Failed Boundaries: the Near-perfect Correlation Between State-to-state Wto Claims and Private Party Investment Rights

• Citation: Vol. 32 No. 4
• Publication year: 2018
• topic: Constitutional Law

Failed Boundaries: The Near-Perfect Correlation between State-To-State WTO Claims and Private Party Investment Rights

Ari Afilalo

FAILED BOUNDARIES: THE NEAR-PERFECT CORRELATION BETWEEN STATE-TO-STATE WTO CLAIMS AND PRIVATE PARTY INVESTMENT RIGHTS

Ari Afilalo^*

Abstract

This project is the first empirical examination of WTO filings to determine if a private party could bring an action for damages arising under the same core of operative facts pursuant to a bilateral investment treaty. This Article reviews all national treatment, most favored nation, quantitative restrictions, TBT, and SPS filings. After exploring the doctrinal and theoretical reasons for the trade/investment tension, it analyzes those trade filings under a model investment treaty applied in light of decided cases. This Article classifies the filings into "Positive," "Potentially Positive," and "Negative" categories. The findings show a near perfect correlation between trade and investment. These findings are highly significant not only because this is the first empirical study of its kind, but also because they suggest that private parties that relied on liberalized trade laws to invest across borders would have private causes of action for damages for protectionist measures that violate international economic law. Trade has traditionally been the domain of state-to-state dispute resolution, where states often operate based on rational choice, selective determinations of which matters to prosecute. Shifting trade litigation to the private party cause of action model would fundamentally alter sovereign immunity and the balance of power between private parties—in particular, large multinational corporations—and host jurisdictions.

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Introduction

In this Article, I report the outcome of my study of the cases filed by governments with the Dispute Settlement Body (DSB) of the World Trade Organization (WTO) during the WTO's first 20 years of operation in the most controversial areas of trade law,¹ with a view to determine whether a private party could bring a complaint before an investment arbitral tribunal that arises from the same core operative facts as under trade law. My goal was to test if, in fact, as I had argued before,² the network of investment treaties regulating the cross-border flow of capital overlaps with trade law. The answer is an unqualified yes.

Trade filings are the domain of the WTO,³ which acts at the request of the contracting parties' governments and issues rulings invalidating national laws found to violate the General Agreement on Tariffs and Trade (GATT).⁴ The WTO hears a wide range of cases.⁵ It deals with controversies involving plainly protectionist measures such as import bans or domestic taxes.⁶ It also decides whether sensitive domestic laws that hinder trade pass muster under international economic law,⁷ such as restrictions on the use of asbestos,⁸ hormones,⁹ or genetically modified materials;¹⁰ packaging laws regulating the

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advertising and marketing of cigarettes;¹¹ or measures intended to preserve foreign currency reserves in a financial crisis.¹²

Investment law is the domain of arbitral tribunals¹³ awarding damages to private parties, rather than states, when their legitimate expectations are thwarted by government measures adopted by the host jurisdiction.¹⁴ The investment legal regime also handles a wide array of cases, including revoked permits; breached agreements; modifications to advance official rulings incorporating agreements concerning the treatment of foreign investors on tax, securities regulation, and other matters; the expropriation of property; denial of justice; administrative irregularities; and a plethora of disputes between investors and their host states.¹⁵

The state-to-state WTO system and the investor-to-state investment framework arose from different historical circumstances and are typically categorized as different subject-matter areas of international law governed by constitutional and institutional norms that sharply differ.¹⁶ Yet my analysis of the WTO filings shows that private parties may use investment treaties to litigate virtually all trade causes of action and obtain damages for any violation of trade law. In this Article, I reviewed approximately 180 filings during the first two decades of operation of the WTO that were made under the national treatment,¹⁷ most favored nation,¹⁸ and quantitative restrictions provisions of the GATT;¹⁹ the Agreement on Technical Barriers to Trade (TBT);²⁰ and the Agreement on

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the Application of Sanitary and Phytosanitary Measures (SPS).²¹ These cases are grouped in this Article because they implicate similar issues of trade and investment law and they cover most controversies dealing with the three "pillars" of trade.

My findings leave little room to doubt that the investment framework overlaps with the trade framework. I classified the trade cases into two categories: Trade Positive and Trade Negative. Trade Positives are cases that have either been decided in favor of the complainant by the DSB or did not reach the adjudicatory stage but would have a substantial likelihood of success by the complainant—applying trade law to the facts as stated in the filings. Cases where the respondent prevailed or is reasonably likely to prevail belong in the Trade Negative category. I then classified the Trade Positives and Trade Negatives into three investment categories: Investment Positive, Potentially Positive, and Negative. These categories are based on whether a private party would likely prevail in an investment cause of action arising out of the same facts, would have a colorable chance of prevailing, or would likely lose.

The examination of the respective trade and investment outcomes shows a near-perfect correlation between Trade Positives, and Investment Positives or Potentially Positives. Approximately two-thirds of the Trade Positives have Investment Positive outcomes, and one-third of the Trade Positives have Potentially Positive investment outcomes. There are no cases where, applying investment law, a Trade Positive can be said with reasonable certainty to be an Investment Negative. Furthermore, some losing complainants in trade could, in an action brought by their private party nationals, raise the same issue in an investment cause of action with a Potentially Positive outcome. (The case-by-case results are reported in tables appearing with each grouping of WTO cases in Part III.)

These findings demonstrate that states that introduce policies inconsistent with their obligations under the GATT expose themselves to possible investment arbitration claims. Private parties and their attorneys could acquire a legal weapon to challenge virtually every measure that may violate free trade and obtain money damages for those breaches. States might escape liability for

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breaches of the GATT in the WTO dispute system because states—on account of having limited legal resources and fear of retaliation for their own violations—are likely to bring legal challenges only in disputes involving high monetary, political, or precedential stakes.²² However, in the overlapping investment arbitration system, states will have virtually unlimited exposure to lawsuits brought by private parties arising from the very same measure and core operative facts.²³

In Part I, I describe the history of trade and investment and how two systems intended to operate in different realms of international economic law came to overlap. In Part II, I explore the doctrinal reasons for the trade/investment tension, using decided investment cases, standard investment treaty provisions, and familiar principles of trade law. In Part III, after explaining my methodology for grouping trade cases and predicting outcomes, I review the filings discussed in this Article. I conclude with some observations and a preview of the next steps in this research project.

I. Trade and Investment

In Part I, I outline the historical, institutional, and constitutional features of the trade and investment systems that are relevant to their intersection.

A. Trade

Trade is the domain of the WTO and regional frameworks such as the North American Free Trade Agreement (NAFTA).²⁴ Their membership includes states that established a relatively transparent system to monitor international interference with their internal regulatory power.²⁵ Those states decided to

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handle disputes without involving private parties or giving direct effect to trade law.²⁶ With few exceptions, only governments have the right to take enforcement action, and individuals do not have standing to sue.²⁷ Government officials carefully select which disputes sufficiently implicate weighty national interests before bringing them to dispute resolution.²⁸ In doing so, they weigh limited resources and the possibility of retaliation for their own violation before initiating legal proceedings. States will exercise their prudential choice in the marketplace of violations to determine which disputes to prosecute and which violations to refrain from challenging (or to let stand after an initial filing), in exchange for the other side giving up a claim of its own.²⁹ Likewise, "networks" of government officials forge bonds across borders to create a loose but effective network of lawmakers and enforcers.³⁰

The limited liability of the state enshrined in trade law is consistent with the origins and theoretical foundations of the GATT and the WTO. The original GATT carefully maintained a structure that protected state sovereignty and regulatory space.³¹ As John Maynard Keynes famously expressed, the lawyers as "poets of Bretton Woods" married after World War II a good economic idea

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with a politically acceptable treaty system.³² The GATT established three "pillars" of trade: tariff reduction and most favored nation,³³ national treatment,³⁴ and prohibition of quotas and like measures. Those regimes were...