International Investment Law and its complexities

I have not been keenly following the Investor-State dispute debate with all it's intricacies. But for those interested in the subject a paper by Joost Pauwelyn titled "At the Edge of Chaos: Emergence and Change in International Investment Law" provides a substantive account of issues involved.

This explanation of IIL was interesting:

"Understanding IIL as a multilayered, historical construct, where one historically-situated layer (treaty or institution) gets added to the next, also better explains today’s confusion around the multiple goals ascribed to IIL, ranging from promotion of FDI and protection of individual rights to sustainable development and good governance. IIL cannot be explained by a singular motive, agent or plan, be it BITs as credible commitment to attract sunk investments, BITs as photo opportunities tumbled into by uninformed developing countries, investor-state arbitration as depoliticization of state-to- state disputes or IIL as a dark conspiracy pupeteered by rent-seeking arbitrators and law firms. There is no single creator, plan or deliberate design. Rather, it is large and small steps, influences and interactions which together organically produce IIL. This also explains why recent empirical evidence that BITs only modestly (if at all) contribute to FDI has left most participants unfased and not dramatically influenced the system."

Informal International Lawmaking

There was a fascinating discussion on Opinio Juris on a book on  "Informal International lawmaking" and its impact on traditional notions of State consent, accountability and international structures.  Initiated by Joost Pauwelyn it raises important questions on the role of the State, private actors, consent and international law making. I found the debate particularly interesting because of the "State-centrality" of WTO and multilateral trade discourse. The thread of the debate is found here. Though I am not discussing the concept of Informal International law making in detail here, the comment of Joost Pauwelyn on the involvement of the State is interesting.

"The real “new world order”, thankfully, includes many actors and interests beyond just bureaucrats and experts.  Governments increasingly lack the knowledge and resources to be effective when operating alone; expert opinions need to be weighed and balanced in a broader public forum. And because of the decreasing cost of participation, the private interests heard are no longer just big industry.  This is where effectiveness and legitimacy can meet.  This is also why e.g. the G-20 and the Internet Engineering Task Force (IETF) – though relying on different legitimacy ingredients – can be studied as part of one broader phenomenon (David’s “policing the borders” point)."

What are the implications of informal international law making on the multilateral trading system? How should dispute settlement mechanisms react to it? Is State centrality in the WTO seriously being challenged by private players and interests? How democratic, representational and accountable are they? Do we need a new model to engage in multilateral trade negotiations and dispute settlement by broadening the scope of State representation? How are democratic politics, accountability and private actor involvement reconciled?

Law and Economics at the WTO - A tense but necessary relationship

I have blogged about the relationship of economics and law in the interpretation of international trade law here and here. What is the relevance of economic principles, complex econometric models and economic analysis in WTO litigation. As lawyers one tends to ignore or sidetrack principles of economics while interpreting legal provisions.

Joost Pauwelyn in this piece titled "The Use, Nonuse and Abuse of Economics in WTO and Investor-­State Dispute Settlement" has a brilliant exposition of the complex relationship between economics and the law especially in relation to WTO litigation and Investor-State disputes. It traces the tense relationship, possible areas of application and the caveats required to have a meaningful combination.

Especially in relation to WTO disputes, the author states that the increasing use of economics is found in the determination of "like products", an analysis of "less favorable" treatment under various Agreements, definition and impact of "subsidies" as required by the ASCM, interpretation of the ever expanding "general exceptions" clause under Article XX of the GATT. he also prescribes some caveats in the unbridled use of economic principles like economics must be filtered through legal criteria, methodological discipline, for communication purposes, ‘keep it simple’, due process and avoiding or disclose value judgments.

He concludes with these words:

“Legal certainty and economic principles are not substitutes but complements”.100 Economics has a role in WTO and investor-­‐state dispute settlement. Economics provides insights not only in lawmaking but also in law application, both fact establishment and legal interpretation. The influence of economic evidence and arguments, including quantitative studies, is on the rise in both fields (in contrast to, for example, the practice of the International Court of Justice). It spans far beyond damage calculations and decisions on appropriate trade retaliation. In the WTO: like products (where quantitative studies could be used more prominently), less favorable treatment (where a tension is emerging between “detrimental impact” which must be shown, and “actual trade effects” which are not required), subsidies (e.g. assessing anticipated export shares for de facto export contingency or ex post serious prejudice for actionable subsidies) and general exceptions. In investor-­‐state arbitration: economic necessity (where the infamous Enron award was annulled for being based on economics rather than law). And in both regimes many more provisions lend themselves to input from economics. For example, in the WTO: causation and exceptions; in investment: definition of investment, fair and equitable treatment. Such input can provide more robust, empirically sound and predictable outcomes and better connect trade and investment law to the ‘real world’. It improves the output and effectiveness of both litigating parties and adjudicators. This, in turn, can broaden the support and legitimacy of both the trade and investment regimes. 

At the same time, reliance on economics does not come without risks. “Economic evidence is a powerful but also a dangerous tool”. Core caveats and limits are: (1) at least in litigation, economics must be filtered through legal criteria; (2) methodological discipline, to be respected by both the parties and the adjudicator (to avoid collective action problems, these disciplines must be imposed ex ante on both parties, which is not the case today); (3) for communication purposes, ‘keep it simple’; (4) due process (e.g. in respect of input by WTO staff economists; the independence and cross-­‐examination of party-­‐appointed experts; and participation of poor countries or small investors); and (5) avoid or disclose value judgments. The cases and controversies discussed in this contribution indicate the progress made on all five scores but highlight that a lot of work must still be done to conform to ‘best practices’. Appropriate use of economics surely tops nonuse. At the same time, given the risks involved, nonuse may eventually be wiser than misuse or abuse." 

The theme of the relationship between law and economics has a long standing one, especially in the context of trade law. Economics and its quantitative analysis has a bearing on judicial interpretation. Infact, this blog has a rich source list of blogs that believe in this inextricable relationship - Law and Economics and The Becker-Posner blog. What does this mean for litigation and negotiation at the WTO - more interdisciplinary teams of trade lawyers, economic experts to handle such complex situations. The question perhaps is not whether law or economics should prevail - the issue is how each could supplement the other in understanding realities of trade and business.

Joost Pauwelyn on the future of the WTO

The WTO website has a Public Forum on "Is Multilateralism in Crisis" which has renowned experts in the field predicting the future of the world trading system. It has a piece on Jagdish Bhagwati's bleak future in the context of PTAs about which I have already blogged here.

Joost Pauwelyn in his submission at this Forum titled the "The WTO in Crisis: Five Fundamentals Reconsidered" has providing thought provoking insights with respect to some of the key underpinnings of the multilateral trading system. I have tried to summarise the five main points:

1. Consensus: A need for a relook on the definition of consensus which should strive to be conciliatory and inclusive yet not "single country" vetoes.

2. Member-driven organisations: Broadening the scope of involvement of stakeholders within countries to include affected interests and not just trade diplomats. Involvement of non-state actors.

3.WTO as "hard law": Emphasis on "soft law" rather than the formal dispute settlement mechanisms

4.Single package:Replacing the single package requirement with diversity of rights and obligations depending on the country's requirements and commitments

5.Special and differential treatment for "developing countries": Recognising that developing countries are not a homogeneous unit with identical interests and are in need of differential treatment.

The submission on the "hard law" aspect of the WTO and its importance is relevant in the context of the high reliance on dispute resolution as a mechanism of sorting out trade disputes. To elaborate on his point on the subject:

"3. The WTO as “hard law” subject to compulsory dispute settlement

The WTO was created at the highpoint of legalization of world politics (mid-1990s), on the (mistaken) assumption that “hard” law, enforced by binding dispute settlement, is necessarily “better” law.  To facilitate agreement and, in some cases, because it is simply the optimal way of addressing an issue (e.g. because the problem is merely one of coordination or enhanced flexibility and adaptation is needed¹⁰), the WTO should consider creating some agreements that are not subject to WTO dispute settlement or even mere guidelines with flexibility for domestic implementation and future adaptation subject to peer review and less adversarial monitoring mechanisms.¹¹  In many cases, the incentive structure to comply with soft or informal law may be greater and more effective than those to comply with hard law.  Many problems in today’s networked knowledge society, where technologies change rapidly and uncertainty prevails, are increasingly difficult to address through the rigidity of traditional treaties and formal dispute settlement.  WTO members have already engaged in this direction, adopting ministerial declarations or guidelines in specialized committees (such as the TBT Committee Principles for the Development of International Standards) or non-binding paragraphs in Accession Working Party Reports.  Although violations of these norms are not enforceable in WTO dispute settlement, WTO panels and the Appellate Body can and have referred to them in the interpretation of the WTO treaty.  They could also be backed-up with Trade Policy Review Mechanism style monitoring with the possible inclusion of non-state actors discussed above."

Would the WTO consider some agreements not subject to the WTO dispute settlement mechanism? The dispute settlement mechanism is considered the jewel crowns of the WTO system. It signifies the rule based system's primacy over a "power based" system. A Burkina Faso is as "powerful" in this system as the United States and can enforce a WTO commitment by a decision in its favour. Trading relations or power equations do not play a role in judicial decision making though it may have an impact on compliance issues. The message conveyed is that how so ever powerful you are in terms of your trading might in the globalised world, all countries are bound by a set of clear, rules that are interpreted in a judicial manner bereft of political considerations or pressures. It also acts as a safety valve in times of extreme tensions as well as assuaging domestic concerns of injustice. Should this system be replaced or supplemented by a "softer system?" Would the softer system of peer review, ministerial declaration, trade policy reviews or guidelines be as effective? Would it re-enforce trading power hierarchies? The Ministerial Declaration at the 8th Ministerial Conference at Doha announced a battle against protectionism. However, countries are increasingly adopting protectionist barriers. The only remedy for an aggrieved country against such measures is the dispute settlement mechanism rather than the reliance on a "soft" Ministerial declaration. Does the real world of trade politics and economics require "hard law" rather than "soft law"? Is a combination of the two desirable?