The European Union and Japan have announced the main elements of a new economic partnership agreement, which has been hailed as the most important bilateral trade agreement ever concluded by the EU. However, investment protection currently remains outside the scope of the agreement, begging the question of whether a recent opinion from the Court of Justice of the European Union (“CJEU”) regarding the EU-Singapore free trade agreement really does spell the end of the EU’s proposed Investment Court System (“ICS”).

Bridges, Not Walls

The timing and forum for the public launch of the Japan-EU Economic Partnership Agreement (“JEEPA”) at the G20 summit in Hamburg was not accidental. In a political climate where there is a growing divide between advocates and opponents of free trade and globalization, it is hard not to interpret the official press releases referring to “building bridges, not walls” and “no protection in protectionism” as anything other than a direct rebuke to the current US Administration. Similarly, the inclusion of an express reference to the Paris Agreement on climate change in the draft text of JEEPA demonstrates the determination of both parties to press ahead with such multilateral initiatives in spite of the US’s withdrawal.

However, for all the fanfare regarding the importance of this new trade deal and the innovative provisions concerning sustainable development, environmental protection and corporate governance, there is one glaring omission that may signal a longer-term problem for the EU’s trade negotiators.

ISDS is dead… Long live the ICS

The current negotiating text does not include any substantive investment protections or investor-state dispute settlement (“ISDS”) mechanism. It is currently unclear whether this is a result of an underlying disagreement between Japan and the EU or an overly cautious approach by the EU, following the recent opinion from its highest court, under which the EU was required to seek the consent of all 38 national and regional parliaments for provisions concerning investment protection and ISDS in the EU-Singapore free trade agreement (see our previous article).

In relation to substantive investment protections, the CJEU opinion focused its criticisms on the inclusion of portfolio investment, which it considered to be outside the scope of the EU’s exclusive competence. This suggests that there is no reason why the EU should be hesitant to include pure foreign direct investment within the scope of JEEPA. However, in relation to ISDS, the story is very different.

In a fact sheet published by on 1 July 2017, the European Commission boldly declared that “for the EU ISDS is dead”. The same fact sheet also describes how the ICS (under which a permanent panel of State-appointed judges is established), is now being pursued by the EU in all its trade agreement and “this is also the case with Japan”. Yet there is no evidence that Japan has signed up to this proposal in the context of JEEPA or any other economic partnership agreement. On the contrary, the vast majority of Japan’s international investment agreements contain traditional ISDS mechanisms and it recently supported the inclusion of such a mechanism in the context of the Trans-Pacific Partnership (“TPP”). Admittedly, Japan was willing to exclude ISDS from the Australia-Japan economic partnership agreement in 2015, but the substitute in that instance was reversion to the domestic courts, pending future agreement on an appropriate dispute resolution mechanism. The Australian government has subsequently reversed its blanket opposition to ISDS.

It remains to be seen whether the EU and Japan might eventually be able to reach an agreement on investment protection and an alternative dispute resolution process for investor-state disputes. However, it does not bode well for the EU’s pet project if, after “18 intense and constructive negotiating rounds and several meetings at technical and political levels”, it has been unable to persuade Japan of the merits of the ICS. To coin a phrase from Mark Twain, reports of the death of ISDS may have been greatly exaggerated.