The small Belgian province of Wallonia was the focus of international attention in October 2016 when it briefly blocked the signature of a trade agreement between Canada and the European Union (CETA), in part because of the agreement’s mechanism for settling disputes between foreign investors and host countries — investor-state dispute settlement (ISDS). Such provisions are also highly controversial in recent trade negotiations between the EU and the United States, and in the Trans-Pacific Partnership.
With this controversy, international investment rules have crept out of the shadows, moving from being an arcane topic discussed primarily among lawyers to one that prompts public protests in the streets. The latest chapter in the IRPP’s trade volume, written by Andrew Newcombe (University of Victoria, Faculty of Law), helps put this debate in context, arguing that foreign investment provisions are valuable, and that Canada should continue to play a leadership role in developing rules that are supported by effective ISDS.
Advocates of ISDS say that by respecting due process and property rights and requiring minimum standards of treatment, investment treaties can protect and promote foreign direct investment as well as the rule of law and good governance. But in recent years, as the number of international investment agreements and ISDS claims grows (see figure), criticism of the international investment regime has increased. Critics are concerned about many issues, including that ISDS tribunals have the power to review host country laws and regulations and question the domestic policy decisions taken by sovereign governments to protect human health and the environment (although they cannot directly order changes). Moreover, these tribunals can order countries to pay damages to foreign investors if commitments are violated.
Newcombe provides an informative overview of the international legal framework governing foreign investment, focusing on Canada’s approach. He examines the main critiques of the investment treaty regime and reviews the principal attempts to address these concerns over the past decade, in Canada and the United States. Now that these issues have acquired a greater public profile, efforts to recalibrate the international investment agreement regime are gaining momentum. Clearly international investment law is in an acute period of contestation and transformation. What can and should Canada do?
Continue to play a leadership role
As Newcombe points out, investment treaty policy has evolved significantly over the past decade, and Canada has been at the forefront of these developments. He argues that Canada should continue to play a leadership role, and make improvements to its investment agreements that balance the protection of foreign investment with domestic regulatory flexibility. He sees the updated investment chapter in CETA as a model to build on in Canada’s future investment agreements (the amendments include an Investment Court System and other provisions designed to affirm the right of host countries to regulate in the public interest, such as the joint interpretative instrument).
Globally, Canada is the sixth most frequent respondent state to ISDS claims (mainly under NAFTA’s chapter 11), while Canadian investors have made the fifth highest number of claims. Canada has 33 foreign investment promotion and protection agreements in force (and 19 more are either concluded, signed or in negotiation). Canadian direct investment abroad is valued at just over $1 trillion, of which almost 60 percent is in countries with which Canada has an international investment agreement. In Newcombe’s view, Canada’s legal counsel has generally been successful in defending Canada against questionable claims. When viewed in the context of the stock of foreign direct investment in Canada, he says, awards to date in favour of foreign investors represent a very small fraction of those investments (less than 0.025 percent). Moreover, he sees no convincing empirical evidence to demonstrate that ISDS rules have prevented Canadian policy-makers from regulating in the public interest.
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Newcombe concludes that Canada should continue to support international investment obligations backed up by ISDS. The fundamental rationale for the international investment regime, he says, is to protect investments by adhering to and enforcing international standards. Canada (together with other countries) has a systemic interest in supporting an international standard of ISDS that extends beyond any single agreement. The crux of Newcombe’s argument, which applies to CETA — and more broadly — is that Canada and other advanced economies cannot expect other countries to accept obligations in international investment agreements if they are not willing to be bound by them.
Promote a multilateral investment framework as a long-term goal
Looking ahead, he says the growth of international supply chains and the globalization of investment will require longer-term changes to the architecture of international investment law —a multilateral approach that better reflects the complex intersections between international trade and investment. The current regime — a network of over 3,500 international investment agreements — is uneven, inconsistent, inefficient, and based primarily on an outdated bilateral approach.
Canada and the EU have committed to pursue with their other trading partners the establishment of a multilateral investment tribunal and appellate mechanism to resolve foreign investment disputes. In December 2016, Canada and the EU hosted exploratory discussions on this issue. Newcombe says that although this is a positive development, it is unlikely to succeed in the short term unless it gains the support of major economic powers, such as the United States and China, which is unlikely in the near term. Thus, he says, even though a comprehensive multilateral investment framework to replace the current regime of thousands of agreements clearly would be more efficient and effective, it should be a long-term goal, not a short-term priority.
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