Who benefits from ISDS - large or small firms?

The issue of the influence of businesses in Investor State Dispute Settlement has been an ongoing theme. How much of influence do the big businesses have on the regulatory space? Who benefits from ISDS cases? How do States get affected by ISDS claims when businesses are large and multinational.

A recent article by Weijia Rao titled "Large Corporations and Investor-State Arbitration" brings to light some new facts about who benefits from ISDS. Relying on an empirical approach the author argues that small and mid-sized firms have benefitted from ISDS, rather than large corporations.

"The finding that small- or medium-sized firms have brought more ISDS cases than large firms contradicts conventional narratives that ISDS is dominated by large firms, and reveals the unintended consequences that eliminating ISDS may have on small- or medium-sized firms. The finding aligns with other studies that posit that small firms are more frequent users of ISDS."

In conclusion:

"While it is generally believed that the financial burden of ISDS proceedings may limit the access of small- or medium-sized firms to the system, this Article shows that small- or medium-sized firms, rather than large firms, acted as claimants in most ISDS cases. With respect to damages, large firms do not appear more likely to prevail in ISDS cases. However, compared with small- or mediumsized firms, large firms have had greater success in influencing respondent countries to amend or repeal the challenged measures in ISDS cases."

Again, evidence based research can produce interesting outcomes contrary to popular perceptions. 

Junking ISDS with a domestic foreign investment law

ISDS is often criticised for being unbalanced and favouring the foreign investor over the State as well as domestic businesses. The inadequacy of the domestic legal regime in reasonably protecting foreign investor interests is one of the reasons put forth to canvas for the ISDS provisions in BITs as well as investment agreements.

Abdelhameed Dairy writing in the Harvard International Law Journal opines otherwise. In his piece titled  "Navigating the International Investment Maze: Dissecting Imbalances, Ditching BITs, and Charting a Course Towards Sustainable Solutions", he argues that the domestic legal space is a more appropriate forum for foreign investment protection instead of the international BIT or FTA realm.

Proposing a "National Foreign Investment Law" NFIL, the author argues that the protection for foreign investment should lie in the domestic legal framework where protection, the right to regulate as well as adequate safeguards to foreign investors should be given. It also envisions a competitive environment amongst states to protect foreign investment to attract more investment. This is like the eas of doing business paradigms that many states adopt to facilitate investment.

One aspect is the credibility of domestic judicial processes and procedures in terms of efficacious remedies for violations of rights of foreign investors. How does the NFIL tackle that premise? Also, is doing away with BITs a altogether a pragmatic solution?

Finally, an ACWL prototype for international investment disputes?

More than a decade ago, I had blogged about developing countries, dispute settlement at the WTO and the role of the Advisory Center for WTO Law.

The principle of a Center to assist developing countries and least developed countries in dispute settlement in international trade has now moved to international investment. Unlike WTO law, the international investment dispute ecosystem does not have such a centre to assist countries not having capacity. Reliance on international arbitration law firms or local teams was the solution thus far.

The UNCITRAL Working Group III which is working on issues of reforming the investor state dispute settlement process (ISDS) has come out with a draft statute to establish an Advisory Centre for International Investment Dispute Resolution. It aims to provide training, support and assistance with respect to international investment disputes.

The rise of ISDS cases against developing countries has been a matter of concern and dealing with State capacity is one of the issues. The Centre is aimed to meet that deficit. A useful guide on the state of play in investment disputes is brought out by UNCTAD here. The complexity of investment treaties (both old and new) is shown beautifully in this diagram from the UNCTAD report.

However, the larger debate around ISDS still persists - with new model BITS, exclusion of ISDS chapters in regional trade agreements as well as finding innovative ways in substantive provisions (including expanding the scope of the right to regulate, strengthening domestic exhaustion of local remedies) of lessening their impact. One of the interesting points in the note attached to the draft statute is whether the Centre should be part of the larger organisational structure of the UN or should be independent like the ACWL.

Time will tell whether such a Centre will serve the purpose of addressing the capacity deficit of many countries in dealing with international claims on State actions.

Being futuristic about the WTO

Predictions about the future of the global trading system are common. 

This recent one by Alan Wm.Wollf provides a futuristic WTO and what needs to be done to achieve it. In a piece titled "The Future of the Multilateral Trading System" in the American University, he outlines his vision of the institutions's future.

What caught my attention was the list of topics that he laid out as what the WTO may have to address in the future 

Climate change. Crops will fail. Extreme weather, which can appear in the form of droughts or floods, will be experienced. Waves of pests may occur. Rising sea levels will cause displacement of people and agriculture. Global challenges require coordinated action. Food production will need to be more efficient and more responsive. Markets will have to be more open, and undistorted. An equally important front in combatting climate change is carbon reduction. Unilateral measures to deal with carbon leakage will prove to be contentious and less effective. A pillar of policy responses should be liberalization of trade in environmental goods and services. 

Sustainability. The WTO’s members chose to plant a flag for stewardship of the environment with the issue of curbing fisheries subsidies. They have proceeded part of the way with a first agreement, and clarified the issues that divide members in a second part of the fisheries subsidies suite of issues. Part I of the agreement is poised for ratification. Part II is poised for conclusion of the negotiations. The degree of success for this next stage rests primarily with China and India. This is a test of their commitment to an effective multilateral solution. 

Social issues. Trade distortions caused by gender discrimination, forced labor, as well as changes in trade patterns due to technological advances and shifts in competitive strengths and weaknesses not eased by domestic policy measures, all undermine domestic social contracts in the absence of an international social contract. These subjects require more than discussion. The current global trade rule book needs updating. 

 Global health. The WTO failed to rise to meet the trade challenge of the COVID-19 pandemic. The question is whether the institution will be in any better position to meet another global health emergency. 

Industrial policy. What is considered acceptable requires international discussion, to understand if there are boundaries that can be established. 

 The digital economy. As trade increasingly is increasingly digital, if there are no agreed rules of the road, competing national and regional regulations will tend to stifle economic growth and result in trade conflicts. Maintaining “policy space” (freedom to regulate) is a sub-optimal solution. 

Trade across the geopolitical divide. Neither the US nor China seek complete decoupling of their economies. The European Union and other allies of the US clearly do not wish this, not yet in any event. The current trading system is unstable due to uncertainty over to what extent trade across the geopolitical divide is deemed positive by either side. 

Considering the current state of negotiations where issues progress at a glacial pace, it may well look like a futuristic vision. 

More than FTAs, what "flanks" them may be determinant!

For trade negotiators, the provisions of the agreement are critical in assessing its impact and scope. The binding language, intent and meaning are discussed and debated over hours. A "shall" or "may) can derali a negotiation!

Came across this article on something the authors called "flanking" measures to FTAs which are instruments that accompany an FTA (not part of the main provisions of the agreement) but are crucial in interpreting and addressing concerns that parties have on the agreement. Noémie  Laurens,  Christian  Winkler  and  Cédric  Dupont writing in the Review of International Political Economy outline the scope and impact of these flanking measures. Sweetening  the  liberalization  pill:  flanking  measures  to  free  trade  agreements  discusses the various instruments that accompany FTAs that serve a particular purpose - soften the blow FTAs may have on domestic interests.

The authors define the scope of flanking measures:

 Our  conception  of  flanking  as  the  adoption  of  an  additional  instrument  outside  of  the  initiating  treaty  is  driven  by  the  original  meaning  of  the  verb  ‘flank’  (i.e.  to  be  at  the  side  of  something)  as  well  as  the  French-language  equivalent,  ‘mesures  d’accompagnement’  (accompanying  measures),  originally  used  in  the  EU-Switzerland  context.  However,  we  acknowledge  that  flanking  measures  can  take  different  positions  on  the  inside-outside  continuum. For  instance,  the  CETA  Joint  Interpretative  Instrument,  while  located  ‘outside’  the  treaty,  deals  with  the  application  of  ‘inside’  provisions,  which  makes  it  closer  to  the  ‘inside’  end  than  general  domestic  measures,  such  as  the  TAA.  Moreover,  flanking  measures’  position  on  the  continuum  may  be  dynamic  over  time.  For  example,  the  NAFTA  side  agree-ments  on  the  environment  and  labor  have  later  been  incorporated  into  the  main  text  of  subsequent  US  FTAs.

What are the motivations for these flanking measures? Why can't they be regular provisions in FTAs instead of sui generis instruments? As the authors argued, the deeper the agreements get, will there be more such measures to address concerns of shrinking of policy space? What impact do these flanking measures have on dispute settlement and interpretation of the agreement? Is it a way of getting an FTA through the finishing line? It si important that negotiators are aware that such measures are available in their toolkit to engage in constructive negotiations when deadlocks are imminent and progress is slow. Overall, a very educative piece on what is happening in the FTA space.

Less is better says Dani Rodrik!

Some recent reading on multilateralism and the need for global trade rules, the extent of its influence and what should the ideal world have:

Dani Rodrik in his latest paper titled "How to smooth US-China economic relations for the benefit of the global economy: A light model of global economic governance" where he as argued that global economic governance should be minimal and not over intrusive. In other words, less is better. Deep integration agreements, in terms of prescribing rules in every sphere both on substance and procedure would be undesirable in this model. Transparency and a "meta-regime" of agreement on certain core principles is what is suggested.

While transparency enhancing procedures are straightforward, the meta regime that he proposes are based on 4 principles:

1. Actions that are prohibited - Policies that are definitely harmful to the other and need to be prevented

2. Co-operative negotiations - import restrictions fall in this category

3. Independent and autonomous action - each State ha a free-will to calibrate its own policy like food safety and labour or perhaps intellectual property (?)

4. Multilateral governance - where there are clear incentives for global governance

What kind of measures fall into each of these categories can sometimes be a challenge but what this framework attempts to do is to give more credence to national/local priorities when it comes to global economic governance. It is premised on the understanding that the world is more multipolar now than it was a few decades ago. This understanding is reflected in the polarity principle here:

The current economic indicates such as GDP share, no single state will be able to completely dominate all other countries in the world economy. Therefore, no single power can write and enforce all the rules of a future order by itself. The structure of global power for the next several decades will be either bipolarity (with the United States and China as the two poles) or highly uneven multipolarity, with Japan, India, Germany or EU and possibly some other states occupying significantly weaker positions among the major powers. The character of a future global order will be heavily shaped by the relations between the United States and China, what other countries choose to do will also matter considerably.

We see a trend of a whole swathe of issues being discussed in bilateral trade agreements and FTAs. Of course they are limited to the treaty parties, but they do form templates for multilateralization at a later stage. Should multilateral economic governance be limited to transparency enhancing provisions and a core set of understandings on principles? What would it mean for future WTO negotiations? Does the WTO rule book have to be re-written?

Less overarching global rules, more autonomy for the States, more diversity, more ideological differences permitted and less harmonization - where the lines are to be drawn and how countries will agree on which category each of their actions fall into would be the challenge.