How did investor‐state dispute settlement get a bad rap? Blame it on NAFTA, of course

• Published date: 01 December 2017
• DOI: http://doi.org/10.1111/twec.12515
• Date: 01 December 2017

ORIGINAL ARTICLE

How did investor-state dispute settlement get a bad

rap? Blame it on NAFTA, of course

Greg Anderson

Political Science, University of Alberta, Edmonton, AB, Canada

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INTRODUCTION

One of the central issues plaguing international commercial relations is that the private interests at

the heart of flows of goods, services and capital have traditionally lacked any “personality”within

the customary international law.

Without international “personality,”private investors or exporters have had difficulties binding

themselves contractually to sovereign hosts in ways that secure their market access or private

investments, as would be the case in their home markets. Without standing or “personality”in the

context of international law, private foreign commercial interests, much like individuals, have had

few avenues through which to pursue their international legal claims. The absence of such rules

has long been thought to be an important disincentive on capital flows from developed to develop-

ing countries and a partial explanation for the historical tendency for foreign direct inves tment

(FDI) to flow so predominantly between developed economies.

One popular mechanism for mitigating these problems with respect to foreign direct investment

has been the emergence and use of bilateral investment treaties (BITs) in the post-war era. The use

of BITs between state parties to define the treatment of private investment, including rules for dis-

pute settlement and compensation, has offered private interests a form of “personality”withi n

international law through which they can defend their interests.

For the United States in particular, efforts to support US nationals investing abroad have histor-

ically taken the form of treaties of Friendship, Commerce and Navigation (FCN), whi ch governed

trade in goods. With the growth of international capital flows following World War I, the United

States began expanding the use of these commercial treaties to deal with the treatment of US

nationals investing in foreign countries. In comparison with European countries, the United States

was slow to adopt a formal BIT programme, doing so in 1981 and completing only 46 BITs by

the end of 2000. The core provisions of US BITs have remained consistent in this short time and

were effectively trilateralised within Chapter 11 of the North American Free Trade Agreement

(NAFTA) in 1994.

The short history of the global expansion of BITs was, until recently, relatively uncontroversial.

However, for Germany, Australia, Canada, the United States and others, the so-called investor-state

dispute settlement (ISDS) provisions of those same BITs have become the source of considerable

controversy and concern. In Europe, a Swedish power company, Vattenfall, is suing Berlin under

the investment terms of European Energy Charter Treaty because of Germany’s 2012 decision to

DOI: 10.1111/twec.12515

World Econ. 2017;40:2937–2965. wileyonlinelibrary.com/journal/twec ©2017 John Wiley & Sons Ltd

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accelerate closure of most of the country’s nuclear facilities.

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In Australia, the tobacco giant Phillip

Morris used the investment provisions of the Australia–Hong Kong Free Trade Agreement to sue

Canberra over its cigarette packaging rules.

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And Canada and the United States have together been

the defendants in nearly three-quarters of the suits filed under the investment chapter of the North

American Free Trade Agreement.

In 2006, the United States and Australia concluded a Free Trade Agreement without investment

provisions (Dodge, 2006). In 2011, Australia went further and made it blanket policy to eschew

them in all future agreements.

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Germany is balking at ISDS provisions in the Canada-EU Trade

Agreement (CETA) completed in August of 2014 and is resisting their inclusion in the EU’s ongo-

ing negotiations with the United States (the Trans-Atlantic Trade and Invest ment Partnership, or

TTIP);

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ironic since Germany was an originator of investment rules in the 1950s.

Given the long, and relatively uncontroversial, history of ISDS, how can we account for the

sudden fuss these rules have kicked up? Contemporary anxieties about ISDS provisions are fuelled,

in part, by the two-decades-long experience of the United States with NAFTA. The US BIT pro-

gramme was employed to protect the investments of US nationals from expropriation, almost

exclusively in developing countries. Until 2012, there had not been a single instance of dispute set-

tlement cases initiated against the United States by firms from BIT countries.

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Yet, in the short

history of NAFTA Chapter 11 jurisprudence, there have been 50 claims, 36 of which have been

filed against developed states; 18 against the United States, 18 against Canada and just 14 against

Mexico.

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NAFTA has, of course, been controversial from the start, in part because of the exaggerated

claims about the Agreement’s impact by both proponents and critics alike (Hufbauer & Schott,

2005, pp. 5–8). Virtually, none of the sales pitch for or critiques of NAFTA centred on ISDS. Yet,

NAFTA was pivotal in transforming a set of obscure, and until then, an uncontroversial set of

bilateral investment treaties worldwide into controversies roiling contemporary international trade

and investment agreements like the Trans-Pacific Partnership (TPP), the CETA and the proposed

TTIP.

This paper is generally about the experience with investment rules in NAFTA’s Chapter 11;

how ISDS found its way into NAFTA, the controversy those rules initiated, and the ripple effects

that controversy is having elsewhere. When Chapter 11 ISDS became part of the NAFTA text, it

was presumed that Mexico would be the principal target of most suits; it was still a developing

1

Nathalie Bernasconi-Osterwalder and Martin Dietrich Brach, “The state of Play in Vattenfall v. Germany II: Leaving the

German Public in the Dark,”International Institute for Sustainable Development Briefing Note December 2014: 1–8.

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See Philip Morris Asia Limited, Notice of claim under the agreement between the Government of Hong Kong and the

Government of Australia for the promotion and protection of investments, 27 June 2011.

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Government of Australia, “Gillard government trade policy statement: Trading our way to more jobs and prosperity,”April

2011: 14.

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“Transatlantic trade talks hit German snag,”Financial Times, 14 March 2014; “EU quietly asks Canada to rework trade

deal’s thorny investment clause,”CBC News, 21 January 2016; Regulation No 1219/2012 of the European Parliament and

of the Council, Establishing Transitional Arrangements for Bilateral Investment Agreements Between Member States and

Third Countries, 12 December 2012; European Union’s proposal for Investment Protection and Resolution of Investment

Disputes, Transatlantic Trade and Investment Partnership, 12 November 2015. http://trade.ec.europa.eu/doclib/docs/2015/

November/tradoc_153955.pdf. Accessed on 29 March 2016.

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In 2012, four separate cases were launched in connection with the Allen Sanford financial services ponzi scheme fraud,

one each using the investment protection provisions of, respectively, the US–Uruguay BIT, US–Peru FTA, US–Chile FTA

and the CAFTA-DR.

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As compiled by the US Department of State, Office of the Legal Adviser, https://www.state.gov/s/l/c3439.htm, accessed on

13 April 2017.

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ANDERSON