We Still Need Investor-State Dispute Settlement

Despite my high regard for Simon Lester’s views on many trade matters, I do not find his arguments against investor state dispute settlement to be compelling. By my reading, Mr. Lester puts forward eight arguments against investment treaties. I will respond to each as they appear in his paper and then offer an additional commentary.

 

1. Investment treaties are no longer necessary because economic nationalism has faded.

Unfortunately, economic nationalism is alive and well, especially since the global downturn of 2007. Governments continue to favor domestic over foreign companies on a regular basis. In any event, declining economic nationalism does not offer a compelling argument against protecting foreign investors who do face discrimination. And perhaps any decline is partially due to the role of investment treaties in discouraging governments from discriminating against foreign investors.

2. Investment treaties are relatively unnecessary because subsidies are a bigger problem.

Economic nationalism can take many forms. I agree that one form – subsidy – is a significant problem. However, since it is a lot easier and less costly for governments to favor domestic companies over foreign ones through non-tariff barriers than though subsidies, I am not sure I agree that subsidies pose the “biggest problem in the world of foreign investment.” The biggest problem is with investments that are never made because of local protectionism. Investment treaties typically do not address this problem because treaties are aimed at protecting investments that are made rather than those that are not made.

Also, while it could certainly be strengthened, we already have an international trade agreement to address subsidies. But even if we did not, the lack of an agreement to address subsidies is not a compelling argument against bilateral agreements addressing expropriations.

3. Investment treaties are “outdated” because there is no longer a bright line between foreign and domestic companies.

I agree that that the line between foreign and domestic firms is no longer clear or relevant in many policy debates regarding today’s global economy. But I do not see the relevance of this point in the context of the debate over investment treaties. Investment treaties serve a very particular purpose: to protect foreign investors from certain types of abuse. If an investor cannot establish that they are in fact “foreign,” the protections of the treaty are not available. While companies are globalizing their operations at a fast clip, we are still a long way from jettisoning the nationality of all companies.

4. Since “investment issues are no longer all about the West versus the rest,” one country’s discrimination against another country’s investors should be handled through state-to-state rather investor-state mechanisms.

Global balance of power trends aside, perhaps the most compelling trend in human history has been the growing empowerment of individual rights over state power. I prefer a world where individuals who believe they have been wronged can bring their claims directly against the alleged perpetrator, rather than being dependent on the state to espouse their claims for them. Governments have bilateral agendas that may cause an individual’s claim for justice to be subordinated to interests that states share, but that individuals do not.

5. Investment treaties should only address discriminatory measures.

Oftentimes, measures that could trigger investors to seek to relief under investment treaties could be characterized as discriminatory. As such, treaties that cover only discriminatory measures would certainly be better than no treaties at all.  But treaties limited in this way would not cover situations where a country nationalizes all companies in a particular sector, even if there is just one domestic company and many foreign companies. Such an expropriation without fair compensation may not be discriminatory on its face, but it would certainly be unjust and deserving of recourse through an investment treaty.

6. Defining “fair and equitable” treatment is too complicated.

Granted, judicial concepts like “due process” and “fair and equitable” treatment are not simple and self-defining. But that is true in domestic law as well as international law. The mere fact that these concepts are difficult does not strike me as a compelling reason to abandon them. Investment disputes are vigorously argued. Each side makes its case for whether fair and equitable treatment was provided. The tribunal members who hear these disputes have significant experience in dealing with arguments of equity and fairness.

7. Existing investment agreements only protect foreign investors and should be replaced with “an international treaty on expropriation” that would protect both foreign and domestic property owners, and through efforts to reform domestic law.

Undoubtedly, the world would be a better place if property owners (domestic and foreign alike) had more reliable recourse in domestic courts to enforce property rights against state action. However, there is no evidence that existing investment treaties have dampened domestic political pressure in any country for better property protections. In fact, it is more likely that extending protections to foreign property owners would instill demand for more protections for domestic property owners. Calls for domestic property protections would seem to get louder if such protections are extended to foreign property owners.

8. Companies should bear the risk of investing across borders and not be able to mitigate that risk through investment treaties.

I agree that private investors must bear risk to avoid problems of moral hazard. But over the past centuries a considerable legal infrastructure has been built whereby aggrieved parties are able to bring their disputes before neutral arbitrators. Investment treaties are part of an international legal infrastructure. Subjecting foreign investors to unqualified caveat emptor seems no more justifiable than subjecting domestic contract disputants to such a remedy-less environment. Also, the notion that investors should protect themselves against foreign governments through contact rather than through investment treaties ignores the fact that most investments are private affairs in which no government is a party. Governments should not have free rein to expropriate (without fair compensation) property from parties that have no opportunity to bargain for this protection through contract.

            To his credit, Mr. Lester’s criticism of investment treaties does not include the following one but since it has often been made, I will raise it here:

Investment treaties prevent governments from exercising their ability to regulate commerce in order to protect the health and welfare of people and the environment.

Prevailing in an investor-state dispute is extremely difficult. I know of no successful claim brought by an investor against an action by a government that could fairly be described as a simple, non-discriminatory exercise of legitimate government regulatory powers. In any event, an investment treaty cannot “prevent” a government from taking whatever action it chooses. Dispute panels may award monetary judgments, but they have no jurisdiction over a country’s laws.

Of note, some groups that have become vocal opponents of investment treaties are involved in raising funds in the United States to purchase and protect rainforests and other threatened land resources in foreign countries. This is laudable work. Imagine though that a host government in one of these countries decided to renege on the deal and later expropriate the protected property for commercial development. I suspect these environmentally conscious U.S. investors at that point would prefer the opportunity protect their investments through an international treaty rather than having their only recourse be through the domestic courts of that foreign country.

Also from This Issue

Lead Essay

  • Does Investor State Dispute Settlement Need Reform? by Simon Lester

    Simon Lester says that the rules for international investment dispute resolution are outdated - and they’re hurting global trade. When the rules were first written, the big danger seemed to be from government expropriation, for socialist or economic nationalist reasons. This made corporations reluctant to invest in the developing world. But now, the same legal regime that once protected them is being used increasingly to win treatment for corporations that is actually too favorable, at least for corporations that are particularly adept at this type of rent seeking. Lester suggests we re-examine the rules and their consequences to improve them for an era when supply chains literally span the globe.

Response Essays

  • Why Libertarians Should Welcome ISDS by Ingrid Persson

    Ingrid Persson says libertarians should welcome investor-state dispute settlement because it protects property rights, with good consequences all around. The worldwide decline in outright expropriation of foreign investment capital is, she says, a direct result of previous decades’ ISDS agreements, and of the good normative work they have done. Repealing these regimes would therefore be inadvisable. Indeed, we should move in the opposite direction and protect property rights still further. This is a goal that libertarians should constantly strive for; it is highly consistent with libertarian values, and ISDS has an important ongoing role to play in the process.

  • New Trade Agreements Don’t Need ISDS by Jason Yackee

    Jason Yackee argues that the TPP and TTIP trade agreements don’t need investor-state dispute settlement and would be better off without it. Empirical evidence is mixed about whether ISDS encourages investors to invest abroad. They may or may not even know that it exists, or in what cases it can be of help. Making use of it is costly, investors lose most of their cases, and they rarely win anything like the damages they sought. Both expropriation and gunboat diplomacy are increasingly relics in the modern world, and it would be a mistake to legislate defensively against them. The costs of ISDS seem likely to rise as it is implemented more widely, but its benefits remain elusive.

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