Redesign as Reform: a Critique of the Design of Bilateral Investment Treaties

REDESIGN AS REFORM: A CRITIQUE OF THE

DESIGN OF BILATERAL INVESTMENT TREATIES

MOHAMMAD HAMDY*

ABSTRACT

This Article engages with the heated debates about the reform of the legal re-

gime of international investment. The primary goal of most reform proposals is

to improve the regime’s dispute settlement mechanism. This Article draws atten-

tion to the redesign of bilateral investment treaties—the principal legal instru-

ment in international investment law—as an alternative reform agenda. It

describes the main extra-legal theories put forward in the investment law litera-

ture to explain the design of these treaties. The Article argues that none of the

cited theories fully justify the current design, but rather warrant modif‌ications

thereof which go far beyond the reform of dispute settlement. The Article outlines

these modif‌ications as possible options for reform and provides a roadmap for

further research on the redesign of bilateral investment treaties.

I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256

II. THE INTERNATIONAL INVESTMENT REGIME: A DISINTEGRATING

CONSENSUS?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261

A. What is the Investment Regime? . . . . . . . . . . . . . . . . . . . . 262

B. The Dynamic Division of Labor in International Investment 264

C. Divergent Reforms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267

III. THE MAINSTREAM VIEW AND THE UNCONTESTED DESIGN OF BITS 270

A. The Contours of Mainstream Scholarship . . . . . . . . . . . . . 271

B. The Positivist Agenda(s) of Reform . . . . . . . . . . . . . . . . . . 274

C. The Problematic Avoidance of the Question of Design . . . . . 281

IV. THE THEORY OF POLITICAL RISK (OBSOLESCING BARGAINS AND

DYNAMIC INCONSISTENCY). . . . . . . . . . . . . . . . . . . . . . . . . . . . 284

A. Def‌ining the Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284

B. The Models as Theories of Design . . . . . . . . . . . . . . . . . . . 287

C. Political Risk and the Redesign of BITs . . . . . . . . . . . . . . . 291

* Visiting Assistant Professor, Tulane Law School. I am immensely grateful for Duncan

Kennedy, David Kennedy, Mark Wu, and Adam Feibelman for reading and commenting on

earlier drafts of this Article. This project has also benef‌ited from the excellent insights provided

by participants and attendees of presentations given at Harvard Law School, the Biennial

Conference of the American Society of International Law International Economic Law Interest

Group at the University of Miami School of Law, and the Tulane Law School Faculty Workshop.

V

C 2020, Mohammad Hamdy.

255

V. ECONOMIC GROWTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294

A. The FDI-Growth Nexus in Host States . . . . . . . . . . . . . . . . 295

B. Explaining FDI—Why Do MNCs Invest Abroad?. . . . . . . . 299

C. FDI and the Economic Growth of Home States . . . . . . . . . . 304

D. A Holistic View of Growth as a Foundation of Redesign. . . . 306

VI. ECONOMIC EFFICIENCY AND COMPARATIVE ADVANTAGE . . . . . . . . 310

A. Eff‌iciency and Comparative Advantage as Theories of Design 310

B. The Models in the Critical Discourse . . . . . . . . . . . . . . . . . 315

C. The Missing Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319

VII. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321

I. INTRODUCTION

Whether it is suffering from “growing pains”

1

or a “teenager crisis”

2

or is merely on the path to “responsible adulthood,”

3

the “young” inter-

national investment regime is going through a tumultuous period.

4

The regime, as it has been known for the past two decades, has reached

a def‌initive turning point. Despite the bilateral character of its main

legal instrument, bilateral investment treaties (BITs), the international

investment regime has provided foreign investors with legal protection

that is largely uniform.

5

For better or for worse, this uniformity is slowly

1. See Angel Gurrı´a, The Growing Pains of Investment Treaties, OECD INSIGHTS, (Oct. 13, 2014),

http://oecdinsights.org/2014/10/13/the-growing-pains-of-investment-treaties/.

2. BRIGITTE STERN, The Future of International Investment Law: A Balance Between the Protection of

Investors and the States’ Capacity to Regulate, in THE EVOLVING INT’L INV. REGIME 174, 175 (Jose E.

Alvarez & Karl P. Sauvant eds., 2011).

3. Silvia Constain, ISDS Growing Pains and Responsible Adulthood, 11 TRANSNAT’L DISP. MGMT.,

no. 1, Jan. 2014.

4. See infra notes 20–29 and accompanying text for a def‌inition of the ‘international

investment regime.’

5. Patrick Juillard, for example, notes that “[t]he same clauses always appear in the same

order; def‌inition, admission of investment, standards of protection, expropriation and

compensation, and then a dispute settlement procedure. These seem to form the basic core of

each and every model. Further, these clauses seem to rely upon the same basic notions: fair and

equitable treatment . . . This would appear to warrant the conclusion that there is not much

dissimilarity between basic provisions from one model to another and, as a consequence, from

one BIT to another.” Patrick Juillard, Variation in the Substantive Provisions and Interpretation of

International Investment Agreements, in APPEALS MECHANISMS IN INTERNATIONAL INVESTMENT

DISPUTES 81, 91 (Karl P. Sauvant ed., 2008); see generally Jeswald W. Salacuse, The Emerging Global

Regime for Investment, 51 HARV. INT’L L.J. 427 (2010) (arguing that, notwithstanding potential

discrepancies, BITs form a “global regime for investment”); see also Stephen W. Schill,

Multilateralizing Investment Treaties through Most-Favored-Nation Clauses, 27 BERKELEY J. INT’L L. 496

(2009).

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disintegrating at a time when the globalist ethos of the 1990s is unmis-

takably subsiding.

Recently, the regime was hit hard by an unprecedented upheaval

against investment arbitration.

6

This current backlash might be the

most disruptive since the developing world’s agitation against foreign

direct investment (FDI) in the 1960s and 1970s which gave birth to the

New International Economic Order (NIEO).

7

Unlike the NIEO, how-

ever, present-day fervor against the investment regime and globaliza-

tion in general has found a new home in developed countries.

8

In Europe, the widespread alarm engendered by the draft investment

chapter in the Transatlantic Trade and Investment Partnership (TTIP)

evinced growing distrust of the investment regime among the general

public. The European Commission’s public consultation on investor-

state dispute settlement (ISDS), which concluded on July 13, 2014,

received 149,399 replies—the largest number of submissions by stake-

holders in the history of the EU The vast majority of responses unequiv-

ocally rejected the inclusion of ISDS, the hallmark of the contemporary

investment regime, as it currently stands in the agreement.

9

6. Ruchir Sharma, When Borders Close, N.Y. TIMES, (Nov. 12, 2016), https://www.nytimes.com/

2016/11/13/opinion/sunday/when-borders-close.html; see also MICHAEL WAIBEL ET AL., THE

BACKLASH AGAINST INVESTMENT ARBITRATION: PERCEPTIONS AND REALITY (2010).

7. U.N. CENTRE ON TRANSNATIONAL CORPORATIONS, TRANSNATIONAL CORPORATIONS IN WORLD

DEVELOPMENT: THIRD SURVEY 56–57 (1983). See also generally MAHBUB AL HAQ, OVERSEAS DEV.

COUNCIL, THE THIRD WORLD AND THE INTERNATIONAL ECONOMIC ORDER, (1976); see generally

MOHAMMED BEDJAOUI, TOWARDS A NEW INTERNATIONAL ECONOMIC ORDER (1979). On the history

of the NIEO and its failure to help developing countries avoid liability for the expropriation of

foreign businesses during the 1960s and 1970s, especially in the extractive sector, see JERZY

MAKARCZYK, PRINCIPLES OF A NEW INTERNATIONAL ECONOMIC ORDER: A STUDY OF INTERNATIONAL

LAW IN THE MAKING (1988). For a critical view of the NIEO, see Thomas Wa

¨lde, A Requiem for the

“New International Economic Order” — The Rise and Fall of Paradigms in International Economic Law and

a Post-mortem with Timeless Signif‌icance, in LIBER AMICORUM: PROFESSOR IGNAZ SEIDL-HOHENVELDERN

IN HONOUR OF HIS 80TH BIRTHDAY 771 (Gerhard Hafner et al. eds., 1998).

8. Contrasting Views of Foreign Investment, PEW RESEARCH CENTER 4, 11 (Sept. 16, 2014), http://

www.pewglobal.org/2014/09/16/faith-and-skepticism-about-trade-foreign-investment/trade-04/.

9. EUROPEAN COMMISSION, ONLINE PUBLIC CONSULTATION ON INVESTMENT PROTECTION AND

INVESTOR-TO-STATE DISPUTE SETTLEMENT (ISDS) IN THE TRANSATLANTIC TRADE AND INVESTMENT

PARTNERSHIP AGREEMENT (TTIP) 132 (Jan. 13, 2015), http://trade.ec.europa.eu/doclib/docs/

2015/january/tradoc_153044.pdf [hereinafter EUROPEAN COMMISSION]; see also Greens EFA, Investor-

state dispute settlement (ISDS) in EU law and International Law, YOUTUBE (Mar. 16, 2015), https://www.

youtube.com/watch?v=OkqUYFoRG8U; European Commission, Draft text on Investment Protection

and Investment Court System, in the Transatlantic Trade and Investment Partnership (TTIP) (Sept.

16, 2015) (proposing substantial modif‌ications of conventional ISDS in the draft TTIP

agreement).

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