What I Did on My Summer Vacation (Part I): The Transparency of the International Investment Regime

The opportunity to guest blog on Opinio Juris is most appreciated. It is almost like having the ASIL Presidency forum all over again. 

My first topic emerges from a conference hosted by the Canadian-based Institute for Sustainable Development in Barcelona in July 2010. The Institute invited a number of practitioners and scholars to address the topics of transparency and independence in the course of investor-state arbitration. Some 20 of us, including staff members of the IISD, officials of relevant organizations (e.g., the European Commission, the Permanent Court of Arbitration, UNCTAD), academics and members of the private bar gathered in that sultry city, just prior to when it became even hotter over the World Cup, to exchange views with respect to two draft papers written by IISD. Like most others, I had no prior connection with IISD, presumably was invited to provide my own independent assessment, and did not rely on IISD for my travel expenses.

Although IISD has a reputation as a strong (and early) critic of the investment regime (consisting of nearly 3000 bilateral investment treaties (BITs) and investment chapters of free trade agreements (FTAs) and a bourgeoning number of investor-state arbitral decisions interpreting them) its draft discussion papers on the contentious questions of transparency and the possibility of conflicts between investor-state arbitrators and those who also act as counsel in such cases were not the conventional agitprop disguised as research sometimes produced by left-leaning NGOs. This blog will use the IISD paper on transparency, which is still in draft and unpublished, to explore broader challenges facing the investment regime. (For prior IISD positions see here).

As I, among many others, have noted (see “What and Why are we ‘re-calibrating’?” (a working draft)), the investment regime is at a crossroads. BITs, which originated with Western capitalist exporting nations anxious to provide better protection to their foreign investors abroad, proliferated globally with the end of the Cold War. Although these treaties differ among themselves and the investment regime is more of a spaghetti soup bowl than a harmonious “system” as compared to the GATT covered agreements, most of these treaties provide investors from either party national and most favored treatment, fair and equitable treatment and full protection and security, guarantees that they will be able to freely export capital (such as profits), and prompt, adequate and effective compensation in case of direct or indirect expropriation. Some BITs and FTAs also contain “umbrella” clauses under which the state parties agree to abide by their contractual or other obligations to foreign investors. The vast bulk of BITs have taken advantage of existing venues facilitating international arbitration (such as the International Centre for the Settlement of Investment Disputes (ICSID) under the World Bank) as well as other agreements that removed obstacles to the enforcement of arbitral awards rendered in the course of commercial disputes among private parties (such as the New York Convention on the Enforcement of Arbitral Awards). The investment regime is characterized by an enforcement mechanism that is similar to (but goes beyond) those that apply under regional human rights courts. Under BITs and FTAs, foreign investors can directly enforce their treaty rights against respondent states without, in most instances, exhausting local remedies or seeking the permission of their home states.

During the decade of the 1990s, developing states that were at the receiving end of IMF demands or that needed cash in the midst of a global credit crunch turned to these treaties because David Ricardo’s theory of comparative advantage seemed the only game in town. (For my take on the origins of the investment regime – and my disagreements with the most popular account of the spread of BITs – see “The Once and Future Foreign Investment Regime” (a working draft). Most states – including eventually even formally “communist” ones like Cuba and China, and others not normally associated with “the West” such as Egypt, turned to such treaties to signal their capitalist bona fides.

The investment regime has now outgrown its origins. Although originally conceived in neo-colonist terms, it no longer consists solely of North/South agreements between Western capital exporters and Southern capital importers. Today’s web of investment agreements is less easy to characterize. (For my contention that the regime no longer can be described as a form of imperial rule defined in traditionally territorial terms but may continue to be an “empire” of capital and of law, see “Contemporary Foreign Investment Law: An ‘Empire of Law’ or the ‘Law of Empire’?”  Today, as many as one-third of BITs and FTAs are between countries of the Global South.  Western states have entered into investment agreements among themselves (such as the NAFTA and the Energy Charter), and the ten states that have most frequently been sued by investors include Canada, the United States, the Czech Republic, and Poland. (As this update from UNCTAD indicates, Argentina, with over 50 investor claims, most growing out of its emergency legislation passed in the midst of its 2001-2002 economic crisis, leads the pack. States that some would expect to see among the top ten – such as poor African states with a history of investment problems – are not among the most frequent respondents.)  When two of the leading capital exporters of the world – the United States and China – are also two of the leading capital importers, those countries’ respective investment protection treaties can be expected to cut both ways. Countries like these, which also include capital exporters/importers like India and Russia, have to worry both about protecting their foreign investors abroad as well as being sued by foreign investors that they host. Therein lies the regime’s current dilemma: investor-state arbitrations have become so popular – and visible, including in countries with hyperactive civil societies – that they have displaced the WTO as the focal point of competing contentions over the merits of economic globalization.