International Investment and National Security Review.

• Author: Ma, Ji

TABLE OF CONTENTS I. INTRODUCTION 901 II. TWO TRENDS IN NATIONAL SECURITY AND INTERNATIONAL 907 INVESTMENT A. Towards a Broad, Shared Meaning of National 907 Security B. Towards a Self-Judging Nature of National 909 Security Measures III. EXAMINING NATIONAL SECURITY REVIEW IN THE ABSENCE OF 911 THE INTERNATIONAL INVESTMENT TREATY FRAMEWORK A. The Convergence of National Security Review 912 Mechanisms in the Pre-Establishment Phase B. Examining National Security Review in the 915 International Investment Pre-Establishment Phase C. Examining National Security Review in 917 International Investment in the Post-Establishment Phase IV. EXAMINING NATIONAL SECURITY REVIEW WITHIN THE 920 INTERNATIONAL INVESTMENT TREATY FRAMEWORK A. Review of Non-Self-Judging Security 920 Clauses 1. The Reviewability of Non-Self-Judging 921 Security Clauses 2. The Approaches for Necessity Test 922 B. Review of Self-Judging Security Clauses 928 1. The Reviewability of Self-Judging 928 Security Clauses 2. The "Good Faith" Standard 931 C. Rejection of the "Good Faith" Standard 933 1. Risk of Abuse of the "Good 933 Faith" Test 2. Ambiguity of "Good Faith" Standard 934 3. Interpretation of Self-Judging 936 Clause V. ALTERNATIVE OPTION FOR NATIONAL SECURITY REVIEW IN 938 THE INTERNATIONAL INVESTMENT LEGAL REGIME A. International Tribunals' Calling for 938 Compensation B. The Advantages of Compensation Standard 939 C. The Calculation of Compensation 942 1. The Distinction between Lawful 942 Expropriation and Unlawful Expropriation 2. Standard of Compensation 944 VI. CONCLUSION 945 I. INTRODUCTION

International investment agreements (IIAs) aim to protect and promote foreign investment by setting obligations for the host states. Investor--state arbitration has formed a part of the international investment legal regime for more than forty years. The first reported arbitral award was issued just twenty-nine years ago. (1) Today international investment has become the most important vehicle to bring goods and services to foreign markets, (2) and IIAs have grown considerably over the last decade. (3) According to the 2017 World Investment Report, thirty-seven new international investment agreements were concluded in 2016, resulting in 3,324 international investment agreements in total. (4) Sixty-two new investor--state dispute settlement cases were filed in 2016, resulting in 767 known IIA claims in total. (5) This fast development has generated serious systemic and legitimacy challenges. (6)

Foreign investment flowing into host states generally goes through two phases--the pre-establishment phase and the post-establishment phase. (7) Both phases potentially involve essential security issues. IIAs can grant rights to protected foreign investors only after they have been allowed into the territorial jurisdiction of the state. (8) When a bilateral investment treaty (BIT) is limited to the post-establishment phase, the host country retains the right to set specific entry requirements for foreign investors. (9) National legislation may provide discriminatory rules in relation to the admission of foreign investments. (10) Once they are admitted, however, foreign investments may not be subjected to discrimination, regardless of their country of origin. (11)

IIAs may also grant rights to protected foreign investors after the admission or establishment of investment. With the emergence of investment chapters in free trade agreements (FTAs) in the 1990s, an increasing number of IIAs have granted rights to foreign investors after the admission phase to liberalize capital movement. (12) The North American Free Trade Agreement (NAFTA) Article 1103 started this trend, (13) followed by its respective model BITs. (14) The EU--Canada Comprehensive Economic and Trade Agreement (CETA) and the China--Australia FTA made the same arrangement. (15) Upon extending BIT benefits to the pre-establishment phase, host states waive any discriminatory measure on the admission of foreign investment, and they also waive their right to take new discriminatory measures in the future. (16) Extending the scope of BITs to the pre-establishment phase is an important limitation of state sovereignty.

The international investment legal regime provides for essential security exceptions, aiming at protecting host states' interests. (17) This practice has been honored by international investment treaties and international investment tribunals. (18) With respect to sovereignty concerns regarding national security, international investment treaties provide two categories of essential security clauses. The first one is the non-self-judging clause, such as United States--Argentina BIT Article XI. (19) This kind of clause does not clearly specify that state parties have full competence to assess the necessity of the measures related to essential security. (20) The other category is the self-judging clause, such as Article 18 of the U.S. Model BIT. (21) This kind of clause empowers the parties of the agreements to fully judge the necessity of the measures taken to protect their essential security interests. The difference between these two categories of clauses is that the latter contains the phrase "it considers necessary," while the former only contains "necessary." By means of the latter clause, states reserve the right to unilaterally declare such obligations to be nonbinding if the state in question determines that its essential interests are at stake. Although such exemption provisions can balance the interests between international investors and host states, they might be abused by host states due to rising protectionism. Can domestic courts or international tribunals examine the process of national security review? If yes, how should domestic courts or international tribunals evaluate the process of national security review? If no, what are the alternatives to prevent the abuse of application of national security exceptions?

The overarching objective of this Article is to set out a framework for the study of these aforementioned questions and offer some thoughts on how they might be used to guide adjudicators in dealing with national security issues in the international investment arena. With respect to non-self-judging essential security clauses, this Article asserts that the investment tribunals have the competence to review them, and the "reasonable available" approach is a better approach than the "only way" approach in reviewing non-self-judging essential security clauses. With respect to self-judging essential security clauses, this Article rejects the traditional "good faith" approach in reviewing self-judging essential security clauses. Instead, this Article offers an alternative option, that is, compensation should be paid for the loss from essential security measures, including the specific reasons for compensation.

This topic is timely and important. From the beginning of the international investment legal regime, to the economic crisis in Argentina, to worldwide protectionism today, legal scholars have not comprehensively explored how to deal with national security in international investment. (22) Today, worldwide protectionism is rising under the guise of national security, especially in the pre-establishment phase of international investment. Wary of "Made in China 2025," the EU, United States, and Australia all are seeking to shield their industries under the guise of national security. (23) Aiming to fill this gap in the existing literature, this Article will comprehensively explore this issue and provide a new, practical methodology to resolve national security issues in international investment. This Article takes the position that, upon international tribunals' urging call, the model of compensation can incentivize state parties to make careful choices, promote political efficiency, keep the option of adopting essential security measures open, and balance the interests of safeguarding the national security and protecting foreign investment. Only when a practical solution is provided for how to deal with national security in international investment can the international investment legal regime have sustainable development.

In Part II, this Article will address the trend towards a common, shared, and broad meaning of national security, as well as the rise of the self-judging nature of security measures and the underlying reasons for this rise. In Part III, this Article will explore whether domestic courts or international tribunals can examine the national security review process in the absence of an IIA, in both the pre-establishment phase and the post-establishment phase. In this Part, this Article also asserts that states are trying to build a Committee of Foreign Investment in the United States (CFIUS)-style national security review mechanism in the pre-establishment phase. Building on that, this Article will discuss how to examine the process of national security review in the pre-establishment phase and the post-establishment phase. Part IV will examine the national security review mechanism within the international investment treaty framework. In this Part, this Article will examine whether international investment tribunals can review non-self-judging essential security clauses or self-judging essential security clauses. This Article concludes that international investment tribunals review non-self-judging essential security clauses under the "reasonable available" approach, while international investment tribunals tend to review the self-judging essential security issue under a "good faith" standard. Part V will recommend an alternative option to deal with national security review in the international investment legal regime--just compensation should be paid to investors out of essential security measures. Part VI concludes this paper with the possibility that some disputes about essential security clauses may occur in the future.

2. Two TRENDS...