T-TIP NEGOTIATIONS ROUND TWO: AN OPPORTUNITY TO REDIRECT THE TRAJECTORY OF INTERNATIONAL INVESTMENT LAW.

• Author: Wiggins, Nicholas
• Position: Proposed Transatlantic Trade and Investment Partnership Agreement

INTRODUCTION 1291 I. BACKGROUND: THE E.U. AND U.S. POSITIONS ON INVESTOR-STATE DISPUTE SETTLEMENT IN CONTEXT 1295 A. International Investment Law at a Crossroads 1295 B. The E. U. Experience with Investor-State Dispute Settlement 1302 1. The EuropeanUnion's Evolving ISDS Policy from 2010 to 2015 1302 2. Opinion 2/15 1305 3. Achmea 1306 4. CETA and Opinion 1/17 1309 a. Structure and Content of the CETA Investment Chapter 1309 b. Opinion 1/17 1312 C. The U.S. Experience with Investor-State Dispute Settlement 1313 1. From NAFTA to T-TIP 1314 2. T-TIP Round One 1318 3. The Turn in U.S. International Investment Policy 1320 4. The Relevance of the U.S. Position on the WTO's Appellate Body 1324 II. ENHANCING THE LEGITIMACY OF INTERNATIONAL INVESTMENT LAW AND PROTECTING TRANSATLANTIC INVESTMENT THROUGH AN E.U.-U.S. IIA 1327 A. The Rationale for Investor-State Dispute Settlement in an E.U.-U.S. ETA 1327 1. Strengthening the Legitimacy of International Investment Law 1327 2. The Importance of Bilateral Investment Between the European Union and United States 1329 B. The Design of an E.U.-U.S. ETA Investment Chapter 1335 1. Dispute Settlement 1335 a. Traditional Ad Hoc Arbitration in the First Instance 1335 b. The Appellate Mechanism 1337 i. The Opt-In Appellate Instrument Establishing the Appellate Mechanism at ICSID 1341 ii. The Pool of Appellate Adjudicators 1344 iii. The E.U.-U.S. IIA Language 1344 iv. The Appellate Mechanism Illustrated 1346 2. Substantive Provisions 1346 a. E. U. and U.S. Formulations of the Fair and Equitable Treatment Standard in Existing International Investment Agreements 1347 b. The Formulation of the Fair and Equitable Treatment Standard the European Union and United States Should Include in an E.U. -U.S. IIA 1350 i. Prescribing the Sufficient Conditions for a FET Breach 1350 ii. Codifying the Legitimate Expectations Principle 1354 iii. Providing for General Exceptions that Parallel Those Found in the WTO Agreements 1356 III. IMPLICATIONS OFTHIS COMMENT'S PROPOSAL 1360 CONCLUSION 1362 "[W]hen borders are crossed, arbitration offers the crucially important advantage of forum neutrality--parties can appear before a neutral decision maker without having to be hauled into the other's courts." --U.S. Supreme Court Associate Justice Stephen Breyer (1) INTRODUCTION

Despite the operation of more than 2,500 (2) international investment agreements (IIAs), (3) most of which include an investor-state-dispute settlement (ISDS) (4) mechanism allowing investors to allege host-state (5) breaches of the IIAs, international investment law sits at a crossroads. The crescendo of opposition to ISDS has built to a fever pitch over the past several years--especially as developed countries have concluded more IIAs with each other and have increasingly found themselves defending against ISDS claims. (6)

Critics of ISDS register various procedural and substantive grievances. On procedure, they argue that ISDS lacks transparency, democratic accountability, and a mechanism to correct erroneous arbitral decisions. On substance, they contend that ISDS infringes states' right to regulate, includes vague investment protection standards that are interpreted inconsistently, and gives foreign investors advantages over domestic investors.

In light of this legitimacy crisis, an investment chapter in a free trade agreement (FTA) between the United States and European Union--which would cover roughly $4.5 trillion in cumulative transatlantic foreign direct investment (FDI) (7)--would provide a vehicle to redirect the trajectory of international investment law and deepen the E.U.-U.S. economic relationship.

Such an FTA would revive the Transatlantic Trade and Investment Partnership (T-TIP), a comprehensive FTA that the European Union and United States began negotiating in 2013 but then paused in 2016, partly because of differences over ISDS. (8) Specifically, the United States balked at the European Union's proposed inclusion of an Investment Court System in the FTA's investment chapter. (9) Attempts to revive T-TIP negotiations have sputtered, as the two sides have sparred over discrete trade issues and have prioritized the conclusion of FTAs with other trading partners. (10)

Nonetheless, given the size of the E.U. and U.S. economies and the volume of their bilateral trade and investment, both sides have signaled their interest in eventually resuming full-fledged FTA negotiations. (11) And as of this Comment's publication, the European Union and the Biden Administration have signaled their commitment to intensifying E.U.-U.S. economic cooperation. (12)

Despite the opportunity presented by an investment chapter in an E.U.-U.S. FTA, the path toward its conclusion is unclear, as the European Union and United States have adopted differing approaches to remedying their perceived shortcomings of the current international investment law regime. Since 2015, the European Union has insisted on including an E.U.-developed Investment Court System--instead of traditional, ad hoc investor-state arbitration--in all its IIAs. (13) The Investment Court System model reflects the European Union's view that having ISDS claims heard under a structure that resembles a domestic court--including an appeals mechanism--will enhance international investment law's legitimacy. Over the past several years, the European Union has included the Investment Court System in IIAs negotiated with Canada, Singapore, and Vietnam. (14) Ultimately, the European Union envisions the treaty-by-treaty Investment Court System structures merging into a Multilateral Investment Court.

Conversely, the United States has responded to criticisms of ISDS by removing the ISDS mechanism between the United States and Canada, and narrowing its application between the United States and Mexico in the United States-Mexico-Canada Agreement (USMCA). (15) Although various U.S. presidents and Congresses have contemplated an appellate mechanism for ISDS disputes, (16) the United States has never taken concrete steps toward establishing such a mechanism in any of its IIAs.

Against this challenging backdrop, this Comment provides a pragmatic roadmap for how the United States and European Union can reconcile their positions on international investment law and negotiate an IIA that will provide a model on which future IIAs can be built. First, it claims that the combination of ad hoc arbitration with an appellate mechanism embedded in the World Bank's International Centre for Settlement of Investment Disputes (ICSID) would remedy many of the procedural challenges that international investment law faces. Second, it argues that an E.U.-U.S. IIA could resolve lingering uncertainty in international investment law about the scope and content of substantive investment protections.

The Comment proceeds as follows. Part I discusses the history of ISDS, its foreign policy and economic rationales, and the nature of the legitimacy crisis it faces. It then explains the E.U. experience with ISDS and examines how the European Union's political and legal institutions have developed the European Union's current position on ISDS. In turn, Part I addresses the U.S. experience with ISDS and U.S. responses to criticism of ISDS--especially in light of the recently concluded USMCA and the U.S. critiques of the World Trade Organization's (WTO) Appellate Body.

Part II advances the proposed structure of an investment chapter in an FTA between the European Union and United States. Specifically, it focuses on how an ISDS mechanism with traditional, ad hoc arbitration in the first instance, coupled with an appellate mechanism located within ICSID, would operate and resolve legitimacy concerns. Part II also explains how the proposed investment chapter would respond to perceived flaws in the substance of international investment law by clarifying the scope and content of core investment protection standards. Part III discusses the implications of this Comment's proposed investment chapter structure, with an emphasis on institutional and strategic challenges that the proposal might introduce.

1. BACKGROUND: THE E.U. AND U.S. POSITIONS ON INVESTOR-STATE DISPUTE SETTLEMENT IN CONTEXT

   This Part uses the historical development of ISDS to define the boundaries within which the European Union and United States can negotiate a legitimacy-enhancing IIA. First, it examines the main rationales for ISDS and the nature of its legitimacy crisis. Second, it considers the European Union's experience with ISDS, demonstrating how the European Union evolved into the global champion for an Investment Court System. Third, it analyzes the U.S. experience with ISDS and why the current U.S. position on ISDS must be understood in light of its denunciation of the WTO's Appellate Body.

   1. International Investment Law at a Crossroads

      ISDS has long been used as a tool to advance states' foreign policy and economic interests. (17) Before examining the criticisms leveled against ISDS, it is necessary to explain the foreign policy and economic rationales that led to its development and that remain ongoing justifications for its use.

      From a foreign policy perspective, ISDS has been justified as a way to guarantee that a home country's investors receive certain core standards of legal protection when investing in another country, without needing the home country to intervene on its investors' behalf when disputes arise. (18) Indeed, a multilateral desire to end the aggressive intervention of developed states on behalf of their investors in the first half of the twentieth century--so-called gunboat diplomacy--motivated the development of the ISDS regime. (19)

      Home-state interference in investment disputes in the absence of IIAs has continued into the twenty-first century. For example, consider the U.S. Section 301 investigation into China's measures related to the forced technology transfer of U.S. companies investing in China. Under Section 301 of...