Negotiating changes in investment treaties

Negotiating the right kind of international investment treaties has always been a complex task for countries with insufficient capacity. Building State capacity is critical to achieve that balance. However, repeatedly, States are taken to international arbitration - some could have been avoided by craftier language or anicipating changes in economic conditions.

Karl Sauvant and Louis T Wells bring out the complexity in anticipating changes in economic conditions while negotiating international investment treaties. Stability clauses that bind the State to a particular position without providing avenues for legislative change could restrict States from initiating reasonable reform. They stress on the importance of taking into account changes that may occur due to windfall profits or due to the need to amend existing regulations.

One lesson for governments is clear: mistakes, vague terms and failures to account for future conditions and concerns can no longer easily be corrected later. Governments must get contracts right from the beginning. Resource contracts need mechanisms to cover the prospects of future windfalls: progressive royalties or income taxes, or production-sharing formulas that adjust government take. They also need working provisions, so investors lose mining rights for failure to meet deadlines for production and target production rates. Agreements should anticipate potential problems with transfer pricing, debt financing, etc. The scope and duration of any stability clauses must be limited, anticipating that taxes and environmental and social concerns might be subjects of future legislation. Ideally, contract terms should be subject to occasional review.

The ability to anticipate changes and incorporate suitable language in treaties to address unforeseen trajectories is a question of State capacity and intent. It also ensures treaties that are balanced. For this State capacity needs to be built - by involving multisectoral experts, legal expertise and administrative, public sector experts. That is easier said than done!

Digital Trade - Perspective for growth

Digital trade has captivated debate domestically as well as in international trade circles for many years now. the growth of digital technologies and digital trade is undeniable. It is also a fact that a large number of developing countries are using digital technologies to further social inclusion and growth. Issues of digital divide, data flows, data privacy, big tech and digital divide dominate the discussions.

What role do trade rules have in fostering digital trade growth and opportunities? Is there a single way of charting out trade rules? Do all players benefit equally from strong, digital trade rules? Like goods and other services, are there predominant digital trade providers and receivers?

A 2021 WTO publications on digital trade is an interesting read. Titled "Adapting to the Digital Trade Era:Challenges and opportunities", it gives a birds eye view of digital trade agendas, progress and challenges from across the world.

What trade strategy should countries adopt with respect to digital trade? An open, free, non-interventionist stance to benefit from digital technologies and products from across the world? Or an "industrial strategy" of developing national players? Have the great powers in digital trade today always invested in open policies towards digital trade or have they had a graded policy?

As the conclusion of the report (p.346) states:

There also is a convergence on the view that while digital trade offers opportunities, there is a risk as it can also exacerbate inequality and limit inclusiveness. Developed-country policymakers tend to stress the importance of the free transmission of data across borders, while some developing-country policymakers have advocated for a digital industrialization strategy to limit competition from the large technology firms to encourage the growth of local digital capabilities. Developing countries that lack the tools to compete in the new digital environment are in danger of being left even further behind. The challenge is to achieve inclusive growth to the benefit of all, with no member being left out and not deepening the economic divide. What to regulate, how to regulate and at what level? Multilaterally, regionally or bilaterally? 

Will there be a consensus that digital rules multilaterally are the way forward for digital trade growth? Are national regulatory and business environments more important and strategic than international engagement? Or is it a strategic mix of both? What is the mix and who decides? Are there minimum standards that one needs to adhere to?

Proactive implementation of trade agreements?

ASIL Insights has an interesting review of a case of the Court of Justice of the European Union (CJEU) relating to Hungary. The CJEU in Commission vs.Hungary held that a Hungarian law which mandated an international agreement to be entered into by a foreign university (Central European University) violated the national treatment obligations of Hungary under the General Agreement on Services (GATS) under WTO.

Two interesting analysis on the judgement concerning the applicability of GATS by CJEU and the domains of the European Commission and Member States with respective to their competencies is found here and here.

What I found striking about this judgement is that the European Commission challenging one of the Member State's (Hungary) action as being WTO inconsistent. In normal circumstances, a WTO member where the foreign university originates or is registered (in this case the United States) could have filed a case in the WTO against the European Union. However, here the Commission brought a case against Hungary in the CJEU.

Proactive implementation of trade agreements? Imagine a large federal country where the cetral/federal government brings a case against one of its states/provinces for a measure which is apparently inconsistent with WTO law? Pre-empting WTO dispute settlement may be?

Enforcement of trade rules

The EU has come out with new rules reated to enforcement of WTO provisions in the context of the non-functioning Appellate Body at the WTO. The guidelines that came into force on 13th February 2021 permit the EU to initiate counter-measures against other WTO members whose measures are perceived to be inconsistent with WTO rules even if an appeal is filed before the Appellate Body.

The preamble to the amended rule, inter-alia, states:

"...

(3). The WTO Dispute Settlement Body has been unable to fill the outstanding vacancies on the WTO Appellate Body (the ‘WTO Appellate Body’). The WTO Appellate Body is no longer able to fulfil its function from the moment when there are fewer than three WTO Appellate Body Members left. Until that situation is resolved and in order to preserve the essential principles and features of the WTO dispute settlement system and the Union’s procedural rights in ongoing and future disputes, the Union has sought to agree interim arrangements for appeal arbitration pursuant to Article 25 of the WTO Understanding on Rules and Procedures Governing the Settlement of Disputes (the ‘WTO Dispute Settlement Understanding’). That approach was endorsed by the Council on 27 May 2019, 15 July 2019 and 15 April 2020 and supported in the European Parliament resolution of 28 November 2019 on the crisis of the WTO Appellate Body. If a WTO Member refuses to enter into such an arrangement, and files an appeal to a non-functioning WTO Appellate Body, the resolution of the dispute is effectively blocked.

(4) A similar situation might arise under other international trade agreements, including regional or bilateral agreements, where a third country does not cooperate in the manner necessary for dispute settlement to function, for example by failing to appoint an arbitrator and where there is no mechanism provided to secure the functioning of dispute settlement in such a situation.

(5) If dispute settlement is blocked, the Union is unable to enforce international trade agreements. Therefore, it is appropriate to extend the scope of Regulation (EU) No 654/2014 to cover such situations.

 (6) To that end, the Union should be able to expeditiously suspend concessions or other obligations under international trade agreements, including regional or bilateral agreements, if effective recourse to binding dispute settlement is not possible because the third country does not cooperate in making such recourse possible. 

          ..." 

In effect, does this amended rule make it mandatory for other WTO members to either agree to an interim arrangement for appeal or not file a WTO appeal? Is the WTO's recourse to appeal, albeit non-functioning, effectively curtailed by this resolution? Is it WTO consistent? Can the non-resolution of the Appellate Body impasse in terms of appointing AB members give the right to WTO members to pursue trade remedial measures before the completion fo the mandated process of appeal? It would be interesting to see the reaction of Members who have active trade dispute with the EU on this amended measure - the EU is currently engaged in 45 active WTO cases in which they are complainants in 29 of them.

Another pieceof news, though slightly outdated, is the creation of the role of a Chief Trade Enforcement Officer in the EU to effectively implement and enforce trade agreements that the EU is a party to. Detailed procedures on how the CTEO will act as a single point of contact for trade compliances are useful guides to other countries that face similar issues of trade barriers and enforcement. One has to step up internal institutional mechanisms to enforce agreements that one enters into. As it was rightly said: "any legislation is only as good as its implementation"! This is applicable to both domestic and international law.

Grassroot Globalisation

An interesting discussion on "Grassroot globalisation" from Project Syndicate.

Who are the rulemakers and rule takers? Is that changing now or has nothing really changed? Have emerging economies titled the balance or is it just a theoretical debate? Is capital controlling rulemaking across the north and the south?

An appeal in investor-state disputes at last?

The lack of an appellate mechanism in the international investment arbitration regime, unlike the WTO (albeit dysfunctional now) has been a major source of criticism as well as a challenge to the legitimacy of the ISDS system. The EU has attempted to correct this notion by proposing an investment court system as well as an appellate mechanism. It has incorporated this idea in the Canada-EU Comprehensive Economic and Trade Agreement. The idea of the arbitral tribunal and the appellate mechanism was also subject to challenge as violating EU law. The European Court of Justice in this decision seems to have laid that to rest.

The rules and finer print of the mechanism have been worked out now and are publicly available (page 62 of this larger large multilingual document) here. The Appellate Tribunal is what the appellate mechansm will be now called. It would be a six member tribunal. The term of office would be for 9 years. A division to hear a particular appeal will consist of 3 members - similar to the WTo Appellate Body. In terms of the Secretariat servicing the Appellate Tribunal, the ICSID Secretariat would be performing that role.

I was trying to compare the ambit and timelines of the Appellate Tribunal with that of the WTO's Appellate Body - 2 significant departures ( I am sure there may be more)

1. Power to remand the matter back to the original tribunal 

Under the DSU, the Appellate Body has no power to remand the matter to the panel that had originall decided the case. As per Article 17, paragraph 13 the "Appellate Body may uphold, modify or reverse the legal findings and conclusions of the panel." There is no scope for remand.

The Appellate Tribunal under the Canada-EU CETA has the power to remand the matter. Article 3(3) of the decision setting out the administrative and organisational matters regarding the functioning of the Appellate Tribunal states as follows:

"If the facts established by the Tribunal so permit, the Appellate Tribunal shall apply its own legal findings and conclusions to such factsand render a final award. If that is not possible, it shall issue a decision referring the matter back to the Tribunal to render an award in accordance with the findings and conclusions of the Appellate Tribunal..."

2. Duration

The WTO Appellate Body has a 90 day rule for completing its reports - 

"As a general rule, the proceedings shall not exceed 60 days from the date a party to the dispute formally notifies its decision to appeal to the date the Appellate Body circulates its report. In fixing its timetable the Appellate Body shall take into account the provisions of paragraph 9 of Article 4, if relevant. When the Appellate Body considers that it cannot provide its report within 60 days, it shall inform the DSB in writing of the reasons for the delay together with an estimate of the period within which it will submit its report. In no case shall the proceedings exceed 90 days."

The period and the inability of the Appellate Body to complete the proceedings and submit its report within 90 days has been a cause of considerable tension at the WTO.

The Appellate Tribunal under the Canada-EU CETA seems to have been given more time! In fact, there is an opportunity to extend the period through a specified process.Article 3, paragraph 5 of the decision states:

"As a general rule, the appeal proceedings shall not exceed 180 days from the date a disputing party formally notifies its decision to appeal to the date the Appellate Tribunal issues its decision or award..."

Further, the Appellate Tribunal can inform the parties if it requires more time than the 180 days with the reasons for the delay. Further, every effort (a best endeavour again?) to complete the proceedings by 270 days must be done. Has the EU-Canada CETA provisions formalised what used to happen in Appellate Body practice in reality at the WTO?

I am sure there are more nuances that the two processes can be compared with. One needs to see how the Appellate Tribunal will function under the CETA, would it face similar challenges as the Appellate Body of the WTO and would it prove to be a model for investment norm setting multilaterally?

Emerging powers and rule makers

A recent online symposium on emerging powers and international economic law caught my attention in the Opinio Juris Blog. Andreas Buser's book "Emerging Powers, Global Justice and International Economic Law" was being reviewed. 

Is the international trade and investment law arena being rescripted by the emergence of new power realities? Have Brazil, India, China and Russia redefined the way international law in economic activty is perceived and drafted? Have the rule takers become rule makers? Or has the change been incremental and not substantial? Has global rule making shifted from a Euro-centric, western perspective to a more fragmented, global edifice?

My thoughts on emerging powers and the global economic order are as follows:

1. Emerging powers have had varying approaches to many issues being negotiated in the trade and investment arena. These approaches have been propelled by national interest and growing influence in international economic engagement. For example, China has been open to the investor state dispute settlement mechanism partly because of the increasing trend of outward capital flow to other countries. It has become a capital exporting country now.

2. There is no unified position from these players on what the international economic rulebook should transform itself into. In fact, while there are strong coalitions of interest in negotiations amongst these groupings, there is also opposition when it comes to certain areas. Notice the divergent views on agriculture negotiations between Brazil and India in the WTO or the contrasting positions of China and India on participation in investment facilitation discussions.

3. Most of the emerging powers reiterate their faith in the multilateral, rule based system. Being engaged in one rather than radicalising and uprooting it is the mainstay of all powers.

4. While international economic law has seen coalitions of interests coalesce, geostrategic interests have thrown up new coalition partners. What influence do new geo-strategic coalitions have on a unified stand of emerging countries int he international economic order would be an interesting area of research.

5. And finally, all attempts today are of shaping international law from within. Many emerging powers seek to engage with international law for national interest as western powers did when the rules were framed. 

The issue of rule-makers and rule takers has been a long standing one in international economc law. How much of this change in power dynamics will change the nature of international economic law is the key question.

Low ambition "comprehensive" deal?

I had blogged about the investment agreement between the Eu and China a few days ago here. The text of the Comprehensive Agreement on Investment (CAI) is available in the public domain here.

Daniel Gros, in this Project Syndicate piece, did not have much hopes on the promise of the CAI in terms of liberalising investment between the two partners. An important point he makes on the ability of legal instruments to make a difference when one's internal economy is already "liberalised' is interestng. Therefore, when one's regulations are less of a barrier, international instruments do not add as much value as intended.

Critics of the CAI neglect to mention that the EU had little leverage because investment in Europe is already mostly liberalized. The EU therefore could not offer meaningful improvements for Chinese investors. And you if you have little to offer in a negotiation, you cannot expect much from the other side. Under these circumstances, we should not have expected an agreement that addresses every social or human-rights problem Europeans see in China.

I was taking a cursory glance at the dispute settlement provisions of the CAI. 

No ISDS, no appeal mechanism. Is State to State arbitration back in business?

Will the Airbus-Boeing saga really end?

One of the longest fought disputes at the WTO, at all stages of the dispute settlement process, involving two of the world's largest corporates is the Airbus (European Union) and Boeing (United States) dispute. I have blogged about the progress of this dispute at varyng intervals here, here, here, here and here. Books have been written about this and the dispute has ensured a lot of jurisprudential wisdom in the arena of industrial subsidies under the WTO's Agreement on Subsidies and Countervailing Measures.

This recent Peterson Institute's piece has called for a political settlement - now that it has been established that both Airbus and Boeing have been subsidized by their respectve governments. The rationale for a political settlement, apart from employment and reducing the carbon foot print ( the need to collaborate on reducing emission), seems to be China:

Large aircraft production is essentially a global duopoly between Boeing and Airbus. An accord would thus facilitate new global rules for airplane manufacturing subsidies generally, sending a signal to China, which is the most likely third global producer of large wide-body aircrafts under the direction of the Chinese state-owned Commercial Aircraft Corporation of China  (Comac). The degree to which Comac enjoys direct subsidies from the Chinese government is unknown, but they are likely to be lavish. In fact, Comac has so far produced only two relatively small aircrafts—the 90-seat ARJ21 and the 168-seat C919. The ARJ21 is generally considered inferior to competitors from Brazil’s Embraer and Canada’s Bombardier, and the soon-to-be-available-commercially C919 has not attracted orders from non-Chinese airlines. Comac is also working with Russian partners on the CR929, a wide-body long-range airplane seating up to 280 passengers.

Therefore, one of the primary motivators is a stiff competitor in the making and the need for a united front. This also throws open the question - will subsidies int he aviation sector really come down? is it an exception that the WTO rules should cater to or should they be disciplined like any other product under the trading regime?