Churning in international investment dispute settlement norm setting

Continuing on the issue of appeals in ISDS proceedings, Kluwer Arbitration Blog carried this recent piece on the trend of EU agreements incorporating clauses that include an appellate mechanism, akin to the Appellate Body of the WTO.

In this post, Daniel Avila II and Nicolas Borda outline the proposed EU-Mexico Free Trade Agreement proposal for an appellate mechanism for investment arbitration.

According to the Agreement in Principle, the “EU-Mexico agreement fully implements the new EU approach to investment protection and investment dispute resolution by fundamentally reforming the old-style ISDS system. It establishes a standing international investment court system composed of a Tribunal of First Instance and on an Appeal Tribunal.”

The proposal of an appellate mechanism is not novel. The UNCITRAL Working Group III was established in the fall of 2017 to “provide a useful model for possible reforms in the field of investor-State arbitration, in conjunction with interested organizations.” In its Thirty-eighth session, the UNCITRAL Working Group IIII provided a possible reform adding appellate and multilateral court mechanisms.

Commentators analyzing the strengths and weaknesses of the proposed appeal reform by UNCITRAL in international arbitration have argued that an appellate mechanism replaces “crucial parts of the system such as annulment mechanisms, enforcement and finality of awards.” On the other hand, commentators note, “Consistency in the application of substantive norms in BITs would contribute to the confidence in ISDS” and will serve as a check against legal error. Further, commentators have raised concerns of costs and time increasing by allowing appeals to go forward in international arbitration.

Interesting developments in the international investmentment norm setting space - while Cabada rejects ISDS for Canadian investors and Canada as a respondent in USMCA, the EU model proposes permanent arbitrators at the panel stage and an appellate mechanism. Where all this will converge is yet to be seen. However, the churning in the investment norm setting arena is evident with modifications to treaty obligations, new model BITs, co-operation and mediation instead of dispute resoluton, State to State arbitration instead of ISDS and then finally an appellate mechanism.

States have a lot to choose from unlike in the heydays of BITs which were more templates to be signed on. How States choose their obligations and practises would reflect what they consider important and relevant for their interests in the context of a negotiation. Whether these efforts would lead to a multilateralization and standardisation of practises is not known - the UNCITRAL Working group is working on certain aspects of ISDS reform. 

This decade would definitely have a lot in store for international investment law enthusiasts.

Proposals for reform - to appeal or not is the question?!

News of proposals to reform the WTO from the USTR made headlines today here, here and here. In brief, the proposals covered 5 reform points including rationalising tariffs so that baseline tariffs apply to all members with minimal exceptions, eschew non-regional free trade agreements, end special and differential treatment to large and advanced economies, create new rules to address State led capitalism of China and ending the Appellate Body with a single dispute settlement level at the panel stage. These views are not new and will have to be considered at the WTO when dust settles down after the next DG's selection.

Just a thought on a single stage dispute settlement process and the debate in the ISDS context. 

In international investment arbitration today, there is a single stage ad-hoc arbitral tribunal that decides the disputes arising out of international investment agreements. The criticism has been that this leads to inconsistency in jurisprudence by ad hoc tribunals and there is a need for an appellate mechanism, on the lines of the WTO's Appellate Body, to steady the ship. The EU has also proposed a multilateral investment court. It is also part of the UNCITRAL reform discussions. In the international trade dispute settlement mechanism, there already exists an Appellate Body (or atleast did exist a while ago), but there are calls to revert to a single stage, panel mechanism. 

Two narratives from two different experiences in international economic law and policy streams - trade and investment. While one sees the appellate mechanism as a bane to the system which has exceeded its limits, the other sees it as a panacea for the ills of the ad hoc, inconsistent panel system that has far exceeded its limits in treaty interpretation.

Does this speak to the fact that treaty interpretation itself has pitfalls of interpretative imagination beyond the words of the treaty - be it the panel stage or Appellate Body. As long as there is a body interpreting a treaty and adjudicating on a set of facts, one will perforce have to live with the reality of unexpected outcomes of judicial creativity!

A decade of blogging

It has been a decade of blogging for me with the first blogpost here in 2010. Inspired by my dear friend and star's blog Urbanomics, (but nowhere near its level of conceptualisation, clarity and class), this space has seen ups and downs.

Hope to keep at it - international economic law and policy never seems to have a dull moment!

Standard setting in engineering - Our standard please!

 When one talks about international trade agreements, one is normally accustomed to think in terms of tariffs, rules on intellectual property, ecommerce and customs facilitation. What about technical standards? The Technical Barriers to Trade Agreement covers the issue of standards in international trade and ensures that standards are not trade restrictive and discriminatory. However, who sets these standards? International standard setting bodies come into the fray. However, who plays a role in these international standard setting bodies? 

An interesting piece coming from engineers in UK on standard setting emphasizes the importance of setting standards internationally, playing a role in it and ensuring trade agreements protect one's own standards instead of adopting the trading partners standards. 

On how settings technical standards in the engineering field are important for the UK:

Standards underpin the daily work of British engineers. From technical drawings to quality management, a huge array of standards enable the engineering industry to deliver world class projects safely and efficiently. These standards ensure that the process is as smooth as possible for British companies, allow consumers to know that their safety and security has been prioritised and can support regulation.

The UK achieves this through the work of the national standards body, BSI. We bring together expert stakeholders – over 13,000 of them – to put forward their views in our specialist committees across all sectors. With all UK stakeholders represented, we create a national body of knowledge in a collection of standards that is coherent and non-conflicting. 

On how UK standards, become the international standard and is thus a facilitator for more exports:

 The UK, through BSI, is already one of the most influential members of the international standards community. We participate in more ISO committees than any other country. Many of the world’s best known international standards started as British Standards, in areas such as quality management, asset management and building information modelling.

On how standard setting is important for trade deals he piece opines:

BSI works closely with the government to support trade deals that maximise the opportunities from the strategic use of international standards. We encourage the government to make the best use of our expertise and that of our committee members, and have proposed the creation of a cross-cutting advisory group that looks at the risks and opportunities from ‘technical barriers to trade’ issues that may go unnoticed without expert input.

However, if the US pushes for a similar approach to standards that it agreed with Canada and Mexico, the UK government could be required to call up in regulation US standards in place of British Standards. US standards have no systematic input from British businesses or consumers in areas vital to our engineering industry. Recognising US standards in support of regulatory conformity in the UK in place of or as an alternative to British Standards would create complexity and cost for industry and undermine UK influence in international standards-making. 

And finally what are the costs for UK businesses for adopting a different standard:

However, to fully grasp the global trading opportunities we see before us, government must retain the UK’s regulatory autonomy supported by a coherent set of national standards. To do otherwise would put UK engineering companies, wider industry and consumers at a severe disadvantage. Let’s accept where we have different systems for using standards with regulation and focus on the future. 

Very interesting thought coming out from the business stakeholders who actually do business post the trade agreement. It signifies how important it is to be rule setters in standard setting rather than rule receivers to protect one's business interests. Well, for developing economies, one of the main issues is that they have been rule receivers in almost all fields of international trade norm setting, not just standards.Therefore, it is not just tariffs, ecommerce rules, subsidies that one has to watch out for - standard setting is the next great frontier!

Data driven economies, conflicts and international trade regulation

Data, as everyone now knows, is the new oil or gold! We are in a data driven-economy and many international developments are flowing from the growth and conflict this data-driven economy brings. 

The recent debates and developments on the digital services tax (against global technology giants - the data controllers), anti-competitive practices by technology giants as well as the tension over 5G networks point to the fact that data, its control and access is going to be the next battlefield in international economic and political diplomacy.

Dan Ciuriak, has written a brilliant piece titled "Economic Rents and the Contours of Conflict in the Data-driven Economy" on the nature and future of this data driven economy. Theorising on the historical growth of the causes of conflict from land, to mercantilist trade, to oil to intellectual property, he opines that a data-driven economy is the next battleground for both internal and external conflicts. Sharing of the economic rents flowing from the data-driven economy will determine future conflicts and that fact that the large technology players are concentrated in a few economies would be a cause for concern. 

He also suggests that the WTO could be a forum where the new rules on data to avoid future conflicts should be written. He has opined that the negotiations on the digital services tax too should be n the WTO. That would be an aspiration considering the present state of negotiations. Further, OECD is already engaged in such negotiations. That would involve a grand bargain since economies that are not strong players in the data economy apart from being consumers would seek a quid pro quo. What could that be - a reduction in industrial and agricultural subsidies? May be the trends of norm setting in plurilateral and bilateral trade agreements on digital trade could have some lessons - but they do not cover digital services tax for sure, for now!

An interesting point that Dan has made is the dichotomy in the various branches of government vis a vis big technology companies in the US - on the one hand being protected against the global barrage of digital services tax while internally being questioned hard for anti-competitive practises. An example of institutional independence amongst various domestic actors? He captures it well here:

In the consumer- and society-facing aspects of the data-driven economy, China evolved separately from the rest of the world behind its Great Firewall. Accordingly, the main contest for rents in these areas boils down to the United States, which hosts global champions that capture the vast bulk of the market, versus the rest of the world, which captures little. Interestingly, whereas domestically US populist politics align against the technology giants, internationally, US interests align with them. This makes for particularly challenging governance issues for the United States and likely militates against an international accord being reached. Moreover, China is not in this picture.

The paper itself is an enriching historical account of how international economic conquest and conflict were shaped and how data fits into that narrative. An enjoyable read. 

The need for an ISDS Moratorium - Not at all fair!

I had blogged about the demands of a moratorium on ISDS during the Covid pandemic here and here.The critics of the ISDS and Investment Agreements argued that the pandemic was the right time to have a temporary moratorium so that the regulatory space of States to address the challenges of the crisis is not mitigated, amongst other things by a regulatory chill.

Prabhash Ranjan disagrees. Arguing in the Opinio Juris here, he is of the view that this proposal assumes many things - that States always act in good faith, States will always lose an ISDS claim and that the aspect of regulatory chill is over-rated.

A fundamental flaw with the proposal to have an immediate moratorium on ISDS claims is that it postulates that States are innocuous actors who shall not abuse their regulatory powers to the detriment of foreign investors. This assumption flies in the face of the growing literature on how the Covid-19 pandemic is being used to propel authoritarianism with would-be autocrats using it as an excuse to amass greater power and control. While some governments have handled the pandemic by acting within the constraints of the law, some have acted like autocratic opportunists by spurring narrow nationalism, creating a surveillance State as Yuval Noah Harari warns us. In a situation such as this, the apprehension that populist and nationalist governments shall misuse their regulatory powers to impair the legally protected rights of foreign investors under international law cannot be ruled out.

Firmly opposing the call for any moratorium, alleging that this could lead to authoritarian tendencies and the junking of the rule of law by States, he avers that ISDS and IIAs, with modifications is an essential feature of the rule of law regime.

Notwithstanding all the imperfections, the IIL regime and the ISDS mechanism are part of the legal infrastructure of the global economy. They act as useful restraints on the capricious use of State power vis-à-vis foreign investors and serve an important purpose of holding States accountable under international law for their international investment relations, thus enforcing the international rule of law principles. This role of the IIL regime and the ISDS mechanism is very important in the times of Covid-19 when we see creeping authoritarianism in many countries.    

 Well, the die hard critics and supporters both use the rule of law to augment their positions. While the critics argue that ISDS is a fundamental departure from the rule of law wherein foreign investors are favoured vis a vis domestic businesses as well as arbitral appointments are against the principle of the independence of the judiciary, the proponents of ISDS argue that the system protects the international rule of law by checking arbitrary, non-transparent and malafide exercise of State power.

No easy answers to this conundrum with a range of alternatives from outright rejection to incremental reform being equally strong narratives in the debate.

Let the debate continue.

This time for Africa - A US-Kenya FTA a harbinger for change?

(Courtesy gtreview.com)

News of a trade deal between the United States and Kenya, the first sub-Saharan nation that the US is negotiating with, has been doing the rounds for a while. The first one with Africa by the United States was with Morocco. News of the trade deal is found here, here, here and here.

The US objectives for the FTA are clear and are here. The negotiating objectives are clear. Kenya's objectives and mandates are not spelled out in the public domain.The China factor in motivating this negotiation is another looming question.

Will it be a gold standard FTA? Will it be an agreement that all other African and developing countries will benchmark when they negotiate, if at all, with the United States?

Anabel Gonzalez predicts that this FTA could be a template for future FTAs for Africa here. She argues that it should be a deep, trend setting FTA much beyond the USMCA:

First, recent US trade deals are not suitable models for Kenya. The drivers for a US-Kenya trade accord are not the same, so the right framework needs to be found. The US-China and US-Japan deals are very limited in scope, with neither reciprocal access to the US market nor binding enforcement mechanisms. The United States-Mexico-Canada Agreement (USMCA) includes some positive novel provisions, such as those on digital trade, but its protectionist approach toward rules of origin and intrusive plant-level labour and environmental inspections could restrict the pact’s potential and increase litigation and uncertainty.

Africa’s friends in the US Congress should push away from the USMCA model in favour of more “traditional” US FTAs. The kind of rules negotiated in the Trans-Pacific Partnership, with the type of commitments made by Vietnam in that negotiation, are worth exploring. A deep FTA would cover trade in goods and services, investment, intellectual property, and government procurement; secure access to each party’s markets with appropriate tariff phase out periods; include rules-based dispute settlement mechanisms; be of indefinite duration; and avoid unnecessary constraints. If for political reasons, a short-term deal is favoured, it should be crafted in a way not to impede a better agreement later. Capacity-building measures should accompany the trade accord.

On the criticality and the future repercussions of the US-Kenya trade agreement for other aspirants, the Centre for Strategic and International Studies opines:

While Kenya and the United States both wanted a bilateral negotiation, they are also aware of the larger repercussions of the United States using this agreement as a model for the future. The priorities and compromises Kenya could make would have significant implications on future deals. Though no details have emerged thus far of what will be included, the second U.S.-Kenya Trade and Investment Working Group meeting in November gave some indication as they discussed “services, digital trade, intellectual property, agriculture, environment, customs and trade facilitation, technical barriers to trade, labor, and state-owned enterprises.” Of these nine areas, the three topics that will be watched most closely are the agreement’s handling of labor, the environment, and customs and trade facilitation.

A CRS report outlines the difficulties that the negotiation may face in the near future considering the varied development paradigms, aspirations and domestic compulsions in both economies:

The significant economic development disparities between the two countries suggest possible differences in negotiating priorities. A key challenge will likely be to establish a framework for the talks that can achieve the ambitious level of commitments Congress directs the Administration to seek in FTAs.At the same time,such a framework must remain politically and economically viable in Kenya amidst domestic pressure to maintain protections for import-sensitive or nascent industries. Potentially contentious topics include the timing and extent of tariff liberalization including on agricultural goods;rules on intellectual property rights, investment, and data flows; and the level of labor and environmental protections.The Trump Administration describes the talks as an opportunity to develop a “model” FTA, but has not specified what changes from past practice this may entail. U.S. FTA talks with the South African Customs Union, which were suspended in 2006 in part due to divergent views over scope, highlight the importance of establishing clear parameters for the negotiations at the outset. 

Brookings has identified the digital services tax issues as one of the irritants in the negotiations:

Taxes on data. Few countries have advanced as quickly in the use of mobile-based financial services and digital transformation as Kenya. In an effort to derive more revenue from digital transactions, the government recently imposed two taxes: A 1.5 percent digital services tax, which will take effect on January 1, 2021 and an earlier withholding tax charged on “marketing, sales promotion and advertising services provided by non-resident persons.” American technology companies find these taxes discriminatory. In fact, last month, the U.S. announced tariffs on some French goods in retaliation for France’s unilateral digital services tax targeting American companies. While this matter has not been directly linked to the trade talks, it remains to be seen how the U.S. might approach this issue in the negotiations. How will efforts to resolve this matter in the OECD factor into discussions between the parties?

One would have to watch the outcomes very closely to understand the impacts for Africa as well as the developing world. would it be a gold standard agreement or a tempered down version? Would it be an incremental stage  agreement addressing the hot issues of agriculture, digital trade, digital services tax, intellectual property and labour in the second stage? The issue of dairy products flooding the Kenyan market are already beginning to be raised. These are some of the sensitive issues that the negotiations would have to address on the way.

Let the negotiations begin!