Investor–State Dispute Settlement Systems in Emerging Mega‐Integration Blocs

• Author: Miroslav N. Jovanović
• Date: 01 June 2017
• DOI: http://doi.org/10.1111/1467-8462.12197
• Published date: 01 June 2017

Investor–State Dispute Settlement Systems in Emerging

Mega-Integration Blocs

Miroslav N. Jovanovi

c*

Abstract

Emerging mega-integration blocs, such as the

Trans-Pacif‌ic Partnership and the Transatlan-

tic Trade and Investment Partnership, are

evolving outside of the World Trade Organiza-

tion’sinf‌luence. Their most contested features

are their investor–state dispute settlement

(ISDS) systems. This article considers basic

features of the ISDS system, the expansion in

the number of ISDS cases and the privileged

place of corporations vis-

a-vis citizens in the

law-making process. The arcane private

corporation-friendly ISDS system is beyond

reparation and it needs to be scrapped. The

existing court systems in the self-assured

democracies of Europe, North America and

Australia are suff‌icient.

1. Introduction

Emerging mega-integration blocs, such as

the Trans-Pacif‌ic Partnership (TPP) and the

Transatlantic Trade and Investment Partner-

ship (TTIP), are creating a turning point in

the global economic system by means of

their evolution outside of the inf‌luence of the

World Trade Organization (WTO). These

mega-integration deals are targeted at low-

ering remaining tariffs and at the deregula-

tion of trade in goods, services and foreign

direct investment (FDI). The promoters of

these new mega-blocs expect them to have

a profound positive impact on both the

economies of their region and those further

af‌ield (Jovanovi

c 2016).

While the WTO sets the rules for the

lion’s share of international trade, no multi-

lateral agreement on FDI exists. One of the

contested features in the emerging economic

blocs is the investor–state dispute settlement

(ISDS) system, which is s upposed to be faster

and more eff‌icient than other available

dispute settlement mec hanisms. The objective

of this article is to shed ligh t on this important

issue.

This article is structured as follows: follow-

ing this Introduction, Section 2 presents the

volume of FDI in the TPP region; Section 3

explains the basic features of the ISDS system;

Section 4 describes the agreed ISDS system

within the structure of the TPP; Section 5 sheds

light on the emerging ISDS system in the TTIP;

Section 6 reveals the variety of ISDS cases;

while Section 7 contrasts the place of citizens

and corporations in the law-making process.

Section 8 concludes that the arcane private

corporation-friendly ISDS system is beyond

reparation and it needs to be scrapped.

* Global Studies Institute, University of Geneva, 1211

Geneva 4 Switzerland; email <miroslav.jovanovic@

unige.ch>. I have benef‌ited from discussions with many

friends and colleagues, but I owe a special debt of gratitude

to Lisa Borgatti, Jelena Damnjanovi

c, Nicolas Levrat, Ross

Williams and especially to two anonymous referees. The

article was edited initially by Charles Toby Pearce. The

views expressed are my own and do not necessarily ref‌lect

the position of the organisations for which I work. I am

solely responsible for all errors and mistakes.

The Australian Economic Review, vol. 50, no. 2, pp. 152–68

°

C2017 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

Published by John Wiley & Sons Australia, Ltd

2.Foreign Direct Investment

The world’s attitude towards FDI has changed

over time. Resistance and reception have been

the alternating themes. Times of opposition

were followed by times of acceptance, liber-

alisation, facilitation and promotion, the mind-

set that we see in the world today. However,

upon the arrival of FDI, questions about its

actual impact on domestic economies and on

development come to the fore.

Transnational corporations (TNCs) invest

abroad in order to make prof‌it (at least in the

long term) from their investments. There is

nothing wrong in this behaviour because

private f‌irms exist to make prof‌it. They are

not charities. Public authorities exist to take

care of the needs of a wider society. It is for

the government to f‌ind both a line and a

connection between the needs of society and

the demands of f‌irms. This is a demanding task.

Some countries are not able to strike a balance:

Indonesia and Venezuela reversed FDI laws

and drove out foreign investors, resulting in a

negative impact on their domestic economies.

On the one hand, host countries anticipate

FDI-related gains in the form of new capital

formation, the transfer of new technology,

positive spillovers into the local economy

through supply chains, new employment, tax

receipts, as well as improved links with wider

global business networks. There is ample

evidence on the gains that FDI provides (for

example, Javorcik and Poelhekke 2016). On

the other hand, concerns and costs linked with

FDI and the local operations of TNCs are

numerous and serious as FDIs are volatile,

prof‌its may be transferred abroad instead of

being reinvested locally (transfer pricing and

tax avoidance), TNCs may request and extract

future subsidies to stay in the target location

(without prospective or continuous subsidies

that encourage TNCs to stay, they may threaten

the host government with withdrawal), trans-

ferred technologies may be incompatible with

the local economy (current literature is ambig-

uous on the effects of such linkages, especially

in the case of developing countries), TNCs may

monopolise the host country’s market (through

predatory pricing) and meddle in its politics.

The impact on the target country’s welfare

may end up being rather small and ambiguous.

This is especially concerning in the case of

developing countries that lack the local know-

how and technological capacity to absorb the

presence and operations of TNCs.

In spite of such ambiguities and uncertain-

ties, the f‌lows and stock of FDI are important in

the TPP deal and in other regions. Tables 1 and

2 present the enormous volume of FDI f‌lows in

2014 and 2015 and the stock of FDI in 2015,

respectively. Huge volumes of inward and

outward f‌lows or stocks demonstrate not only

the potential business opportunities, but also

possible conf‌licts between foreign investors

and the target country authorities. A reliable,

fair and equitable framework for the resolution

of possible disputes is essential.

Tables 1 and 2 also show how TPP countries

are intertwined through FDI, even without the

TPP-type ISDS system. The origin of FDI is

often from TPP partner countries. Foreign

production, the supply chain and linkages

through marketing networks are strong con-

necting tissues that assist in economic devel-

opment. Closing the national economy off

from FDI does not aid the creation of national

welfare (for example, North Korea). Even the

off‌icially communist Vietnam realised this and

Table 1Trans-Pacif‌ic Partnership –Foreign Direct

Investment (FDI) Flows (US$million)

FDI inflowsFDI outflows

Country2014 2015 2014 2015

Australia39.61522.2643 –16.739

Brunei568 173 382 508

Canada58.506 48.643 55.688 67.182

Chile21.231 20.176 11.803 15.513

Japan2.090 –2.250 113.595 128.654

Malaysia10.877 11.121 16.3699.899

Mexico25.675 30.2858.3048.072

New Zealand2.495–98673 214

Peru7.885 6.86196127

Singapore68.496 65.262 39.131 35.485

Vietnam9.200 11.8001.1501.100

United States106.614379.894316.549299.969

Note: Negative FDI outf‌lows mean that divestments are

greater than new investments.

Source: UNCTAD (2016b).

Jovanovi

c: Investor–State Dispute Settlement Systems153

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C2017 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research