Let the Domestic Rule of Law Prevail

The recent and intensifying debate over ISDS that has been taking place in the newspapers, at conferences, and on the specialized international law blogs has generally been dispiriting. Partisans on either side defend their respective Alamos as if their lives depended on not ceding any advantage or courtesy to the other side. It is quite pleasurable, then, to participate in this Cato Unbound discussion, where those on both sides of the debate are willing to thoughtfully and respectfully engage with their counterparts on the other on the basis of reasoned exchange rather than of calumny and ignorance.

I would add to my original post that, in my view, the claim that ISDS should be supported because it promotes the “rule of law” is not very convincing. It is not very convincing because it misses the main source of concern, which is, I think, that control over the development of the rule of law has been outsourced to ISDS tribunals who may push that law in directions that are out of step with what the publics of the various Contracting States view as reflecting the proper balance between “property rights” and the “right to regulate.” The Philip Morris case is a wonderful example of this tension. Philip Morris challenged Australia’s plain packaging regulations in Australian court; after much “due process” the Australian high court pronounced that under Australian expropriation law there was no compensable taking. My understanding of the holding is that under Australian expropriation law a government “taking” is not compensable unless the government takes and enjoys the seized property. Because the Australian government wasn’t taking and using Philip Morris’s intellectual property for its own benefit, Philip Morris could not recover.

One could certainly debate on policy grounds whether Australia’s version of takings law is “good” or “bad.” Does it strike the right balance between property rights and the right to regulate? I don’t know. Libertarians would probably tend to say that the law is too favorable to government regulation; those on the left would say that it is just right. The point, though, is that Australian takings law has developed within a democratic system in which we recognize the right of the people to decide, through legitimate governmental mechanisms and processes, what balance between competing interests they wish to strike as the best or most fair. Australia has taken one position; other countries may take others. But the fact that Australia’s position on takings may be more pro-government than some would like does not make that position illegitimate. Indeed, that decision’s origins in a democratic politico-legal system make it fundamentally legitimate, in a way that an ISDS tribunal’s holding cannot be.

ISDS tribunals place themselves in the position of domestic law-makers. They get to decide what the law that rules actually is, what it contains, what balance it strikes between the left’s values and the right’s. That is, in some respects, an inherently political decision, not a legal or technocratic one. And once they have decided, it is very difficult for the people, either at the level of an individual nation-state, or at the interstate level, to change or correct. This is especially so in the case of multilateral treaties, like TPP or TTIP.

This response obviously has less force in the case of non-democracies, where national laws may not enjoy significant democratic legitimacy. But with TPP or TTIP we are (mostly) talking about governments that enjoy strong democratic legitimacy, and in which investors have long been more than willing to invest without any legitimate expectation that the rule of law, both in terms of process and substance, would be other than domestic. Take again Philip Morris—is it plausible to maintain that the company would never have invested in the Australian market if it would have known that its investments would be governed by Australian takings law? I think the answer is “no, it is not at all plausible.” Australian law was more than adequate to encourage Philip Morris to invest; it invested; and under that law what happened to it was not a compensable taking. From my perspective, there is no persuasive reason why that should not be the end of the story.

Expanding ISDS to the billions upon billions of dollars of foreign investment already in place in the TPP and TTIP economies risks, ironically, upsetting settled expectations precisely because it threatens to replace domestic law, articulated and developed through domestic political systems, with new law of uncertain content articulated and developed by tribunals that lack both democratic and technocratic legitimacy. Viewed in this light, we can see that the debate really isn’t over the rule of law—it is about who gets to decide what the law is, and the extent to which the content of the law should favor governments or investors.

Also from this issue

Lead Essay

  • 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

  • In a wide-ranging dissent, John K. Veroneau argues for the continued importance of investor-state dispute settlement. Economic nationalism is alive and well, he writes, and it is found today in non-tariff barriers and subsidies. Leaving disputes to be settled between states also leaves states less answerable to the private sector; this is inherently dangerous, because on many issues, states face incentives that may lead them to act in ways that do not align with the best interests of their citizens. And while “fair and equitable treatment” may be a vague standard of adjudication, it is not unprecedented, and it does not exist in a vacuum.

  • 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.

  • 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.