Getting back to academic discussions, here's more from Freya Baetans on ISDS:
Four possible alternatives to the inclusion of ISDS in TTIP are frequently mentioned. The first would be to opt for state-to-state arbitration. However, such an option would hardly be preferable, as it will invariably politicise a dispute and blow it far out of proportion, potentially influencing the international relations between states as a whole. As these cases are not actually located at the inter-state level, they should not be framed as disputes between states. In order for such cases to proceed to the inter-state level, investors would need to rely upon diplomatic protection, which is sporadic, arbitrary in its incidence and prone to politicisation, as there is no control over the process or any form of remedy for the individual whose claim is espoused. Furthermore, the decision whether to espouse a claim is often not taken on legal grounds but is rather dependent upon other factors such as the relative size of a state and potential need for foreign aid. As such, espousal of claims has rightly been superseded by investment protection and human rights law.
With regard to whether the state-state rules would polticize disputes, I talked about this in an op-ed here:
This politicization argument is not convincing. First of all, it is hard to imagine that any politicization that occurs with state-to-state dispute settlement would be worse than what is going on now with ISDS. The nature of the existing system has politicized trade agreements so much that it is questionable whether some of them can even be concluded.
In addition, the trade dispute process has thrived with state-to-state dispute settlement. Disputes do get political at times, but the number of disputes filed makes clear that governments have not been deterred from asserting their rights when faced with protectionism. Moreover, it is worth noting that state-to-state dispute settlement at the WTO contains some rules on trade in services that cover investment, and the system has not been overwhelmed with politicization.
Poulsen, Bonnitcha, and Yackee say something similar (p. 15).
To add one more thing: The U.S.-Australia FTA has only state-state, and I can't recall any politicization there.
As for the human rights law analogy (which Baetans refers to), as I understand it, what we are talking about here is regional human rights treaties, such as the ECHR. To me, that's fundamentally different than a global human rights regime where direct claims could be brought in an international tribunal (which does not exist). Within a particular region, shared values make this possible, and direct individual rights claims can work in that context. But that can't be translated easily to a non-regional international arrangement. And if you were going to translate it, giving protections only to foreign investors seems like a strange place to start.
As a middle ground approach, you could have ISDS but with the state having the ability to step in. Here's something from economist Simon Johnson and Rep. Sander Levin, writing about what they would like to see for ISDS in the TPP:
One of several important changes would be to ensure that, in the event of a dispute, both governments involved — the host and the home country for the company — can jointly agree that a case is inappropriate and should be dismissed.
Levin says more on this here:
... U.S. FTAs have included a diplomatic screening mechanism of sorts, but only for tax measures. This mechanism should be extended more broadly so that it covers other public interest issues, such as environmental and public health measures.
Specifically, the two governments (the government of the claimant/investor and the government respondent in an ISDS case) could agree that a particular claim is not a claim for which an award in favor of the claimant may be granted. In other words, a dispute would not be subject to ISDS if both governments agree that a claim should be dismissed.
In this regard, Baetans refers to this idea:
A second option would be for the home state to be able to block any claims brought by investors. Some of the problems of this second approach could be mitigated by allowing the home state to be a third-party intervener – which is perhaps a route that could still be explored.
Are there any existing agreements that use this approach? I'm not sure. The decision-making process for a government faced with such an issue would be fascinating, for political scientists and others.