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                                              Barnali Choudhury

In the late 1990s, the OECD began ambitious plans to draft a multilateral agreement on
investment (MAI). The MAI would provide standards for the liberalization of foreign
investment as well as protection to foreign investment by means of a binding dispute settlement
procedure. From the onset, however, the negotiations surrounding the agreement were plagued
by attacks from civil society groups. Their chief complaints were that the agreement failed to
address social concerns that permeated from the economic issues and that those affected by the
agreement were excluded from the negotiation process. 1 By 1998, the MAI was abandoned and
negotiations on the agreement were discontinued. In part, the demise of the agreement was
attributed to the increasing political pressure on the participating states, arising from the
objections raised by the civil society groups.2 Politics — or the furthering of subjective desires3 —
it seems, had contributed to the defeat of investment liberalization.

Yet, while civil society groups were focused on condemning the MAI, states sought alternate
methods for increasing investment liberalization. In the 1990s, states began increasing use of
bilateral investment treaties. BITs, unlike the MAI, had the advantage of not requiring
multilateral consensus on the terms of the agreement and, more importantly, did not seem to
pique the interest of civil society groups who were focused on the MAI. The use of BITs
experienced rapid growth in the 1990s and by the end of the decade, the number of BITs had
increased five-fold to over 2,000 agreements.4 Today, the number of international investment
agreements (IIAs) in the form of BITs and preferential trade agreements exceed 3,000.5

One particular attribute of IIAs is their ability to depoliticize the foreign investment process.
This attribute grew increasingly necessary as economic liberalization became progressively more
subject to the capture of protectionist interest groups, which would try to block liberalization
efforts unless concessions to them were made.6 More recently, as the MAI experience
demonstrates, civil society groups have also joined the ranks of groups demanding that their
interests be addressed before foreign investment is further liberalized.

  N.J. Schrijver, The Changing Nature of State Sovereignty, 70 BRITISH Y.B. INT’L L. 65, 86 (1999) (arguing that the
failure to address social interests as adequately as economic interests and the failure to involve groups other than
OECD states contributed to the collapse of the MAI).
  Pippa Read, International Investment in the WTO: Prospects and Challenges in the Shadow of the MAI, (1999) 11
BOND L. REV. 360, 369. However, Drezner argues that the “torpedo” fired by the NGOs at the MAI was more of a
coup de grace rather than a fatal blow. See DANIEL W. DREZNER, ALL POLITICS IS GLOBAL: EXPLAINING
  Martii Koskenniemi, The Politics of International Law, 1 Eur. J. Int’l L. 4, 5 (1990) (arguing politics is
“understood as a matter of furthering subjective desires and leading into an international anarchy”)
  U.N. Conference on Trade & Dev., World Investment Report 2007 – Transnational Corporations, Extractive
Industries and Development, xvii (2007).
  See generally John O. McGinnis & Mark L. Movsesian, The World Trade Constitution, 114 HARV. L. REV. 511

International investment agreements are thus prized for their ability to remove issues from the
domestic political sphere to a more technocratic, depoliticized venue, which circumvents interest
groups’ attempts at thwarting increased liberalization. The agreements provide for foreign
investment disputes to be adjudicated in a neutral forum by international economic law experts
who interpret the agreements’ standards in accordance with legal rules of interpretation. The
agreements are also drafted in a manner that insulates the economics of investment from the
reach of politics by way of the rule of law. This reflects the assumption that law, and not politics,
should govern the protection of foreign investment.

However, the use of law has not displaced the essentially political nature of IIAs. Although no
longer subject to the demands of domestic interest groups, IIAs still continue to be capture to the
interests of global investors. As a result, IIAs tend to prioritize investment interests over public
interests. This emphasis on investor interests has also had the corollary effect of discounting the
importance of the regulatory goals of states, particularly in seeking to achieve public interest

International investment agreements, accordingly, suggest the demise of embedded liberalism.
The agreements do not represent a fusion of power and legitimate social purpose. Instead, IIAs
predominately reflect only the power and interests of investors. Yet because the scope of the
agreements often extends to public interest issues as well, more than investor interests need to be
reflected within their substance. International investment agreements, consequently, require
more, not less, politics.

Part I of this Article canvasses the history of investment agreements, with a particular emphasis
on resolution of investment disputes, to explore the impetus for the depoliticization of
mechanisms facilitating foreign investment. It describes, first, the highly political nature of the
resolution of investment disputes prior to the use of investment arbitration and, second, the
domestic political landscape of states seeking to liberalize investment.

Part II then turns to examine whether an emphasis on the rule of law in defining standards of
treatment and in resolving investment disputes has effectively removed politics altogether from
these agreements. It also explores the effects of attempting to depoliticize these agreements by
canvassing IIAs’ effects on the public interest. This part concludes by determining that IIAs
pose an inordinate threat to states’ regulatory autonomy, in part, through the creation of
investment norms as a form of supranational law.

Finally, Part III explores the need to re-engage the politics of IIAs. In effect, it argues that only
by providing for a deliberative democratic approach to politics in the formulation of IIAs and in
investment arbitration and by using politics to retain states’ regulatory space can their legitimacy
deficits be corrected and their survival be ensured.

I. The Triumph of Law over Politics

The modern interest in depoliticizing international investment agreements stems in part from the
politically charged origins of foreign investment, particularly in the area of dispute resolution. In
the eighteenth and nineteenth centuries, when the world was largely organized into empires and

foreign investment flowed from the West to colonized territories, investment disputes were
largely resolved by imperial courts or administrators. 7 Those that interfered with foreign
investment faced the power of the empire.8 For states which were not colonized, investment
disputes were largely resolved through diplomacy and force.9 In fact, for much of this period,
“power was the final arbiter of foreign investment disputes.”10 For example, “gunboat
diplomacy”, or the use of implied or actual force was frequently used to resolve investment
disputes.11 Latin American countries, in particular, were exposed to abuses of diplomatic
protection, including gunboat diplomacy, in relation to foreign investment disputes. This led to
the creation of the Calvo Doctrine, which denied foreign investors special privileges and
mandated that foreign investment disputes be settled exclusively by host state tribunals under
domestic law.12

The late eighteenth and nineteenth centuries also marked the beginning of the use of Friendship,
Commerce and Navigation (FCN) treaties.13 Principally concluded between the United States
and its allies, FCN treaties increasingly began to include provisions protecting foreign
investments, although they were initially designed only to facilitate trade and shipping.14 Similar
to the other methods for resolution of investment disputes during this period, FCN treaties barred
foreign investors from initiating a direct cause of action against the host state in a neutral
forum.15 Instead, investors were forced to rely on politicking, in hopes that their home country
government would take up their claim on their behalf. Or in the alternative, they were relegated
to bringing actions against the host state in its national courts.16

In the end, whether by way of actual or gunboat diplomacy, intra-state dispute resolution, or
litigation in imperial or national courts, the resolution of investment disputes was marked by the
involvement of politics, in one form or the other. Moreover, the use of politics — or in this
context, states’ reliance on power to further their own interests in the area of investment disputes
— would remain an integral aspect of the resolution of investment disputes until the middle of the
twentieth century.

  Peter Muchlinski, The Rise and Fall of the MAI: Where Now?, 34 Int’l Lawyer 1033, 1034-5 (2000);
SORNARAJAH, supra note 7, at 19.
  SORNARAJAH, supra note 7, at 19; Bernard Kishoiyian, The Utility of Bilateral Investment Treaties in the
Formulation of Customary International Law, 14 NW. J. INT'L L. & BUS. 327, 329 (1994).
   SORNARAJAH, supra note 7, at 19.
   Id.; Kishoiyian, supra note 9, at 329.
   Ibrahim F.I. Shihata, Towards a Greater Depoliticization of Investment Disputes: The Roles of ICSID and MIGA,
   Jeswald Salacuse, BIT by BIT: The Growth of Bilateral Investment Treaties and Their Impact on Foreign
Investment in Developing Countries, 24 INT'L LAW. 655, 656 (1990).
    David R. Adair, Investors' Rights: The Evolutionary Process of Investment Treaties, 6 TULSA J. COMP. & INT'L L.
195, 196 (1999). Gus van Harten & Martin Loughlin, Investment Treaty Arbitration as a Species of Global
Administrative Law, 17 EUR. J. INT’L L. 121, 129-30 (2006); Susan D. Franck, The Legitimacy Crisis In Investment
Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions, 73 Fordham L. Rev.
1521, 1537 (2005).

In 1959, however, Germany and Pakistan entered into the first-ever bilateral investment treaty.17
The provisions of the treaty became a model for the governance of foreign investment and were
later adopted by most states as a means of creating a more favorable investment climate for its
investors. An integral aspect of these treaties was the introduction of a forum for direct dispute
resolution by the foreign investor against the host state. Investment arbitration, as the dispute
resolution forum came to be known, provided for neutral arbitrators to adjudicate the merits of
the investment dispute in accordance with the rule of law. This was also supported by the
creation of the International Centre for the Settlement of Investment Disputes (ICSID) in 1965.
ICSID provided an institutionalized forum for the resolution of investment disputes and made a
particular attempt at depoliticizing the settlement of these types of disputes.18 Foreign investors,
thus, no longer needed to seek aid from their home governments or, in most cases, to exhaust
local remedies to pursue a remedy.19 Investment arbitration had, for the most part, removed the
political elements out of investment dispute resolution.

While foreign investors and capital-exporting states sought to reduce the political elements, or
mainly the reliance on power, from the resolution of investment disputes, states pursuing
economic liberalization sought similar goals within their national governments. In particular,
states sought to reduce the domestic political influences, mainly relating to protectionism, which
plagued liberalization negotiations in an effort to expand and deepen investment liberalization.20

The problem of domestic politics arose in this context because the pursuit of economic
liberalization is premised on serving the best interests of the state. However, at the national level,
a state’s best interests are those interests that have arisen through the domestic political
process.21 As the domestic political process is segmented by regions, domestic politics may only
reflect the interests of a particular region rather than the state’s national interests.22 Thus, a
region whose industry is threatened by a liberalization policy may lobby its elected
representative to curtail the policy even if the policy is in the best interests of the state as a
whole.23 Consequently, some theorists argue that trade and investment liberalization efforts can
fall prey to the demands of protectionist interest groups, which, in turn, hampers overall efforts at
economic liberalization.24 However, by tying the hands of domestic politicians to an

   In 1959, the Federal Republic of Germany entered into the first ever bilateral investment treaty with Pakistan to
protect German investment in Pakistan: Treaty for the Promotion and Protection of Investments, F.R.G.-Pak.,
November 25, 1959, United Nations, Treaty Series, Vol.1963, p. 24.
   Shihata, supra note 12, at 4.
    Some treaties require that investors elect a “fork in the road”, that is either pursue their claim in the host
government’s national courts or initiate an arbitral action directly against the host state. See, e.g., TREATY
PROTECTION OF INVESTMENTS OF OCTOBER 27, 1982, U.S.-Pan., art. 1, June 1, 2000, S. Treaty Doc. No. 106-46.
   Joost Pauwelyn, The Transformation of World Trade, 104 Michigan L. Rev. 1, 3 (2005).
   Rachel Brewster, Rule-Based Dispute Resolution in International Law, 92 Virginia L. Rev. 251, 252 (2006). See
also, generally, Judith L. Goldstein & Richard H. Steinberg, Negotiate or Litigate? Effects of WTO Judicial
Delegation on U.S. Trade Politics, 71 Law & Contemp. Probs. 257 (2008).
   Id. at 287.
   McGinnis & Movsesian, supra note 5, at 515 (“…given the structure of contemporary democratic governments,
protectionist interest groups within a country can often use the political process to pursue policies that profit
members of the group at the expense of the nation as a whole”); Brewster, supra note 21, at 265.
   See generally McGinnis & Movsesian, supra note 5.

international agreement, theorists contend that the influence of protectionist interest groups will
be constrained and the power of national democratic majorities is promoted by deepening
investment liberalization efforts.25

International investment agreements are thus seen as necessary mechanisms that tie the hands of
domestic politicians and prevent the leakage of domestic politics into foreign investment. The
agreements’ emphasis on law in setting standards of investment protection and resolution of
investment disputes are “binding constraints designed to insulate economic policy from
majoritarian politics.”26 States that enter into IIAs voluntarily limit their own sovereignty and
transfer their curtailed sovereign rights to the expanded authority of the standards in the IIAs,
which are then enforced by arbitrators in the course of investment arbitration. In this way,
politics, in the form of power and protectionism, are removed from the investment liberalization

Depoliticizing IIAs and investment arbitration has, therefore, effectively transformed the
protection of foreign investment from its humble origins. In short, IIAs reflect the triumph of
law over politics, as investment protection is taken out of its political elements and placed within
the realm of law.27

II. The Effects of Depoliticizing International Investment Agreements

International investment agreements are now, at least in theory, creatures of law. However,
politics has not been removed from the mix of IIAs altogether. Instead, domestic protectionist
interests have been supplanted by global market interests and this latter set of interests dominates
investment arbitration. At the same time, arbitral tribunals proceed under the assumption that the
divorce between politics and law in IIAs has been finalized. This allows them to focus on
technocratic decision-making as a means of ensuring that political elements continue to be absent
in their decisions. Consequently, by failing to truly remove all political elements from IIAs,
investment arbitration risks producing decisions that elevate the interests of investors over other
domestic interests.

A.      The Illusion of the Depoliticization of IIAs

Although IIAs were designed as a means of removing the political elements out of economic
policy, the notion that IIAs are fully insulated from political interests is illusory. Instead, IIAs
represent only a reduction, rather than a wholesale removal, of politics as international
investment law continues to be infiltrated by politics.

   Id. at 514. (If its powers remain properly limited, the WTO will promote the power of national democratic
majorities by constraining the influence of protectionist interest groups).
   Kenneth J. Vandevelde, A Brief History of International Investment Agreements, 12 U.C. Davis J. Int’l L. & Pol’y
157, 175 (2005).

For example, in the NAFTA context, the governments of Mexico, Canada, and the United States
have exercised their political power to extra-judicially interfere with investment disputes. In
2001, the governments issued an interpretive statement on the scope of investment treaty
standards in an effort to “second guess” arbitral decisions, including decisions still in progress.28
Politics has also revealed itself in the outcomes of investment disputes as the decisions of
investment arbitral tribunals can shape the future domestic policies of states.29 Thus, investment
arbitral decisions that have found states’ regulations to constitute an interference with the state’s
investment treaty obligations have caused other states to withdraw domestic legislation out of
fear that their legislation would also be found to be a violation of investment treaty obligations.30

Most importantly, IIAs are subject to the capture of investor and corporate interests even though
they have been insulated from the capture of domestic protectionist groups. IIAs continue to be
deals “brokered in the context of power and special interests” that risk elevating investor interests
above the interests of all other interests.31 In fact, the strength of investor and corporate interests
reflected in international investment treaties have caused them to be likened to an economic bill
of rights or human rights protection for a special-interest group of business actors.32 IIAs have
also been described as “constitution-like” because of their ability to assign investment interests
the highest degree of protection while limiting the authority of governments.33

B.       Politics in Investment Arbitration and the Demise of Embedded Liberalism

Investment arbitration also proceeds under the premise that international investment agreements
have been neutralized of all political elements. The politically charged history of the resolution
of investment disputes has provided arbitral tribunals with a greater impetus to focus on the rule
of law as a means of producing rule-oriented, rather than power-oriented resolution of disputes.34
Reliance on law is presumed to introduce objectivity into dispute resolution in a sense that
politics is thought not to be able to do.35 Modern investment arbitration thus values technocratic
decision-making in which investment law is analyzed and interpreted without reference to its

   See NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions, July 31, 2001,
available at
Interpr.aspx?lang=en. See also Jose Alvarez, The New Dispute Settlers: (Half) Truths and Consequences, 38 Tex.
Int’l L.J. 405, 415 n.49 (2003).
   Alvarez, supra note 28, at 410 ( tribunals, the product of states' instrumentalist calculation of
interests, help construct state interests over time. When international dispute settlement works--as it has in the WTO
and in Europe--judges can change states and presumably the world)
   For example, Indonesia withdrew legislation out of fear that it would be found to constitute an expropriation. See
Stuart G. Gross, Inordinate Chill: BITs, Non-NAFTA MITs, and Host-State Regulatory Freedom – An Indonesian
Case Study, 24 Mich. J. Int’l L. 893, 894-95 (2003).
   Pauwelyn, supra note 20, at 54.
   Susan D. Franck, Empirically Evaluating Claims About Investment Treaty Arbitration, 86 N. CAROLINA L. REV. 1,
9 (2007); Robert Wai, Countering, Branding, Dealing: Using Economic and Social Rights In and around the
International Trade Regime, 14 Eur. J. Int'l L. 35, 42 (2003).
   SCHNEIDERMAN, supra note 26, at 4.
   See, eg., Ernst-Ulrich Petersmann, ‘How to Reform the UN System? Constitutionalism, International Law, and
International Organizations’ (1997) 10 Leiden J. Int’l L. 421, 427 (1997); John H. Jackson, Restructuring the GATT
System 94-100 (1990); (both who argue in favor of institutional rules to reduce a power-oriented approach).
   Koskenniemi, supra, note 3 at 7.

socio-political or cultural context.36 Nevertheless, as IIAs continue to be subject to the capture
of investor interests, investment arbitration has often resulted in decisions that disproportionately
weigh the interests of investors over other interests.

For example, recent investment arbitrations have touched upon an array of public interest issues
including environmental or health issues, privatization of public services, revaluations of a
national currency, preservation of historic or culturally valuable sites, and the use of affirmative
action programs.37 The intersection of public interest issues with investment issues has resulted
in arbitral tribunals incorporating these issues into the scope of their jurisdiction. At the same
time, states, which have tried to curtail the activities of foreign investors, in response to political
pressures from their nationals alleging violations of the public interest, have been chastised by
tribunals for allowing politics to affect their actions.38

Arbitral tribunals have also invoked a decidedly investor-friendly approach in determining the
outcome of several investor-state disputes that touch upon public interest issues. Thus, in a
dispute in which Mexican authorities denied the investor a renewal of a permit needed to operate
a hazardous waste landfill site, at least in part because of environmental concerns, the tribunal
held that regulatory administrative actions are not per se excluded from the scope of an IIA,
“even if they are beneficial to society as a whole”.39 Tribunals have also accorded greater
weight to foreign investors’ interests under the rationale that foreign investors cannot participate
in the democratic processes that create the state regulation which affects its investment.40
Consequently, tribunals have found that it may be reasonable for a state’s nationals to bear a
greater burden in the public interest than a foreigner.41

Some tribunals have also sought to evaluate the purpose or necessity of a state measure which
affects an investor or investment.42 This has led to arbitral tribunals second-guessing state
measures which were derived through democratic means.43 In addition, because the impact of
the state measure on the investor often weighs heavily in their analysis, tribunals have found that
state measures are not reasonable if the state could have employed alternative means of

   Ibironke T. Odumosu, The Law and Politics of Engaging Resistance in Investment Dispute Settlement, 32 and 34
   See Barnali Choudhury, Recapturing Public Power: Is Investment Arbitration’s Engagement of the Public Interest
Contributing to the Democratic Deficit?, 41 VAND. J. TRANSNAT’L L. 775 (2008); HOWARD MANN, INTERNATIONAL
   See, eg., Técnicas Medioambientales Tecmed, S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2
(May 29, 2003) at para. 129-37 [hereinafter Tecmed]; Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania,
ICSID Case No. ARB/05/22 (July 24, 2008) at para. 500, 544, 698.
   Tecmed, supra note 38, at para. 121. See also Cia del Desarollo de Santa Elena SA v. Republic of Costa Rica,
ICSID Case no. ARB/96/1, Award of the Tribunal (Feb. 17, 2000) at para. 71-72 (environmental measures, “no
matter how laudable and beneficial to society as a whole” are similar to other expropriatory measure).
   Azurix v. Argentine Republic, ICSID Case No. ARB/01/12 (14 July 2006), para. 310; Tecmed, supra note 38, at
paras. 121-122.
   See, eg., Tecmed, supra note 39; CMS Gas Transmission Company v. Argentine Republic, ICSID Case No.
ARB/01/8, 44 ILM 1205 (2005) [hereinafter CMS]
   See generally Steven P. Croley & John H. Jackson, WTO Dispute Procedures, Standard of Review and Defence to
National Governments, 90 Am. J. Int’l. L. 193 (1996).

achieving their public interest goal.44 For example, in the CMS dispute, in which the tribunal
evaluated Argentina’s actions following a financial crisis, the tribunal found that Argentina’s
actions to maintain public order in the wake of the crisis were not necessary as the measures
adopted by Argentina were not the only steps available to it.45

Interpreting investment law without due regard for its socio-political context and with the
influence of investor interests has accordingly hampered states’ ability to regulate in the public
interest. Arbitral decisions have effectively negated state regulatory activities designed to
protect public order,46 the right to water,47 and environment-related goals.48 Some investment
arbitrations have also had a “chilling effect” on states’ regulatory capacity.49 The threat of
multimillion dollar damage awards arising from investment arbitrations has discouraged states
from enacting regulations that pit public interest objectives against the interests of foreign
investors.50 For example, both the Canadian and Indonesian governments withdrew legislation
designed for the protection of its nationals in response to the threat of investment arbitration.51

The attempt to depoliticize investment arbitration has thus constrained states’ regulatory
intervention powers, suggesting the demise of embedded liberalism.52 The grand ‘bargain’
struck in the post-World War II trade era that guaranteed state’s ability to engage in regulatory
intervention as a means of maintaining its political ability to liberalize does not function within
the sphere of international investment law.53 Instead, by overlooking the legitimate social

   For example, in Tecmed, the tribunal held that determining whether a state’s measures were proportional to the
protection of the public interest and the protection of foreign investment should be assessed by taking into account
the significance of the impact on the investment. Tecmed, supra note 38, at para. 122.
   CMS, supra note 42, at para. 315-331.
   Argentina’s attempts to protect public order arising from the financial crisis it suffered has led to it facing a string
of investment arbitrations, and multimillion dollar damage awards with many more arbitrations still pending.
   For example, water disputes have resulted in damage awards against the governments of Argentina in Azurix,
supra note 37 and Compañiá de Aguas del Aconquija S.A. and Vivendi Universal v. Argentine Republic, ICSID Case
No. ARB/97/3, Award of Tribunal 20 August 2007. Many other water disputes are still pending.
   See, for eg., Santa Elena, supra note 40; Tecmed, supra note 38; Metalclad Corporation v. the United Mexican
States, ICSID Case No. ARB(AF)/97/1, Award of the Tribunal (Aug. 30, 2000).
   United Nations Commission on Human Rights, Human Rights, Trade and Investment, Report of the High
Commissioner for Human Rights, U.N. Doc. E/CN.4/Sub.2/2003/9, (July 2, 2003) at para. 35; UNCTAD, World
Investment Report 2003, 111 (2003) .
   Thomas W. Wälde, Investment Arbitration Under The Energy Charter Treaty - From Dispute Settlement to Treaty
Implementation (1998) at 6, online:; Wai, supra
note 31, at 68-69 (There is evidence that debate in Canada on some matters of social policy now operates in the
shadow of Chapter 11); SCHNEIDERMAN, supra note 26, at 71.
   Ethyl Corporation v. Canada (1997),; Howard Mann,
Private Rights, Pubic Problems: A Guide to NAFTA’s Controversial Chapter on Investor Rights (2001) 73; Gross,
supra note 30, at 894-95.
   For an overview of the concept of embedded liberalism see John Ruggie, International Regimes, Transactions,
and Change: Embedded Liberalism in the Postwar Economic Order, 36 International Organization, 379 (1982).
Ruggie’s work also draws from Karl Polanyi’s idea of the double movement. See KARL POLANYI, THE GREAT
   For a discussion of embedded liberalism within the WTO see Joel P. Trachtman, Legal Aspects of a Poverty
Agenda at the WTO: Trade Law and Global Apartheid, 6 J. Int’l Econ. L. 3, 8-9 (2003); Andrew T. F. Lang,
Reconstructing Embedded Liberalism: John Gerard Ruggie and Constructivist Approaches to the Study of the
International Trade Regime, 9 J. Int’l Econ. L. 81, 85-89 (2006); Jeffrey L. Dunoff, Rethinking International Trade,
19 U. Pa. J. Int’l Econ. L. 347, 351, 371-724 (1998).

purpose of the modern international economic order, in favour only of the power element,
international investment law poses an unduly threat to a state’s regulatory autonomy.54

In effect, insulating economic from political power has transformed international investment law
into a type of supranational law. States must accept the outcomes of investment arbitrations even
if they contradict national regulations derived through a democratic process and at the same time,
the decisions can deeply affect intrinsically held national values of the host state.55 Investment
law is thus seen as possessing a superior authority than that of national law, which allows it to
circumvent political debate. 56 Investment values are, accordingly, placed into a sphere which
can override other values but which cannot, themselves, be touched.

Reliance on law alone is consequently not enough to transform investment agreements and
investment arbitration from their essentially political nature.57 As a commentator has observed,
the idea of overcoming politics by adhering to certain fixed values is bound to fail because
reference to those values itself is immensely and intensely political.58 In the case of IIAs, and
investment arbitration, adhering to law as a means of surmounting politics is not successful as
the values in IIAs bear the taint of the exercise of power and investor interests.

Instead, because IIAs are political acts, they should be responsive to the interests of all the
constituents they affect. This means investor interests along with the interests of the public must
be represented within the framework of international investment law. As this is a political
process, IIAs require more, not less, politics.

III. Reintroducing Politics into IIAs

After decades of attempting to remove politics from IIAs and the resolution of investor-state
disputes as a means of facilitating liberalization, reintroducing greater politics into the mix might
at first glance appear antithetical to the goals of liberalization. However, with the risks posed by
the capture of the agreements to investor interests, the agreements’ threats to states’ regulatory
autonomy and the displacement of investor interests to an arena beyond the control of the
domestic democratic process, the international investment order has begun to suffer from a
legitimacy deficit. International investment agreements’ survival as an effective tool for
investment liberalization is therefore dependent on garnering the political support of those that it
affects the most: the public.

   Ruggie, supra note 53, at 198 and 201. Ruggie notes that the international economic order is determined by a
fusion of power and legitimate social purpose, both of which fuse together to project political authority into the
international system. Id.
   Markus Krajewski, Democratic Governance as an Emerging principle of International Economic Law, Working
Paper No. 14/08, 5 (2008).
   Jeffrey L. Dunoff, Constitutional Conceits: The WTO's ‘Constitution’ and the Discipline of International Law, 17
Eur. J. Int'l L. 647, 662-63 (2006).
   Pauwelyn, supra note 20, at 54; David Schneiderman, Investment Rules and the New Constitutionalism, 25 Law &
Soc. Inquiry 757, 783 (2000).
   Jan Klabbers, Constitutionalism Lite, 1 Int'l Org. L. Rev. 31, 54 (2004).

A.       A Deliberative Democratic Approach to Incorporating Politics into IIAs

The original aim of depoliticizing IIAs was to remove constraints on states’ ability to liberalize.
In essence, technocrats determined the mechanisms that would improve general economic
welfare, without the voice of protectionist interests, in an effort to “save the people from
themselves”. At the same time, reliance on technocrats insulated the economic system from the
political voice and interests of the people that were being saved. Reintroducing politics into IIAs
may thus require no more than conferring on the public a role in ‘saving themselves’.

IIAs and investment arbitration accordingly need to seek ways of introducing a deliberative
democratic approach to politics within the investment regime.59 Provision for public
participation, scrutiny, debate and contestation ought to become fundamental elements of the
formulation of IIAs and in the resolution of investment arbitrations. In short, those affected by
the norms and decisions of international investment law, particularly the public, must be given an
opportunity to have a meaningful say in the creation and application of those norms and

For example, the voice of more than technocrats can be encouraged in the formulation of IIAs by
using a more inclusive approach to investment treaty negotiations.61 In the face of a breakdown
of the embedded liberalism model, the “club model” of treaty negotiations, wherein economic
technocrats dominate investment treaty negotiations to the exclusion of the public and elected
representatives from other branches in the government, needs to be reformulated.62 The
investment treaty process should provide for a notice and comment process in which both the
public and government officials outside the investment department are informed of ongoing
treaty negotiations and given an opportunity to provide their views on related issues.
Technocrats can also seek guidance on public interest issues, which the investment treaty might
implicate, by consulting with government officials in specialized departments, such as
environment or labor departments.

Similarly, public participation, scrutiny, debate, and contestation can be encouraged within
investment arbitration by providing for greater transparency within the process itself. For
example, notice of the disputes, the pleadings, the schedule of the arbitration, procedural orders,
and the final award should all be made publicly available. Public participation, through the
provision for amicus curiae or by allowing the public access to the oral hearings of the dispute,
should also be provided for.63 Investment arbitration should also seek the voice of experts, well

   For an overview of deliberative politics see Jurgen Habermas, Deliberative Politics in DAVID ESTLUND, ED.,
   Dunoff, supra note 56, at 674. See also HABERMAS, supra note 59.
   Robert Howse, From Politics to Technocracy-And Back Again: The Fate of the Multilateral Trading Regime, 96
Am. J. Int’l L. 94,114 (2002).
   Id. See also generally Robert O. Keohane & Joseph S. Nye, The Club Model of Multilateral Cooperation and the
World Trade Organization: Problems of Democratic Legitimacy, in ROGER B. PORTER, PIERRE SAUVE, ARVIND
   For an overview of the benefits of amicus as a form of public participation, see Choudhury, supra note 37, at 814.

versed in public interest issues, in cases where the investment issues intersect with these types of
issues. 64

The importance of greater transparency within investment arbitration has already been
recognized by several arbitral institutions, including the ICSID65 and UNCITRAL,66 and the
NAFTA Free Trade Commission.67 Notably, the ICSID rules have been revised to promote
greater public participation and to facilitate the involvement of amicus curiae.68 Similar
initiatives have also been adopted within the context of NAFTA disputes.69 Nevertheless,
investment arbitrations run under other arbitral institutions, such as the ICC or the London Court
of International Arbitration, continue to emphasize confidentiality in arbitral proceedings.70

B.      Using Politics to Legitimize IIA Outcomes

In addition to a deliberative politics approach to the creation and application of IIAs and
investment arbitration, legitimizing the international investment framework also requires that
states retain sufficient regulatory autonomy that allows for the creation of policies that serve the
interests of their constituents. Thus, the sovereignty constraint a state voluntarily imposes upon
itself by entering into an IIA is legitimized only to the extent that the state’s role as a mediator
between market and society is preserved.71 Unduly constraints on states’ regulatory capacity
can, consequently, have the effect of delegitimizing the entire international investment regime.
At the same time, routine deference to state regulations in investment arbitration risks states
masking protectionism goals as regulations. A balance must therefore be struck between the use
of investment arbitration to ferret out protectionist measures and the state’s right to policy
autonomy. Can politics be used to discern the correct balance between these two objectives?

One commentator has argued that claims alleging state breaches of international trade obligations
should be dismissed if the regulation in question “reflects a deeply embedded value,” which is
supported by a majority of the population. He argues that democracy can be used to legitimize
the outcome of international trade disputes, if the government bears the burden of any ensuing
trade distortions.72 Adapted to the international investment context, this approach suggests that

   For example, in Thailand Cigarettes, a GATT panel requested the World Health Organization to provide an expert
report on the health issues in the dispute. See Thailand - Restrictions on Importation of and Internal Taxes on
Cigarettes, WT/DS10/R (Oct. 5, 1990) GATT B.I.S.D. (37th Supp.) at para. 52.
   See, eg., ICSID, Rules of Procedure for Arbitration Proceedings (As Amended and Effective April 10, 2006).
   CIEL, UN Body Supports Transparency in New Arbitration Rules (3 July 2008),
   NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions (July 31, 2001),
available at; Statement of the Free Trade Commission on Non-
Disputing Party Participation (Oct. 7, 2003), available at .
   ICSID Convention, Regulation and Rules (as Amended and Effective April 10, 2006), Art. 48(4) and Rule 32.
   For example, several NAFTA hearings have been opened to the public. See Choudhury, supra note 37, at 812.
   See, eg., ICC Arbitration Rules, Art. 1, 20(7) and 21(3),; LCIA Arbitration Rules, Art.
19.4, 30.1, 30.2, and 30.3,
   Ruggie, supra note 53, at 208.
   Jeffery Atik, Identifying Antidemocratic Outcomes: Authenticity, Self-Sacrifice, and International Trade, 19 U.
PA. J. INT'L ECON. L. 229, 234, 261 (1998).

majoritarian political will and the values of the state can be used to retain states’ regulatory
space, albeit at a cost. In the alternative, evidence of a regulation that embodies the political will
and the values of the state may be used by arbitrators in determining the appropriateness of the
compensation owed to the investor.

The success in using politics to delineate regulatory capacity, however, is dependent on states not
masking protectionist intent within the ambit of values supported by the political will. As a
result, the authenticity of the values sought to be protected must be discerned.73 Often this can
be shown through documentation of the importance of the value to the states’ nationals that
precedes or follows the enactment of the regulation in question.74 For example, in an investment
arbitration impinging on issues of culture, Canada ought to be able to evidence its history of
encouraging Canadian culture and the numerous threats to its cultural industries. Similarly, in an
arbitration involving challenges to regulations addressing the historical wrongs of apartheid,
South Africa should be able to document its cultural and historical need for affirmative action
programs.75 In other cases, proof of the authenticity of a state’s value may require evidence that
adoption of the regulation does not have a causal link to any protectionist purposes.76 Thus, in
S.D. Myers, the tribunal rightly found in favor of the investor, although the regulation in question
limited the state’s regulatory capacity in the area of environmental protection, because the
regulation was found to be enacted for the predominant purpose of protecting the states’
nationals rather than to serve environmental goals.77

In part, this use of political will as a means of legitimizing international disputes stems from the
European Union’s approach in the aftermath of the EC Hormones dispute.78 In Hormones, the
WTO Appellate Body determined that the European Union’s regulations were contrary to its
WTO obligations.79 However, in the wake of mounting political pressure,80 the European Union,
nevertheless, decided to retain the contested regulations and remunerated the successful parties
for their claimed losses.81 Similarly, in the investment context, states that face an adverse

   For example, the Appellate Body observed that the documentation that preceded or accompanied the European
Union’s ban on hormone-treated beef evidenced the depth and extent of the consumer anxiety regarding the quality
and drug-free nature of available meat. See Appellate Body Report, European Communities--Measures Concerning
Meat and Meat Products (Hormones), WT/DS26/AB/R, para. 245 (Jan. 16, 1998) [hereinafter EC Hormones].
   Note that in an ongoing investment arbitration, Italian investors are challenging South Africa laws aimed at
redressing the historical, social and economic inequalities faced by the Black community in South Africa during the
apartheid regime, claiming that a provision which requires a forced partial divestiture in mining companies to
historically disadvantaged South Africans is an expropriation, a denial of national treatment, and a denial of fair and
equitable treatment. See Piero Foresti, Laura De Carli, and Others v. Republic of South Africa, ICSID Case No.
   Donald H. Regan, Judicial Review of Member-State Regulation of Trade within a Federal or Quasi-Federal
System: Protectionism and Balancing, Da Capo, 99 Mich. L. Rev. 1853, 1884 (2001).
   S.D. Myers, Inc. v. Government of Canada, Partial Award (13 November 2000) at para. 61-62.
   EC Hormones, supra note 74.
   As European Union Agricultural Commissioner Franz Fischler noted: “[a]ll surveys show that European
Consumers don’t want to buy hormone-treated meat”. See EU Official Signals Continuation of Ban on Hormone-
Treated Meat, Inside U.S. Trade, 8 (Dec. 8, 1995).
   For an overview of the European Union’s non-compliance with the WTO Appellate Body ruling in EC Hormones,
see Isis Amelia Rose Sien, Beefing Up The Hormones Dispute: Problems in Compliance and Viable Compromise
Alternatives, 95 GEO. L.J. 565, 570-73 (2007).

investment arbitral award can decide to retain the contested regulation, if it serves the values of
the majority, after compensating the plaintiff investor. Alternatively, states can argue that the
compensation owed to the investor should be discounted to reflect the political will and values
reflected in the regulation at question.

Nevertheless, these approaches may not fully reinstate states’ regulatory authority. First, unlike
in the WTO, states that compensate one plaintiff investor may still face additional arbitrations
from similarly situated investors because of the lack of institutionalization of investment
arbitration. Second, using politics to retain a states’ regulatory space is an option only available
to states that can afford this practice. Developing countries, that need to retain their regulatory
role perhaps even more than developed states, may not be able to pay the costs necessary to
retain a regulation which has been found to violate a state’s investment treaty obligations. In
those instances, states may need to argue in favor of having the total compensation owed to the
investor being reduced by an amount that reflects the national values embodied in the regulation.

Politics can also be used to retain states’ regulatory capacity by using national courts to review
investment arbitral awards to ensure that they comply with public policy. In particular, this
approach can assuage countermajoritarian criticisms associated with investment arbitration since
the process involves a judiciary, acting alone, to restrain popular will.82 By adopting a narrow
definition of public policy – such as “a genuine and sufficiently serious threat to one of the
fundamental interests of society”83 – national court review of the award can ensure that
investment arbitral awards do not compromise states regulatory initiatives by vacating the
portions of those awards that compromise one of the fundamental interests of society. Even for
those investment arbitral awards that do not permit national court review, a public policy
requirement can be incorporated when the party seeks enforcement of the award in a national
court.84 This approach ensures that even if investment arbitration cannot protect regulatory
initiatives needed for the preservation of fundamental societal interests, review by domestic
courts can “correct” the failure to do so.

Finally, politics can also be used as an ex ante device for ensuring regulatory space, rather than
an ex post tool. That is, states may need to seek to legitimize the scope of the IIA prior to the
formulation of the agreement rather than after the investment arbitration decision. For example,
states can use political responses to investment arbitration decisions as a means of defining the
ambit of proposed or future IIAs. Thus, citizen protests in water-related arbitrations in several
South American and African states have caused other states to carve-out water issues from the
scope of IIAs.85 The government of Canada has also eliminated several public interest issues,

   Barry Friedman, The History of the Countermajoritarian Difficulty Part One: The Road to Judicial Supremacy, 73
N.Y.U. L. Rev. 333, 353 (1998).
   This is the definition adopted by the European Court of Justice and the WTO’s General Agreement on Trade in
Services. See Office of the United Nations High Commissioner for Human Rights, Human Rights and World Trade
Agreements - Using General Exception Clauses To Protect Human Rights HR/Pub/05/5 (2005) 10.
   Edward Balbin, Mark Kantor & Michael Nolan, Limits to Enforcement of ICSID Awards, 23 J. Int’l. Arb.1, 5-9
(2006) (noting French courts have recognized public policy as part of the framework within which ICSID awards are
   See, eg., The Annex of the Treaty Between the Government of the United States of America and the Government
of the People's Republic of the Congo Concerning the Reciprocal Encouragement and Protection of Investment

including health and culture, from the scope of future IIAs, in part, because of public opposition
to the inclusion of these sensitive issues in prior IIAs.86 More radically, political pressure
resulting from the threat of IIAs to states’ regulatory capacity has caused Bolivia to withdraw
from IIAs altogether, while Ecuador is threatening to follow a similar course.87 In effect, by
eliminating particular issues from the scope of IIAs, states ensure that domestic regulatory space
is preserved, at the minimum, for these issues of national importance.


Overcoming politics entirely in IIAs and investment arbitration is neither possible nor desirable.
International investment law reflects a bidirectional flow between law and politics, both of which
are essential to the legitimacy of the system.88 On the one hand, reliance on law provides
rationality and efficiency for the system and provides a pre-commitment strategy that lessens the
agreements’ capture to protectionist interests. On the other hand, politics reengages the broader
context of investment disputes and provides a meaningful voice for those affected by the
outcomes arising out of IIAs. Both law and politics are thus necessary for the proper functioning
of the international investment regime.

However, modern international investment law is already a highly legalized regime. The goal of
investment arbitration is based on a system of objective decision-making in which the leakage of
politics is resisted at all costs. Nevertheless, because of the bidirectional nature of law and
politics, a highly legalized system can only be legitimized with the input of more, not less,
politics. For international investment law, legitimacy requires the introduction of greater
deliberative politics, in the form of increased participation, scrutiny and debate, and a sufficient
role for state regulatory autonomy that protects the interests of the public at large. In the end, it
is only by reorienting international investment law towards the use of more politics that it will
achieve the proper balance between law and politics.

   See for example Agreement between Canada and the Republic of Peru for the Protection and Promotion of
Investments (2007), Art. 10(1)(a) and 10(6). The threat of investment arbitrations to Canada’s regulatory space led to
citizen groups bringing an action to overturn the North American Free Trade Agreement. See Council of Canadians
v. Canada (Attorney General), 2006 CanLII 40222 (ON C.A.).
   Anne van Aaken, Perils of Success? The Case of International Investment Protection, 9 Eur. Bus. Org. Rev. 1, 24-
25 (2008).
   Pauwelyn, supra note 21, at 16. See also Christian Reus-Smit, The Politics of International Law in CHRISTIAN
REUS-SMIT, ED., THE POLITICS OF INTERNATIONAL LAW 14 (2004) (arguing that there is a mutually constitutive
relationship between politics and law).


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