminated against. ISDS brings along a couple of characteristics which distinguish it from regular courts, for instance the non-public proceedings are usually presided by private lawyers. Critics fear that ISDS in CETA could enable foreign investor companies to imperil the ‘right to regulate’ of sovereign states shying away from certain regulations out of fear to be sued.
This essay uses Putnam’s two-level game approach to analyse why CETA was firstly endangered but did eventually not fail because of the dispute on ISDS. I argue that this can be mainly explained by the overlapping of the win-sets, decisively rendered possible by the change of government in Canada.
In this essay, I will first of all evaluate the win-sets of both parties. Secondly, I will analyse how and why these win-sets did at first not overlap but eventually did, before concluding with an estimation of the usefulness of Putnam’s two-level game theory for European trade policy.
The European Union’s win-set
According to Putnam, three factors determine the size of the win-set: “preferences and coalitions” on the domestic level (Level II), political institutions on Level II and the “negotiator’s strategies” on the international level (Level I). Putnam defines the win-set itself as “for a given Level II constituency as the set of all possible Level I agreements that would ‘win’ – that is, gain the necessary majority among the constituents (…)”.
CETA is in the EU widely considered as a preference for economic but even more for geopolitical reasons. The EU Commission expects CETA to boost +trade between both partners by almost a quarter. CETA is geopolitically a part of EU’s global trade strategy focusing on bilateral agreements. It is supposed to be a “gold-standard trade deal” which “helps to shape globalisation” making sure European political and economic ideals and values remain a part in the global trade and economy. A second geopolitical aspect apart from agenda-setting is the need for the EU to actually prove its capacity to act as a geopolitical player. These conditions enlarged the EU’s win-set because of the tremendous “cost of no-agreement” on the economic and even more geopolitical field.
Considering preferences and coalitions on Level II, one can state that the controversy on ISDS in CETA was harsh and politicised, activating and opposing those who criticised ISDS as “discouraging legislation for fear of triggering a suit” and those who regarded it as an indispensable instrument to protect investments abroad. These heterogenous societal interests decreased the size of the EU win-set. In turn, it had a better negotiation position because it could always point to the massive opposition against CETA and ISDS in some member states.
Secondly, the size of the EU win-set was reduced by the complicated ratification process of the deal within the EU, not only including the Council and the European Parliament but also members states’ national ratification processes. Again, this had the double effect of making a deal more unlikely (higher risk of “involuntary defection” in case ratification failed in just one member state and uncertainty about the “deliver-ability” ) but also enhanced the EU negotiation position.
Given the sheer size of the EU’s internal market and the fact that the EU is Canada’s second biggest trading partner after the United States of America, CETA seems to be economically highly important. Canada’s home market is relatively small and the success of its economy therefore depends on the tapping of new markets.
However, CETA’s significance for Canada does not only lie in economic figures but also in its geopolitical effects. For instance, via a closer economic relationship with Europe, Canada could lessen its dependence from the Unites States and compete better with them. Having already concluded free trade agreements with the two globally most significant economies, Canada is currently negotiating several other trade agreements which would altogether (including CETA) create a broad network of stronger economic – and thus political – partnerships worldwide, strengthening Canada as a global actor. The Canadian government lastly also stressed CETA’s agenda-setting value.
Canada’s win-set was furthermore marked by resistance against CETA on the domestic level, hence by heterogeneous societal interests, downsizing Canada’s win-set.
Regarding political institutions on Level II, the federal government has a particularly strong position in foreign policy, including the right to negotiate, sign and ratify trade deals. The national assembly and provinces have no decisive role. In other words, the number of veto players was considerably lower than in Europe, enlarging Canada’s win-set. Overall, the Canadian win-set has been consequently larger than the EU’s one.
From hardened fronts to a “clear break from the current ISDS system” 
Despite promising gains from CETA, several EU governments (also driven by domestic public opinion) made it clear after the publication of the treaty text that they could not accept CETA with the ISDS regulations included.
In other words, even though the negotiators on Level I (EU Commission and the Canadian government) had agreed perfectly on the content of the treaty, its ratification seemed to be impossible because on Level II (EU governments and their constituencies) the opposition against one element of the treaty was huge enough to blow up the entire deal. Considering that the conservative Canadian government however was reluctant to renegotiate ISDS provisions (thus diminishing Canada’s win-set considerably), by mid-2015 CETA was far from being a “done deal”. Level I at the Canadian side was not ready to give any further concessions and Level II at the European side was not willing to ratify the deal. In short: both win-sets did not overlap at this moment.
However, in order to reach an international agreement, the win-sets of both sides must overlap, getting more likely with the increasing size of the parties’ win-sets. What eventually lead to a breakthrough was apparently the change of government in Canada from the conservative to the liberal party in October 2015, the latter willing to renegotiate on ISDS, thus increasing again the Canadian win-set and resulting in an overlapping with the EU’s win-set. Along with the government, Canada’s preferences had apparently changed, from insistence on the original ISDS regulations to a fast treaty completion. Indeed, an agreement was reached in February 2016 satisfying the requests of previously critical EU governments which consequently signalled to support CETA.
 European Commission, “EU and Canada start negotiations for economic and trade agreement”, 10 June 2009.
 European Commission, “EU-Canada agree deal to boost trade and investment”, 26 September 2014.
 Council of the European Union, “EU-Canada trade agreement: Council adopts decision to sign CETA”, 28 October 2016 & European Commission, “EU-Canada summit: newly signed trade agreement sets high standards for global trade”, 30 October 2016.
 European Commission, “European Commission proposes signature and conclusion of EU-Canada trade deal”, 5 July 2016.
 European Commission, “Factsheet on Investor-State Dispute Settlement”, 3 October 2013, p.1.
 Bundesverband der Deutschen Industrie e. V., “Investitionsschutzabkommen und Investor-Staat-Schiedsverfahren: Mythen, Fakten, Argumente“, February 2015, p. 5.
 M. Krajewski, “Modalities for investment protection and Investor-State Dispute Settlement (ISDS) in TTIP from a trade union perspective”, 2014, pp. 6-7.
 Amis de la Terre France et al., “Free-trade agreement between the European Union and Canada: Corporations Must Not Make The Law”, 20 October 2011, p.1 & P. Eberhardt et al., “Trading Away Democracy: How CETA’s investor protection rules could result in a boom of investor claims against Canada and the EU”, September 2016, p. 2.
 R. Putnam, “Diplomacy and Domestic Politics: The Logic of Two-Level Games”, International Organization, vol. 42, no. 3., 1988, pp. 441-442.
 Ibid., p. 437.
 European Commission, “EU and Canada conclude negotiations on trade deal”, 18 October 2013.
 B. Rudloff, “SWP Aktuell - Kein CETA ist auch keine Lösung“, October 2016, pp. 1-2.
 C. Malmström, “CETA shows that Europe can shape globalisation”, 31 October 2016.
 Ibid. & F. Steinmeier, “Mit CETA Standards setzen“, 8 September 2016.
 U. Ladurner, “Es geht nicht nur um CETA“, 27 October 2016.
 Putnam, op. cit., p. 442.
 Eberhardt, op. cit., p. 2.
 Bundesverband der Deutschen Industrie e. V., “BDI spricht sich für Investitionsschutz mit Kanada und den USA aus“, 29 September 2014.
 Putnam, op. cit., pp. 444-445.
 Ibid. & K. Hübner et al., “CETA: the Making of the Comprehensive Economic and Trade Agreement Between Canada and the EU”, April 2016. p. 27.
 European Commission, op. cit., 5 July 2016.
 Putnam, op. cit., pp. 438, 453.
 Ibid., p. 439.
 European Commission, “Questions and answers - How much trade is there already between Canada and EU?”, 5 April 2016.
 J. Jacobsen, “CETA Free Trade Agreement Could Benefit Canada More Than EU”, 10 November 2014 & Rudloff , op. cit., p.1.
 A. Campbell, E. Feldman et al., “No Time for Complacency: A 21st Century Trade Strategy for Canada”, November 2015, pp. 4, 7.
 Ibid., p. 8, Jacobsen, op. cit. & L. Herman, “Canada is right to be furious about European Union trade negotiations”, 24 October 2016.
 Campbell, Feldman et al., op. cit., p. 11.
 Ibid., pp. 6-7.
 Government of Canada, “International Trade Minister introduces legislation to Parliament to implement CETA”, 31 October 2016.
 Amis de la Terre France et al., op. cit.
 Hübner, op. cit., pp. 19-20 & Parliament of Canada, “Parliamentary Involvement in Foreign Policy”, 10 November 2008.
 Hübner, op. cit., pp. 16-17 & Parliament of Canada, op. cit.
 European Commission, “CETA: EU and Canada agree on new approach on investment in trade agreement”, 29 February 2016.
 “France may block EU-Canada trade deal over ISDS”, Euroactiv, 2 July 2015, C. Gammelin, “Berlin lehnt Freihandelsabkommen mit Kanada vorerst ab“, 28 July 2014 & B. Patterson, “Hungary says it won't ratify CETA because of ISDS provision”, 11 May 2015.
 M. Barlow, “The EU Conversation Harper Refuses to Engage With”, 19 May 2015.
 Putnam, op. cit., p. 438.
 J. McGregor, “Justin Trudeau to talk over troubled trade deal with European Parliament head”, 22 January 2016.
 S. Drymer, “CETA Under New Management: Why Is Trudeau Changing the Game?”, 12 May 2016.
 European Commission, “CETA: EU and Canada agree on new approach on investment in trade agreement”, op. cit.
 H. Kafsack, „Durchbruch im Streit um Investorenschutz“, 29 February 2016 & M. Fekl, „Commerce extérieur - Accord entre l’Union européenne et le Canada pour une nouvelle approche de règlement des différends“, 1 March 2016.
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- CETA TTIP ISDS EU Kanada Handelspolitik Freihandel Freihandelsabkommen Investorenschutz Trudeau Kommission win-set Putnam two-level games regulatory chill