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‘Rethinking Global Governance on Trade and Investment’ Conference: Insights on ISDS Reform Proposals

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On 31 August 2019, the Leuven Centre for Global Governance Studies, KU Leuven, organized a conference titled ‘Rethinking Global Governance on Trade and Investment: International Perspectives’ as part of the GLOBE project. The goal of the conference was to incorporate speakers from both the Global North as well as the Global South to examine the contestations and cooperation in the crucial reform processes, including a panel dedicated for investor-state dispute settlement (ISDS) reforms. The ISDS perspectives from Brazil, India, China and the EU were discussed in detail to highlight convergences and divergences in the approach for reforms. The speakers included: Dr. James Nedumpara (Centre for Trade and Investment Law, India), Mr. Henrique Choer Moraes (Mission of Brazil to the EU), Mr. Colin Brown (the European Commission), Prof. Catharine Titi (University Paris II Panthéon-Assas), and Prof. Yuwen Li (Erasmus University Rotterdam). Dr. Guillaume van der Loo (Post-doctoral researcher, GGS) chaired the panel. The introductory remarks were provided by Prof. Dr. Jan Wouters (Director, GGS; Full Professor, KU Leuven) on challenges to multilateralism in the governance of international economic order.

Currently, international investment law is fragmented in 2000+ bilateral, regional, and multilateral treaties. The dispute settlement mechanism - the ISDS system, is ­ad-hoc with arbitration as a model for dispute resolution. This system has given rise to numerous issues such as lack of consistency, predictability, and legitimacy in the governance of international investment. To address these issues, the EU has been fostering the idea of an investment court system that operates multilaterally since 2015. This idea, was concreted in 2017 when the EU proposed a conceptual framework for a Multilateral Investment Court System (MICS). It has also incorporated this system in its trade agreements with Canada, Singapore, Vietnam and Mexico. The European Court of Justice in its Opinion 1/17 has also given its consent for this incorporation. However, not everyone is on board with this framework. Unlike the approach to preserve multilateralism in international trade at the WTO, reform for international investment governance has witnessed divergent approaches by countries. The Global South countries like India, Brazil and China have pursued different strategies to resolve the gaps in the current ISDS system.

India has been a late-comer to the ISDS system. It has signed bilateral investment treaties (BITs) and has also included investment chapters in economic partnership agreements. While most of the investment disputes were settled without pursuing arbitration in the 1990s, the White Industries Ltd. v. Republic of India dispute posed a particular challenge to the Indian investment regime. One of the major allegations in the dispute was that the Indian Government did not provide a viable mechanism for litigation in the Indian judicial setup. This dispute, along with the unfolding of the 2G scam, and the retroactive tax application in the Vodafone case, paved way for India to revamp its investment treaty approach. In 2016, it released a new Model BIT with an objective to preserve public policy space with respect to areas including, compulsory licenses, income tax, and subsidies. This model does not include clauses on Fair and Equitable Treatment and Most Favoured Nation (MFN). The non-inclusion may be attributable to the White Industries Ltd. dispute where the investor invoked the ‘effective means’ provision of the India-Kuwait BIT by relying on the MFN provision of the India-Australia BIT to claim damages. But the saga does not indicate that India is unwilling. The fact that India has been granting faster approvals for foreign investments indicates that India intends to improve its framework and be an important FDI destination. It was noted that the best solution to move forward is to revamp the domestic legal system.

On the other hand, Brazil has been pursuing its sui-generis BIT-less model. Although Brazil has not signed any BIT, it still ranks as one of the top destinations for FDI in the world. Since 2015, it has negotiated Cooperation and Facilitation Investment Agreements (CFIAs) that departs from traditional features of the current system. It does not provide for an ISDS mechanism. The model is based on investment facilitation, dispute prevention, friendly regulatory framework, and state-to-state dispute settlement mechanism for consultations and arbitration. Brazil has signed 14 CFIAs with countries in Africa and Latin America. It has negotiated one with India, which has not yet been ratified. Considering investment facilitation is also one of the important discussions at the WTO currently it was highlighted that the Brazilian model provides a good alternative approach that deviates from the current system as well as proposed reforms.

China has underscored similar shortcomings in the current ISDS mechanism.  These range from the lack of appropriate correction mechanism in arbitral awards to stability, consistency, and predictability in the jurisprudence. Multilaterally, China has supported the EU’s MICS project. Bilaterally, China has been negotiating investment law through its Belt and Road Initiative (BRI). 136 countries have joined BRI by concluding MoUs or cooperation agreements with China. However, most BRI-related investment treaties belong to 1st or 2nd generation treaties. Several domestic measure such as setting up and reforming arbitration centres have taken place in the recent past. China has also promulgated a new PRC Foreign Investment Law that will go into effect in January 2020. Although China has expressed keen interest in the ISDS reforms, concerns such as whether China will be the rule-maker or a rule-taker still remains in question. 

While countries have had a different approach in pursuing ISDS reforms, they have also engaged multilaterally at the UNCITRAL through its Working Group III. The EU has claimed for this to be the best forum, considering it is a UN body that is open all the UN members and its decisions are passed through the UN General Assembly. Countries such as the EU, India, Brazil and China have been participants in the discussions. While Brazil has pushed the CFIA model, China has been accepting the idea of MICS. India has not made any submissions yet. However, the quintessential question of the multilateral aspect of the MICS project still remains in question. It may not be multilateral, but at best be plurilateral.

Reflecting on convergences and divergences between different reform proposals, two important factors must be addressed: 1) the feasibility of formulating procedural rules through MICS before agreeing upon substantive law and standards as an antecedent; 2) a multilateral system needs to be representative in character with interests of countries other than the EU that are also taken into consideration. On substantive standards, the EU believes that achieving success in this area is a long-term goal. The MICS project need not require harmonization of substantive rules as an antecedent, and a certain amount of predictability and consistency may be given through the interpretation of the Court. Moreover, the UNCITRAL discussion on MICS may act as a catalyst to also invite more members and discuss substantive standards in the future. On the aspect of higher degree of representation in the MIC, the need for this was noted. The EU believes that the UNCITRAL is the best forum to represent civil society actors as it is one of the most open and transparent forums for negotiations. On the contrary, India is not favourable to provide locus  to civil society actors such as NGOs. India believes that arbitrators could get swayed by the NGOs’ arguments, like India’s contestation of amicus briefs in the WTO dispute concerning EC – Asbestos. Therefore, divergent opinions on both aspects – feasibility and representation – were discussed upon.

The next meeting of UNCITRAL Working Group III is scheduled to take place in October 2019. Several countries have proposed different approaches. It may be interesting to witness the negotiations and what common elements of the proposals will be taken into consideration for a multilateral path forward.

This is a post by Vineet Hegde, a PhD researcher in WTO Law at the Leuven Centre for Global Governance Studies at KU Leuven, Belgium.