Reconceptualizing International Investment Law from the Global South

Courtesy of Fabio Morosini and Michelle Ratton Sanchez Badin

The international investment regime (IIR) is under attack. Critics argue that international investment agreements (IIAs) constrain the right of host countries to regulate in the public interest and that the investor-State dispute settlement (ISDS) clause grants foreign investors alone the opportunity to bypass local, state or federal domestic administrative bodies and courts. This legitimacy crisis of the IIR is generalized, affecting countries in the North and South of the globe, but the bulk of scholarly discussion to date has been to a great extent concentrated in the North, which accounts for only limited versions around the same story.

 As policymakers worldwide look for alternatives to the current regime, insufficient attention is paid to contributions originating from the Global South,[1] which has not traditionally been viewed as a laboratory for legal innovation. Our new book “Reconceptualizing Investment Law from the Global South” (CUP, 2017) presents original empirical research documenting legal reform in international investment law in the most important emerging economies, looking at Brazil, India, China and South Africa, but also in Chile and Australia – a middle-income economy in the geographical South undergoing major reforms in its trade and investment regulation for reasons that cannot be captured by the standard North or Southern narratives in the field.

The book argues that the current reform in investment regulation is part of a broader attempt to transform the international economic order.[2] Countries in the North and South are currently rethinking how economic order ought to be constituted in order to advance their national interests and preferred economic orientation. While some countries in the North seek to create alternative institutional spaces in order to promote neoliberal policies more effectively, some countries in the South are increasingly skeptical about this version of economic order and are experimenting with alternative versions of legal ordering that do not always sit well with mainstream versions promoted by the North. While we recognize that there are differences in approaches to the investment regimes proposed by countries in the South, we identify commonalities that could function as the founding pillars of an alternative economic order. Unlike investment regulation currently being produced in the North that presses for the maintenance of the status quo and introduces changes to the system mostly focused on procedure, some countries in the South are attempting to reconceptualize investment regulation. They contest the unbalanced foundations of investment regulation that overprotects investors at the expense of the home state’s regulatory space. In turn, developing countries try to create an economic order that, while recognizing the importance of FDI for their economic development, seeks to preserve state autonomy to regulate in the public interest. Our book showcases selected countries in the Global South where investment law reform is current underway, and explores the potential and limitations of an alternative order coming from the South.

The book contributes to our understanding of how the transformation of investment regulation in the Global South is shaping the broader debate in the field. The main finding of the book is that some developing countries have created new model investment agreements and/or reformed existing national laws to respond to the legitimacy crisis of the investment regime in ways differ substantially from the manner in which most developed countries have chosen to respond. We focus on the similarities of approaches in the Global South to foster our claim of an alternative economic order originating from the South. The book aims to understand what explains changes in international investment law in selected developing countries and how some countries – mostly emerging economies – might offer alternatives to the existing debate currently dominated by the United States and the European Union. In sum, it hopes to inspire other countries to also design regulatory tools that meet their developmental needs.

There are at least two reasons why a book on Global South alternatives to investment regulation is both timely and important. First is the uncontested existence of a legitimacy crisis of the international investment regime and the universal quest for solutions.[3] The magnitude of this legitimacy crisis cannot be underestimated, since most of the countries in the world have implemented FDI policies as part of their overall developmental strategies, either as recipients of FDI, exporters or both. By the end of 2016, existing data reported the existence of 3,324 international investment agreements.[4] The investment regime, even if lacking a multilateral framework, has a direct impact on development promotion in developed and developing countries.

The current investment regime faces structural challenges, which are rooted in different and interrelated explanations. One factor associated with such crisis is the increasing discomfort about the actual effects of International Investment Agreements (IIAs) in promoting FDI. A second factor relates to the controversial nature of investment agreements that unduly protect private property at the expense of the right of host countries to regulate in the public interest.[5] Third, there is a growing demand for a more balanced approach between investors and states, imposing more obligations on the former. Finally, the legitimacy crisis of the investment regime is linked to the contested benefits of Investor State Dispute Settlement (ISDS), which is grounded on the potential disparity of treatment between foreign investors and domestic investors, arbitrator’s bias, lack of arbitrator accountability, lack of transparency, absence of amicus curiae and third party participation, inconsistency of awards, absence of an appeals mechanism and constraint on policy space. While these structural challenges affect both developed and developing countries, their responses vary according to the size of their markets and developmental needs, and their leverage in the international investment regime. Thus, a book that looks at the so called legitimacy crisis from the perspective of developing countries is both timely and necessary.

As a result of the legitimacy crisis in the investment regime, many countries or groups of countries are currently considering alternatives to investment policymaking. Reactions emerge from different levels of regulation – multilateral, regional, bilateral and national – and they vary in scope. While much of the international debate these days is concentrated on new investment rules created in megaregional agreements, such as the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), less attention is paid to changes in national laws and model investment agreements. By the end of 2015, at least 110 countries have reviewed their national and/or international investment policies since 2012 and a smaller number of countries have developed new model IIAs.[6]  In essence, national level reforms are ways to tackle the challenges linked to the crisis of the investment regime.

Our book contributes to the debate on changes in investment regulation and looks beyond the debate currently conducted by academics in the developed world, looking for alternatives in the Global South. Authors were asked to contextualize recent changes in their countries investment regulations based on internal and external factors. The major claim of the book is that attempts to transform the economic order are underway, some of which are emerging from the Global South.

While we do not claim that investment law reforms in the countries studied in our book “reinvent the wheel”, we argue that there is a good degree of innovation pursued by some of these developing countries by the inclusion of new elements and in the way that they make new combinations of existing investment provisions to advance their own development goals. These innovations tend to take place in two main areas of investment regulation. The first is dispute settlement, where some developing countries are replacing ISDS with state-to-state arbitration or local courts, and making mediation between the disputing parties mandatory before starting dispute settlement proceedings. The second area of investment regulation where some countries of the Global South are innovating concerns enlarged regulatory space for host countries. Countries like Brazil have excluded fair and equitable treatment and limited compensation only to direct expropriation, attempting to enlarge host countries’ policy space. South Africa, on the other hand, began to terminate its investment treaties and revise domestic laws in investment after realizing that certain provisions of existing BITs were in violation of its constitution and circumscribed the government’s policy space.[7] China showed its flexibility in relation to regulatory space and dispute resolution in the China-Australia Free Trade Agreement. But other innovations take place ‘inside’ the ISDS system. India has recently issued a new Model BIT without most-favored nation (MFN) provisions and requiring the exhaustion of local remedies before triggering ISDS. Recent Chilean IIAs give to States, more policy space and control over investment claims and include provisions enhancing transparency and consistency in arbitral proceedings.

We conclude that the developing countries selected in this study take different approaches to investment regulation, ranging from conformity with regulation originated from developed countries, as is the case of Chile, to selected resistance in central provisions such as the right to regulate in the public interest and alternatives to ISDS. These approaches can be used to challenge more traditional forms of investment regulation and inspire change in like-minded countries, notably in the developing world.

The desirability and degree of reform in each of the countries studied vary according to the size of their economies, which determines their leverage in international negotiations, and the role investment flows play in their developmental policies. From this perspective, developing countries covered in this project can be roughly grouped into four different categories, based on their bargaining power in investment negotiations: 1) China; 2) Brazil, India and South Africa; 3) Chile; and 4) Australia.

China’s regulatory strategy for investment agreements is inextricably tied into its ambitions in relation to the development of outbound trade and investment, both inbound and outbound.  Its negotiating format maintains traditional BIT provisions, including ISDS, but its recent agreements with developed and developing countries demonstrate considerable negotiating flexibility. China has followed the world trend of preferential trade agreements (PTAs) with investment disciplines and is now engaged in an active program of negotiating PTAs with its trade partners. China is also pursuing the goal of a high quality BIT with the United States, which will include pre-establishment national treatment and a negative list, while at the same time pursuing the domestic liberalization policies which will make it possible for China both to grant and to ask for greater concessions in relation to market access. Left out of the TPP negotiations, China is pushing an alternative megaregional project, the Regional RCEP, involving the ten members of the Association of South East Asian Nations (ASEAN), Japan, Korea, India, Australia and New Zealand. China is also promoting a yet more ambitious initiative, the One Belt One Road (or New Silk Road), which involves massive infrastructure investment and related trade projects with 64 countries, mostly developing, through Central Asia to Europe and Africa and through the South China Sea to south-east Asia.  With these countries China appears to be pursuing a different, more diplomatically based, strategy in relation to investment protection.

A second category of developing countries studied in our book gathers the emerging economies of Brazil, India, and South Africa. Traditionally recipients of FDI, these countries have also become capital exporters over the past two decades. Unlike China, they are countries with sufficient leverage to challenge existing investment rules, but not enough to develop an alternative system. In other words, these countries need to accommodate their interests within the existing system, adopting occasional detours to promote their own developmental policies.

A third category of developing countries explored in the book is that of a small developing country economy that strongly relies on an open trade and investment strategy to promote development, illustrated by the Chilean case. Chile portrays a narrative of a country that unilaterally reduce barriers to trade and increase foreign investment protection, with limited bargaining power to negotiate alternative investment rules, a settled position of accepting the terms of the agreements proposed by the United States and the European Union – to a large extent replicated in its agreements with other developed and developing countries, and a slim record of cases brought against Chile by foreign investors (and with a majority of outcomes in favor of the respondent state). Such characteristics help to explain the country’s decision to deepen a web of BITs and free trade agreements (FTAs), in many cases including investment disciplines. Additionally, it also explains why Chile is not in a position to challenge the existing regulatory framework that so far has worked in its favor. Despite the small size of Chile’s economy, adherence to mainstream trade and investment forms of regulation should be factored in the equation to explain the country’s stable flux of capital in and out of the country.

The last country studied in our book is Australia, a global South country only by means of geography. Australia is a middle-level economy, a major exporter to developing countries and a recipient of substantial amounts of investment from both developed and developing countries. Given its special circumstances, investment regulation produced by Australia differs from the types of laws traditionally produced in the developed or developing world. Our book relies on the Australian narrative to offer alternatives that might be considered by developing countries in relation to investment dispute settlement and the right to regulate in the public interest. First, Australia has decided to take a case-by-case approach in relation to investment dispute settlement. ISDS is no longer the default rule – and, when agreed to, Australia’s recent ISDS clauses are heavily negotiated. The decision to reconsider the indiscriminate use of ISDS is to a great extent related to the controversial Plain Packaging case, which challenged Australia’s health regulations based on the Australia-Hong Kong BIT, as well as to significant popular resistance to the concept. Second, although very pro-investment, Australia has developed a system of screening FDI that may or may not enter the country, based on the country’s national interest. These and other lessons can be considered by other developing countries, especially those with greater bargaining power.

 

[1] See B.S. Chimni, ‘Third World Approaches to International Law: A Manifesto’ (2006) 8 ICLR 3, 27.

[2]  On the potential of countries from the South to change the global order, see Andrew Hurrell, On Global Order: Power, Values, and the Constitution of International Society (OUP, Oxford 2007) 104, 117, Hurrell and Sandeep Sengupta, ‘Emerging powers, North–South relations and global climate politics’ (2012) 88 IA 463, 484, Hurrell, ‘Narratives of emergence: Rising powers and the end of the Third World?’ (2013) BJPE 33 203, 221 and Anne Orford, ‘Constituting order’ in James Crawford, Martti Koskenniemi and Surabhi Ranganathan (eds), The Cambridge Companion to International Law (CUP, Cambridge 2012).

[3] See inter alia:  Michael Waibel, Asha Kaushal, Kyo-Hwa Chung and Claire Balchin (eds), The Backlash Against Investment Arbitration: Perceptions and Reality (Wolters Kluwer Law & Business, New York 2010) and  UNCTAD, ‘Reform of Investor-State Dispute Settlement: In Search of A Roadmap’ (2 IIA Issues Note 2013) <http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d4_en.pdf> accessed 28 September 2016.

[4] UNCTAD, World Investment Report 2017 – Investment and the Digital Economy (United Nations, Geneva 2016) 101.

[5] See N. Perrone, ‘The international investment regime and foreign investors’ rights: another view of a popular story’ (Ph.D Thesis, The London School of Economics and Political Science 2013) and Perrone, ‘The International Investment Regime after the Global Crisis of Neoliberalism: Rupture or Continuity?’ (2016) 23 IJGLS (forthcoming).

[6] UNCTAD, ‘Taking Stock of IIA Reform’ (1 IIA Issues Note 2016) <https://www.tralac.org/images/docs/9186/taking-stock-of-iia-reform-unctad-march-2016.pdf> accessed 28 September 2016.

[7] IISD, ‘Report of the Ninth Annual Forum of Developing Country Investment Negotiators’ (Rio de Janeiro, November 16-18, 2015) <http://www.iisd.org/project/annual-forum-developing-country-investment-negotiators> accessed 28 September 2016.

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