Thanks to the Kluwer Arbitration Blog editors for this chance to weigh in on the ISDS debate.  I have been a frequent critic of the existing ISDS system, but I take a different approach than many other opponents.  For me, the discussion should focus on two main issues, one related to access to international rights protections and the other related to substantive obligations:

1.  Why do foreign investors have recourse to enforceable international law to assert their rights, whereas virtually no one else does?

2.  What should the scope of international investment law obligations be?

In this post, I will highlight these two issues, and I look forward to hearing the responses of ISDS supporters.

On the issue of who has access to enforceable international law, it is widely acknowledged that international law is a fragmented system. However, it is nonetheless possible to step back and evaluate it as a whole, to see how various groups are treated. When you compare international investment law to other areas, such as human rights, it is clear that foreign investors have been given a fairly effective enforcement mechanism, whereas ordinary citizens generally have not (one or two regional rights treaties aside).  We should ask why that is.  On its face, this situation does not seem, well, “fair and equitable.”

Some have argued that international investment law is a progressive force that can be used as the basis for expanding rights to others.  That is a principled position.  However, in practical terms, it is not likely that this will happen anytime soon, if ever. The rights of foreign investors are a one-off grant; there is no movement to extend these rights to others.  Thus, supporters of the system need to accept that the current system gives rights to some and not others, and that is not likely to change.

Is there a justification for giving special rights only to foreign investors?  If this were the 1950s, when newly independent countries were asserting their sovereignty and nationalizing the investments of foreign companies, there might have been a better case for it. In a situation where certain national governments are targeting foreign investors, the idea of a neutral international tribunal to adjudicate the issues could have some merit.

But today, the situation of foreign investors is very different. Except in fairly rare circumstances, governments are not targeting foreign companies on the basis of nationality.  (And if they were, a non-discrimination provision alone could address the problem. I will discuss the substantive obligations further below.) In fact, the bigger problem with governments and foreign investors is probably the large subsidies governments keep offering to lure them in. To take an example, even as the United States and the European Union battle at the WTO over the subsidies each provides to Boeing and Airbus, respectively, U.S. state governments are offering subsidies to that foreign competitor Airbus!

Of course, it is certainly true that governments treat investors, and citizens more generally, badly sometimes. In many countries, even the more advanced ones, the absence of rule of law can be a serious problem.  But it is hard to make the case that most countries are targeting investors because they are foreign.  The truth is, governments treat a lot of people badly; mostly this means treating their own people badly, but foreign investors do sometimes get caught up in this general problem.

The strange thing about ISDS is that it addresses only a small subset of this problem of bad government treatment, in that it only addresses the problem as it pertains to foreign investors. What is particularly odd about it is that foreign investors are often in a much better position to defend their rights than are domestic investors or ordinary citizens. There are certainly a range of foreign investors, and not all are big multinational companies. However, in order to engage in investment outside of your country, significant resources are usually required. By contrast, domestic investors are often small companies, such as dry cleaners or pool maintenance companies. As it stands now, though, it is only foreign investors who get the protections under international law, not domestic investors, or ordinary citizens for that matter.

There are arguments for addressing gaps in the rule of law through international treaties, either with an international standard or a requirement to incorporate such standards in domestic law. But the ISDS approach of providing such protections only for foreign investors undermines the rule of law as much as it promotes it. It is akin to saying in a domestic constitution that the only rights we will protect are those of wealthy property owners.

Turning to the substantive obligations, the discussions of what international investment law requires often blur together some very different rules. Sometimes defenders of the system portray it as only about prohibiting discrimination against foreign investors; other times they focus on the issue of expropriation of physical assets. If these were the only obligations, ISDS may never have made headlines in the first place.

In truth, the biggest issues are the international investment law rules on regulatory expropriation and on the minimum standard of treatment, including fair and equitable treatment. My sense is that some defenders see these as very narrow obligations, which would only affect a small percentage of government actions, those which cross a very high threshold of bad behavior.  In practice, however, some broad interpretations of these provisions have created opportunities for litigators to challenge a wide range of government actions and inactions.

While some critics worry about the “regulatory chill” that may result, my fears are broader than that.  It seems to me that we have given foreign investors an opportunity to challenge just about any government behavior that they do not like.

Of course, that does not mean that investors will win every challenge. But to me, the win-loss record is not the most important thing. The more interesting issue is what kinds of challenges are being brought, and what impact they are having on governments. When I see claims made against governments who decide to withdraw subsidies, it raises concerns.

Note that it would not be very difficult to fix the problems of overbroad legal obligations. In the context of regulatory expropriation, a number of agreements have added language to make clear that nondiscriminatory regulation will almost never violate this provision. Something similar could be added to the minimum standard of treatment provisions.  Or, a general exception for legitimate social policies could be included. This would not be unprecedented, as some agreements already have a provision like this. The resistance to adding such language in U.S. and EU investment obligations is somewhat baffling, although I suppose the obvious explanation is that business groups are lobbying hard against it.

I have tried hard to engage with supporters of the existing ISDS system on these issues, on twitter, on various blogs, and via e-mail. It has been difficult to get much of a response. Usually when I raise the issue of the broad scope of fair and equitable treatment, for example, they disappear from the debate, leaving me wondering what their position is.  If ISDS is about the treatment of foreign investors, why isn’t a non-discrimination provision enough?  And why have an international legal system that requires fair and equitable treatment, and compensation for expropriation, for foreign investors, but not for anyone else?

I appreciate the opportunity from the editors of this blog to raise some of these issues, and I look forward to hearing any responses from ISDS supporters.


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4 comments

  1. There is a wide angry campaign against investor state dispute settlement clauses in multilateral trade agreements, especially those negotiated in TTIP and CETA. I feel however that the more information the anti TTIP campaigns put out there, the more confused the message gets. I thought therefore of offering a short, simple explanation on why you should oppose ISDS.

    Investor arbitration is a useful tool in attracting investment in jurisdictions where the dispute resolution system is inadequate in dealing with complex legal problems. This may be due to institutional deficiencies or concerns as to partiality. None of this is of any relevance to developed western countries.

    This not why you should oppose ISDS however. The reason is that Courts have to take into account public policy considerations. Investment tribunals do not. As a citizen therefore you have no interest in handing dispute resolution over major state-corporate deals to a body that does not have to worry itself with the common good.

  2. Simon,

    Thank you for your post. I admire and agree with the work the Cato Institute does in resisting the growth of the regulatory state. My responses to your arguments follow.

    An argument that is premised on the fact that governments treat people badly should end with a plea other than to suggest that all people should be treated badly, I submit.

    It may be that your conclusion follows from a flawed basic assumption. International legal protection protects international actors. No government has or will agree to subject its sovereign right to determine what domestic rights and obligations its citizens may exercise to the will of a government or tribunal other than its own. Nor would we wish it were so. So the perhaps overly simple answer to your first question is that only foreign investors are protected by international law because they and their host states are the international actors who have agreed to be subject to that international regime.

    Regimes and enforcement mechanisms for other non-commercial transgressions among states exist. But the problem I mention above is at the heart of the human rights violations we all lament where people and not states are the subjects of the law. Whether and the extent to which a responsibility to protect can justify an intervention in a state’s mistreatment of its citizens is a contested issue.

    I disagree with your contention that the plight of foreign investors is so very different from what they faced during the era of decolonization. To be sure, outright expropriation, while not completely a thing of the past, has been replaced by other means of taking a foreign investor’s property. But takings, including the kind that the Cato Institute fights, continue apace, and
    sometimes still under the rubrics of the NIEO past. And the state and non-state actors have relocated in some cases to what would have been known then as the developing world. But governments everywhere as you so aptly describe it, too often accord little or no respect to property rights. They always have and, I submit as long as governments are subject to the will of populist urgings, always will. The foreign investor remains a convenient bogey man.

    And I wouldn’t be so quick to condemn the “litigators” who push the boundaries of the legal regime on behalf of clients who believe they have been wronged. Clever lawyers hold those in power to account; that is a good thing, I believe, and the work of others who have posted here shows without question that there is no “regulatory chill” or other untoward result of claims made. It is far better than gun boat diplomacy.

    To your question about the substantive law or what I would call the need for more than one way to state the rights of investors, I would say as long as governments come up with creative ways to take private property, we should maintain the traditional arguments for holding governments to account. To respond specifically to your query about the need for prohibitions on expropriation without compensation where a requirement that fair and equitable treatment is the standard, we come full circle to where I started. A government that treats all investors foreign and domestic fairly and equitably by seizing their property without paying for it is a government that should be held to account, and if such a government prefers that only foreign investors be granted a right to compensation, then it seems to me the remedy is to change the law or the government or both.

    Thank you for posing these two interesting questions. It is a sunny day in Seattle, and I’d really rather be outdoors.

  3. It shouldn’t be necessary to give an ISDS 101 course to someone who holds a JD from Harvard Law, but this post demonstrates such an astounding lack of understanding that I guess it is.

    Question 1 is easily answered: Because FDI is seen as a positive by both home and host states, which are therefore ready to sign BIT treaties providing for ISDS in the hope that it increases capital flows. A supernational human rights enforcement mechanism, in contrast, is not seen as a positive by a number, (but by no means all, note the existence of the ECHR) states. Is this fair to domestic investors? While one could argue that they tend to find it easier to navigate the political risks of their own country, I’d say no, overall. Alas, there is no fairness in injustice, and surely taking justice away from those who, even if by wild chance, have achieved it, won’t accomplish anything.

    Question 2 is heavily debated by the ISDS community. In fact, the draft for CETA contains a “legitimate regulation” exception. A little research may have enlightened you as to the contents of this discussion, and maybe would have lead to more people engaging you in your attempts at “debate”.

  4. Thanks very much for the comments. You can only do so much in the space allotted for a blog post, so I’ll refer to you some other things I’ve written on the subject for answers to the questions raised:

    http://www.cato.org/publications/policy-analysis/liberalization-or-litigation-time-rethink-international-investment

    http://object.cato.org/sites/cato.org/files/articles/jwt-49-2-lester.pdf

    One key point: I’m not saying we should do nothing. I think we should work towards domestic laws that protect the rights of all, including foreign investors. ISDS seems like a distraction from that goal.

    Also, on CETA, my understanding is that the the exception for legitimate regulations does not apply to the minimum standard of treatment obligation.

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