Investment norm setting clarity - a long way to go

Another blogpost on the chaos in investment treaty norm setting is highlighted in this CCSI piece by Federico Ortino. He alludes to the fact that substantive treaty protections in investment treaties have been very broadly interpreted by arbitral tribunals leading to a backlash by States to re-define the scope and content of these obligations.

The situation is bleak to arrive at a consensus on this since treaty negotiators are taking diametrically opposite views - from strengthening investor protection to rescinding treaties. The lack of multilateral fora or a comprehensive agenda is adding to the chaos.

Thus, when it comes to a core aspect of the investment treaty system, investment protection, policy-makers find themselves between a rock and a hard place: investment tribunals’ shortcomings as described above, on one side, and the politically arduous multilateral mountain to climb, on the other side. Something will have to give.

Thus, when it comes to the core of reform - the substantive provisions - there is a spaghetti effect with various bilateral and regional initiatives muddying the waters. Some would argue that this is essential considering that there is no one size fits all solution or approach.

What I found interesting in the piece was a reference to "Stabilisation clauses" that also restrict change in regulatory regimes too. Reference to the Italy Mozambique BIT and the provision that restricts regulatory change is here.

Whenever, after the date when the investment has been made, a modification should take place in laws, regulations, acts or measures of economic policies governing directly or indirectly the investment, the same treatment shall apply upon request of the investor that was applicable to it at the moment when the investment was agreed upon to be carried out.

In today's reform oriented treaties and modelas, such clauses are actually unthinkable or atleast will be modified to the extent of the need for legitimate regulatory power. That itself indicates how far we have come in investment norm setting.

The trend of varied approaches is likely to contnue in 2021 as indicated in this piece:

As we move into 2021 and States continue to review their BITs, we are likely to see new alterations and alternatives to the traditional ISDS model. However, there is no panacea to the issues surrounding foreign investment. As Esmé Shirlow notes, reforms “to one procedure may produce unintended consequences for others.” Accordingly, while arbitral institutions continue to discuss their role in facilitating international investment agreements, there will still be a need for a comprehensive approach that leverages “the strengths of different dispute settlement techniques whilst minimising their weaknesses”.

Thus, we will see more of experimentation and less of uniformalisation. Perhaps, that is the way forward. 

 

 

ISDS cases, appeals and some complexity

 The latest news on investment arbitration is the Cairns ISDS verdict against India. News of it here, here and here.

I had blogged about a similar case of Vodafone here. Now there is news about an appeal against the Vodafone Arbitral award.

Can an ISDS arbitration award be appealed against? is it an appeal on jurisdiction or a de novo review? Where does the provision to appeal against an arbitration award exist? In the investment treaty or elsewhere? The WTO has (or had till now) an appellate review mechains. However, ISDS cases do not have an appellate mechanism. The EU proposal to set up an Appellate mechanism is a movement in that direction.

So, then should the Vodafone arbitration award be appealed against. 

Two contrary views have surfaced:

Yes, we should: Promod Nair and Shivani Singal have argued that India should appeal against the ISDS arbitral award in Singapore:

The seat of the Vodafone arbitration was Singapore and any challenge to the award will have to be brought before the courts of Singapore. Unlike other jurisdictions (such as Switzerland which accord a wide margin of deference to the decisions of investment tribunals), the courts of Singapore have not hesitated to set aside BIT awards in cases where an investment tribunal has exceeded its jurisdiction.

        ...

India has an opportunity to challenge the Vodafone award in Singapore, which it should avail of. The time period for challenging an award is 90 days from the date of receipt of the award. The scope of consent to arbitration (including whether India has ceded jurisdiction to an ISDS tribunal to decide tax disputes arising out of the exercise of sovereign legislative power) is an important issue that needs to be finally settled - not least because it could have multi-billion dollar implications for India in respect of other cases involving challenges to India’s taxation measures by foreign investors.

At least two other investment arbitrations – commenced by Cairn and Vedanta respectively – where final awards are presently awaited, arise out of the same taxation measure that was held to be in breach of India’s obligation to accord FET protection under the India-Netherlands BIT in the Vodafone arbitration.

A favourable decision from the courts of Singapore in the Vodafone case could serve as a useful persuasive precedent for such other cases, and also uphold the government’s position that it has not ceded jurisdiction to ISDS tribunals to decide issues that go to the very core of legitimate exercise of legislative power by a sovereign State. 

No, we shouldn't: Hiroo Advani and Tariq Khan have argued that India should not appeal for the following reasons:

In our view, India should not challenge the Award in view of fact that the Supreme Court had already decided the issue way back in 2012. Further, there are very thin chances of succeeding in the Appeal against the PCA Award considering the fact that Singapore has not entertained similar challenges in the past.

The appeal has two aspects: procedural (jurisdiction) issues and substantive. The substantive issues could re-open the entire gamut of issues related to sovereign powers to tax and the limits of state power vis a vis fair and equitable treatment. I am not sure if ta policy , retrospectivity and the extent of FET can be re-adjudicated in Singapore?

I am just curious to know if all the substantive aspects that have been argued in the arbitral award can be re-submitted before the Court in Singapore? Or will it be restricted to issues of public policy and jurisdiction? Will it be a de novo appeal? A piece on Singapore COurts and arbitral awards is interesting here. Does the India-Netherland BIT provide for an appeal? Is the basis of the appeal the UNCITRAL Model Law on Commercial arbitration? Can the BIT terms be re-interpreted by the SIpgapore Court?

This dispute just shows how complex and winding ISDS cases can be. From the domestic courts in India to an ISDS tribunal to a SIngapore Court now.

A lawyers paradise indeed.

WTO and trade rules - some thoughts

 On the crisis of the WTO and future of world trade, some notes:

Pascal Lamy, the former DG of the WTO, has this to say in this video talk on what holds for future world trade, including the need for the big tech companies to pay adequate taxes. The Economist has an interesting piece on the contrasting style of the US and EU on how they approach big tech, anti-trust and regulation. While the US relies on existing rules and litigation, the EU is going ahead with new regulatory interfaces.

Farah Stockman has called it a mid-life crisis for the WTO comparing the WTO to a drunk in a bar waiting to be picked up, in this opinion in the the New York Times!

Jared Bernstein and Lori Wallach list out the priorities of the WTO in this undated piece. What should those new rules be? WIll there be agreement to take up the new road for new rules? Amongst their priorities is new rules for currency manipulation at the WTO.

The fact that our current crop of trade negotiators tells us that the inclusion of actionable rules against currency manipulation is impossible should be taken not at face value, but as a clear sign that the present negotiating system is broken. If the current “highway crew” is unable to build a road that facilitates this critical change, we need a new crew. The International Monetary Fund’s definition of currency manipulation, accepted by countries worldwide, provides important elements of a blueprint for this critical measure.

An interesting point on the process of trade negotiation and transparency is made by the above authors:

Rather than tinkering with the advisory system’s composition, we should eliminate it entirely. If proposed U.S. texts and draft texts from negotiations are made publicly available, the main official advantage of the committee system – access to that information – would disappear. Absent the committee structure, U.S. positions on trade deals can be formulated the way other U.S. federal regulation are: through the on-the-record public process established under the Administrative Procedure Act to formulate positions, obtain comment on draft texts throughout negotiations, and seek comment on proposed final texts. 

We must also enact strict conflict of interest rules such that those representing an industry with an interest in negotiations are barred from serving as negotiators for at least five years after leaving their companies. Likewise, public officials should be barred from representing an industry with an interest in negotiations for a similar time period after serving as a negotiator.

Trade negotiation and stakeholder engagement leaves a lot to be desired across the globe. How we structure it and what emanates as trade priorities will determine the type of trade rules we have. 

Of lows and highs - ISDS and RCEP

 I have discussed the debate over Investor State Dispute Settlement (ISDS) in many blogposts. The tension between state regulatory power and investor rights has captured the imagnation of treaty negotiators. The results have led to oscillation from rejecting ISDS to making a modified ISDS framework with greater balance.

Now that RCEP is the talk of the town, an analysis of the dispute settlement provisions in RCEP in this post in Kluwer Arbitration Blog once again shows how ISDS is not universally acceptable. The RCEP investment chapter has rejected the ISDS for now and has settled for the traditional, more non-controversial State to State dispute settlement.

This, nonetheless, does not mean that investors are left without any recourse for breaches of RCEP Investment Chapter by a host state. Although the RCEP Investment Chapter does not specify any DSM, an all-purpose state-to-state DSM is provided under Chapter 19 (Dispute Settlement) (the RCEP DSM). This means that if a Party to RCEP commits any breach of the obligations under the RCEP Investment Chapter, the relevant investors could request their home state to espouse their claims by way of diplomatic protection, and subsequently the home state may bring a claim against the host state under Article 19.3(1) of RCEP. Article 17.11 of RCEP, however, carves out a major area of protection by providing that the RCEP DSM is not applicable to disputes relating to pre-establishment rights, namely those disputes relating to admission or approval of foreign investment during the screening process applied by the Parties.

Well, as the blogpost suggested - is this the lowest common denominator as far as investment dispute settlement is concerned? It depends on what one considers "low" and "high" in norm setting in investment treaty making! For some, the ISDS is the new low point. 

Currency undervaluation back in business!

The IELP blog has a recent discussion on currency undervauation issues being brought in countervailable duty investigations by the US against Vietnam tyre exports to the US.

The US Department of Commerce Report is here. The relevant part of the currency undervaluation analysis is here:

In determining whether there is undervaluation, we will normally “take into account the gap between the country’s real effective exchange rate (REER) and the real effective exchange rate that achieves an external balance over the medium term that reflects appropriate policies (equilibrium REER).”159 Pursuant to 19 CFR 351.528(a)(2), we normally will make an affirmative finding of undervaluation only if there has been government action on the exchange rate that contributes to that undervaluation. Next, pursuant to 19 CFR 351.528(b)(1), after making an affirmative finding of undervaluation, we will determine the existence of a benefit after examining the difference between the “nominal, bilateral United States dollar rate consistent with the equilibrium REER,” and the “actual nominal, bilateral United States dollar rate during the relevant time period, taking into account any information regarding the impact of government action on the exchange rate.” Consistent with 19 CFR 351.528(c), we requested that “the Secretary of the Treasury provide its evaluation and conclusion as to the determinations” under 19 CFR 351.528(a) and (b)(1).

 In its August 24, 2020 response to our request,160 Treasury reported that the VND was undervalued during 2019, because there was a gap between Vietnam’s REER and its equilibrium REER.161 Treasury also reported its finding that “on a bilateral basis, {it} assesses that the Government of Vietnam’s actions on the exchange rate had the effect of undervaluing the dong vis-à-vis the U.S. dollar by 4.7%.”162 Based on this evidence, we preliminarily determine that Vietnam’s currency vis-à-vis the U.S. dollar was undervalued during the period of investigation by 4.7 percent. 

The Report relied on Treasury inputs which have a detailed explanation of the methodology for determining undervaluation is here.

This CSIS piece explains the whole issue and the implications it may have. A critique of the move to use currency undervaluation in subsidy investigations is found here.

Added to this is the semi-annual report of the US Treasury on currency undervaluation.The last one published in January 2020 is here.

Someone had said currency undervaluation and trade are remotely connected. Time to reconsider it's entry into the world of global trade rules. If currency undervaluation rules is one way, CVD investigations are surely the other way it is going to set policy makers thinking.

Some weekend webinars on trade and investment

In the times of Covid, two interesting webinars in trade and investment worth watching.

The first one, is on what should India's trade policy strategy be focused on? Should it be inward or export oriented? Should it be import substitution based or export orietnted? More protectionism, a la the major world economies or should it still repose its faith in globalisation.

Arvind Subramanian feels India should not abandon its hitherto export oriented strategy. What implication does this have for engaging in world trade rules? Would it change India's strategy in engaging in multilateral negotiation and mega-regionals like RCEP?

Dr.Harsha Vardhan Singh makes a distinction between border measures as against domestic regulation. He speaks about the experience of Asian economies in protectionism, connecting to global value chains, establishing lead firms and providing protectionist incentives like tariffs. lack of effective implementation of getting good value chains into the country compounds the problem.

On the investment front, it was about investment treaty reform and the Carribean region. CCSI had this seminar on investment treaty reform. Chantal Ononaiwu explained Caricom's position on investment treaty reform. The impact of ISDS cases on small states was an important point.

Some weekend reading (oops, webinar) work!

RCEP, digital economy and innovation

News of the mega trade deal RCEP is trickiling in here, here, here and here. The IELP blog has a preliminary analysis of some of the provisions. 

The signing ceremony of RCEP

That took me to the Electronic Commerce chapter of RCEP legal text and I was curious to know the data localisation standard. A number of interesting aspects in Article 12.14 covering "Location of Computing facilities".

Article 12.14: Location of Computing Facilities 

1. The Parties recognise that each Party may have its own measures regarding the use or location of computing facilities, including requirements that seek to ensure the security and confidentiality of communications. 

2. No Party shall require a covered person to use or locate computing facilities in that Party’s territory as a condition for conducting business in that Party’s territory.11 

3. Nothing in this Article shall prevent a Party from adopting or maintaining:

(a) any measure inconsistent with paragraph 2 that it considers necessary to achieve a legitimate public policy objective12 provided that the measure is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade; or 

(b) any measure that it considers necessary for the protection of its essential security interests. Such measures shall not be disputed by other Parties. 

11 Cambodia, Lao PDR, and Myanmar shall not be obliged to apply this paragraph for a period of five years after the date of entry into force of this Agreement, with an additional three years if necessary. Viet Nam shall not be obliged to apply this paragraph for a period of five years after the date of entry into force of this Agreement.

12 For the purposes of this subparagraph, the Parties affirm that the necessity behind the implementation of such legitimate public policy shall be decided by the implementing Party. 

The mandate to not require local computing facilities ahs its exceptions. Cambodia, Lao PDR and Myanmar can have measures that require dta localisation for a periof of 5 more years, extendable to eight. Transition time seems to apply only to these three members.

Essential security exception is available to all members wherein obligations under paragraph 2 are violated. Moreover, there is a non-justiciable element here.  Article 12.4 (3)(b) states that such measures shall not be disputed by other Parties. Therefore, it is self-judging to the core. Whether it satisfies the standard set forth in the exception si to be decided by the Party whileno other Party can challenge it in the dispute settlement proceedings under RCEP.

It would be an interesting to compare three new norm setting legal paradigms and their impications for policy space and standradisation - CP-TPP, RCEP and the Australia Singapore Digital Economy Agreement.

Fertile ground for experimentation and innovative solutions.

 

Not self-judging no more!

 The security exception has hogged the limelight of late. Recent WTO decisions have called into question the self-judging character of the security exception in WTO agreements.I have blogged about it here, here and here.

A recent blogpost in Opinio Juris throws some light of the issues involved:

The tussle between the ‘self-judging’ nature and the objective assessment of these requirements has arisen in the past. In defending her export restrictions against Czechoslovakia, USA contended that the WTO had no jurisdiction to question a Member State’s exercise of sovereignty. Similarly, the EC defended the suspension of imports from Argentina on the ground that the security exception was a repository of “unspecified, inherent rights”. This exception has been litigated recently in the Russia – Traffic in Transit and Saudi Arabia – Measures Concerning Protection of IPR (Saudi Arabia – IPR), largely putting this debate to rest by rejecting the notion of the security exception as an unlimited escape clause.

A recent blogpost on Kluwer Arbitration Blog on space law and ISDS, took me to an interesting analysis of the security exception in a BIT as compared to WTO law.

While analysing the security exception clause in a BIT in the CC/Devas vs. India arbitration dispute, the Tribunal tried to make a distinction between the broad exception in the BIT as agains the seemingly "self-judging character" of the provisions under WTO law. 

Indeed, it is well established by judgments of the International Court of Justice (the “ICJ”) and investment arbitration awards that, unless a treaty contains specific wording granting full discretion to the State to determine what it considers necessary for the protection of its security interests, national security clauses are not self-judging.

In footnote 286, the tribunal notes:

Self-judging “essential security interests” provisions are far from being unknown in international law. See, for instance, Article XXI of the General Agreement on Tariffs and Trade 1947 (“GATT”): “Nothing in this Agreement shall be construed: (a) to require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests…” (emphasis added); ...

I found this reference to self-judging clauses interesting. In the end, they are no longer self-judging as they seemed to be with recent WTO jurisprudence.

Evolution of a stance on foreign investment protection

 International investment protection has always been the dominant method used by states which have a sizeable force of foreign investors investing in host states. As a result, developing economies have been at the receiving end of foreign investment claims. However, recent studies show that developing countries are also capital exporting countries. Therefore, their investors now become foreign investors in other hosts states. Does their attitude towards international investment treaties as well as dispute settlement mechanisms like ISDS change when the nature of their role in international trade and investment changes.

This piece in the East Asia Forum thinks so. Giving the eample of China and its Belt and Road Initiative, it explains how Chna is using the international investment legal framework to advance its investors interests in other countries.

Despite some continuing concerns, China today is deeply committed to the BIT system. Rather than viewing international investment law as inherently threatening or constraining, China now sees it as a valuable instrument for protecting its investments and interests abroad. By relying primarily on BITs to protect its BRI investments, China is actively leveraging existing international rules and norms to advance its national interests.

It would be interesting to see the timeframe, provisions and evolution of these BITS as the BRI progressed. How did the provisions and protections change due to experience and investor feedback?

Bryan Mercurio and Deni Sejko explain how the BIT regime is important for the BRI here.The have assessed the set of treaties and aver their inadequacy:

The great majority of investment treaties in force between China and the BRI countries belong to the first and second-generation and are characterized by terms that are encouraged but not required. More importantly they contain investor state dispute settlement (ISDS) clauses with a limited amount of compensation payable to investors in case of expropriation. Thus, early Chinese treaties greatly reduce important protections for foreign investors in clauses related to national treatment, most-favoured nation status, fair and equitable treatment, and full protection and security. Another problem with China’s first- and second-generation BITs is enforcement. They generally provide for the establishment of ad hoc tribunals (with only limited use of ICSID arbitration tribunals) that can only decide cases dealing with the amount of compensation in case of expropriation. In addition, non-ICSID awards require much more complicated enforcement procedures.

They have opined that China needs to be more aggressive in its international investment rule making strategy

There is a general need for China to improve the trade and investment framework with BRI countries, which is recognised by the 2015 Chinese government circular on Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road. President Xi also has advocated for the negotiation of new international agreements that support trade, investment, and enhanced integration along the Belt & Road area.

The Chinese vision in 2015 is clear on this count.

We should speed up investment facilitation, eliminate investment barriers, and push forward negotiations on bilateral investment protection agreements and double taxation avoidance agreements to protect the lawful rights and interests of investors

How the invetsment regime will evolve, what kind of disputes would be brought and what implications they would have to the investment norm making framework may set the agenda for the 21st century international investment regime discourse.

 

Some random readings

Three random articles caught my attention - one on labour and trade, one on monopoly and the last on protectionism.

On labour and trade, Mandeep Minhas explains how labour provisions in present trade agreements are just not adequate to enforce worker rights. Referring to the long drawn Guatemalan dispute,  he opines that there must be stronger labour provisions in trade agreements.

The dispute between the unions and Guatemala is just one example of inadequate labor provisions. To remedy FTAs we must put labor rights at the center and invite representatives from labor groups to join trade advisory committees. Does anyone believe that labor groups would have consented to a process that required a panel to first determine that a labor violation was “affecting trade or investment” in order to conclude that their had been a violation of the FTA?

Not many would agree that there is a need for labour related provisions in trade agreements. The fact that these provisions are being increasngly used in bilateral trade agreemnents is a sign athat the scope, extent and interpretation would become increasingly contentious in the coming years.

On protectionism, Scott Lincicome in his inimitable style outlines the impact of foreign trade policy on local businesses and possibly election outcomes.Referring to a study on economic effects of trade policy on States, he opines:

Although the study’s authors are careful to note that these findings do not prove that President Trump’s trade wars caused these states’ weaker economic performance in 2018, they nevertheless state that the strong negative correlations between trade exposure and employment/​production suggest that the tariffs, retaliation, and related uncertainty played a significant role. Furthermore, their findings indicate that “the trade war initiated by the United States may have had a stronger impact on U.S. employment and production than what is found through the lenses of standard models of trade,” because those national models might mask the concentrated pain that U.S. tariffs and foreign retaliation inflicted on certain trade‐​exposed states.

An interesting model to study trade policy and impact on States.This would be relevant to many States that are federal with multiparty democracy!

The last read was fascinating - a piece on trade routes and monopoly. It tries to draw a causation between monopoly rights, over loading due to rent seeking and shipwrecks.

Together, these results provide additional evidence that is consistent with the mechanism outlined in our model. Ships in the Manila Galleon trade were more likely to be shipwrecked or to return to port because they were late and overloaded; in short, they were shipwrecked by rents.

This study demonstrates how monopoly regulations can have unanticipated negative consequences in the form of shipwrecks. While this historical setting is unique, the lessons from rent-seeking in the Manila Galleon trade can be generalised. The mechanisms responsible for shipwrecks in the Galleon trade are likely operative in other settings. For instance, cargo limits are often not observed on smaller flights – a problem that is particularly acute in developing countries – and this has been anecdotally linked to airline crashes.

 An eclectic list!

Digital trade - Need for alliances?

A recent piece in CFR on digital trade interestingly covered digital trade, cyber security, privacy as well as national security concerns. A number of issues concerning what a digital trade agreement should look like, how geo-politics would play out, how data localisation can impact internet trade as well as how internet governance and digital trade are intricately connected was brought out. Enshrining "demcratic values" in digital trade agreements is a strategy to counter geo-political threats. reference is also made to the digital tax on the big US tech companies, privacy concerns as well as the control of the internet by regimes across the world.

Titled "Weaponizing Digital Trade" by Robert K. Knake, the paper has ambitious goals and ambitions for a democratic alliance:

The key recommendations are:

The U.S. government should work with other democratic nations, the technology industry, nonprofits, academia, and user groups to create a digital trade zone with rules that govern content moderation, data localization, cross-border cybercrime, and obligations to assist during cyberattacks. It should then establish the organizations and mechanisms necessary to implement these agreements. By tying access to the digital trade zone to obligations for cybersecurity, privacy, and law enforcement cooperation, the United States and its democratic allies can create a compelling alternative to authoritarian visions for the internet. In doing so, the United States and its allies can force countries to choose between access to their markets or tight control of the internet in the Chinese model, thereby creating the kind of leverage that has been missing from U.S. efforts to promote an open, interoperable, secure, and reliable internet. Tariffs on digital goods from outside the trade zone should be used, at least in part, to fund joint cybersecurity efforts within the zone.

How would trade negotiators view this agenda? The article foresees some reality:

Digital trade can be enhanced if the mitigation strategies to the ills it creates are baked into digital trade agreements; conversely, addressing cybercrime and other digital ills that freely flow across open digital borders will only happen if these strategies are tied to digital trade. Such thinking, however, is anathema to trade negotiators, who are typically hostile to the concerns of law enforcement and actively work to limit oversight and enforcement mechanisms in trade negotiations, believing that they will encumber free trade. Yet failing to build in these mechanisms will ultimately harm the prospects of increased digital trade if threats in the digital domain are not curtailed.

Apart from this, there is an issue of the north and south, developinga nd the developed, data sovereignty and data production. Are these not relevant? Is free flow of data between democratic regimes a superior goal than say developing local data champions? A reference has been made to the gold standard digital trade agreements in the USMCA and the need to go beyond. Will the competing goals of geopolitics and economic independence in data production clash? Where will the line be drawn, by whom and to what extent? Is there a middle path here?

 

Parliamentary scrutiny of trade deals - feasible?

 Who negotiates trade treaties? Who should have the final say - the executive or the legislature? Should trade deals be approved by Parliament before being signed off? Of course, it depends on the system of governance and constitutional scheme.

An interesting note on the contrasting approaches between the US, EU and UK on the prerogative of parliamentary/legislative scrutiny is found in this piece. It essentially notes that the US and EU have a far greater parliamentary control of trade outcomes as compared to UK, Canada and Australia.

The US Congress and EU Parliament both get involved before negotiations begin, and shape the negotiating mandate. The US Congress stipulates in domestic legislation (the Trade Promotion Authority) negotiating objectives that the Government must follow, and it has to be informed and consulted before each negotiation the Government wants to embark on. The European Parliament doesn’t have the formal right to shape the negotiating mandate, but it does have the right to be informed. As the European Parliament ultimately has to approve trade agreements, the European Commission has an incentive to solicit Parliament’s views, and it has become routine to consult Parliament on negotiating directives.

In contrast, in the UK, Australia, and Canada, the government has no legal obligation to share negotiating mandates or consult with parliament. The UK has started to publish summaries of its negotiating objectives and hold short debates on them, but is yet to establish a mechanism for consulting Parliament on them.

Is Parliamentary scrutiny desirable in complex trade negotiations all the time? Are they practical? Can there be alternative mechanisms - select committees or joint parliamentary committees? Would trade deals be subject to political maneuvering of subject to parliamentary scrutiny? Would it lead to delays? DO developing countries have the capacity to deal with such scrutiny in terms of research and providing adequate information to take informed choices?

Is there a middle path between parliamentary scrutiny and executive monopoly? 

Arbitral decisions and domestic courts - what if?

 The Vodafone arbitration decision brings back to focus the debate on ISDS and its impact on policy space. Is it a case where sovereign tax policy was impeded? It was yet again a case where the Fair and Equitable (FET) clause was invoked successfully by the investor. It is pertinent to note that the FET clauses are missing in new age treaties partly because of the fear of its expansive interpretative scope. Another issue is the applicability of investment and trade treaties to taxation issues. Obviously, the treaty under question did not have an exception clause taking taxation outside its purview. However, new age treaties do have exceptions excluding the applicability of the provisions of the treaty to taxation matters. However, is that sufficient to deter a claim is another debate altogether.

Another interesting aspect of the Vodafone dispute was the legal battle that took place domestically with the Supreme Court also involved. The intersection of domestic judicial decisions with international arbitration raises interesting questions. What if, hypothetically, the Supreme Court had upheld the constitutional validity of the retrospective tax amendment? What if the claims made by the State were found to be as per domestic law? Then the arbitral decision would have been in direct contrast to domestic judicial dicta, that too of the highest court of the land. The Supreme Court having decided in favour of the assessee avoids the question of what if there was a divergence.

I think the decision is not in the public domain yet. But did find this preview on the barandbench website. 

The conclusion of the decision states:

XIV. DECISION 

363. After deliberation, and for the reasons of fact and law set out above, the Tribunal decides as follows: 

(1) The Tribunal has jurisdiction, under the terms of the Agreement between the Kingdom of the Netherlands and the Republic of India for the Promotion and Protection of Investments, done at The Hague on 6 November 1995, to consider the Claimant’s claims for breach of the Agreement. 

(2) The Claimant is entitled, in respect of its investments in mobile telecommunications in India, to the protection of the guarantee of fair and equitable treatment laid down in Article 4(1) of the Agreement. 

(3) The Respondent’s conduct in respect of the imposition of the Claimant of an asserted liability to tax notwithstanding the Supreme Court Judgement is in breach of the guarantee of fair and equitable treatment laid down in Article 4 (1) of the Agreement, as is the imposition of interest on the sums in question and the imposition of penalties for non-payment of the sums in question. 

(4) The finding of breach in paragraph (2) entails the obligation on the Respondent to cease the conduct in question, any failure to comply with which will engage its international responsibility. 

(5) In the light of the above findings, it is not necessary for the Tribunal to proceed to a determination of the Claimant’s other claims. 

(6) The costs of the arbitration will be borne equally between the Parties. 

(7) The Respondent will reimburse to the Claimant the sum of £ 4,327,294.50 or its equivalent is US Dollars, being 60% of the Claimant’s costs for legal representation and assistance, and € 3,000 or its equivalent in US dollars, being 50% of the fees paid by the Claimant to the appointing authority

It is interesting to note the reference to the Supreme Court decision in the arbitral tribunal decision. What if the Supreme Court had decided in favour of the State. Would the Respondent's conduct in respect of imposition of the Claimant of an asserted liability to tax NOT amount to a breach of the fair and equitable treatment if the Supreme Court and other domestic courts have endorsed the State's views? How would that have played out? Would it have become relevant to the arbitral proceedings? Would the present arbitral decision then have tantamounted to over-ruling the decision of the highest constitutional court of the land?

Another ISDS decision - policy space, tax matters and sovereignty

Breaking news - Vodafone arbitration dispute goes in favour of the investor. 

Reported here, here and here.

Looking forward to reading the arbitral tribunal's decision - tax matters, retrospectivity, sovereignty and policy space. Lot of questions.

Africa and investment law norm setting

An interesting series of posts on Africa and investment norm setting in Kluwer Arbitration blog here and here. The normal churning that States are facing in terms of what should the scope of investment arbitration obligations be, what kind of protections to be included and what dispute settlement mechanism to be adopted face the negotiators of the Investment Protocol of the African Continental Free Trade Area.

Statistics of the skewed nature of arbitrator selection caught my eye:

The limited involvement of African arbitrators and African institutions in the ISDS ecosystem is a matter of great concern to many in Africa. According to The ICSID Caseload – Statistics (Issue 2019 – 2), although Sub-Saharan Africa contributes 15 percent of all ICSID cases by State Party involved, the region only accounts for 2 percent of arbitrators, conciliators and ad hoc Committee members appointed in ICSID cases. By contrast, Western Europe contributes 8 percent of all ICSID cases by State Party involved but account for a staggering 48 percent of arbitrators, conciliators and ad hoc committee members appointed in ICISID cases. North America (Canada, Mexico and U.S.) contributes 4 percent of all ICSID cases by State Party involved but account for 20 percent of arbitrators, conciliators and ad hoc committee members appointed in ICISID cases.

Will the negotiators reject ISDS altogether? Will State to State arbitration or the Brazilian model of co-operation and mediation hold sway? Or will the substantive obligations be more balanced with an ISDS mechanism?

Can Africa be the next place for investment norm setting standards for the world?

What kind of reforms at the WTO - this time for Africa?

 The selection of the next Director General is on everyone's agenda. atleast in trade circles. While the debate on whether a political leader or a technocrat should head the organisation gains pace, talks of the inevitability of "reforms" is rasied by many members. What exactly is the shape and form of these reforms? There are different perceptions of how the WTO should transform itself for the 21st century.

Project Syndicate carried a piece on what Africa needs from a reformed WTO. Hippolyte Fofack and Pat Utomi argue that the multilateral trading organisation ahs not served the interests of Africa thus far and needs to have an agenda that is more fair. In "Making the WTO work for Africa", the three pillars of their reform agenda are:

1. Tariff escalations and stringent technical standards hinder export of goods from Africa

2. Policy space - Developing countries are not allowed to design industrial policies that encourage their domestic sectors, a strategy that the developed world used effectively in the past

3. Agricultural subsidies maintained by large developed countries which depress world prices that impact farmers in Africa.

Arguing that Africa wants to be a player in the multilateral setting, a robust private sector in Africa seeks access and opportunity.

Africa is now a mature global player, with a private sector ready to drive development and take its rightful place alongside firms in more advanced economies. All we ask is that the WTO remove the artificial barriers and prejudicial hindrances that prevent Africans from unleashing their creative and productive energies.

A fairer, more equal, and more accessible global trade system must be at the top of the next director-general’s reform agenda. A WTO that is fit for purpose will also allow governments of smaller developing countries to act on behalf of their private sectors without fear or favor. Africa will support Azevêdo’s successor, provided that the WTO serves Africa in the same way it serves the rest of the world.

Will this reform agenda be the driving force of the new WTO? Well, not everyone in the WTO has this notion when speaking about reforms. One will have to see a real convergence of ideas for reform to make a thriving fora for future negotiations.

The importance of treaty language and doing it right!

Legally binding treaties that impose enforceable obligations must be negotiated and concluded with great care. Many a times what is intended is not reflected in the language of the treaty text while in many cases the ambiguity in the provisions of the treaty give wide scope for arbitral tribunals/dispute settlement panels to interpret obligations in ways that were not conceived by the treaty negotiators. Now a days a lot of importance is given to State parties being vigilant about treaty provisions they are entering into.

The debate on how many developing countries entered into international investment agreements without comprehending the full extent of obligations is well documented. This led to steps by States to rescind or rethink on their investment treaty negotiation strategy. Old age treaties have given way to new age treaties where State parties have been more circumspect in assuming obligations.

A classic account of how important treaty text is while negotiating is emphasized by this CCSI paper by George A. Bermann, N. Jansen Calamita, Manjiao Chi, and Karl P. Sauvant on the overlap between the interplay of the WTO Investment Facilitation Framework (Framework) and bilateral investment treaties of WTO members. Can the obligations assumed under the Framework be used by investors or State parties to butress their cases in ISDS cases under international treaties. Since both are separate legal regimes under different institutional set ups one would come to a conclusion that obligations under wither of the settings cannot be used in the other.

However, the paper outlines the importance of having clear, explicit treaty text in the Framework to exclude that possibility. A series of legal language is proposed to ensure that the Framework obligations are not imported as an interpretative tool to expand the rights and obligations under investment agreements. 

Some examples of such language suggested are as follows:

A future Framework can be expected—and needs to state expressly—that it does not cover “market access, the treatment and protection of investment or investors, and ISDS.

A determination that there has been a breach of this Framework shall not establish the breach of any rules on investment protection or investor-state dispute settlement.

For greater certainty, obligations arising from other treaties do not in themselves constitute ‘treatment’ and thus are excluded for the purpose of assessing a breach of this Article. Conversely, only measures adopted by a Member pursuant to those obligations shall be considered ‘treatment’. Furthermore, the obligations in this Framework shall not constitute ‘treatment’ under any other treaty.

This Framework cannot and shall not serve as a means to interpret any rules on investment protection or investor-state dispute settlement

So what seemed to be a non-issue is not exactly that straight-forward. Creative interpretations can upset carefully crafted balance in treaties. It can also lead to unintended consequences. 

Unintended and unwanted interaction between a Framework and IIAs is possible. WTO negotiators should therefore seriously consider including provisions.

The above piece only illustrates, once again, the importance of treaty negotiators to be aware of such consequences, create capacity to deal with the challenge of interpretation and exercise utmost caution. Quite often States leave this to their lawyers. However, this problem is much more than a legal one. It is one of State capacity that policy makers must have. It is a necessary toolkit in such challenging environs!

  

Digital trade rules - where are we headed?

Digital trade has captured the imagination of policy makers, both domestic and international.While some argue that the present legal architecture is insufficient to address the internet of things, others argue that national priorities must prevail when pursuing the ecommerce agenda. For some global trade rules is a must. For others it is anathema.

Touching on this theme, Dani Rodrik, in his inimitable way, highlights the tensions that digital trade and data bring to the fore in international economic policy making. Writing in the Project Syndicate, he highlights the three core challenges of new digital developments - issue of national security wherein digital technologies are perceived as being able to impact internal domestic security, the issue of data privacy where some countries value the principle more than others and the issue of economics where large technology players benefit from first mover advantage.

The WTO is definitely not well placed to address these issues - but should it be the multilateral fora where digital trade rules should be negotiated? Do developing economies that are still at the base of the ladder agree to multilateral trade rules that enable technology companies of the developed world to dominate. What about consumers? Should they not benefit irrespective from where the service is provided?

So are global rules the answer? Should we harmonise rules on data localisation, cross border data flows and standards? Who would benefit. Dani Rodrik states:

The benefits of common rules are clear. In their absence, practices such as data localization, local cloud requirements, and discrimination in favor of national champions create economic inefficiencies insofar as they segment national markets. They reduce the gains from trade and prevent companies from reaping the benefits of scale. And governments face the constant threat that their regulations will be undermined by companies operating from jurisdictions with laxer rules.

But in a world where countries have different preferences, global rules – even when they are feasible – are inefficient in a broader sense. Any global order must balance the gains from trade (maximized when regulations are harmonized) against the gains from regulatory diversity (maximized when each national government is entirely free to do what it wants). If hyper-globalization has already proved brittle, it is in part because policymakers prioritized the gains from trade over the benefits of regulatory diversity. This mistake should not be repeated with new technologies.

So the answer lies in a minimalist global rule framework where core national interests are protected:

Global governance and multilateralism will often fail, for both good and bad reasons. The best we can expect is a regulatory patchwork, based on clear ground rules that help empower countries to pursue their core national interests without exporting their problems to others. Either we design this patchwork ourselves, or we will end up, willy-nilly, with a messy, less efficient, and more dangerous version.

But do exporters of such technologies agree that there needs to be minimal global trade rules. There is a belief that harmonisation is beneficial to the world at large. The debate in the coming years would be how economies view global trade rules in ecommerce - as factors enabling their integration and development or one that hinders there digital and industrial road map.

Digital competitiveness, digital trade and indicators

Digital trade and digital competitiveness are the new kids (no longer new) as far as multilateral trade rules are concerned. There are growing demands for new rules on ecommerce that can spur digital trade and growth across the globe.

I found this interesting report on digital competitiveness called the Digital Riser Report 2020 done by the European Center for Digital Competitiveness which ranks countries of the globe based on how digitally competitive or ready they are. I wasn't interested in the ranking - was more interested in the methodology and the indicators used to decide who is up and who is down.

The Report lists out two sets of parameters to determine digital competitiveness - ecosystem related and mindset related. The effort was to examine whether the right conditions exist where digital growth and entrepreneurship could flourish.

The Ecosystem related indicators asked the following set of questions:

1. Venture capital availability -  “In your country, how easy is it for start-up entrepreneurs with innovative but risky projects to obtain equity funding?”

2. Cost to start a business -  Expressed as a percentage of the economy’s income per Capita

3. Time to start a business - Number of calendar days needed to complete the procedures to legally operate a business

4. Ease of hiring foreign labour - "In your country, how restrictive are regulations related to the hiring of foreign labour?” 

5. Skillset of graduates -  “In your country, to what extent do graduating students from secondary education possess the skills needed by businesses?” and “In your country, to what extent do graduating students from university possess the skills needed by businesses?” 

The Mindset indicators asked the following questions:

1. Digital skills among active population - “In your country, to what extent does the active population possess sufficient digital skills (e.g. computer skills, basic coding, digital reading)?” 

2. Attitudes towards entrepreneurial risk - “In your country, to what extent do people have an appetite for entrepreneurial risk?”

3. Diversity of workforce - “In your country, to what extent do companies have a diverse workforce (e.g. in terms of ethnicity, religion, sexual orientation, gender)?” 

4. Mobile-broadband subscriptions - Number of active mobile-broadband subscriptions per 100 Population. 

5. Companies embracing disruptive ideas - “In your country, to what extent do companies embrace risky or disruptive business ideas?” 

Broadly, the indicators thrust is to understand what is the ease of doing business, what is the skill set involved,  how good is the availability of venture capital to start innovative companies, what is the cost to start a business, how easy is it to employ qualified foreign labour, what is the internet penetration and what is the attitude of the population towards digitalisation.

Very relevant set of indicators. What I found interesting is that the country's regulatory framework for digital tarde - bth internal or external in terms of rules on data privacy, localisation requirements, cross border trade flows, intellectual property law enforcement, performance requirements, do not form part of the indicators. How relevant are they to digital competitiveness? Do they matter at all? Or are they relevant to increase global competitiveness when one is a digital powerhouse themselves? Of course some of the indicators related to ease of doing business do have a co-relation to investment rules but that is a broader question. In fact, the indicator on foreign labour, calls for a more freer flow of high skilled labour across countries. Do countries have the appetite for that now?

Reform narratives, global innovation index and some random thoughts

Some readings this week:

Jennifer Hillman, former member of the Appellate Body, writing in the Council for Foreign Relations website on the future of the WTO and the challenges for the new Director General opined:

They will inherit a WTO that has failed to reach any significant pacts (other than the Trade Facilitation Agreement) since its founding in 1995. Critical agreements are needed to curb fishery subsidies that are contributing to the depletion of the world’s supply of fish, and to write rules of the road for e-commerce and digital trade. These are “must-do” items, along with fixing the WTO’s dispute settlement system following a U.S. decision to destroy its Appellate Body, which could allow countries to avoid complying with decisions they do not like. The director-general will also need to find ways to address growing concerns over China’s unfair trade practices.

The reform agenda seems to be centred around fisheries, ecommerce rules, addressing concerns around China and fixing the AB. They have been called "must-do" items. I am not sure if there is consensus on the reform agenda itself amongst the 164 WTO members leave alone agreeing on what needs to form the substantive response to this agenda. Some members feel the agenda narrative is not in their interest and the WTO needs to be addressing more "inclusive" agenda items including reduction of agricultural subsidies as well as ensuring interests of developing and least developed countries are protected in future global trade rules. Can the Members get consensus on what the agenda is first?

The Global Innovation Index for 2020 is out.Switzerland tops it once again. 

Some excerpts:

Sovereign Wealth Funds and Innovation - An interesting observation on the impact of geopolitics and the behaviour of SWFs:

However, while geopolitics remains a major consideration for SWFs investing in foreign technology companies, there is a new frontier for political considerations—those of major global technology companies. As firms such as Alphabet, Facebook, and Amazon gather ever more data about their users, they are increasingly shaping people’s lives and politics. For a government-owned investor looking to back major new technologies in an era where start-ups can quickly emerge as dominant global players—and big data can have unforeseen or unintended consequences—it is essential that they look ahead to these considerations and understand the potential reputational and political implications, both for them as an investor and for their government as an owner. 

I found the chapter on government funding of innovation by Josh Lerner interesting as it  raises the difficulties government officials have in handling the innovation bubble - the different world of entrepreneurship, innovation and venture capital!

The final challenge reflects the nature of people who often are associated with the greatest entrepreneurial success. Government officials may have many valuable talents and play incredibly important roles, but the skill sets associated with successfully identifying and funding entrepreneurial businesses are very different from those encountered in their typical daily work. The ambiguity, complexity, and specialization associated with these ventures make these tasks quite challenging. 

In many instances, officials may be manifestly inadequate to selecting and managing entrepreneurial or innovative firms. Many examples can be offered of government leaders who did not think carefully about realistic market opportunities, the nature of the entrepreneurs and intermediaries being financed, and how the subsidies they offered would affect behavior. Whether they affect the ability of firms to accept outside financing, offshore routine coding work, or the response to shifts in customer demand, well-intentioned officials can make rules that prove to be very harmful to those they mean to help. 

But beyond the inability of governments, much of economists’ attention has been focused on a darker problem that affects these and similar programs: the theory of regulatory capture. This hypothesis suggests that entities, whether part of government or industry, will organize to capture the direct and indirect subsidies that the public sector hands out. Subsidies geared towards entrepreneurial firms are no exception.

These issues are exacerbated by the fact that the most creative entrepreneurs are often outsiders. For instance, extensive literature has documented the disproportionate representation of immigrants in U.S. entrepreneurship, both in general and among high-potential enterprises.These may be people who are less likely to be well connected or less able to lobby successfully for public grants.

Solutions like independence of decision making in selecting innovation projects, insisting on matching funds (from informed funders and not government entities!) by the private sector are some of the solutions provided to overcome the government deficit in understanding the innovation world! Good lessons for government's around the world.

 

To appeal or not to appeal is the question

Simon Lester has a succinct account of the Appellate Body (AB) crisis at the WTO and what alternative arrangements in place now can offer to resolve the impasse. With the AB dysfunctional presently and an alternative ad hoc arbitration mechanism in place adopted by about 10% of the WTO's 164 members, one needs to wait and watch on how the Multi Party Interim Arbitration arrangement(MPIA) will pan out.

The MPIA still does have challenges - its limited following, secretarial and funding support, how it will address the issue raised on the AB's overreach, issue of interpretation, "law making instead of clarifying the rights and obligations of WTO members and how much deference it will show to domestic authorities' decisions.

As Simon points out:

Just as there was uncertainty about the Appellate Body in 1995, there is uncertainty about the MPIA now. In addition to the points noted above, there are other questions: What approach will the MPIA take regarding the interpretation of core WTO principles such as the nondiscrimination obligation and public policy exceptions? How often will the MPIA appeal process be used? What kind of legal culture will develop around it, including the approach of the arbitrators and of the litigants themselves? How much deference will the MPIA show toward politically sensitive domestic laws and regulations? How much deference will the MPIA show toward the findings and reasoning of WTO panels? Will the MPIA avoid novel and controversial issues that are put before it or take them on? Only practical experience will give us clear answers.

However, the issue is much more than compliance and enforceability. It is an issue inherent in judicial interpretation. The power to interpret carries with it the inherent possibility of expansive or restrictive interpretative approaches. The language of the law is not always clear and unambigious. The Vienna Convention on the Law of Treaties does provide guidance but the same articles of the VCLT have provided scope of varying interpretation according to the text, object and purpose or context.

The issue is whether sovereign countries are willing to accept a neutral arbiter with the power of enforcement in international trade disputes. It is inherent in such processes to have the arbiter have the final word on interpretation and jurisprudence, of course within limits. One sees the tension in investment arbitration where States seek joint interpretative notes to control the interpretative jurisprudence of treaty text. The irony is that in the arena of international investment arbitration, the debate is about having an appellate system - a Multilateral Investment Court, partly because there is a perceived inadequacy of the ad hoc arbitral tribunal system leading to incoherent jurisprudence.

Trade negotiations - who does one listen to?

Trade negotiations and stakeholders have been a tricky issue always. Who does one consult when arriving at trade deals. Who are the stakeholders in business and society that need to be consulted? How do sub-national and local authorities figure in the process? What should the mechanisms be for effective input sharing and arriving at negotiating positions? What kind of businesses get access to air their views? What about civil society groups and workers?

The UK has set up several Trade Advisory Groups (TAGs) to help the government in negotiating their trade deals in sectors ranging from professional advisory services to life sciences.The purpose is "to provide the blend of strategic and technical expertise required to ensure the United Kingdom’s trade negotiations are able to progress at pace."

The issue of who needs to be consulted and what interests dominate trade negotiations is as old as trade deals itself. Not everyone is happy with how stakeholders are consulted, as is evident in this voicing of concern that workers views  are not getting enough priority in trade deals.

Unions bosses warned “workers will suffer” if the Government failed to involve them in talks.

Animal welfare campaigners such as the RSPCA and consumer groups have also been left out - despite concerns that a US trade deal could slash food standards by allowing chlorinated chicken in British shops.

In another part of the world, concerns of how a trade deal could hurt local jobs in Singapore is a critique of the need for such trade deals. Mobility of labour across geographies pursuant to a trade deal is also seen as very sensitive. 

Trade deals involve extremely complex trade-offs, winner and losers as well long standing impacts on economies. Some sectors stand to gain while others may lose out due to the competition from outside. How the political economy of these realities are understood, negotiated and managed is critical in any trade negotiating strategy. Of course consultation of all those going to be impacted is always the first step towards that goal!