Introduction
This chapter seeks to reconstruct, from a perspective that goes beyond the issues traditionally linked to trade multilateralism, what the meaning has been of the countless attempts to build an international regime to protect foreign investment, which was initially conceived as a core part of the economic multilateralism of the post-Second World War period.
At the end of the 1940s, the multilateralism proposed under the United Nations approach by international economic institutions considered that all matters related to the free movement of trade and investment should be regulated within a single multilateral institution. However, over the past 75 years, multilateralism has turned out to be more institutionally effective in terms of trade, while it has faced serious difficulties in achieving multilateral management related to foreign investment movements and their consequent protection in the host countries. The failure of the original idea – to create a single institution that would handle trade and investment in a sort of tandem – must be attributed to the discrepancy between governments regarding the adoption of a free trade or protectionist economic and political project, but also to the margin of maneuver claimed by governments regarding the rights of self-determination vis-à-vis the attributions of foreign investment conceived to protect the enterprises’ operations.
In this work, we propose to analyze, through a long-term timeline, the international institutionalization of foreign investment protection as the result of over 62 years of implementing a series of standards and strategies jointly designed from the beginning by companies, international organizations and the governments of the major capitalist countries, particularly the United States and the most powerful European countries who were victors in the Second World War. This process illustrates how corporations succeeded in incorporating their own interests and business vision into an interwoven network of conventions, agreements, treaties and international arbitration bodies that, as a whole, would later be known as a customary transnational law on investment.
For that reason, this analysis seeks to reconstruct, from a perspective linked to the more traditional issues of multilateralism, what the staple meaning has been of the numerous attempts to establish a single international investment protection regime, when, in fact, initially there were major attempts to regulate foreign trade and investment within a multilateral formula. In fact, the multilateral nature of the foreign investment protection agreements only began to take shape when they became a chapter on investment in free trade agreements (FTAs), as was the case with the North American Free Trade Agreement (NAFTA) in 1992. Nevertheless, bilateral investment agreements continue to be negotiated in parallel with FTAs, as has happened since 1959 when the first bilateral foreign investment protection agreement between Germany and Pakistan was implemented.
In order to move forward, three instruments were created sequentially and have operated functionally in line with corporate interests: bilateral investment treaties (BITs), FTAs with a chapter on foreign investment protection, and the investor – state dispute settlement (ISDS), an extraterritorial arbitration mechanism linked to the previous instruments. All the instruments conceived to protect foreign investment share certain features that have established a pattern that has not shifted since 1959, when the first BIT was signed. Roughly speaking, these are: (a) investors can directly sue a government receiving foreign investment; (b) state – state investment disputes are replaced by supranational arbitration; (c) international law can be applied to foreign investor – state relationships; and (d) in case of a dispute, exhaustion of local legal remedies may be excluded: the company can directly resort to international arbitration against a government and ignore national instances.
This chapter intends to respond to how, why and for what purpose economic development and public policies have been, and continue to be, formulated to a great extent based on these instruments, when empirical evidence has shown that there is no correlation between the number of BITs and FTAs negotiated and the amount of foreign direct investment (FDI) flows a country receives. Consequently, implementing such instruments ultimately means that these tools and their ISDS do not necessarily lead to more investment or development as such.
This chapter devotes part of its analysis to Latin America, as this region has registered a substantial number of corporate – state investment disputes since the mid-1990s. This area has also faced aggressive corporate lawsuits resulting in large compensation payments. Latin America has been a test tube for international investment arbitration and has become an international benchmark when negotiating BITs or FTAs elsewhere. Many of the investor – state arbitration changes made by governments outside the region when revising or negotiating their treaties were inspired by the Latin American experience. The reforms undertaken at the United Nations Conference on Trade and Development (UNCTAD) since 2014 and at the International Centre for the Settlement of International Disputes (ICSID) from 2019 have been the result of the enormous pressure of various countries, including some in Latin America, that have exerted considerable efforts to induce these changes.
The chapter comprises three lines of analysis. The first one considers the role the USA has played in creating the aforementioned instruments. Therefore, it examines how it has established a benchmark for the observance of FDI protection rules. This section also analyzes how international organizations have created an institutional response to the US government’s and multinational corporations’ (MNCs) interests to impose the universality of a series of rules that, making use of international economic law, regulate and discipline FDI recipient countries’ actions, particularly in terms of their national regulatory frameworks. The subsequent line of analysis examines the strategies that governments of developing countries have adopted individually and/or collectively to resolve the lawsuits stemming from state – company conflicts. It also outlines the approach that Latin American countries have designed to accommodate, neutralize and even annul the implementation of these instruments. This section also examines how the right of governments to self-determination is implicitly associated with these instruments. Lastly, the third line of analysis provides insights on how international economic governance transgresses the right of states to implement their own development policies through FDI protection provisions contained in BITs and FTAs.
Trying to Give a Structure of Its Own to Government – Corporation Relations with Regard to Foreign Investment
The focus that international economic governance has given to the series of rules regulating FDI protection has always been linked to the transformation of the structure and behavior of the MNCs. According to the UNCTAD World Investment Report 2015, the evolution of the regulations protecting FDI comprised at least four stages before 2021. The first phase occurred from the mid-1950s to 1964, during the Cold War. Before 1950, disputes were resolved by resorting to customary international law, but an increase in investment disputes showed the limitations of effective investment protection under customary law, especially because there was no proper mechanism to protect foreign capital. A major event in this regard was the nationalization of the Suez Canal in 1956 and the proliferation of state companies that took over the exploitation of natural resources, particularly in less developed countries, therefore affecting FDI interests (Gutiérrez Haces 2015, 28). During this period, 37 international investment agreements (IIAs) were signed. At this stage, the bets offered relative protection to foreign investors because the BITs did not yet have an extraterritorial arbitration mechanism, as would later be the case.
The second stage runs from 1965 to 1989 and coincides with the take-off of MNCs in the 1970s. In this phase, the number of IIAs increased to 377 and the first company – state lawsuit under the ISDS emerged out of the Netherlands – Indonesia BIT in 1968. Two aspects stand out in this period: the first refers to the rise of investor protection rules, thanks to the creation of ISDS and of codes of conduct to protect investors. The second aspect is about the emergence of other arbitration instances such as ICSID in 1965 and the UN Commission on International Trade Law (UNCITRAL) in 1966. This period saw the creation of the Draft UN Code of Conduct on TNCs [transnational corporations] (1973–1993) and the OECD Guidelines for MNCs (1976).
To confront the empowerment process of MNCs vis-à-vis the capital recipient governments, there was a multilateral attempt to strengthen state sovereignty. During this period the UN presented three resolutions to respond to the situation: the UN Resolution on Permanent Sovereignty over Natural Resources (1962); the Declaration on the Establishment of the New International Economic Order (NIEO) (1974); and the Draft UN Code of Conduct on Transfer of Technology (1974–1985).
The third period in the construction of a foreign investment protection regime was from 1990 to 2007. It was characterized by an active international consensus on the intrinsic value of FDI and the support of developed countries for the regulatory protection system. An exacerbated proliferation of IIAs characterized this stage, with over 2,000 agreements ratified. This impacted on the outcome of the General Agreement on Tariffs and Trade (GATT) Uruguay Round (1986–1994), which included agreements associating trade with investment protection mechanisms, acknowledging the connection between trade and investment under the premise that a great deal of trade was performed between MNCs and their affiliates. This served as an inspiration to execute bilateral, regional or plurilateral agreements that followed the same parameters. The inaugural agreement and template in this phase was NAFTA (1992–2020), an FTA that included a long, detailed chapter on investment, with protection rules similar to those contained in previous BITs signed by the USA and an aggressive extraterritorial arbitration mechanism, the ISDS. NAFTA was more exhaustive than a BIT in many respects, in particular in its fully comprehensive definition of investment.
This agreement was the first to introduce and contain a binding ISDS for the USA, Mexico and Canada through Chapter 11. Additionally, it provided that all compensation resulting from a company – government dispute would have to be preferably paid in US dollars.1 These aspects, together with the incentive provided by US participation, triggered a wave of FTA and BIT negotiations, which changed the correlation of strength between multinationals and host governments, especially when they saw the potential of an ISDS affixed to a trade agreement.
Not all efforts relative to the FDI regime commanded by the USA were successful in the 1990s. By the mid-1990s, the OECD launched the negotiations to create the Multilateral Agreement on Investment that included comprehensive FDI protection and liberalization. However, it was rejected in 1995, mainly by European countries. Something similar occurred during the Doha Round of the World Trade Organization (WTO), where investment was, once again, disallowed, as was also the case with Brazil’s refusal to accept a chapter on investment on US terms, for the failed agreement to create a Free Trade Area of the Americas in 2004.
The little progress made by the investment regime at the multilateral level contrasted with the exponential increase in the number of executing BITs or FTAs that contained an ISDS, which now involved demanding and obtaining large indemnities. The practice by which the developing country takes on almost all the obligations and the MNC enjoys practically all prerogatives has been blown out of proportion.
During this period, international organizations such as the World Bank published guidelines on the treatment of FDI (1992), and the Asia-Pacific Economic Cooperation Non-Binding Investment Principles (1994) were launched. For its part, the WTO introduced the General Agreement on Trade in Services, the Trade-Related Investment Measures, the Trade-Related Aspects of Intellectual Property Rights in 1995 and, a year later, created the Working Group on Trade and Investment (1996–2003).
It is worth mentioning that the WTO initially did not consider establishing an ISDS for investment; the arbitration procedures were only meant to resolve trade disputes. During the WTO meeting in Singapore (1996), three working groups were created: Trade and Investment, Competition Policy and Transparency in Public Procurement. These issues had already been considered as part of the WTO agenda since Doha. However, during the WTO meeting in Cancun (2003), the so-called Singapore issues were discarded because they did not have a broad consensus, and it was decided to focus on trade facilitation.
After 2007, IIAs transitioned to a fourth stage (2008–present) aiming to build a regulatory FDI protection regime. At the WTO Ministerial Conference in Argentina (2017), the negotiation of an investment facilitation agreement began.2 The agreement neither intended to incorporate substantive provisions, which had been requested by developed countries, nor sought to address the challenges caused O.K I changed it BITS and their IDSD (Reji 2018). This aspect reflects the power of multinationals who, at least until 2021, managed to avoid the scrutiny of multilateral arbitration within the WTO.
At the end of 2020, WTO members approved a roadmap that seeks to achieve more significant results in the next WTO meetings, in order to agree on investment facilitation for development devoid of an ISDS. In February 2020, the European Union circulated a statement entitled “WTO Structured Discussions on Investment Facilitation for Development” that reflected the level of consensus and dissent on that issue:
For greater certainty, this agreement does not create new or modify existing commitments relating to the liberalization of investments, nor does it create new or modify existing rules on the protection of international investments or investor – state dispute settlements.
WTO 2020, 2
Until November 2021, this initiative did not contemplate an ISDS because, until then, there was no agreed position on the arbitration mechanism to be used in case of an investment dispute.
The resistance of the European Union stood out in its aim to establish a sort of community arbitration procedure on investment that would gradually replace the innumerable BITs and FTAs that each European country held. This situation was finally reversed in 2009, thanks to the Lisbon Treaty. In May 2012, the Commission issued a draft of the proposal for a regulation on dispute resolution between investors and states in the EU’s BITs. One of the aspects regarding arbitration that most concerned the EU was the division of responsibilities between the EU and its member states. Although the EU is accountable in international law matters and, consequently, will have to pay an adverse award, it reserves the right to hold the member state of the company that is the subject of the dispute accountable.
This stage saw the emergence of a stronger current of opinion that criticized the investment protection model, not only by calling into question the results these policies delivered, but also by implementing concrete actions to significantly modify these instruments. Among these, for example, we may underline the Reforming International Investment Governance initiative, orchestrated by UNCTAD (2015, 101–171).
The Role of the USA in the Attempt to Create a Multilateral Organization on Trade and Investment
Immediately after the Second World War, when the US had become the major creditor country and the process of decolonization threatened the imperial order, the US government attempted to propose the creation of a multilateral organization that would advocate the promotion of free trade and that additionally included a set of rules that would facilitate FDI protection. These ideas were raised at the UN Conference on Trade and Employment in Havana, Cuba, between 1947 and 1948. Before the International Trade Organization (ITO) was formally proposed, there was a series of preparatory meetings among which the London meeting of 1946 stood out, where an ad hoc committee presented a draft charter. In this meeting, the representatives of the developing countries expressed their interest in continuing with their industrialization process and highlighted that the draft did not explicitly recognize their needs; therefore, the agenda under discussion had to be modified to include their right to development. This vindication was embraced by the US government, which decided that the charter must have a chapter on economic development. The London meeting marked the beginning of an endless sequence of meetings that repeatedly contemplated economic development as a sort of natural match for investment (Vandevelde 2017, 118).
Paradoxically, not only did underdeveloped countries raise their voices against the draft charter, but corporations also gathered to express their discontent due to the lack of protection from host governments. This claim materialized in 1947, when companies demanded the creation of a legal foreign investment protection regime. Subsequently, they lobbied and pressured for drafting an ad hoc code for FDI protection, which was eventually discussed in Geneva. The USA and Western Europe insisted that with or without the ITO, it was necessary to establish, according to international law, a minimum standard of treatment for investment and trade. This standard must include a fair market price, payment in case of expropriation, and prompt, appropriate and effective compensation. Both developing and socialist countries refused to recognize the minimum treatment, invoking the Calvo Doctrine’s principles, claiming that it was inadmissible and contrary to international law for foreigners to enjoy more rights than nationals, granting them the right to invoke their country’s protection (UNCTAD 2015, 10–11).
The Havana Charter set the precedent by establishing an unequivocal approach on how foreign investment promotion and protection must be understood. This approach highlighted the role of investment as a key instrument in economic policy in favor of development, seen as a factor that would boost free competition, and assuming that for all the countries to be able to attract FDI, it was necessary to draw on a clear legal framework that provided security and certainty to foreign investors. Such a requirement surpassed the national jurisdiction, hence the need for BITs.
However, no multilateral body in charge of overseeing and harmonizing international private capital operations came forth. Instead, or better said by default, a temporary agreement rather than a multilateral organization was created, as was originally intended.3 The replacement instrument was the GATT, which focused on the implementation of trade rules exclusively, leaving investment issues aside for future negotiations. Noticing the lack of progress on a multilateral initiative to protect investment, the USA began to execute trade agreements that included some prerogatives for its companies. From 1945, it started to negotiate a series of Friendship, Commerce and Navigation Agreements (FCNs), creating a new generation of long-time agreements.4 Despite being meant particularly for trade, they included provisions to protect US FDI. In 1949, the US Department of State set aside the multilateral perspective and decided that FCNs had to be restructured to work bilaterally, as contemplated in President Harry S. Truman’s Point Four Program (1949). This proposal materialized in the International Development Act (1950), involving a wave of investment from the US government and corporations to underdeveloped countries.5 From Truman’s viewpoint, his program was designed to alleviate the lack of industrialization in these countries and stimulate economic development by boosting industrial productivity, as otherwise no one would risk investing in an underdeveloped country without solid protection such as that provided by the FCNs. However, US corporations’ investment focused on the exploitation of natural resources, especially oil and minerals. The bias of US private investment caused unease, and governments reacted by creating state companies designed to exploit natural resources. This antagonism played a critical role in restructuring US investment protection agreements. Throughout the 20th century, many host governments aimed to end foreign ownership of natural resources. Bolivia nationalized oil in 1937 and again in 1952; Mexico did so with oil in 1938; Venezuela did the same in 1943 and later in 1976; Peru responded similarly with copper in the 1960s and so did Chile in 1971. Analogous actions occurred in Iran in 1951 and in Egypt in 1956 concerning oil. To strengthen their individual moves, Iran, Kuwait, Saudi Arabia and Venezuela created the Organization of the Petroleum Exporting Countries in 1960, seeking to coordinate oil production and enable fairer and more stable prices. As a corollary, in 1975, during the Dakar Conference, an organization of countries producing raw materials was created. This was the consequence of various initiatives of over 75 countries in Latin America, Africa and Asia, which since 1960 had created producer-exporter raw materials associations. These measures were consistent and functional with the design of a development policy that needed export earnings to promote industrialization. The recognition by the governments of developing countries that they had the right to part or all of the income from the exploitation of their resources sparked the beginning of a long process in which governments and companies of the developed countries sought to impose investment protection measures through arbitration such as FCNs, and more recently BITs and FTAs.
The Germany-Pakistan BIT was a highly significant milestone in the progress of these agreements, as it indicated the beginning of a European FDI protection strategy amid the Cold War, which, to a certain extent, constrained the US strategy, still negotiated under the FCN model at the time. The first of its kind, this BIT allowed the parties to appeal to the International Court of Justice in the event of litigation. This option worked for the following decade, until the BIT between the Netherlands and Indonesia established the first arbitration mechanism, known as the ISDS, in 1968. Over the years, BITs have become more detailed and sophisticated and have looked at asymmetric negotiations.
In the 1970s, the State Department launched its BIT program in response to the wave of nationalization and multinational concerns. Among the main clauses were those that would become the hard and unmovable core of every agreement over time: equal treatment for investors; free access to the national territory of the contracting parties; national, fair and equitable treatment; the most favored nation clause; constant protection and guarantees abroad; prohibition against governments adopting unreasonable or discriminatory measures that may harm their rights; prohibition of expropriation, and that none of the parties could impose exchange controls that were unnecessarily prejudicial or arbitrarily discriminatory to the rights, investments, transport, trade and other interests of the other party’s enterprises.
The creation of a US model was transcendental and disrupted the contents of the first BIT by modifying and adding new prerogatives to the typical dispositions of the European BIT model, such as FDI pre-establishment protection, enforcing the inclusion of the ISDS system, forbidding the use of performance requirements and eliminating clauses directly connected with investment promotion, among others (UNCTAD 2018, 13).
As the US engaged in a lengthy discussion with its companies regarding FDI protection, the UN General Assembly included a specific clause complementary to people’s self-determination. It affirmed that all peoples had the right to freely use their wealth and natural resources, irrespective of the obligations arising from international economic cooperation commitments. As a counter-response, the capital-exporting countries transferred the discussions to the OECD.
In 1964, during a meeting of the World Bank held in Tokyo, 21 developing countries openly opposed the creation, within the World Bank, of an extraterritorial arbitration body that would allow foreign companies to sue governments directly without having to go through a national court (Parra 2012, 66–67). Six years after the first BIT between Germany and Pakistan had been signed, the Bank opened the Convention on the Settlement of Investment Disputes between States and Nationals of other States for signature, despite the historic “No Tokyo.”
The establishment of ICSID addressed the concerns of multinationals. In the late 1960s, BITs had a moderately binding nature, and the creation of ICSID responded to the demand for implementing a disciplinary recourse that could be used against nationalist governments.
The Convention sought to address a problem that had been compounded by the years. Due to the intense internationalization of companies and the increase in disputes with host governments, investors have become increasingly reluctant to resort to the national courts of host countries. Although there were international arbitration bodies to settle these altercations, this did not seem to be the solution for either companies or governments who refused to be subject to private arbitration. As such, the creation of ICSID as an extraterritorial arbitration instrument was an option for businesses.
Host governments were not of the same opinion. The creation of extraterritorial arbitration weakened the scope of action of national courts since an enterprise could sue a host government directly without the need to go through national diplomatic intermediation. Nor was national court mediation required since there were two extraterritorial arbitration mechanisms in place. ICSID was a crucial step. The administration of investor – state arbitration was a sui generis form of international arbitration, where one party was a state and the other was a private company. The creation of ICSID revolutionized international practices, as disputes between states had hitherto been settled peacefully or violently through embargoes, blockades or outright invasions, but always between states.
The approval of both the Convention and ICSID by the US Department of State and the US Senate later came with a very solid current of opinion: many believed that the approval of this arbitration body represented a great contribution from the USA to consolidate the international rule of law, since the set of clauses contained in BITs ensured that treatment of investments would be governed by the rule of law principles. For the rule of law to materialize into a BIT, the latter had to include a clause where the parties explicitly consented to resort to arbitration, which in practice meant that a dispute would have to be settled under international law rather than diplomacy or national courts. When analyzing the proposal, the Department of State asserted that “[w]hen an American goes abroad, these treaties can be for him much the same sort of shield that the Constitution is at home” (Vandevelde 2017, 545).
The introduction of this clause, which has become indispensable to all other BITs and FTAs of all countries, has proven to be the transcendental shift in the history of the IIA. This meant accepting that an extraterritorial body might lead to arbitration, and therefore the US courts might be dispensable if the parties agreed. This was truly an innovation considering that 17 years earlier the ITO had not been approved due to US congressional distrust about its supra-nationality and that, as a result, GATT could be approved only because it was an agreement rather than a treaty, which meant its attributions did not override the US Constitution.
Various initiatives to protect FDI continued to bloom after 1965, and in the 1970s the concept of “investment guarantees” was introduced to provide certainty against what was called a “political risk” to protect investors from possible state actions or events that might endanger their investment.6 In this sense, various national bodies have been established to protect investments, such as the Overseas Private Investment Corporation in the USA. Meanwhile, the World Bank sought to create a multilateral investment guarantee agency that, after several failed attempts due to developing countries’ reluctance, eventually came into place with the creation of the Multilateral Investment Guarantee Agency in 1985.
At the same time, in 1967, the OECD produced a draft Convention on the Protection of Foreign Property. This Convention was never implemented but undoubtedly served to promote the harmonization of investment protection elements that developed countries included in their agreements. It is worth noting that ICSID’s existence exerted an influence on the characteristics of the first model created by the OECD, particularly with regard to the form of arbitration that turned to national courts other than extraterritorial courts, as was the case of ICSID.
In line with the World Bank and OECD initiatives, Third World countries began to push for a position that supported permanent sovereignty, in particular in Latin America. This position reached its peak in 1974, when the NIEO introduced binding obligations on investors and thus ensured their national autonomy to regulate them. The Charter of Economic Rights and Duties of States was adopted in 1974 as part of the NIEO initiative, which advocated the right of states to regulate and exert authority over foreign investments within their national jurisdiction, observing their laws and rules according to their national objectives and priorities. Nonetheless, this initiative weakened in the face of the events stemming from the 1982 foreign debt crisis, which led countries to adopt structural adjustment and economic liberalization policies to walk their way out of debt. The demands for the NIEO exacerbated developed countries’ interests, and they responded by implementing new BIT initiatives where the USA, Austria, Japan and the United Kingdom had created their treaty outlines.
Building Strategies to Tackle Investor – State Disputes
Undoubtedly, one of the most reiterated and consistent criticisms leveled against the focus on investment protection embodied in BITs and FTAs has been that the rules stipulated by these instruments go against the flow of development. Most countries that negotiated the FTA and BIT rapidly since the mid-1990s were collectively convinced that they would trigger higher FDI inflows that would have a positive impact. During the negotiations, governments paid little attention to arbitration mechanisms until the first litigation against them began. The skewed structure of the BIT has become more and more contentious.
Foreign investment was heavily protected, with little or no responsibility or obligation to the host economy and the people, particularly in terms of protecting land, natural resources, and environmental and labor rights. This form of negligence or contempt has created a difficult environment for decision makers whose job it is to address these concerns. Governments devised various strategies to force arbitration, but with time, they inferred that the mechanics behind the strategy had to extend and contemplate both preventive and proactive actions, among which stand out those that arose from the Americas. Many countries have recognized that they are being held hostage by allegations, claims and even lawsuits from companies. South Africa cancelled almost all its BITs in 2012, yet it has continued to be the top African FDI destination; India became the leading location as recipient of FDI in Asia after releasing a new BIT model in 2015; and Indonesia, despite announcing in 2014 that it would terminate its BITs, saw inward FDI increase by more than 130 percent between 2016 and 2018 (Johnson et al. 2018, 7).
A similar exercise in many Latin American countries led to discussions about some of the requirements provided in BITs and, in extremis, they would decide to cancel an enterprise’s exploitation contract. Such was the case of Spanish company REPSOL in Argentina (2012); US oil companies OXY and CHEVRON in Ecuador (2012); Mexican cement company CEMEX (2011) and Mexican flour producer GRUMA (2011 and 2013) in Venezuela; ELFEO and CADEB (2012), both affiliates of Spanish IBERDROLA and Aguas del Tunari in Bolivia (2000); and the mining company Tia Maria in Peru, a property of Grupo México (2011).
The decision to withdraw the argument linking the contribution of a BIT to the economic development of a region and, ultimately, a country had a number of effects. Most importantly, it prompted governments to seriously consider cancelling BITs and/or denouncing them before the ICSID. Governments challenged the immutable nature of the rules contemplated in the BIT and FTA, questioning the structure of ICSID. This exercise led governments to push for greater transparency as well as for the execution of the resources contemplated in international law, such as amicus curiae, which requested the presence of third parties on the panels.
In 2001, the Canadian, Mexican and US governments published a Note of Interpretation on NAFTA’s Free Trade Commission about the meaning of some provisions contained in NAFTA’s Chapter 11. This Note was critical for the future of developing countries because it originated from two developed countries. The Canadian protocol sought to defend the right of the government and the provinces to dictate public policies to protect primarily their development policies, their citizens, natural resources and the environment. This Note advocated the right to self-determination at all three levels of government and sought to de-litigate future litigation, supported by the indirect expropriation clause and performance requirements. The Canadian position reflected the misperception of NAFTA’s Chapter 11 benefits from the perspective of the provinces and the federal government, but it also echoed the concern of the government and civil society about the increasing number of lawsuits coming from companies, mainly American, against the Canadian government and the cost involved in paying compensation. After 24 years of implementation, the renegotiation of NAFTA in 2018 allowed Canada to completely dissociate itself from ISDS and determine that any investment dispute should be heard in Canadian courts. Although Mexico and the USA have mutually agreed to maintain the same ISDS structure as NAFTA in the new agreement (the US – Mexico – Canada Agreement, USMCA), a major change has been made. The term “equivalent to expropriation” was removed and with it the meaning of the term was narrowed.
Broadly speaking, the governments of the Americas have questioned international arbitration and have gradually recovered their legitimate right to resort – in the face of overwhelming evidence – to national legislative bodies, which meant a return in some ways to the Calvo Doctrine in the 21st century. The Argentinian case turns out to be emblematic, as it openly ignores ICSID’s article 54 and declares that every lawsuit and award of a foreign company must be closely examined by Argentinian courts, arguing that ICSID favors foreign investors and discriminates against local investors.7 Other countries have also supported similar proposals, such as Colombia, Bolivia and Ecuador, which have directly reformed their constitutions and presented their position in these amendments. In some cases, overwhelmed by the indemnity amounts and the number of lawsuits, governments have decided to denounce the ICSID Convention and, as a result, initiated the process of delinking from its arbitration.8 Naturally, this decision has serious consequences for a country, especially due to the enforcement of residual or survival clauses that grant a BIT between 20 and 40 years of grace after being denounced, which allows lawsuits against a country to go on despite them having cancelled the instrument.
Until 2020 the review and reform processes of many Latin American constitutions relating to lawsuits filed by companies against governments and to the need to settle them in national courts produced a legitimacy crisis for extraterritorial courts, leading to important changes in ICSID and UNCITRAL arbitration since 2014.
How Do IIAs and ISDS Transgress the Right of States to Implement Development Policies?
The defense, survival and even readjustment strategies of countries in the face of the effects brought about by BITs, through ICSID and UNCITRAL arbitration, have been far from uniform; however, these strategies allow the grouping of countries according to the courses of action they have taken. These strategies have been a common trait in all the countries in Latin America, but they have failed to find a common cause, as shown in the results of the First Ministerial Meeting of the Latin American States Affected by Transnational Interests, held in Ecuador in 2013. At the meeting, the convening countries endorsed the final statement, while some invited countries, such as Argentina, Guatemala, El Salvador, Honduras and Mexico, preferred to take note of the conclusions and statements to disseminate them within their own governments. Again, as in other moments in the history of Latin America, ideological differences, combined with distrust of this type of initiative, predominated among the participants, who preferred to continue accepting international arbitration.
Paradoxically, multilateral integration bodies such as MERCOSUR, the Andean Community or CARICOM did not act as a vehicle for achieving consensus and coherent positions on investor – state disputes. For their part, other countries in Latin America such as Chile, Colombia and Peru opted for individual strategies that were different from those of Ecuador, Bolivia, Venezuela and Argentina at the time.
In contrast with the toughest positions, represented by Bolivia, Ecuador and Venezuela, the measures taken by Peru were conspicuous, as this country preferred to create a government body called the State Coordination and Response System for International Investment Disputes (since 2006), which oversaw BITs, detected possible conflicts and, if necessary, coordinated the entire arbitration process. Something similar to this has been implemented by Colombia to prevent potential conflicts with investors. Other countries, such as Argentina, Bolivia and Nicaragua, conceived very different initiatives that primarily focused on defense during the arbitration process, rather than preventive actions to avoid a lawsuit.9 Additionally, these forms of resistance created jurisprudence and alternative approaches that started to be considered by other countries outside the region.
Despite the entire set of rules and regulations stemming from BITs, ICSID and UNCITRAL, conflicts between governments and enterprises are far from being resolved. Their implementation has triggered several distinct changes both within and outside Latin American countries. As explained above, governments have orchestrated various strategies to reverse the negative effects of BITs, but together with this, a conspicuous ISDS industry has been developed, led by law firms and experts, former BIT and FTA negotiators and former government officers who go back and forth between the ministries and international courts without pondering the existence of a conflict of interest.
With the arrival of new governments, new approaches to dealing with the problem emerge. In the case of Ecuador, the new bureaucracy decided in 2021 to re-enter ICSID and accept the BIT rules negotiated in the past, throwing overboard the efforts of previous governments to dissociate themselves from an arbitration mechanism that has proven to be harmful to the economic development of countries.
Concluding Remarks
Since the 1980s, international institutions and MNCs have tried to undermine state power, especially the right of countries to determine their economic development strategies. They have gradually imposed economic and political change on them, not only by dictating structural adjustment programs, but also through FTA and BIT negotiations that would modify not only countries’ economic policies but also their national legislation. These efforts aimed to solidly establish an international regime for protecting foreign investment, where investors become privileged citizens of an international legal order designed above all to guarantee unlimited protection for the movement of capital owned by large corporations, challenging national governments’ autonomy to dictate their own development policies. In this regime, investment rules can be viewed as a set of binding constraints designed to insulate state economic policy and development strategies for public policy (Schneiderman 2008).
In some ways the current economic crisis, together with the COVID-19 outbreak, has exacerbated the erosion of governance principles by pressuring governments to liberalize and establish even more flexible operating rules favoring foreign capital. The schemes to protect foreign investment analyzed here reveal a common trait: the tendency to constrain state power and impose sanctions against any flagrant failure to protect foreign investment safeguarded by a BIT or FTA.
Because the imposition of performance requirements on foreign investment or any discriminatory treatment of such investment is considered a violation of the agreement inside the BIT and the FTA, most governments find it very difficult to put their economic development policies ahead of international corporations’ priorities. This deprives the governments of capital-importing countries of one of their most important duties: the ability to set public policy to facilitate development, preceding large companies’ interests.
Throughout this chapter we have analyzed the politics behind international development from the perspective of the construction of an international foreign investment protection regime. This set of instruments and relevant arbitration mechanisms have been implemented for over 62 years, during which there have been conspicuously sharp and uneven contrasts. The consequences of these agreements, particularly concerning arbitration, have compelled multiple governments to question their significance when indemnity amounts derived from court sentences have represented a huge blow to the countries’ public expenditure.
Furthermore, developing countries have gained experience in devising proactive contention and buffer strategies in the face of an exponential increase in foreign companies’ lawsuits, especially concerning natural resources and environmental issues; however, most governments still contemplate negotiating BITs and FTAs. It is worth mentioning that governments voluntarily accept a loss of jurisdiction when negotiating these agreements. By utilizing these instruments, companies have managed to impose rules to make their performance respected, allowing them to locate, delocalize and relocate according to competitiveness and profit criteria, ignoring altogether the question of whether these actions might destroy the social fabric of a community.
Seen in this way, what would be the trigger that encourages governments to continue negotiating these types of agreements despite their dubious reputation? The quick answer would be having greater foreign investment flows and, consequently, more economic growth. How is it possible, then, to reconcile this lawful interest to the ample proof demonstrating that the requirements associated with a BIT or FTA damage many of the economic development policies of a country?
One of the consequences of this is that governments, fearing new demands, have preferred self-censure, giving companies greater freedom even when this damages development-related activity, such as exploitation of natural resources and protection of the environment.
In the late 1990s, a current of opinion emerged worldwide calling into question the performance of ICSID and UNCITRAL dispute resolution mechanisms, which was surprisingly endorsed by the governments and civil society of developed and developing countries. Yet the real dilemma lies in how to attract productive investment while simultaneously limiting companies’ ambitions through ISDS. In February 2020, ICSID published a proposal to amend its procedural rules for IIAs and their ISDS. This proposal, which was an open draft to receive comments from states, governments and civil society, includes the most profound changes ICSID has proposed in over 50 years. Among the proposed changes are the adoption of a greater range of dispute resolution mechanisms based on new mediation and conciliation rules and updated fact-finding, greater case transparency and a better balance between the interests of states and investors (CIAR Global 2020, 1–4).
Based on the above and on further analysis, in 2014 UNCTAD began to carefully analyze the IIA as well as ISDS and finally proposed a reform to the IIA regime, asserting that “[t]he question is not about whether to reform or not, but about what, how and the extent of such reform” (UNCTAD 2015, 120–171).
In 2015, UNCTAD refined its proposal and published in its World Investment Report a chapter entitled “Reforming the International Investment Regime: An Action Plan,” which openly suggests a strategic-approach policy option. In this way, UNCTAD took up its old struggles and concerns from the 1970s, back when it was an international institution dedicated to promoting economic development, especially in the least developed countries. Its new stance has been a breath of fresh air for those countries that have been plagued by skewed investment protection rules that prioritize the interests of developed countries and private companies.
Bibliography
CIAR Global. 2020. “CIADI Publica Compendio De Comentarios Sobre Las Enmiendas A Su Reglamento.” Noticias. Last modified October 5, 2020. https://ciarglobal.com/ciadi-publica-compendio-de-comentarios-sobre-las-enmiendas-a-u-reglamento/.
Gutiérrez Haces, María Teresa. 2015. “Entre la observancia de los acuerdos de protección a la Inversión y el derecho a instrumentar políticas públicas de desarrollo en América Latina.” In ¿Hacia dónde va América Latina respecto del Derecho Internacional de las Inversiones?, edited by Álvarez Zarate: 23–60. Colombia: Universidad Externado de Colombia.
Reji K., Joseph. 2018. “Investment Facilitation Agreement in WTO: What It Contains and Why India Should Be Cautious?” SSRN Electronic Journal, December 2017. https://dx.doi.org/10.2139/ssrn.3083945.
WTO (World Trade Organization). 2020. WTO Structured Discussions on Investment Facilitation for Development. Communication INF/IFD/RD/46.
This is preferred but not required. Sometimes a part is paid in the currency of the requested country.
In the context of the WTO, investment facilitation means the setting up of a more transparent, efficient and investment-friendly business climate, making it easier for domestic and foreign investors to invest, conduct their day-to-day business and expand their existing investment.
In 1955, the National Advisory Council on International Monetary Fund and Financial Problems (NAC) observed that over the previous 30 years there had been three US attempts to reach a multilateral agreement on investment and all three had failed: the League of Nations Draft Convention on the Treatment of Foreigners and Foreign Enterprises (1929); the attempt to include investment provisions in the ITO Charter; and the 1948 Inter-American Conference of Bogota (Vandevelde 2017, 252–253).
Between 1948 and 1949, the USA restructured its FCNs and continued negotiating with them to protect its FDI until 1966, with the execution of its last FCN, and opened BITs under a different approach.
The economic aid initiative for least developed countries embodied in President Truman’s Point Four Program in 1949 was the continuation of the economic aid proposal raised in the Marshall Plan of 1947.
This proposal was brought forward by the initiative of President Luis Echeverria and the Mexican government and was accepted at the UN General Assembly through Resolution 3171.
“Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State” (ICSID 2006, art. 54).
Ecuador decided to denounce the ICSID Convention in 2009, while Bolivia had done so in 2007. Nicaragua announced it would do so in 2008, and Venezuela formalized its irrevocable denunciation in 2012. The Argentinian government requested authorization from its congress to commence the ICSID denunciation process in 2012.
The Arbitration Defence Assistance Unit in Argentina (2003), the Minister without Portfolio Responsible for the Legal Defence of State Recoveries in Bolivia (2008) and the Inter-Institutional Defence Commission of the State of Nicaragua against Investment Disputes (2007).