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Observations on Costs: A Response and Implications for UNCITRAL and ISDS Reforms

Published on May 1, 2019        Author: 

Editor’s Note:  This week, we will be featuring several posts critically examining the UNCITRAL ISDS reform process, which held its latest Working Group III meetings in New York on April 2019.  Monday’s introduction from our Contributing Editor Anthea Roberts and UNCITRAL Academic Forum Chair Malcolm Langford summarized key points of contention raised by States as to the narrower procedural reforms to ISDS as the mandate of UNCITRAL Working Group III.  In Tuesday morning’s post and Tuesday afternoon’s post, Contributing Editor Anthea Roberts and her co-author Taylor St. John address geopolitical and ideological issues that affect ISDS reforms. Today we feature a response post from Academic Forum Member Susan Franck, author of the new 2019 book, Arbitration Costs: Myths and Realities in Investment Treaty Arbitration (OUP, 2019).

We are in the midst of a unique political, legal, and psychological moment. UNCITRAL Working Group III’s effort will have a legacy that affects discourse about international economic dispute settlement for decades to come. It was, therefore, with great interest, that I read the Academic Forum’s submission on EJILTalk! on costs, as costs are at the forefront of the debate.

International arbitration costs are part of what motivated my own research agenda. Whether it was my 2005 article, Legitimacy Crisis in Investment Treaty Arbitration, where I made claims about the costs of investment treaty arbitration (ITA) with a limited set of anecdotal information, or my later articles, Empirically Evaluating Claims and Rationalizing Costs, where I confronted the cold reality that I had not systematically tested my earlier assertions and instead corrected my error by offering data.

As my most recent book, Arbitration Costs, explains that ITA costs are “the dull knife that cuts both ways,” I found the framing of the cost-related mandate to be somewhat unfortunate, namely an exploration of “Excessive Costs and Insufficient Recoverability of Cost Awards.” Students of psychology know that the framing of questions affects the information sought, the processing of derivative information, and subsequent decisions. Rather than focusing on costs and cost recoverability generally—which are important concerns that should be of interest to all stakeholders—the evocative framing creates challenges for balanced and holistic analysis. As Chapter 2 of Arbitration Costs explores cognitive illusions, that likely influence debates about ITA and that my previous experiment with Anne van Aaken and others demonstrated affect arbitrator decision-making, it is vital to acknowledge that illusions of framing, negativity, and confirmation bias, among others could skew both the conversations and derivative choices at a critical inflection point. 

There are undoubtedly many thoughtful aspects of the post.  The most valuable relate to focusing on: (1) raw descriptive arbitration costs, (2) factors tribunals should consider in making cost assessments, and (3) highlighting the importance of security for costs. The observations nevertheless require a degree of caution and may benefit from rebalancing, lest policy reform presumably designed to be helpful nevertheless generate negative externalities.

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UNCITRAL and ISDS Reforms: Battles over Naming and Framing

Published on April 30, 2019        Author:  and

Editor’s Note:  This week, we will be featuring several posts critically examining the UNCITRAL ISDS reform process, which held its latest Working Group III meetings in New York on April 2019.  Yesterday’s introduction from our Contributing Editor Anthea Roberts and UNCITRAL Academic Forum Chair Malcolm Langford summarized key points of contention raised by States as to the narrower procedural reforms to ISDS as the mandate of UNCITRAL Working Group III.  The next series of posts this week focus on broader issues and substantive questions that suffuse the reform process. In this morning’s post and this post, Contributing Editor Anthea Roberts and her co-author Taylor St. John address geopolitical and ideological issues that affect ISDS reforms. Anthea Roberts attends UNCITRAL Working Group III as part of the Australian delegation but she acts and writes in her independent academic capacity. Taylor St John attends UNCITRAL as an observer from PluriCourts, University of Oslo.

A striking feature of the debates over ISDS reform in the last UNCITRAL session were the battles over naming and framing. In some ways, these battles reflect the power that names and frames have in shaping our understanding of reality, guiding and limiting debates, and making some approaches or positions seem more obvious or appealing than others. In another way, these debates often represented proxy battles for deeper, substantive divisions among various states of the type we addressed in our previous blog on the Divided West and the Battle for and by the Rest.

What is in a name? Does framing matter?

When we imagine negotiations between governments, we often picture hard bargaining over bracketed text. In reality, the early stages of negotiation are often more about framing, particularly when negotiations deal with new issues or evolving processes. Framing plays a crucial role in creating the conceptual categories through which participants understand dynamics and formulate or communicate their positions. Every frame simultaneously reveals and obscures, both providing insights and limiting vision.

Naming is important because the names attached to positions can be relatively neutral or can be designed to make some positions seem more attractive or inevitable than others. Actors can attempt to use names dispassionately to describe situations or as advocacy tools to support particular positions. Sometimes it is not clear which is being done. Sometimes different actors can be using the same names in different ways.

Names and frames are often in flux during negotiations. Particularly in a consensus driven negotiation, we should expect naming and framing to shift over time in order to forge consensus among disparate groups. Heated debates in the UNCITRAL ISDS reform process over the use of the names “incremental” and “systemic” provide a good illustration of these phenomena.

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UNCITRAL and ISDS Reforms: The Divided West and the Battle by and for the Rest

Published on April 30, 2019        Author:  and

Editor’s Note:  This week, we will be featuring several posts critically examining the UNCITRAL ISDS reform process, which held its latest Working Group III meetings in New York on April 2019.  Yesterday’s introduction from our Contributing Editor Anthea Roberts and UNCITRAL Academic Forum Chair Malcolm Langford summarized key points of contention raised by States as to the narrower procedural reforms to ISDS as the mandate of UNCITRAL Working Group III.  The next series of posts this week focus on broader issues and substantive questions that suffuse the reform process. Today, Contributing Editor Anthea Roberts and her co-author Taylor St. John address geopolitical issues that inevitably affect ISDS reforms. Anthea Roberts attends UNCITRAL Working Group III as part of the Australian delegation but she acts and writes in her independent academic capacity. Taylor St John attends UNCITRAL as an observer from PluriCourts, University of Oslo.

The UNCITRAL debates over ISDS reforms can serve as a real-world laboratory for observing changes in the national interests and policies of different countries, as well as shifts in their geopolitical weight and alignments. As part of a commitment to transparency, UNCITRAL decided to allow a wide range of observers in the room and to make recordings of the debates available. Such transparency gives non-state actors a chance to analyse these dynamics in real time and to consider not only what they mean for ISDS reforms but how they reflect and reinforce broader shifts in international economic governance. During the latest Working Group III meeting in April in New York, we observed a divided West and an emerging battle by and for the Rest.

The Divided West

The ISDS reform debates reached UNCITRAL despite a division within ‘the West.’ For multiple reasons, most notably that ad hoc investor-state arbitration had become politically toxic within Europe as a form of ‘private justice,’ the European Union proposed the creation of a multilateral investment court. Although initially reluctant to bring these issues to UNCITRAL, the European Union and Canada ultimately supported these reform debates going forward within a multilateral UN body. Other significant powers, including the United States and Japan, were opposed to both the creation of a court and these reform debates going forward in UNCITRAL. Read the rest of this entry…

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UNCITRAL and ISDS Reforms: Hastening slowly

Published on April 29, 2019        Author:  and

Editor’s Note:  This week, we will be featuring several posts critically examining the UNCITRAL ISDS reform process, which held its latest Working Group III meetings in New York on April 2019.  We begin with today’s introduction from Anthea Roberts and Malcolm Langford.  Malcolm Langford attends UNCITRAL Working Group III as Chair of the ISDS Academic Forum and a representative of Pluricourts, University of Oslo. He writes here in his independent academic capacity.Anthea Roberts attends UNCITRAL Working Group III as part of the Australian delegation but she acts and writes in her independent academic capacity. 

UNCITRAL’s Working Group III on investor-state dispute settlement (ISDS) reform continues to attract substantial and growing interest. In the first week of April 2019, a record number of states and observers descended on New York to clarify the final list of concerns and establish a work plan for moving forward on concrete reforms. This session continued the earlier trend of hastening slowly. A recognition of the need for reform amongst states is clear but the tempo remains modest given the reticence of some and the panoply of reform options being considered. This blog post sums up the four main takeaways of the week and will be followed by three reflective analytical posts on the West/Rest politics underlying the process, the role of academics in international politics, debates around naming and framing (“we are all systemic reformers now”) together with a concluding post. Read the rest of this entry…

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Life Without the WTO – Part II: Looking to the Everyday

Published on April 26, 2019        Author: 

Editors’ Note: This is the second post of a two part series by EJIL:Talk Contributing Editor Michael Fakhri. Part I can be found here.

In this second post I want to provide two examples of how life might look like without the WTO. One could do this in a myriad of ways and my purpose is to encourage more thinking along these terms and not to define that debate (well, not yet at least). Let’s see what the world looks like when we highlight the everyday practices of procuring food and doing business:

If a central tenet of the WTO is trade liberalization, the Agreement of Agriculture has always been a failure no matter what your definition of liberalization is. Developing countries had, either through the coercion of IMF structural adjustment programs or unilaterally with the aid of World Bank programs, already implemented a small revolution and liberalized their agricultural sectors before 1994. By the late 1980s, they were export-oriented and did little to protect (i.e. support) domestic agricultural production. So, developing countries did not need the WTO to liberalize their agricultural markets.

Instead, the Agreement of Agriculture, took what was an exception under GATT, and turned it into the norm through things like the Green Box (defined in Annex 2 of the Agriculture Agreement). The most popular way that rich countries made exceptions within GATT for their agricultural policy was under GATT Article XII which allowed for quantitative restrictions to be temporarily employed in order to avoid a fiscal crisis caused by a serious balance of payment deficit. In 1955, this temporary exception became the permanent rule when a very generous waiver was granted to the US (BISD 3S/34-5) and a more conditional ‘Hard Core Waiver’ (BISD 3S/39) for the rest of the world but which primarily favored the then EEC. The result was that the GATT now granted countries permission to impose quantitative restrictions for trade in agriculture. The waivers became the rule and were in effect until 1994. With the WTO’s Agreement of Agriculture, the world’s largest markets continued to be closed off to developing countries. Read the rest of this entry…

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Life Without the WTO – Part I: Stop all this Crisis-Talk

Published on April 25, 2019        Author: 

Editors’ Note: This is the first part of two posts by EJIL:Talk! Contributing Editor Michael Fakhri.

We hear a lot today about the WTO being in crisis. Some people have focused on institutional changes are imagining life without the DSU if it is not reformed. Others are proposing that the WTO consider life without the US. I think, however, we’re at a moment when it’s worth imagining life without the WTO (or at least radically reimagining the WTO). It is actually not too difficult a task if you look at one place the WTO should not have gotten into in the first place – agriculture – and one place where people conduct cross-border business and the WTO is nowhere in sight – the informal economy. I’ll address those in my second blog post.

But first, all this new talk of a WTO crisis is overblown. The WTO was born into a crisis. In light of the Marrakesh Agreement’s 25th birthday this month, it is worth recounting some living memory surrounding the WTO. In the final years of the Uruguay round, farmers in India argued with each other in the streets and in the newspapers over whether they would benefit from a freer market. Environmentalists around the world re-energized their protest efforts having learned some lessons in trade law from the GATT Tuna-Dolphin cases. And labor unions worried about a regulatory race to the bottom. The food sovereignty movement was galvanized by the advent of the WTO and continues strong to this day. Read the rest of this entry…

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The WTO Panel Ruling on the National Security Exception: Has the Panel ‘Cut’ the Baby in Half?

Published on April 12, 2019        Author: 

Recently, media attention has been captured by the unravelling trade war between the declining western hegemon and the rising eastern mega-power with other discussions, such as the reform of the WTO dispute settlement system, reflecting the points of the growing divergence between the two.

Against this backdrop, the  Russia – Traffic in Transit (DS 512) dispute between Ukraine and the Russian Federation would not have attracted attention if not for one tiny detail: the Russian Federation invoked the national security exception contained in Art. XXI of the GATT. Pandora’s Box has been opened. The WTO panel found itself in a tricky situation. Amidst the severe crisis, which threatens the very existence of the WTO dispute settlement system, the panel entered murky legal terrain – adjudication of the trade measures related to national security. The national security clause had never been interpreted before – for good reason.

This post is an attempt to briefly reflect upon the panel’s ruling on the contentious issue of the national security exception. I begin by outlining the historical context of the recent transit dispute. The post then summarizes the legal claims brought by Ukraine and the justifications raised by the Russian Federation. Subsequently, the findings of the panel are discussed. The conclusion delves into the potential implications of the present decision.

In a number of the ongoing trade disputes, the parties have expressed their desire to rely upon the national security exception. The present ruling will be likely celebrated by the WTO Members that have brought legal claims against the additional steel and aluminium tariffs imposed by the United States (Section 232 tariffs). In a nutshell, if the panel’s ruling is not appealed, especially in the part pertinent to the objective review of the subparagraphs (i)-(iii) of Article XXI, then the United States national security justification in those disputes would not stand the scrutiny.

It appears, though, that the panel’s findings do not shed much light on how to resolve the unfolding trade conflict between Qatar, the United Arab Emirates and Saudi Arabia. (DS526, DS567 and DS576) The tension between these countries has a more political flavour and is not easily regarded a mere protectionism under the guise of national security. Read the rest of this entry…

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The Reviewability of the Security Exception in GATT Article XXI in Russia – Traffic in Transit: Implications for South China Sea Investment Disputes in GATT Article XXI-type Clauses in ASEAN Regional Investment Treaties

Published on April 9, 2019        Author: 

The landmark WTO Panel Report on security exceptions in GATT Article XXI came out Friday last week in Russia – Traffic in Transit.  I have written extensively about necessity and national emergency clauses in the past – particularly to reject the position of the supposed wholesale unreviewability of these clauses in the Schmittian sense (on GATT Article XXI exceptions here and here, and on GATT Article XX exceptions, here and here).  The significant valence to this decision, in my view, does not just lie with the Panel’s reasoning (especially as to what they considered to be “objectively” determinable) and its broader implications for the current configuration of the world trading system in this era of increased Trump-driven trade wars.  The greater impact of this decision’s rejection of unreviewability, I submit, will be to enable arbitral tribunals to review security defenses of States anchored on international investment treaties that have purposely grafted GATT Article XXI language.

This phenomenon may be particularly acute for the regional investment treaties of the Association of Southeast Asian Nations (ASEAN). (For the detailed analysis of these clauses, see my previous published work here.)  Attempts by any ASEAN nations (such as the Philippines, Malaysia, Viet Nam, in particular) to impose, in the present or in the future, certain regulatory measures against China-funded development projects or activities of Chinese firms who are increasingly expanding their footprint (from either dredging activities and the creation of artificial islands from dredged and pulverized coral reefs; to tourism; logistics, construction, as well as energy operations in the South China Sea) could, ordinarily, be justified under the GATT Article XXI-type clause of Article 17 (Security Exceptions) in the 2010 ASEAN-China Investment Agreement.  With the declared reviewability of GATT Article XXI in Russia – Traffic in Transit, however, ASEAN Member States should expect that these measures could be challenged (and likely reviewed by arbitral tribunals) in investor-State dispute settlement proceedings permitted under Article 14 of the same 2010 ASEAN-China Investment Agreement.  This is just one illustration of the kind of deep ripple effects that the reviewability of GATT Article XXI-type security exceptions could have across many investment treaties that have kept replicating this clause (and particularly why I have generally, in my own expert work for ASEAN, cautioned against wholesale grafting of trade norms into the regional investment treaties, without setting an explicit treaty provision either rejecting or permitting the justiciability or reviewability of these provisions).  Transposing trade law so unstintingly into investment law creates its own set of unexpected consequences.  Notwithstanding regime differences with world trade law, investor-State arbitral tribunals may find it hard to ignore the authoritativeness of the Russia – Traffic in Transit Panel Report’s finding of reviewability of GATT Article XXI security exceptions.

This post will first give a brief summary of the Panel’s reasoning on reviewability of GATT Article XXI in Russia – Traffic in Transit, anticipating some of the consequences for ongoing trade wars of the United States, the EU, and Russia that depend on the unreviewability of the security exceptions clause in GATT Article XXI. (We expect extensive commentary on this landmark decision from several quarters, and this post certainly does not intend to be the last word on the full elaboration of reasons on all issues in this case.) The remaining part of this post focuses on GATT Article XXI-type security exceptions clauses in the ASEAN regional investment treaties, and how the reviewability of these clauses could potentially impact the investment and development dimension in the South China Sea disputes.

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Lack of Consistency and Coherence in the Interpretation of Legal Issues

Published on April 5, 2019        Author: , and

Editors’ Note:  This is the last post in our ongoing series of posts (see introduction here, first post on costs here, second post on duration of proceedings here, third post on the diversity deficit in investment arbitration here, fourth post on the impartiality and independence of arbitrators here, fifth post on an empirical assessment of ISDS here) , sixth post on incorrectness of ISDS decisions here) authored by individual members of the Academic Forum of the UNCITRAL Working Group III (UN WG III) on Investor-State Dispute Settlement Reform, in parallel with the ongoing UN WG III sessions taking place this week in New York.  The series features summaries of more detailed concept papers prepared by various working groups of the Academic Forum.  This post summarizes a more detailed concept paper prepared by members of Academic Forum Working Group 3.

This post is the product of the work of the UNCITRAL Academic Forum’s (own) “Working Group 3” whose focus is on the lack of consistency and coherence in the interpretation of legal issues. Lack of consistency has been identified in UNCITRAL Working Group III (WGIII)as one of the concerns with regard to the current system of investor State dispute resolution.

In the view of WGIII, the most glaring cases of unjustifiable inconsistency are cases “where the same investment treaty standard or same rule of customary international law was interpreted differently in the absence of justifiable ground for the distinction” (UN Doc No A/CN.9/935 (14 May 2018), para. 21). Other apparent inconsistencies may be wholly justifiable, where tribunals are interpreting similar, but materially different treaty texts – or interpreting the same treaty in relation to materially different facts. Usually, however, inconsistencies in the case-law fall somewhere between these poles. Indeed, there may be problematic inconsistencies where tribunals make too much of formal differences in treaty texts, where different interpretations may nevertheless prove materially unjustifiable. Not every difference in drafting across thousands of investment treaties necessarily signals a divergent meaning.

Rather than focus on only the glaring cases, we have sought to push further into analyzing the incidents, causes, and varied harms produced by discrete inconsistencies in the ISDS case law. In approaching our task, we have focused on three discrete issues:(1) the obligation to provide full protectionand security (“FPS”); (2) the treaty / contract relationship; and (3) the scope of the most-favoured-nation (“MFN”) clause.  In determining whether there are unjustifiable inconsistencies with respect to these issues, we have explored the following questions: (a) what is the inconsistency?; (b) what is the cause of that inconsistency?; (c) what is the harm being caused by this inconsistency?; and (d) what is the solution for this inconsistency (if one can be identified)?

We have found that a fruitful distinction can be drawn between two kinds of unjustifiable inconsistencies: inconsistent interpretations of basic substantive obligations (e.g. FPS) and inconsistent interpretations of more structural “rules of the game” (e.g. MFN and the treaty / contract issue). The former phenomenon can be problematic, but such inconsistencies are to some extent endemic to any legal system. The life of the law is, everywhere, one of change and development. Moreover, such inconsistencies are relatively manageable. For example, should States worry about inconsistent interpretations of FPS, they can clarify the meaning of such treaty terms through treaty drafting, amendment, and/or joint interpretations. Governments and investors can also, in theory, manage such inconsistencies through private agreement, by contracting for what they consider important.

Unjustifiably inconsistent interpretations of the rules of the game are more problematic, insofar as they create severe uncertainty and unpredictability inthe making of investments and for national regulatory choice. Where there is uncertainty as to whether States and investors can contract around investment treaty rules, efficient private ordering is off the table, leaving price as the best lever to reduce uncertainty. Similarly with MFN, uncertainty about whether such clauses allow importation of substantive treaty rules from treaties with third-parties, procedural rules, or neither, creates severe ex ante uncertainty for all parties about the nature and extent of the regime applicable to the investment. In both cases, uncertainty as to the rules of the game creates harms ex ante and ex post. To the extent that States and investors are aware of these problems, they can lead to bargaining and price inefficiencies in the making of investments. To the extent they are unaware, such inconsistencies can lead to unfair and unjustifiable surprise ex post.

For the purposes of this short blog post, we draw out this distinction by sketching our analyses of inconsistencies in the case law on FPS, treaty / contract, and MFN.  

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Responding to Incorrect ISDS Decision-Making: Policy Options

Published on April 5, 2019        Author: 

Editors’ Note:  This is the latest post in our ongoing series of posts (see introduction here, first post on costs here, second post on duration of proceedings here, third post on the diversity deficit in investment arbitration here, fourth post on the impartiality and independence of arbitrators here, fifth post on an empirical assessment of ISDS here) authored by individual members of the Academic Forum of the UNCITRAL Working Group III (UN WG III) on Investor-State Dispute Settlement Reform, in parallel with the ongoing UN WG III sessions taking place this week in New York.  The series features summaries of more detailed concept papers prepared by various working groups of the Academic Forum.  This post summarizes a more detailed concept paper prepared by members of Academic Forum Working Group 4 (members Daniel Behn, Chi Manjiao, Eric De Brabandere, Anna De Luca, Jaemin Lee, Martins Paparinskis, Catharine Titi).

In UNCITRAL Working Group IIIdiscussions, concerns have been raised about the consistency, as well as the correctness, of investor-State dispute settlement (ISDS) decisions. Consistency and correctness are distinct concepts: inconsistent ISDS decisions can be correct, and consistent ISDS decisions can be incorrect. Developing potential policy responses to incorrect ISDS decision-making first requires an understanding of how achieving correctness requires more than achieving consistency.

Working Group Four of the Academic Forum on ISDS has prepared a report analyzing the “correctness” of ISDS decision-making. That analysis balances two competing considerations. First, the legal reasoning and outcomes of many ISDS decisions have faced significant criticism from a range of actors – including States, organizations, and scholars– which has raised questions of correctness and, more generally, the substantive legitimacy of the ISDS regime. Second, criticism of particular ISDS decisions, even when widespread and intense, does not necessarily establish the incorrectness of those decisions, due to a number of factors, including how investment treaty obligations are drafted (often in open-textured terms) and interpreted (where, under principles of treaty interpretation reflected in the Vienna Convention on the Law of Treaties, factors beyond the ordinary meaning of treaty text must be considered). Particularly with respect to disapproval of ISDS decisions by States, such disapproval might, in some instances, reflect State views that the decisions were incorrectly decided, but in other instances might only reflect a perceived need by States to provide clearer policy guidance to ISDS tribunals. Read the rest of this entry…

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