In its early years, during the 1960s, 1970s, and 1980s, the international investment law system, and its provisions allowing foreign investors to sue host governments directly in an international tribunal (Investor State Dispute Settlement or ISDS), was relatively uncontroversial. Taking widely accepted domestic law principles and using them as the basis for an international law framework to protect certain rights seemed like a good way to expand the rule of law and promote economic development and growth. Who could object to principles such as fair and equitable treatment or the protection of property rights?

As it turns out, however, the system was uncontroversial only because it was obscure and mostly unutilized. An investment treaty between the United States and Senegal, for example, did not have much practical impact because of the limited investment flows, and thus it did not raise many concerns. But when industrialized countries began to negotiate these agreements with other capital exporting countries (e.g., Canada and the United States in NAFTA), and investors started filing lawsuits, a backlash occurred. Now that people see what the obligations mean, many have risen up in protest.[1]

As the debate has heated up, it has deteriorated a bit. Some of those with the most passion are not very well informed on the substance. The truth is that there are good faith arguments to be made on both sides. In this essay, I lay out my critique of the existing system, and I look forward to hearing the responses of other participants.

 

How is foreign investment treated today?

The international investment law system looks out of date. It deals mainly with problems that existed a long time ago, while it ignores the current reality of international investment flows. If you look back at the situation of 60 years ago, foreign investors were often treated badly. At that time, the world was much less democratic. Many authoritarian governments shifted their views about foreign investment, alternately encouraging it and then expropriating it, in an effort to generate economic benefits for themselves. In the post-colonial world of the 1950s, 1960s, and 1970s, economic nationalism was on the rise, and newly empowered developing nations began to take back what they believed was theirs, often through expropriation of physical assets. This era was a challenging one for Western multinationals who had invested in the developing world. While they were not always angels themselves, the expropriation of their assets without compensation was clearly a violation of their property rights.

To deal with this situation, these companies lobbied their governments for international treaties that would give them recourse to neutral international courts, which could handle any disputes that arose. This approach appealed to the governments themselves, who did not like having to engage in the diplomacy of defending their companies’ rights. In the 1960s and 1970s, templates for such treaties were developed and applied, and soon they proliferated.[2]

As this was going on, however, negative attitudes towards foreign investment began to dissipate in much of the world. Economic nationalism faded and governments began to court investors. Today, a typical story about large foreign investments will note the subsidies offered by the government to attract that investment.[3]

To a great extent, then, bad treatment of foreign investment is a problem of a prior era. There are still some nations, scattered here and there, who threaten expropriation or actually expropriate, but the numbers are down considerably.[4] According to one study of the issue, the number of expropriation acts related to foreign investment was 136 in the 1960s and 423 in the 1970s, but has since declined to only 17 in the 1980s, 22 in the 1990s, and 27 instances in the 2000s through 2006.

In the face of this empirical data, it is not completely clear what problems investment tribunals should address. If expropriation is rare today, what exactly is the problem faced by foreign investors? And where is it a problem? This issue simply has not been studied. With no data on the nature and extent of the problems faced by foreign investors, it is hard to craft appropriate rules to address them. The “fair and equitable” treatment obligation is well-known as a general “catch-all” provision for government actions that harm companies. But to what degree do investors actually face treatment that is not “fair” or “equitable”? And what kind of treatment is this exactly? A few anecdotes aside, we have a very limited understanding. The result has been an explosion of litigation as creative lawyers seek to push the boundaries of the obligation.

In reality, the biggest problem in the world of foreign investment may not be bad treatment, but rather treatment that is too good: subsidies. As noted, subsidies to attract foreign investors have proliferated.[5] If there is any problem with foreign investment that needs to be addressed through international agreements, it is probably this one.

 

What is “Foreign” Investment in a Globalized Economy?

Supporters of ISDS point to bad treatment of “foreign” companies in domestic political/legal systems as the problem they are trying to address. In their view, “foreign” companies face discrimination and prejudice, and cannot always get fair treatment. But the notion of “foreign” and “domestic” companies looks increasingly outdated in today’s globalized world. A hundred years ago, the global economy could much more easily be divided along national lines. Many companies had a clear nationality, and when they invested their money abroad, they maintained that nationality to a great extent. Foreign investment often meant big Western companies investing in developing countries (and this is where problems with bad treatment typically arose).

The modern economy looks different from this older period. Today’s foreign investment flows in much more varied ways. It is not just Western companies investing in the developing world. It is a wide range of companies of many nationalities, investing all over the world and creating global supply chains and operations. Companies might have their headquarters in one country, develop technology in another, and produce in several other countries. And the nationality of the owners might not match up with any of these countries.

In this context, the notions of “foreign” and “domestic” investment have much less meaning. Looking to recent headlines to illustrate this point, Burger King recently merged with the Canadian coffee and donut company Tim Horton’s, and, in the process, created a parent company in Canada.[6] If Burger King is now owned by a Canadian company, can the parent company sue the U.S. government under the NAFTA investment rules when a future Mayor Bloomberg mandates size limits on donuts because of health concerns? Clearly, the formal nationality of companies has become less important over the years, and it may not serve as a good basis for imposing investment obligations on governments.

 

From Gunboats to ISDS to Modern Treaties: Can International Investment Law Evolve?

In the colonial era and its immediate aftermath, Western companies suing developing country governments in international tribunals had a certain logic: It was an extension of the existing economic relationship between the West and the developing world. Prior to the rise of investment treaties, Western governments had sometimes resorted to military action in response to expropriation of their companies’ property in developing countries (“gunboat diplomacy”). Neutral arbitration of these issues seemed like a substantial improvement. It was a more civilized way for Western companies to assert their rights in the colonial arrangements that existed at that time.[7]

But today’s era is very different, as there is a more even balance of power. It is not Europe, the United States, and Japan above everyone else; economic power is distributed much more uniformly around the world. As noted, investment flows in all directions today; investment issues are no longer all about the West versus the rest. Thus in the modern era we need treaties that reflect this change, by relying on states to manage their relations through state-state dispute settlement, as used in other international agreements.

In addition to the procedural issue of which entities — companies or states — may bring a complaint, we also need to think carefully about the substance, that is, what these international obligations should say. It is one thing to say that governments should promise not to discriminate against each other’s foreign investments. The benefits are clear, and the scope is limited. Non-discrimination is at the core of international economic relations. It includes both national treatment, which means not discriminating against foreign goods, services, or capital; and most favored nation treatment, which means not discriminating among goods, services, or capital of different nations. Such a rule promotes good international relations and is good economics. Without it, protectionist measures can proliferate, and economic alliances can stand in the way of peaceful relations.

A non-discrimination rule is narrow and bounded. Under such an obligation, a government can regulate however it likes, and on whatever policy it chooses, as long as the measure is non-discriminatory.

By contrast, creating a general “due process” type obligation for governments, such as “fair and equitable” treatment, is exceedingly broad. It shifts a good deal of power from national legislators and regulators to international courts, and it deserves more debate than it has seen so far. “Fair and equitable” treatment has been the subject of much criticism in the context of the investment system. Concerns about its scope have led governments to try to put boundaries on it. However, these attempts do not show much promise. A recent effort by the EU and Canada as part of their Comprehensive Economic and Trade Agreement leaves us with obligations that still look quite broad and undefined. The CETA includes “manifest arbitrariness” and “fundamental breach of due process” as examples of such treatment.[8] Unfortunately, even if such terms are narrower than previous obligations, they raise more questions about the scope of the obligations than they answer. What exactly are the limits of these obligations? Which government actions might violate them? No doubt creative lawyers are already thinking about the possibilities, even before the CETA is signed.

International judicial review is not objectionable in and of itself, of course. But the nature of the obligations, who has access to them, and how enforceable they are need to be considered carefully, and the legal obligations must be written precisely. Having open-ended provisions that are available only to foreign investors contributes to the perception that international economic law is a corporate handout, with ordinary people ignored. Depending on how the courts later rule, that perception may become a reality.

At the same time, it would be a great idea for investment generally, both foreign and domestic, if we could elevate property rights and discourage expropriation through international law. Unfortunately, current efforts in the international arena are weak and isolated. In international investment law, these rights are only provided to a limited group — that is, foreign investors — and under an uncertain and unpredictable quasi-judicial framework. If we want property rights to be taken seriously, we need to promote them as a matter of domestic law. Conversations about such issues in international fora are useful, but to really push them forward, perhaps an international treaty on expropriation could help. Such a treaty could establish global minimum standards and encourage their adoption in domestic law.

Along the same lines, more general principles of due process, transparency and good governance would also be valuable to domestic legal systems. If the criticism is that some domestic courts are biased and corrupt, isn’t the ideal solution to find ways to make them less so? Again, allowing foreign investors to escape the corruption of a domestic court does not help the local citizen who has no other option. International cooperation to improve the functioning of domestic courts would be a better focus.

 

Let Foreign Investors Take Responsibility for Themselves

Finally, foreign investors need to take more responsibility for their business decisions. All investments carry risk; there is more risk when investing in some countries than in others. Companies have a responsibility to know this and plan for it, and, in fact, it is not hard to do so. Companies who make foreign investments can buy political risk insurance, and they can demand arbitration clauses in any foreign investment contracts they sign with host governments. This approach is better than running to the government to lobby on their behalf for special treaties. It addresses the problem without creating an overbroad international judicial system.

The actors involved usually have significant resources and a lot of experience in these matters. When governments step in to help big corporations and rich investors, and when they ignore those without similar wealth, it gives off the appearance of special favors for those with wealth and influence. When you look around the world today, you see many people in dire straits. People who are being oppressed on the basis of their religion, race or gender; people whose property has been stolen; and people who are being treated unjustly for no reason at all. Do any of these ordinary people have access to enforceable international law to assert their rights against governments? For the most part, a couple regional human rights treaties aside, they do not.[9] But foreign investors do. As a result, the criticism of the investment law system as constituting special favors for the wealthy seems, on its face, to be credible.

 

Conclusion

As people start to rise up against the international investment system, it seems to me the task now for the investment law community is to figure out what its purpose is. What is the problem you are trying to deal with? What is the best way to address it? In the field of trade law, much of the problem is obvious for anyone to see. For example, tariffs are written down clearly in domestic tariff schedules, which identify tariff rates for specific products; anti-dumping tariffs are imposed on the basis of a quasi-judicial procedure and result in published tariff rates; and even domestic laws such as Buy National procurement policies are usually publicized clearly. As a result, dealing with these issues in an international agreement is fairly straightforward. International obligations to address protectionist trade policies such as these are not difficult to construct.

By contrast, with foreign investment, the problem is often a bit obscure. When there is an approval process to make a foreign investment in the first place, the discrimination issue is clear, and international rules to address this make sense. But when the issue is the proper treatment of foreign companies in domestic law, it becomes hard to identify the specific behavior that is supposedly of concern. What does “denial of justice” look like exactly in the context of the treatment of foreign investors and investments? How can international courts appropriately judge the behavior of domestic governmental actors? These problems do exist in the real world, but they are not easy to define and construct international obligations to confront. The universe of problems experienced by foreign investors (and others) in domestic legislation, regulatory agencies, and courts remains unclear.

Thus, the task of ISDS supporters should be to study today’s problems, analyze them, and quantify them. The current model is based on 1950s era, pre-globalization situation; it is time to move into the modern era, with an evidence-based agenda.

Despite my high regard for Simon Lester’s views on many trade matters, I do not find his arguments against investor state dispute settlement to be compelling. By my reading, Mr. Lester puts forward eight arguments against investment treaties. I will respond to each as they appear in his paper and then offer an additional commentary.

 

1. Investment treaties are no longer necessary because economic nationalism has faded.

Unfortunately, economic nationalism is alive and well, especially since the global downturn of 2007. Governments continue to favor domestic over foreign companies on a regular basis. In any event, declining economic nationalism does not offer a compelling argument against protecting foreign investors who do face discrimination. And perhaps any decline is partially due to the role of investment treaties in discouraging governments from discriminating against foreign investors.

2. Investment treaties are relatively unnecessary because subsidies are a bigger problem.

Economic nationalism can take many forms. I agree that one form – subsidy – is a significant problem. However, since it is a lot easier and less costly for governments to favor domestic companies over foreign ones through non-tariff barriers than though subsidies, I am not sure I agree that subsidies pose the “biggest problem in the world of foreign investment.” The biggest problem is with investments that are never made because of local protectionism. Investment treaties typically do not address this problem because treaties are aimed at protecting investments that are made rather than those that are not made.

Also, while it could certainly be strengthened, we already have an international trade agreement to address subsidies. But even if we did not, the lack of an agreement to address subsidies is not a compelling argument against bilateral agreements addressing expropriations.

3. Investment treaties are “outdated” because there is no longer a bright line between foreign and domestic companies.

I agree that that the line between foreign and domestic firms is no longer clear or relevant in many policy debates regarding today’s global economy. But I do not see the relevance of this point in the context of the debate over investment treaties. Investment treaties serve a very particular purpose: to protect foreign investors from certain types of abuse. If an investor cannot establish that they are in fact “foreign,” the protections of the treaty are not available. While companies are globalizing their operations at a fast clip, we are still a long way from jettisoning the nationality of all companies.

4. Since “investment issues are no longer all about the West versus the rest,” one country’s discrimination against another country’s investors should be handled through state-to-state rather investor-state mechanisms.

Global balance of power trends aside, perhaps the most compelling trend in human history has been the growing empowerment of individual rights over state power. I prefer a world where individuals who believe they have been wronged can bring their claims directly against the alleged perpetrator, rather than being dependent on the state to espouse their claims for them. Governments have bilateral agendas that may cause an individual’s claim for justice to be subordinated to interests that states share, but that individuals do not.

5. Investment treaties should only address discriminatory measures.

Oftentimes, measures that could trigger investors to seek to relief under investment treaties could be characterized as discriminatory. As such, treaties that cover only discriminatory measures would certainly be better than no treaties at all.  But treaties limited in this way would not cover situations where a country nationalizes all companies in a particular sector, even if there is just one domestic company and many foreign companies. Such an expropriation without fair compensation may not be discriminatory on its face, but it would certainly be unjust and deserving of recourse through an investment treaty.

6. Defining “fair and equitable” treatment is too complicated.

Granted, judicial concepts like “due process” and “fair and equitable” treatment are not simple and self-defining. But that is true in domestic law as well as international law. The mere fact that these concepts are difficult does not strike me as a compelling reason to abandon them. Investment disputes are vigorously argued. Each side makes its case for whether fair and equitable treatment was provided. The tribunal members who hear these disputes have significant experience in dealing with arguments of equity and fairness.

7. Existing investment agreements only protect foreign investors and should be replaced with “an international treaty on expropriation” that would protect both foreign and domestic property owners, and through efforts to reform domestic law.

Undoubtedly, the world would be a better place if property owners (domestic and foreign alike) had more reliable recourse in domestic courts to enforce property rights against state action. However, there is no evidence that existing investment treaties have dampened domestic political pressure in any country for better property protections. In fact, it is more likely that extending protections to foreign property owners would instill demand for more protections for domestic property owners. Calls for domestic property protections would seem to get louder if such protections are extended to foreign property owners.

8. Companies should bear the risk of investing across borders and not be able to mitigate that risk through investment treaties.

I agree that private investors must bear risk to avoid problems of moral hazard. But over the past centuries a considerable legal infrastructure has been built whereby aggrieved parties are able to bring their disputes before neutral arbitrators. Investment treaties are part of an international legal infrastructure. Subjecting foreign investors to unqualified caveat emptor seems no more justifiable than subjecting domestic contract disputants to such a remedy-less environment. Also, the notion that investors should protect themselves against foreign governments through contact rather than through investment treaties ignores the fact that most investments are private affairs in which no government is a party. Governments should not have free rein to expropriate (without fair compensation) property from parties that have no opportunity to bargain for this protection through contract.

            To his credit, Mr. Lester’s criticism of investment treaties does not include the following one but since it has often been made, I will raise it here:

Investment treaties prevent governments from exercising their ability to regulate commerce in order to protect the health and welfare of people and the environment.

Prevailing in an investor-state dispute is extremely difficult. I know of no successful claim brought by an investor against an action by a government that could fairly be described as a simple, non-discriminatory exercise of legitimate government regulatory powers. In any event, an investment treaty cannot “prevent” a government from taking whatever action it chooses. Dispute panels may award monetary judgments, but they have no jurisdiction over a country’s laws.

Of note, some groups that have become vocal opponents of investment treaties are involved in raising funds in the United States to purchase and protect rainforests and other threatened land resources in foreign countries. This is laudable work. Imagine though that a host government in one of these countries decided to renege on the deal and later expropriate the protected property for commercial development. I suspect these environmentally conscious U.S. investors at that point would prefer the opportunity protect their investments through an international treaty rather than having their only recourse be through the domestic courts of that foreign country.

The investor-to-state dispute settlement system (ISDS) has been the focal point of most discussions on trade agreements currently negotiated. Whilst the discussion is mostly directed at the mega-regional agreements,[1] the critics’ cause for concern in fact derives from older Bilateral Investment Treaties (BITs) signed and ratified in the 1960-80s.

So also Simon Lester’s critical essay. Whereas Lester’s title speaks of the need to reform, the underlying argument in his essay is that ISDS is superfluous. I am concerned that Lester chooses to ignore the need for judicial review in a more globalized and more political environment, where protecting foreign investments from arbitrary or discriminatory behaviour of states is essential for the respect of property rights.

Today’s foreign investment climate did not come about by chance.

Lester starts off by arguing that foreign investment is treated well, thus questioning the need for investment protection clauses. He makes his criticism of investment protection by citing Hajzler’s figures showing how expropriation of foreign investors in developing countries has decreased from 423 instances in the 1970s to 27 instances during the period between 2000 to 2006.[2] Although I share the enthusiasm for a world in which expropriation is less common, Lester fails to give credit to what has brought about the decrease in expropriation. Interestingly, Hajzler himself concludes that the decline in expropriation is likely to correlate with the increased number of investment treaties signed.[3] In that sense, the success of including investment protection in BITs is the exact reason to include it in future investment chapters and treaties.[4]

Furthermore, Lester argues that the “fair and equitable” treatment obligation is a catch-all provision opening the door for potential frivolous claims by investors. Looking at the data, there are few successful frivolous claims to be found. Thus, his criticism of the concept is unsubstantiated, but interestingly enough it also carries another hypothesis: Perhaps even the most “flawed” investment protection chapters are drafted in such a way as to prevent frivolous claims from being ruled in favor of the investor. UNCTAD statistics show that investors are far less successful in winning cases than states, meaning the theoretical fear of frivolousness is just that, theoretical.

Does a more democratic world equate to better treatment of foreign investment?

Direct expropriation might be in decline in the developing world, but that does not cover the full range of discrimination against foreign investors in the developed world. In fact, most ISDS cases do not deal with expropriation at all, but rather with broken contracts or arbitrarily withdrawn licenses.[5] Moreover, 40 percent of the claims in 2014 were brought against developed states, showing that even here investors see the need for ISDS.[6] Whilst Lester is correct in stating that more people than ever live in democratic states,[7] I question whether this is a reason to keep ISDS out of future agreements.

One of the main reasons why foreign investment must continue to be protected even in democratic countries is politics, and the lack of effective separation of powers between the executive branch and the judicial system. The fact that two of the EU Member States that will be a party to TTIP are ranked below Russia and Zimbabwe in judicial independence shows that investors seeking redress in domestic courts face potential discrimination even in EU Member States.[8] Furthermore, Lester asks if it is not better to fix domestic courts when found biased and corrupt instead of including ISDS, but he offers little guidance on how to do so. Perhaps this is too obvious to mention, but the two approaches are also not mutually exclusive.

Unfortunately, there are a number of recent cases where developed states have discriminated against foreign investors by arbitrarily terminating contracts and licenses, but also by expropriating assets. One of them is AbitibiBowater v Canada, where Newfoundland and Labrador expropriated the assets of the company without compensation.[9] Another is Vattenfall v Germany, where the city of Hamburg due to a public and political uproar decided to terminate Vattenfall’s permits to build a power plant,despite the city’s previous approval.[10]

Lester’s argument implies that treaties upholding fundamental rights are not needed where these rights are already seen to. There is a danger in taking both the respect for human rights and property rights for granted in an environment affected by politics and political whims. Therefore, as a libertarian, one ought to welcome investment protection clauses that put a “regulatory chill” on political whims, thus safeguarding property rights.

Globalization as a normative tool

One of the problems that Lester explores is the globalized nature of investment, blurring the lines between domestic and foreign investments, insinuating that foreign investors are not treated worse than domestic investors. Perhaps he is right, but he makes another very important point without acknowledging it. The fact that it is harder to distinguish between foreign and domestic investments could have a normative effect on investment protection, creating interdependence and making it more costly to discriminate against any investor. Moreover, blurring this line gives domestic investors access to ISDS, if needed.

This can be seen in Yukos v Russia, where the Russian nationals associated with Mikhail Khodorkovsky could file a claim against Russia for expropriating the company’s assets, since the company was listed on the Isle of Man.[11] Furthermore, this is also salient in the claims filed by the minority shareholders from the United Kingdom[12] and Spain[13] against Russia, using corresponding BITs. Consequently, the fact that it is harder to distinguish between domestic and foreign investments creates more opportunities for investors to seek redress for the violation of their rights.

But there is also another normative aspect of the globalization of investment protection clauses, namely the spread of corporate and judicial discipline, where investment protection clauses seek to minimize the risk of corrupt practices of companies. Here, World Duty Free v Kenya[14] and Metal-Tech v Uzbekistan[15] ought to serve as warnings for investors not to enter into illegal activities, since being involved in bribery causes the investor to lose its rights to seek redress in investment arbitration courts. In this sense, ISDS has a disciplining effect in both the global corporate sphere as well as on state behaviour.

What is the alternative to ISDS?

Lastly, Lester argues that investors ought not to rely on the state to set out the conditions for safeguarding investments on their behalf. Whilst I do understand the libertarian idea behind such an argument, I would argue that political risk insurances or letting companies negotiate conditions for investment protection with the host state will leave smaller investors at risk. I highly doubt that smaller investors would have the leverage to negotiate good investment protection against powerful states or will be able to afford a political risk insurance. Instead it is mutually beneficial for both small and bigger investors to create a level playing field in the protection of investors entering a foreign market, as they do under the market access chapters of FTAs.

Furthermore, Lester brings forward the argument that investment disputes ought to be treated in the same way as any other disputes. Although I would agree that state-to-state dispute settlement is sometimes better in trade disputes - though it increases the risk of politicization - investment disputes are not of the same character. Investment disputes are often the result of individual and targeted discrimination (and 22 percent are small or individual investors.[16] On the other hand, trade disputes are mostly systemic and impact all interested parties. Therefore the dispute settlement must be established accordingly.

But ultimately, there is a libertarian argument for why investor-to-state dispute settlement is preferable. Investors ought to fight their own battles, and not rely on the defence of their government. Investors should also carry their own costs, where the losing party is made liable for all arbitration expenses. This should be part of all future ISDS clauses, as it is in CETA[17] and most likely TTIP.

Conclusion

In conclusion, Lester points out some of the more opaque problems of investment protection through ISDS that are worthy of more attention. But despite concerns of giving investors too much room for maneuver to litigate against states, hardly any frivolous claims have been ruled in favor of the investor. Perhaps that shows that ISDS does not need substantial reform.

Today, foreign direct investment takes place in a setting of proliferated global value chains, but also in a more democratic world. Expropriation and discrimination might be on the decline exactly because of all the investment treaties signed during the last 50 years. Removing the protection that investors have been using for decades would put at risk the gains that investors have made in assuring their property rights around the world. In fact, the success of investment protection should rather make us think of expanding it to other policy areas, such as environmental protection.[18]

Even so, investors do experience both expropriation and discrimination despite all the investment treaties that they enjoy. The discrimination is arguably less a result of nationalism and the search for independence, but rather a result of certain political agendas or political whims. As a libertarian, I therefore welcome ISDS in order to safeguard property rights.

 

 

Notes

^[1] The mega-regionals currently negotiated are the Transatlantic Trade and Investment Partnership (TTIP), Trans-Pacific Partnership (TPP), and Comprehensive Economic and Trade Agreement (CETA).

^[2] Christopher Hajzler, “Expropriation of Foreign Direct Investment: Sectoral Patterns from 1993 to 2006,” Review of World Economics, Vol. 148, No. 1, 2012, p. 2.

^[3] Idem, p. 24.

^[4] “Recent trends in IIAs and ISDS”, IIAs Issues Note N0 1, UNCTAD, February 2015, p. 8. Available at: http://unctad.org/en/PublicationsLibrary/webdiaepcb2015d1_en.pdf

^[5] Idem, p. 7.

^[6] “Recent trends in IIAs and ISDS”, p. 5.

^[7] See, e.g., Max Roser, “Democratisation,” 2015, published online at OurWorldInData.org. Available at: http://ourworldindata.org/data/political-regimes/democratisation/

^[8] “Competitiveness Report 2014-2015,” World Economic Forum. Available at: http://reports.weforum.org/global-competitiveness-report-2014-2015/rankings/.

^[9] AbitibiBowater Inc., v. Government of Canada, no case number since settled before Tribunal was established. Available at: http://www.italaw.com/cases/39

^[10] Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG v. Federal Republic of Germany, ICSID Case No. ARB/09/6. Available at: http://www.italaw.com/cases/1148#sthash.kgrUvHLw.dpuf

^[11] Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227. Available at: http://www.italaw.com/cases/1175#sthash.xOF0CD0G.dpuf

^[12] RosInvestCo UK Ltd. v. The Russian Federation, SCC Case No. V079/2005. Available at: http://www.italaw.com/cases/923#sthash.7IZCPjiB.dpuf

^[13] Renta 4 S.V.S.A, Ahorro Corporación Emergentes F.I., Ahorro Corporación Eurofondo F.I., Rovime Inversiones SICAV S.A., Quasar de Valors SICAV S.A., Orgor de Valores SICAV S.A., GBI 9000 SICAV S.A. v. The Russian Federation, SCC No. 24/2007. Available at: http://www.italaw.com/cases/915#sthash.UDoYtxAp.dpuf

^[14] World Duty Free Company Limited v The Republic of Kenya, ICSID Case No. ARB/00/7. Available at: http://www.italaw.com/documents/WDFv.KenyaAward.pdf

^[15] Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3. Available at: http://www.italaw.com/cases/2272#sthash.t8z1MF63.dpuf

^[16] David Gaukrodger and Kathryn Gordon, “Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy Community,” OECD Working Papers on International Investment, 2012/03, OECD Publishing, p. 17. Available at: http://www.oecd-ilibrary.org/docserver/download/5k46b1r85j6f.pdf?expires=1431330380&id=id&accname=guest&checksum=610791AC86E2028D2D16F1A1112CAE91

^[17] Consolidated text of the “Comprehensive Economic and Trade Agreement” between the European Union and Canada, published on September 26th 2014, p. 176. Available at: http://trade.ec.europa.eu/doclib/docs/2014/september/tradoc_152806.pdf

^[18] “The environment needs more investment protection – not less,” The ISDS Blog, Stockholm Chamber of Commerce Arbitration Institute, November 10th, 2014. Available at: http://isdsbloggen.se/blog/2014/11/10/the-environment-needs-more-investment-protection-not-less/#sthash.iebq2MWO.dpuf

Simon Lester’s lead essay challenges us to be clear as to what specific problems ISDS is intended to address, and to examine thoughtfully ISDS’s potential to effectively address those problems.[1] How we define the relevant problems depends in part on whether we are focusing on the question from the perspective of a developing (capital importing) or developed (capital exporting) state. In the case of the former, the main argument of ISDS proponents is typically that the problem is inadequate flows of foreign investment to the developing world. This shortfall of foreign investment is said to be driven by a lack of legal security for investor property rights, and ISDS is said to provide an especially effective means of securing those rights. Investors are said to recognize ISDS as playing such a role, and to take the presence or absence of ISDS into account in a meaningful way when deciding whether and where to invest.

It is difficult to argue against the notion that many developing countries could benefit from greater access to foreign capital. It is also difficult to argue against the notion that many developing countries have serious rule-of-law type problems. However, there is room to doubt that ISDS has much chance of meaningfully impacting either problem. There are a number of empirical (statistical) studies attempting to identify significant correlations between foreign investment flows and whether a host state has entered into investment treaties. Several of these studies indeed find a positive correlation (controlling for various other factors), but others fail to find a correlation. The empirical literature is, in short, inconclusive on the question of whether investors make investment decisions on the basis of a state’s commitment to ISDS. While proponents of ISDS may argue that more studies find a correlation than do not, or that some studies are better than others, in fact there are very serious methodological and data problems that, in my view, require all of the statistical results, positive and negative, to be taken with a significant grain of salt.  For example, data on foreign investment flows is of notoriously poor quality; existing studies fail to adequately address the fact that many states adopted numerous other investment related reforms at the same time they embraced ISDS (raising a problem of confounding influences); and they fail to account for the fact that investors have access to a number of potential substitutes to treaty-based ISDS, such as contract-based arbitration clauses or political risk insurance. If investors can already use such alternatives to protect against “political risk,” then the addition of treaty-based ISDS is unlikely to substantially change their evaluations of the costs and benefits of making an investment.

And perhaps most importantly—though here too the empirical evidence is admittedly incomplete—there are intriguing suggestions in the literature that foreign investors, like businesses generally, are either ignorant of international investment law, or likely to heavily discount its value and relevance. ISDS supporters may justifiably be accused of holding an unsubstantiated and perhaps unrealistic view of the importance of investment law in the foreign investment decisionmaking process, as well as an exaggerated sense of the actual effectiveness of ISDS at protecting investor interests. On that latter point, as Professor Susan Franck has shown empirically, ISDS is very costly, investors lose most cases they bring, and they rarely win anything close to the amount of damages claimed.[2]

From the perspective of developed (capital exporting) countries, like the United States, Germany, or the United Kingdom, it is implausible to argue that they suffer from a deficit of foreign investment. These economies are almost completely open to foreign investment and receive massive amounts of it. It is also implausible to argue that such economies suffer from systemic rule-of-law problems of the sort that ISDS is meant to address. The United States, for example, has no meaningful practice of discriminating against foreign investors, of seizing their property without full compensation, or of treating them in other grossly arbitrary ways. While there will always be a risk of isolated instances of government mistreatment, even in the United States, in almost all cases the domestic legal system will be more than adequate to address the problem. ISDS proponents often cite the famous Loewen investor-state arbitration, involving a challenge to a highly questionable Alabama jury award, but that case is but a single example of arguable investor mistreatment, and in fact the investor lost its arbitration. Loewen is a highly inadequate and unconvincing argument for the position that there is an objective “problem” as to U.S. treatment of foreign investment, or for the position that ISDS is well suited to solving it.

Instead, the proponents’ argument from the capital-exporting perspective is that ISDS is intended to solve the problem of the mistreatment of rich-country investors in weak rule-of-law states. This argument is less concerned with demonstrating that ISDS promotes investment to the developing world, and more focused on the question of whether ISDS reduces mistreatment, or provides adequate remedies for it, on the theory that capital-exporting governments are legitimately interested in how their investors are treated overseas. There are of course any number of examples of such mistreatment, some more shocking than others, and of arbitral awards intended to redress it. But we should be careful not to exaggerate the scope of the problem or the effectiveness of ISDS to combat it. As Simon notes, expropriation seems to be historically rare. Most developing states today very much desire foreign investment and have a strong reputational incentive to treat investors well. Moreover, Professor Franck’s work, already cited above, suggests that ISDS is far from a guarantee that an investor who feels he has suffered a wrong at the hands of the state will actually recover anything. Indeed, the more that the scope of ISDS is “reformed” (narrowed) in response to criticisms of the system, the less likely it will be to provide effective redress (just as it will be less likely to actually promote investment).

Another problem that ISDS is frequently said to prevent is the “politicization” of investment disputes. The concept of “politicization” is not well-defined, but a common usage entails the claim that ISDS prevents investor-state disputes from developing into diplomatic crises that may, in the worst cases, involve “gunboat diplomacy”—military intervention by the home state government against the (typically) weaker host state. This claim has not been subject to any serious empirical study. But it seems relatively obvious that there is very little risk of a return to “gunboat diplomacy” in the modern era. Many of the states covered by ISDS have no real ability to project military force in order to protect investments abroad, and those that do, including the United States, are unlikely to find militarized intervention to be in their national interest except in the rarest of circumstances. Nor am I aware of any compelling, contemporary examples of serious diplomatic crises that might plausibly have been avoided by ISDS.

The discussion above has focused on the problems that ISDS is supposed to solve. I have suggested that those problems may not actually be all that great, and (or) that ISDS is not likely to help resolve them. If I am correct on those points, then we might say that ISDS—especially in the context of rich-country relations—promises to offer few “benefits.” But what about costs? Critics argue that ISDS prevents governments from regulating in the public interest. The problem here, though, is that there is not much evidence that “regulatory freeze” has been a serious problem to date, and critics are vulnerable to attacks of the “Chicken Little” variety. Part of the problem may be that it is difficult, for practical reasons, to identify policies that haven’t been adopted because of the threat of ISDS. Another problem is that the critics’ most impressive example—Philip Morris’s arbitration against Australia—remains pending. Should Philip Morris win, the critics will have spectacular evidence in their favor. The challenge for proponents is to either to argue that Philip Morris is likely to lose, or to distinguish tobacco as somehow “unique” in its potential to cause trouble. In that case, a pragmatic if unprincipled solution might be to exclude tobacco from ISDS protections, while maintaining it for everything else.

My own view (admittedly as speculative as anyone else’s at this point) is that Philip Morris will almost certainly lose, in part because those deciding the dispute recognize that a tobacco victory would place in peril the larger ISDS system, which, in its current form, enriches a small group of elite lawyers. But I also don’t think that the tobacco challenge to the right to regulate is particularly unique. Other industries, advised by the same creative lawyers as enjoyed by Philip Morris, can be counted upon to bring innovative ISDS claims that seek to push international investment law in ways that diverge from national standards and practices. It is impossible to predict how many such claims might arise under the Trans-Pacific Partnership (TPP) or Transatlantic Trade and Investment Partnership (TTIP), or how many might be successful. But even if we expect such challenges to rarely succeed, it is worth noting that ISDS in TPP and TTIP would cover a truly massive number of investments, greatly expanding the pool of potential ISDS claims. The “costs” of ISDS for the United States and its treaty partners would certainly rise as compared to the situation today, as the TPP and TTIP governments would find themselves litigating significantly more ISDS claims. And the more claims that are litigated, the greater the chances that at least one will succeed. The United States government prides itself on never losing a NAFTA Chapter 11 arbitration, but that track record is unlikely to hold up under the brave new world of super-FTAs.

In sum, then, a careful examination of the purported problems that ISDS is meant to solve also suggests that including ISDS in TPP or TTIP is unlikely to provide significant benefits. And while ISDS may not cause the litany of regulatory horrors that critics sometimes suggest it will, ISDS “costs” will surely (if perhaps modestly) rise. Should the decision whether to include ISDS in TPP and TTIP be a rational one, I would suggest that the rational way to proceed is to exclude it.    

 

In the response essays and reader comments on these essays, supporters of ISDS make some important points. Let me now respond to their arguments and clarify my own view a bit.

First, John Veroneau points out that “economic nationalism is alive and well.”  I fully agree, which is why I support international investment rules that prohibit discrimination against foreign companies. The concerns I have are mainly with the rules that allow investors to sue states and the substantive obligations that go beyond non-discrimination.

Second, with regard to subsidies, I want to emphasize the importance and scope of this issue. In almost every article about a new foreign investment in the United States (or elsewhere), there is inevitably a discussion of the subsidies that were offered to that company to locate here. We even subsidize companies that are rivals to major U.S. manufacturers:  We subsidize Airbus![1]  Subsidies to foreign investors are a huge problem, and international investment obligations ignore it completely. Why do they ignore it?  Because big business loves subsidies and lobbies against any effort to rein them in. That is not something we – libertarians or others – should accept. We should take a strong stand against such policies, and not just follow the demands of business groups in formulating international investment law.

Third, Ingrid Persson raises what I think is the most important point in this debate, but one which usually gets overlooked:  As currently written, ISDS includes “judicial review” of the “arbitrary” behavior of governments. In large part, such review arises from the provisions on the “minimum standard of treatment” obligation, of which “fair and equitable treatment” is usually a crucial part (expropriation and non-discrimination are much narrower concepts). ISDS supporters often obscure this point, but it is the crux of the issue.

The impact of international judicial review of arbitrary government behavior should not be underestimated. Governments act in an arbitrary manner quite often. It is not just some rare, occasional event. Health laws are often not based on science; safety regulations are often not based on evidence; courts often do not follow appropriate procedures. And to be clear, I don’t mean that this something that occurs only in poor countries; this happens in rich countries, too.

Most people probably agree that this should be improved. We want governments to base their actions on science, evidence, and proper procedures, and to avoid arbitrary behavior. But the question is, should it be the task of international tribunals to improve things?  There are reasons to say yes, but it does not seem that most politicians are even aware of the issue. President Obama recently said that there is “zero chance” that U.S. food safety, environmental, and financial regulations will be challenged in ISDS.[2] That is not remotely true. In fact, there is a very good chance they will be challenged, and there is also a good chance the United States will lose some of these challenges. That is not really in question. You do not have to be a libertarian to understand that governments often act in arbitrary ways, and international investment tribunals will confront instances of this.

What is in question is whether people in the U.S. government, and U.S. citizens, and governments and citizens around the world, can live with this. I suspect they will have trouble doing so, although I suppose we will only know for sure when it happens.

John makes the point that domestic law and courts are able to handle these same principles. That is certainly true. But elevating the principles to the status of enforceable international law is a huge leap, one that governments need to understand better than they seem to.

Related to this, Ingrid says that I have not pointed to any frivolous claims under ISDS. But my argument is not that there are frivolous claims. Rather, my argument is that the “minimum standard of treatment” obligations are so broad that they encompass huge numbers of non-frivolous claims. As an example, look at the recent NAFTA Chapter 11 award in the Bilcon case.[3]  If the government actions at issue there constitute a violation, there are thousands of violations out there.

Let me turn now to what I think is my most fundamental objection:  ISDS only gives rights to foreign investors, not ordinary citizens. John, perhaps implicitly, and Perry Bechky, in the comments more directly, suggest that perhaps the international system could be expanded to cover people other than foreign investors (“expand individual access to, and the effectiveness of, other international adjudicatory mechanisms where individual rights are at stake, especially regional human rights tribunals”). If that happened, I would be a lot more comfortable with the system. But it is clear that this is not politically feasible any time soon. Most likely, it will not happen in our lifetimes. The result is that we have an international system that gives rights only to foreign investors. If someone were proposing a new system that gave rights to all, that would be one thing; but defending an existing system that gives rights only to foreign investors, but could, in theory, possibly some day give rights to others as well, seems very unbalanced.

To illustrate the implications of this, let me raise Ingrid’s point about the AbitibiBowater case, where a Canadian province expropriated assets without compensation. I am glad the investor got compensation through ISDS, but to me this just highlights the fact that a Canadian investor would not have any recourse for such compensation under Canadian law, which lacks good rules on expropriation.[4]  Under ISDS, foreign investors are helped but domestic investors and ordinary citizens are not. I think we can do better, and one way is a treaty that promotes better expropriation rules in domestic law, so that in the future both Canadian and foreign investors have a remedy.

This is also relevant for Ingrid’s point about how to fix domestic courts. A treaty could encourage or require governments to incorporate due process obligations into their domestic law.

There are a few other points I want to address. Ingrid says that state-state dispute settlement only works in trade agreements because “trade disputes are mostly systemic and impact all interested parties.”  I don’t think that is an accurate description of the WTO dispute system, where many of the cases involve narrow issues relating to trade remedy tariffs imposed on specific companies, or domestic regulations that harm specific industries or companies. State-state dispute settlement at the WTO has been a great success. It should be noted that the WTO’s General Agreements on Trade in Services actually covers investment, and I have never heard a suggestion that the state-state dispute procedures have caused problems in that context.

In terms of whether “smaller investors would have the leverage to negotiate good investment protection against powerful states or will be able to afford political risk insurance,” I would want to see evidence that they could not. At first glance, I’m not sure why that would be the case. More generally, on Ingrid’s point that “[i]nvestors ought fight their own battles, and not rely on the defense of their government,” I don’t agree that this argument supports treaty-based ISDS. Such treaties come about when business groups lobby their government to spend political capital on special rights for the benefit of (usually wealthy) investors (as noted above, these rights are not available to anyone else). I would prefer that governments do things to help society more generally, such as reducing or eliminating tariffs. “Investors fighting their own battles” would mean using good sense and mitigating risks when investing abroad (or anywhere).

As to whether the spread of investment treaties led to the decline of expropriation, it is worth nothing that expropriation slowed down massively by the early 1980s, while litigation under investment treaties did not begin until 1989 and did not really pick up until the late 1990s.[5]  Thus, I don’t think a correlation exists here. The better explanation, it seems to me, is that expropriation stopped because governments’ attitudes changed (and because some governments had already expropriated everything there was to expropriate!).

Finally, while like any good libertarian, I am not opposed to a “regulatory chill,” it is worth noting that under the minimum standard of treatment, investors can challenge not just over-regulation, but also under-regulation. For example, governments who have tried to withdraw subsidies have been faced with ISDS complaints.[6]

During the last few weeks, I have enjoyed this debate on investor-to-state dispute settlements. Several good points have been raised and ought to be discussed further. However, some of the issues raised have been almost peripheral and some of them unsubstantiated. These need to be addressed more thoroughly.

 

One of the most striking problems with the current debate is the tendency to blame the institution for any eventual material shortcomings of investment protection. A clearer distinction between the material aspects and the institutional aspects must be made, that is, we should distinguish between the laws and the courts. Potential problems with the laws themselves ought not to lead to the conclusion that the courts must be scrapped.

 

The tendency to blame the institution for material shortcomings can be seen in Simon’s criticism of ISDS allowing investors to sue the state when subsidies have been altered or stopped, although they were outlined in a contract. I wholeheartedly share Simon’s aversion to subsidies, and contracts where certain subsidies are promised are not contracts that we should embrace. However, the real problem is with the material aspects of that contract rather than the opportunity for investors to seek redress as such. I assume Simon agrees with me that just because some contracts are bad contracts, we should not scrap the idea of a contract. Perhaps it seems very obvious, but the same goes for ISDS. Let’s look at the material aspects, and let’s try to improve them.

 

Coming closer to the core of this issue, Jason Yackee elaborates on the effectiveness of ISDS by referring to the material aspects of investment protection; he argues that ISDS is not needed in modern trade agreements. Whereas he questions the benefits that ISDS brings, he also argues that each time the system is reformed, the scope of the protection is narrowed, making it less and less effective against arbitrary and discriminatory behaviour. He seems to be arguing that there is nothing wrong with ISDS per se, but rather that the current investment protection provisions are not broad enough, and thus not effective enough. This seems to be an argument for a reform of ISDS where the protection is strengthened, rather than narrowed, contrary to Simon’s objections.

 

On the other hand, Simon seems to accept the notion of external judicial reviews, especially against laws he himself describes as idiosyncratic, but he questions first whether it is the task of international treaties to bear that burden, and second whether states and citizens can accept that. On the first point, yes. That is the whole point of international treaties, whether it is the Marrakech Declaration, the Universal Declaration on Human Rights, or the Energy Charter Treaty. I agree that the first and the third are much more effective than the second, and sadly an ISDS award can only issue monetary compensation; it cannot retract laws. Either way, I doubt that abandoning those mechanisms that are effective is the right way to ensure the effectiveness of enforcing human rights. I cannot under any circumstances agree that we should rather have a world in which everyone is treated equally badly, instead of at least trying to create a world in which we are all, investor or not, treated equally well.

 

As regards the second point, that citizens might not accept such a judicial review, I argue the following: It is not our job to court public opinion. We ought not to make the same mistakes as some governments, i.e. base our arguments not on science and facts, but on our gut feeling. Hence, until there is a clear example of an ISDS case where the concept of fair and equitable treatment has been misused, one ought to accept that even the most “flawed” investment protection chapter is a functional one. One could have many opinions on the Philip Morris vs Australia case, but considering the fact that the only time a Philip Morris case has been concluded, it was not in the investor’s favour, we ought to take the criticism with a pinch of salt.

 

The issue of politicization has come up throughout most of the essays. John Veroneau rather eloquently states that “governments have bilateral agendas that may cause an individual’s claim for justice to be subordinated to interests that states share, but that individuals do not.” I share this opinion. There might be some battles that states would like to simply ignore, or even worse, use against the will of the investor to make a political point. And the alternative to ISDS is not turning back to gunboat diplomacy. The alternative would most likely be state-to-state dispute settlement. As I argued in my first essay, again the problem is politics. Here, one ought to have a look at the politics behind a number of anti-dumping investigations to see how state-to-state dispute settlement is not something that we should embrace. Geopolitical agendas have been aproned by the EU Commission’s anti-dumping and anti-subsidy cases against China, the solar panel case, and the telecom case among others, which were followed by Chinese retaliation in form of the imposition of duties against European wine and chemicals. These two cases show not only the dangers of managed trade, but also the spark of a game of tit-for-tat that I do not wish to see in the field of investment disputes.

 

In conclusion, the debate on investment protection using ISDS has to be based on facts and statistics in order to be fruitful. Although many of the matters mentioned by Simon and Jason are worth exploring, they do not go to the core of the issue. The core of the issue is that a dispute settlement mechanism is what makes an international treaty worth signing. The criticisms leveled against ISDS in this series of essays include both that it is too effective, and that it is not effective enough. But if the criticism against ISDS is that it is so effective, let’s broaden and copy it, making it more accessible and impartial in the process. Let’s use ISDS as a model for dispute settlement, whatever the dispute. But for that, you need treaties in which a mention of dispute settlement is made. Let’s work on that instead of scrapping one of the few effective mechanisms to solve grievances between individuals and states.

 

The ISDS debate is bigger than just ISDS in TPP and TTIP. From a European perspective, it is also about future BITs and FTAs, such as the ones currently being negotiated with China and India. And perhaps more importantly, it is about bringing an end to the unequal level of protection of EU investors in the United States and of U.S. investors in various EU Member States. But ultimately, it is a matter of upholding the rule of law and respecting international treaties.

If I’m reading Ingrid’s views correctly (and she can tell me if I’m wrong), she has a bold view of rights under international law, one that goes well beyond rights for foreign investors. She would like to see an expanded system of international law that provides not just investment rights, but human rights more generally, with effective dispute settlement mechanisms available to everyone for the enforcement of these rights.

That is an ambitious agenda, one that could certainly fit within a libertarian worldview, although it is not only libertarians who might embrace it. People from across the political spectrum might wish to see international courts protect rights more than they currently do. (And, to be clear, libertarians might question whether international courts are the right way to achieve the goal of expanding individual rights).

The problem is that this theoretically broad scope for an international rights regime bears little resemblance to the current political reality. At the margins, a few people here and there do make arguments along these lines. But there is no real chance of it being put into practice. Effective rights protection is mostly confined to domestic constitutions and the occasional regional treaty. There is no prospect at the international level for extending rights to individuals who are not foreign investors any time soon.

Ingrid dismisses the role of public opinion in this regard, but these treaties cannot be adopted unless public opinion favors them. An enforceable international rights regime would be a radical departure from the status quo. The people and their representatives need to sign off on this change. (Of course, it is true that there are already many human rights treaties out there. But, as Ingrid notes, they do not have the enforcement mechanisms that give real protection to these rights.)

Putting aside this theoretical expansion, what we have, in practice, is an international regime that protects the rights of foreign investors but not the rights of others. And that is very hard to defend. It would be like having a U.S. Constitution made up exclusively of the Takings Clause (and only protecting the property rights of some people). It’s great to defend property rights, but those cannot be the only rights you protect.

Also, if Ingrid were the one drafting this hypothetical international constitution, I would have some confidence that it would promote and protect individual rights. However, the reality of an international rights treaty might be something very different. There are a lot of asserted “rights” out there, and it is not clear to me that the actual rights regime that came into being would be desirable.

Summing up, I think it is perfectly legitimate to argue for an international rights regime that protects a wide spectrum on individual rights. Ingrid and other internationalist libertarians are free to push for broad rights protections in international law. But that’s not what we have in ISDS, and nor is ISDS a bridge to a full-fledged system of rights in the future. The investor-state regime gives rights to a selected group of wealthy individuals. That’s great for them, but it is not helpful to the vast majority of people who are not covered. Practically speaking, ISDS is not a foundation on which to add more rights later; rather, it is a one-off grant of rights to the wealthy, who lobbied hard for it. Libertarians (and others) should not follow a model that protects the rights of the elite and ignores those of the masses.

The recent and intensifying debate over ISDS that has been taking place in the newspapers, at conferences, and on the specialized international law blogs has generally been dispiriting. Partisans on either side defend their respective Alamos as if their lives depended on not ceding any advantage or courtesy to the other side. It is quite pleasurable, then, to participate in this Cato Unbound discussion, where those on both sides of the debate are willing to thoughtfully and respectfully engage with their counterparts on the other on the basis of reasoned exchange rather than of calumny and ignorance.

I would add to my original post that, in my view, the claim that ISDS should be supported because it promotes the “rule of law” is not very convincing. It is not very convincing because it misses the main source of concern, which is, I think, that control over the development of the rule of law has been outsourced to ISDS tribunals who may push that law in directions that are out of step with what the publics of the various Contracting States view as reflecting the proper balance between “property rights” and the “right to regulate.” The Philip Morris case is a wonderful example of this tension. Philip Morris challenged Australia’s plain packaging regulations in Australian court; after much “due process” the Australian high court pronounced that under Australian expropriation law there was no compensable taking. My understanding of the holding is that under Australian expropriation law a government “taking” is not compensable unless the government takes and enjoys the seized property. Because the Australian government wasn’t taking and using Philip Morris’s intellectual property for its own benefit, Philip Morris could not recover.

One could certainly debate on policy grounds whether Australia’s version of takings law is “good” or “bad.” Does it strike the right balance between property rights and the right to regulate? I don’t know. Libertarians would probably tend to say that the law is too favorable to government regulation; those on the left would say that it is just right. The point, though, is that Australian takings law has developed within a democratic system in which we recognize the right of the people to decide, through legitimate governmental mechanisms and processes, what balance between competing interests they wish to strike as the best or most fair. Australia has taken one position; other countries may take others. But the fact that Australia’s position on takings may be more pro-government than some would like does not make that position illegitimate. Indeed, that decision’s origins in a democratic politico-legal system make it fundamentally legitimate, in a way that an ISDS tribunal’s holding cannot be.

ISDS tribunals place themselves in the position of domestic law-makers. They get to decide what the law that rules actually is, what it contains, what balance it strikes between the left’s values and the right’s. That is, in some respects, an inherently political decision, not a legal or technocratic one. And once they have decided, it is very difficult for the people, either at the level of an individual nation-state, or at the interstate level, to change or correct. This is especially so in the case of multilateral treaties, like TPP or TTIP.

This response obviously has less force in the case of non-democracies, where national laws may not enjoy significant democratic legitimacy. But with TPP or TTIP we are (mostly) talking about governments that enjoy strong democratic legitimacy, and in which investors have long been more than willing to invest without any legitimate expectation that the rule of law, both in terms of process and substance, would be other than domestic. Take again Philip Morris—is it plausible to maintain that the company would never have invested in the Australian market if it would have known that its investments would be governed by Australian takings law? I think the answer is “no, it is not at all plausible.” Australian law was more than adequate to encourage Philip Morris to invest; it invested; and under that law what happened to it was not a compensable taking. From my perspective, there is no persuasive reason why that should not be the end of the story.

Expanding ISDS to the billions upon billions of dollars of foreign investment already in place in the TPP and TTIP economies risks, ironically, upsetting settled expectations precisely because it threatens to replace domestic law, articulated and developed through domestic political systems, with new law of uncertain content articulated and developed by tribunals that lack both democratic and technocratic legitimacy. Viewed in this light, we can see that the debate really isn’t over the rule of law—it is about who gets to decide what the law is, and the extent to which the content of the law should favor governments or investors.