Arbitration scheme obstacle to EU-Canada trade deal

BRUSSELS (Reuters) - The French-speaking region of Wallonia may be the final hold-out against a planned EU-Canada free trade deal, but its view that a system to protect foreign companies threatens democracy is shared by many protesters across Europe.

Investor-state dispute settlement (ISDS) was once a term known only to international trade experts, but became the rallying cry of those opposed to EU-U.S. trade negotiations when these were launched three years ago.

Were it not for planned EU-U.S Transatlantic Trade and Investment Partnership (TTIP), the EU-Canada Comprehensive Economic and Trade Agreement (CETA) could well have sailed through like the EU's last major deal, with South Korea in 2011.

However, CETA has been dubbed "TTIP's Little Brother", setting the tone for a bigger North American deal. It became the focus of labor, environmental and other protest groups who say it will cause a race to the bottom in standards, mainly through its system of investor protection.

ISDS is a mechanism that allows foreign companies to challenge state interference, such as expropriation. Typically the lawsuit is brought before a panel of private arbitrators, its members appointed by the investor and state in dispute.

Critics say that the system can be abused, allowing multinationals to dictate public policy.

"We want absolutely no private arbitration mechanisms," premier of Wallonia Paul Magnette said on Monday as he delivered a final "Non" to signing the deal this week - though in fact negotiators involved in CETA argue that its tribunals will be appointed by governments on either side without corporate input.

Critics of past ISDS arrangements point to challenges brought through investment or trade treaties by Marlboro-maker Philip Morris International against legislation in Uruguay to include graphic health warnings and in Australia to insist on plain packaging for cigarettes.

In fact, Uruguay has won its case, while rulings to date have been in Australia's favor. However, critics say even the threat of a legal challenge and its cost mean national or sub-national governments will feel unable to tighten rules on public health and environmental or labor standards.

They also question why foreign companies should be granted a separate arbitration system rather than using existing domestic courts. Trade experts say EU trading partners are probably content with legal standards in western Europe, but may be less convinced about those among the newest EU members.

Opposition forced the European Commission in 2014 to suspend negotiations on the investment parts of TTIP and to hold a public consultation on investment protection. Of nearly 150,000 submissions, the Commission said 97 percent were "pre-defined" negative responses.

Ironically, Germany, the location of the largest anti-TTIP and CETA protests, was the founder of ISDS. Its 1959 trade agreement with Pakistan featured such a clause to protect its companies in an uncertain political and economic climate.

ISDS has since become a staple of trade pacts, included in over 1,400 investment treaties concluded by EU countries and some 3,000 worldwide.

The EU-Canada trade deal specifies that states have the right to regulate and would establish a permanent and more transparent tribunal to rule on disputes, with members appointed by EU and Canada in advance. The partners would also work towards creating a permanent multilateral investment court.

(Reporting By Philip Blenkinsop)