Emerging Voices: Minilateral Approaches to International Investment Agreements

[Maninder Malli recently completed a LL.M. (International Legal Studies) at New York University and he is currently working with the Legal Vice Presidency of the World Bank in Washington, D.C.]

International investment law (IIL) is highly dynamic.  The lack of a broad multilateral agreement on investment coupled with the rapid rise of foreign direct investment (FDI) has led to the profusion of bilateral investment treaties (BITs) and, increasingly, minilateral arrangements between three or more geographically-proximate or otherwise like-minded States.  The ‘spaghetti bowl’ of international investment agreements is becoming further entangled with hundreds of minilateral arrangements, including free trade agreements (FTAs) with investment provisions, economic partnership agreements and regional agreements.

In many areas of international law, including international trade, States are abandoning glacial multilateral initiatives and opting for regional or sectoral approaches to solve global problems and coordinate mutually beneficial action.  Moses Naím suggests that the failure since the 1990s of most grand multilateral negotiations represents not only a perpetual lack of international consensus, but also a “flawed obsession with multilateralism as the panacea for all the world’s ills.”  Naím argues for a smarter, more targeted approach, by bringing to the relevant table “the smallest number of countries needed to have the largest possible impact on solving a particular problem.”  Francis Fukuyama, similarly, has advocated for “multi-multilateralism,” entailing a diversity of institutions and institutional forms to provide governance across a range of security, economic, environmental, and other issues.

In the context of IIL, the profusion of regional investment arrangements (such as the recent trilateral investment agreement between China, Japan and South Korea and the Mexico–Central America FTA) and the ongoing discussions for investment regulation in a Trans-Pacific Partnership (TPP) and a Transatlantic Trade and Investment Partnership (TTIP) are clear evidence of this minilateral trend.  As proposed in the TPP and TTIP, investment regulation is incorporated into broader economic arrangements which often include trade, intellectual property and regulatory coherence.  The Energy Charter Treaty (ECT) is a sectoral example of a minilateral treaty which entails investor protection.  States are clearly converting their strong bilateral economic and political relationships into minilateral arrangements to regulate FDI.

These initiatives, at least in part, reflect a desire of State parties to circumvent broader multilateral efforts that lack consensus on the precise standards of treatment of foreign investors and thus fail to achieve substantive common ground.  The OECD’s failed Multilateral Agreement on Investment in the late 1990s and the inability to advance the multilateral investment agenda within the World Trade Organization illustrate the challenge of crafting comprehensive general principles and specific treaty provisions which are responsive to the diverse and vacillating economic, social and political conditions of a large number of States.  In the IIL context, this is most clearly manifested in the dichotomy between (i) the desire of States to attract FDI and to be perceived as active participants in the liberal economic order, on one hand, and (ii) the need to retain regulatory flexibility and avoid plethoric investor-state arbitration, on the other.  The absence of complete and adequate multilateral investment rules was historically blamed on the discord between capital-supplying and capital-receiving nations.  This dichotomy is today no longer as simple, as an increasing number of countries are both capital suppliers and capital recipients, and the correlation between the two is ever-fluctuating.

I submit that greater attention should be paid to the potential for minilateral arrangements to better reflect modern State desires and ambitions for reciprocal FDI promotion and protection.  While the content of most investment agreements is remarkably similar, there are important deviations in the wording, application and interpretation of many substantive provisions.  Modern examples of these differences include (i) the breadth of the types of investments which an agreement protects; (ii) the scope of the application of national treatment obligations (e.g., carve-outs for ‘affirmative action’ or similar domestic programs); and (iii) host States’ rights to regulate without compensation (i.e., ‘regulatory takings’).  Minilateral arrangements can permit the State parties to craft provisions which more accurately reflect their respective interests and goals.  Moreover, the application of controversial dimensions of IIL can be appropriately molded, such as: (i) binding market access commitments; (ii) the imposition of performance requirements on investors tied to anti-corruption, sustainability or other corporate social responsibility principles; or (iii) the right of host States to restrict investments during times of economic crisis.

While BITs permit State parties to tailor their agreement, the profusion of nearly 3,000 BITs has led to an atomized system which often lacks coherent practice by relevant actors (States, investors, arbitrators), including in the interpretation and arbitration of many substantive and procedural provisions.  Minilateral arrangements may offer a more predictable and stable legal framework from the perspective of both States and investors.

As described by Stephen Schill, the current IIL system, in many respects, functions analogously to a multilateral system.  Certainly the fragmented system cannot be characterized as consisting only of ‘contract-like’ treaties between States.  The relative uniformity of many treaty provisions and their procedural application and interpretation (including most favored nation treatment) reflects the de facto multilateral and, in some instances, constitutional dimensions of the system.  Yet the continued formation and negotiation of specific bilateral and minilateral bargains between States highlights how the system remains fundamentally fragmented.  IIL thus has elements of both (i) an institutional and cohesive body of law and (ii) a fragmented series of bilateral relationships.  Consequently, greater focus should be placed on how these fragmented groupings might be able to enhance the effectiveness and also the legitimacy of the IIL system.  While a truly multilateral system, as endorsed by the majority of the academy, may be desirable, the universalist ethos should be moderated with a view to the negotiable commonalities in smaller blocs which may better reflect the State parties’, and ideally their citizens’, economic and other interests.  Moreover, expanded minilateral approaches may provide the ‘laboratory effect’ and impetus for broader multilateral agreements on investment.

There are certainly drawbacks to this minilateral trend.  Most notably, profuse minilateral agreements have added to the fragmentation of IIL in terms of increasing over-lap and conflicting treaty obligations.  In addition to difficulties in interpreting and balancing treaty obligations, this fragmentation has also increased the ability of investors to ‘forum shop,’ through corporate structuring, for treaties which offer the most favorable protection.  The expansion and entrenchment of minilateral agreements could potentially lead to the termination of redundant and often outdated BITs, although there is little evidence of this dynamic to date.  However, UNCTAD has noted the upcoming expiration of a large number of BITs – by the end of 2013, more than 1,300 BITs will be at the stage where they could be terminated or renegotiated at any time. Further, between 2014 and 2018, at least 350 bilateral treaties will reach the end of their initial duration.  This may present an opportunity for a shift toward minilateral mechanisms in order to reduce the clutter.

Nevertheless, this fragmentation does not diminish the areas of institutional convergence between existing BITs and minilateral arrangements, which might contribute to a more cohesive and effective framework for IIL.  The expansion of minilateral arrangements may forge a favorable middle ground between the atomized BIT network and an unlikely broad multilateral system.