The bilateral investment treaties (BITs) of major capital-exporting states are commonly divided into first and second generations (BITs 1.0 and 2.0); the former tend to be short and much more protective of investors than state sovereignty, whereas the latter are longer and strike more of a balance between these two objectives.7 The 1994 Argentina-United States BIT exemplifies a BIT 1.0, and the 2004 and 2012 U.S. Model BITs are typical of BITs 2.0.8
Of course, not all states have followed the same trajectory, China being a case in point.9 Since different states take different historical and contemporary approaches to investment treaties, there is no neutral baseline from which to measure reforms. I take the BIT 2.0 model as the starting point for this essay, since many major powers, including the United States and China, have converged toward this model in their recent treaty practice.10
Incremental reforms involve adopting small to moderate adjustments to the BIT 2.0 model, something like BITs 2.1, 2.2, and so forth. Systemic reforms operate within the existing system of direct international claims filed by investors against states but involve larger-scale or more-structural reforms, tantamount to BITs 3.0. Paradigmatic reform does not amount to creating BITs 4.0 but, rather, shifts to a new framework altogether for resolving foreign investment disputes.
A. Loading the Language, Fixing the Frame
Before analyzing these different strategies, it is worth pausing to consider issues of language, background, and frame. My typology of incremental to paradigmatic reforms captures the scale of proposed changes, not their merits. Incremental, systemic, and paradigmatic reforms involve progressively more significant departures from the status quo, but that does not mean that more change is necessarily better. To avoid loading the language, I have refrained from using adjectives such as “transformational” and “revolutionary,” which may be imbued with positive or pejorative connotations.11
In addition, the background paradigm matters because what looks transformational within one paradigm may look traditional within another. For instance, jettisoning investor-state arbitration and reverting to domestic courts and state-to-state arbitration might look transformational within the BIT paradigm, but it is quite traditional when viewed in the broader paradigm of either how investors have been protected historically or how dispute resolution often takes place in other international fields.
Perspective also matters because what looks revolutionary to states operating within one paradigm might represent a continuation of the status quo for states operating within a different paradigm. For example, Brazil never ratified any investment treaties and is now proposing a different model of investment facilitation agreements. Having never adopted the BIT paradigm, Brazil is not seeking to revolt against it. The alternative approach it advocates, however, might be seen as a revolutionary path by states with numerous BIT commitments.
How the issue of choice is framed is also important. Consider possible visual aids that could be used to implicitly communicate different messages about the reform strategies. The triangle in figure 1, for instance, might bias the reader toward viewing systemic reform as the privileged (higher) option or the reasonable (midway) point. By contrast, the upward arrow in figure 2 might suggest that the investment treaty system is on a journey that has begun with incremental reforms but will ultimately transition through systemic and then to paradigmatic reform, with an onward and upward momentum.
Figure 1. In Favor of Systemic Reform as a Sensible Middle Ground Solution
Figure 2. In Favor of Onward and Upward Paradigmatic Reforms
The sideways arrow in figure 3 might suggest that the most significant changes often come from focusing on smaller-scale but more-achievable incremental reforms, since larger-scale reforms are less likely to be widely adopted and thus ultimately less likely to be effective. In contrast, the circle in figure 4 might suggest that investor-state arbitration amounts to a departure from the traditional approach, but that the progression of incremental, systemic, and paradigmatic reforms ultimately reverts to the traditional approach of domestic courts and state-to-state arbitration.
Figure 3. In Favor of Focusing on Achievable and Effective Reforms
Figure 4. In Favor of Focusing on Achievable and Effective Reforms
In my view, incremental, systemic, and paradigmatic reform strategies should not be understood as three points on a spectrum. Actors do not need to try incremental reforms before moving on to the others and they are not obliged to transition through systemic options to adopt paradigm-shifting approaches. Paradigmatic reforms are not necessarily the ultimate endpoint, nor are they always the same as traditional approaches. Instead, these strategies are better conceptualized as three points on a triangle in which actors can move directly from any one to any other point. There is no a priori reason for selecting which point on the triangle should have which label.
These three reform strategies are ideal types, but they are not exhaustive. Actors can adopt intermediate positions between two or more ideal types. For instance, some states might endorse semi-systemic reforms, such as by adopting an incrementally reformed model of investor-state arbitration subject to an appellate body. Or states could adopt semi-paradigmatic reforms, as Puig and Shaffer suggest, such as making the availability of international mechanisms subject to exhaustion of domestic remedies.
These reform strategies are not mutually exclusive. Actors may adopt a combination of approaches within or across different treaties, for instance, by endorsing incremental reforms for some treaties and more far-reaching reforms for others. Reform strategies may also impact upon each other. For instance, a realistic possibility of systemic reforms will increase pressure on stakeholders that are resisting change to embrace at least incremental reforms.
B. Identifying Reform Champions
At UNCITRAL, a wide range of states discussed concerns with investor-state arbitration, as detailed elsewhere.12 This section, by contrast, focuses on the handful of states that have taken positions that are consistent with championing one of the three main reform strategies. This essay takes a snapshot of an evolving process. The positions of states may well shift over time. The UNCITRAL process is also designed to encourage states to reach consensus. Accordingly, one should not view states’ current strategies as static.
First, Chile, Japan, and the Russian Federation have taken pro-investor-state arbitration positions that are consistent with incrementalism. The United States and, to a lesser extent, Mexico voiced similar sentiments at the first UNCITRAL working group meeting. But before the second meeting, Mexico agreed to an investment court in its treaty with the European Union,13 and U.S. Trade Representative Robert Lighthizer disparaged investor-state arbitration in the context of the North American Free Trade Agreement (NAFTA) negotiations.14 Perhaps because of these developments, both states adopted a more muted approach in the second working group meeting.
Incrementalists tend to downplay the severity of the existing system's problems by suggesting, for instance, that the concerns raised are merely matters of perception rather than reality (thus, Chile implored the UNCITRAL working group to fulfill its mandate “based on facts and not perceptions”15), or that the concerns about inconsistent decisions are a natural and positive consequence of the bilateral nature of investment treaties (thus, the Russian Federation argued that the ability of parties to strike particular deals is “an advantage of the system and not a disadvantage”16).
Incrementalists typically claim that any outstanding problems can be addressed adequately through targeted reforms. For example, the United States noted that problematic or inconsistent interpretations could be rectified by drafting new treaties in more detail or adopting authoritative interpretations.17 Incrementalists also warn against enacting systemic reforms that risk undermining some of the key advantages of investor-state arbitration, including neutral appointments, finality, ready enforceability of awards, and depoliticization of disputes.18
An ambiguity lies at the heart of the incrementalist camp. Some may be adopting this position for a mix of substantive and/or political reasons, such as a belief that an incrementally improved model, like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP),19 provides the best way to handle investor-state disputes or one that has been successfully defended domestically. Others may have genuine concerns about investor-state arbitration, but do not want to be rushed in the UNCITRAL process or railroaded into a court-based model about which they have misgivings.
Certain states have taken a skeptical view of some of the incrementalists’ positions, even when the latter have not endorsed any specific reforms. In that vein, Australia argued that both facts and perceptions matter because states have to be concerned with maintaining a “social license” for investor-state dispute settlement: “we are all accountable to the public and we need to [consider] public perceptions to be … fundamentally relevant to the discussion … .”20 Other countries, including Mauritius and South Africa, concurred: “Perception matters greatly for it is a basic tenet of the rule of law that justice must not only be done, it must be seen to be done.”21
Second, among those favoring systemic reform, the European Union, Canada, and Mauritius are key advocates. They would retain direct claims by investors against states on the international plane but would replace investor-state arbitration with a multilateral investment court and an appellate mechanism. These actors stress that problems like inconsistent and unpredictable treaty interpretations, and legitimacy concerns stemming from ad hoc arbitral appointments, are serious and systemic and cannot be adequately addressed through incremental changes.
For instance, the European Union argued that investment claims are based on public international law treaties and involve public law disputes in which generally worded constitutional-like clauses are applied to regulate the sovereign actions of states vis-à-vis investors.22 In similar areas of law, states have favored the establishment of permanent bodies with full-time, tenured adjudicators, such as the WTO Appellate Body and the European Court of Human Rights.23 By contrast, the ad hoc nature of investor-state arbitration raises significant concerns, including a lack of predictability and consistency, limited error correction, concerns over appointments, and costs.24
Many other states registered legitimacy concerns arising from inconsistent awards and perceptions of the existence of pro-investor and pro-state arbitrators, which they tied to the ad hoc nature of the system.25 Some states emphasized the need for systemic solutions: Argentina stated that the reforms require a “systemic” and “multilateral” approach”; China stressed the need for “integral” and “comprehensive” solutions to “systematic” problems it raised; Kenya called for “holistic” not “piecemeal” reforms; and Algeria advocated “in-depth” rather than “frivolous” changes.26 A handful seemed to endorse specific solutions, such as Morocco, which stated that “consistency can be assured by the establishment of a multilateral body” made up of a permanent court with an appellate level.27
Third, other states, most notably Brazil and South Africa, reject the legitimacy and utility of direct international claims by foreign investors against states, regardless if heard by arbitral tribunals or courts. Brazil explained that it had never ratified investment treaties because of concerns such as that investor-state arbitration imposes “discriminat[ion] against national investors who do not have the chance to resort to international arbitration and must tackle any issues within the domestic courts.”28 Similarly, South Africa decried the “exorbitant costs” for cases paid out of public budgets and noted that “[d]omestic investors cannot initiate an ISDS dispute [as this] is a privilege for foreign investors only, which raises the question of equal access to justice.”29
To these states, incremental and systemic reforms will never suffice to redress the system's problems—a paradigm shift is required. According to Brazil: “ISDS is intrinsically flawed. No reforms would be enough to redeem the system … . For us the best solution is simply throw it out of the window and use something different. And we use SSDS, state to state dispute settlement.”30 A Brazilian investment treaty policymaker elaborated:
Investment treaties are much like pre-nuptial agreements where a couple agrees to get married but is already looking ahead to the terms on which a divorce might happen. After that divorce, each party goes its separate way and is not to be seen again. I prefer to think of Brazil's investment facilitation approach as more akin to couple's counselling because we are trying to facilitate a long-term relationship that remains positive rather than envisaging a future divorce. It's a completely different approach.31
South Africa likewise argued that reforms must not simply “legitimize the current system … without any meaningful transformational results.”32 Any new mechanism must take public policy issues into account and permit much broader stakeholder participation, including by permitting standing for actors other than investors and states.33
Paradigm shifting countries thus favor replacing international claims between investors and states with alternatives. South Africa recently terminated most of its investment treaties and replaced them with domestic legislation permitting foreign investors to litigate in its domestic courts or bring mediation claims against the government. If a dispute persists, South Africa may later consent to state-to-state arbitration. Brazil has championed “investment facilitation” agreements where an ombudsman is given powers to try to resolve disputes involving foreign investors. If the dispute persists, the treaty parties consent in advance to state-to-state arbitration.
It is uncertain, however, whether Brazil or South Africa will champion these approaches in UNCITRAL. The paradigm-shifters are more united by what they stand against (the current system) than what they stand for (as they embrace a variety of alternatives). Currently, they do not appear to be coordinating to establish an integrated rival strategy.
Because these three strategies represent ideal types, not all states fit neatly within a single camp. For instance, India's 2015 Model BIT accepts investor-state arbitration but conditions it on extensive resort to domestic remedies and indicates an openness to a future appellate mechanism.34 Although India has not thus far strongly advocated its model in UNCITRAL, its approach arguably comes the closest to modeling the semi-paradigmatic reforms supported by Puig and Shaffer, whereby any international institutional mechanism—whether an international court or arbitral tribunal—may be offered as a complement to, rather than a substitute for, domestic courts, and hence as a means to strengthen the domestic rule of law.
One question to consider is why a core constituency of states has not evolved around this option. States with strong interests as capital-exporters may be reluctant to empower domestic courts in certain developing states owing to concerns about the quality and timeliness of the justice they dispense. As regards incoming investments, these states may have faith in their own domestic courts but hesitate to set up a structure in which international tribunals routinely pass judgment on the decisions of their highest courts (as this prospect may exacerbate, rather than quell, populist concerns). States that are strong capital-importers, in contrast, may lack the capacity and bargaining power to back this approach. Others may feel confident enough to assert the jurisdiction of their courts but lack the inclination to make these courts subject to international oversight.
Beyond states, various international organizations, arbitral institutions, and nonstate actors (including nongovernmental organizations (NGOs), academics, and arbitration practitioners) are aligning themselves with one or another strategy. Although no community of actors is uniform, arbitration practitioners often line up behind the incrementalist position, whereas NGOs frequently call for paradigmatic reforms. Others, like the International Centre for Settlement of Investment Disputes (ICSID), are assuming a nuanced posture, driving incremental reforms while remaining supportive of systemic changes.35
C. Strategies and Risks
Identifying the strategies and risks of different reform advocates requires assessing their best to worst options in isolation, as well as their perceptions of which option is most likely to succeed at any particular moment. The latter point is important because actors assess their options both dynamically and, as Puig and Shaffer indicate, comparatively. An actor might decide that it is rational to embrace its second-best option if it thinks its best option is unachievable and there is a genuine risk that if it does not compromise, it will be faced with its worst option. The likely approaches of key states that have yet to declare a position is another relevant consideration.
The incrementalists count many powerful actors among their number, including significant capital exporters and many arbitration practitioners. They enjoy the benefit of the status quo and can effectively stall or slow down any multilateral reform efforts. Nonetheless, they must contend with three key weaknesses: their supporters do not include all major capital exporters/importers or primarily capital-importing states; the current system has become very controversial; and the ongoing commitment of at least one key proponent of incrementalism (the United States) is uncertain.
A significant risk the incrementalists face is that by refusing to bend (that is, to countenance systemic reform in response to widespread discontent), they will exacerbate the chance that the system will break (that is, that states will abandon the system altogether). Given growing discontent with ISDS, the incrementalists cannot assume that the status quo is stable, particularly if the United States were to clearly withdraw its support for the existing system. The United States’ current rhetoric is more supportive of paradigmatic reform than incrementalism or systemic reform.36
Some incrementalists, including certain states and the arbitration industry, may not incline toward a permanent court in comparison with arbitration but are likely to prefer it vastly to the inability of investors to bring direct claims before international tribunals. If systemic reform comes to seem inevitable, these incrementalists will also have an incentive to engage more actively with the process in an effort to shape it. Thus, we should expect some incrementalists to modify their hostile stance toward systemic reforms if the risk of paradigmatic reform starts to feel possible or systemic reform appears inevitable.
Arbitral institutions typically occupy a place between supporting incremental and systemic reform. They have an interest in maintaining the existence and legitimacy of the system and preserving or improving their market share. This interest helps explain why ICSID, for instance, is engaged in improving its rules;37 in so doing, it both embraces incremental reform and incidentally lessens the case for systemic or paradigmatic reform for states that might be sitting on the fence. But ICSID also appears open to working with the systemic reformers on becoming a host institution for future investment courts,38 which would assist in ensuring that, if systemic reform transpires, it would be well placed to retain or augment its caseload rather than lose out to new or existing competitors.
2. Systemic reformers
The systemic reformers do not enjoy the inertia of the default bias, so they have to rally states in support of a new direction. They also need to build an international coalition because they cannot give effect to their reforms unilaterally. Such an endeavor is difficult because collective innovation-decisions are typically slower to be adopted than either “optional innovation-decisions” (which actors can choose to adopt or reject individually) or “authority innovation-decisions” (where decisions on adoption are made by a centralized authority and mandated for others).39 Even if a collective decision to draft a statute for a multilateral investment court is made, states would then have the individual option of whether or not to embrace that innovation.
Systemic reformers are attempting to sell their position as a sensible, middle-ground option that responds to significant concerns about the system's legitimacy without throwing the baby out with the bathwater. Unfortunately, their posture looks like too much reform to some, but too little to others.
Systemic reformers also face the problem of “horizontal hostility.”40 Movements in favor of a cause often attract both moderate and radical subgroups. Instead of the groups being bound together by the common cause, the radical group frequently proves its commitment to the cause partly by distancing itself from the moderate group.41 For instance, vegans show three times as much prejudice toward vegetarians as the other way around.42 In this situation, strong critics of the system are often particularly hostile toward those seeking to reform, rather than overthrow, the system. That attitude makes it harder for the systemic reformers to bring the paradigmatic reformers on board.
The horizontal hostility problem is manifest in the reaction of some NGOs to the European Union's proposal for a multilateral investment court. S2B, the Seattle to Brussels Network that arose after the 1999 WTO protests in Seattle to challenge what they view as the corporate-driven trade agenda of the European Union, argued that the EU proposal is a “thinly veiled effort to salvage the failing investor-state dispute settlement system by replacing it with a rebranded twin” in order to “enshrine and expand the current system of corporate privilege.”43 Similarly, the Columbia Center for Sustainable Investment declared that the proposed court “fall[s] dramatically short in addressing the most problematic aspects of the ISDS regime and in fact would serve to further expand and entrench the controversial ISDS mechanism.”44
On the other side, many members of the arbitral community are also highly critical, viewing the court proposal as more of an attack on arbitration than a savior of investor protection, and criticizing it for being “remarkably divorced from reality.”45 For instance, a prominent arbitrator, Judge Stephen M. Schwebel, explained that his “fundamental objection” to the European Union's proposal is that it would replace a system that “on any objective analysis works reasonably well” with “a system that would face substantial problems of coherence, rationalization, negotiation, ratification, establishment, functioning and financing.”46
As studies of diffusion have shown, for a proposed innovation to attain a critical mass, it is essential for a number of early adopters to become opinion leaders that preach the virtue of the new approach.47 The innovator here, the European Union, commands two mechanisms to generate support for its new approach: power and persuasion. The EU has used its negotiating power to gain agreement on bilateral investment courts with several of its treaty partners, including Canada, Mexico, Singapore, and Vietnam. Other than Canada, however, these states have not become vocal proponents of the new system, at least to date, though they may partly be waiting for the dust to settle with respect to the EU's internal legal competence.
If the European Union is able to transmit this innovation to its treaty partners only based on its power, the best it will end up with is a plurilateral investment court comprising it and those partners.48 For such a court to become truly multinational, the European Union needs to persuade some other key opinion leaders to champion the institution and advance it through their own treaty practices. This process could include favorably disposed states that have not concluded a recent treaty with the European Union, such as Morocco and Mauritius. The UNCITRAL reform debates give the European Union a platform from which to advocate for its proposal multilaterally.
A significant aspect of diffusion involves identifying opinion leaders from diverse backgrounds, as their participation enhances the likelihood of diffusion. Such transfers often occur between actors that are like each other in key ways.49 It is no surprise, then, that the innovation first spread from the European Union to Canada. To take hold multilaterally, however, opinion leaders should be engaged that are different from these states in key ways and more similar to other states from diverse regions or with diverse profiles. Thus, Singapore or Korea might be influential in establishing support for this innovation in Asia if they became opinion leaders, as might Argentina or Mexico in Latin America, or Morocco or Mauritius in Africa.
The investment court and appellate body proposal will not become a “movement” unless and until it moves without the European Union.50 If the systemic reformers do not succeed in getting a critical mass of states on board with their proposal, they risk creating an even more fragmented system.
3. Paradigmatic reformers
Paradigmatic reformers do not benefit from a status quo bias and they need to develop a greater appetite for reform than the systemic reformers because of the degree of change they favor. Still, unlike the systemic reformers, the paradigmatic reformers often have the advantage of proposing approaches that do not require collective agreement. States can decide individually to withdraw from their investment treaties and pursue other options. Doing so en masse helps to reduce any stigma and potential (or perceived) loss of competitiveness associated with such moves, but it is not essential, as is a degree of multilateral coordination for the court proposal. Entering into new treaties requires collective agreement but passing legislation does not.
The biggest quandary for paradigmatic reform champions concerns whether to support reforms that are more moderate than their ideal preference. States like South Africa,51 along with many NGOs, identify both procedural and substantive problems with the system that they believe require a fundamental overhaul. Should they support the procedural reforms pushed by the systemic reformers, which go partway to addressing their concerns, knowing that, if they do, this route might neutralize some of those problems with the system in a way that reinforces its existence and undermines the likelihood of more revolutionary reforms?
Their answer to this dilemma likely depends on two factors: how much they consider the problems to be primarily ones of substance or procedure, and how strongly they assess the prospects of paradigmatic reform. If they locate the problems at a more substantive level, they are more likely to conclude that procedural reforms alone would be insufficient and vice versa. (The systemic reformists, of course, argue that fixing the process will help prevent problematic interpretations of substantive obligations.) If paradigmatic reform seems unlikely at least any time soon, systemic reform might seem like a wise option.
4. Yet-to-declare states
A majority of states are playing a wait-and-see game for now, taking time to consider the issues and formulate their approaches. Many states that remain in the “undecided” camp probably view themselves as price-takers rather than price-makers, which gives them an incentive to remain open to different approaches so that they have the flexibility to adopt one set of reforms in treaties with one powerful actor and another with a different powerful actor.
That characterization does not, however, hold true for China, which has a marked potential to be a price-maker in its treaty negotiations and to lend crucial weight to one or more of the reform strategies. This conclusion is reinforced by China's need to upgrade its investment treaties with Belt and Road Initiative states.52 Although China maintains investment treaties with most of these states, most of them are early generation investment treaties that provide for limited protections and restricted recourse to arbitration. China is likely to seek to upgrade these treaties, though it has also announced its plans to adopt other mechanisms along this route, such as new institutions to deal with commercial disputes.53
China could well become a semi-systemic reformer, seeking to retain investment treaty arbitration with incremental improvements but subject to an appellate body. The Chinese experience with the WTO Appellate Body has been positive. China has benefited from being able to know and work with a fairly consistent and predictable body of jurisprudence. It has developed a cadre of international lawyers in government and private practice that are used to dealing with WTO disputes and are now also engaged on investment treaty issues.54 A Chinese judge would be likely to be appointed to any new institution, whereas the nation is seriously underrepresented in terms of the appointment of its nationals as arbitrators. Yet China may well be hesitant about totally replacing investor arbitration given its typically cautious and incremental approach to international lawmaking and adjudication.
At UNCITRAL, China has expressed concern that the existing corrective mechanisms (annulment and judicial review) were “limited” when it came to ensuring the important values of consistency and correctness.55 Such mechanisms not only did not guarantee predictability and certainty, but sometimes made the situation worse. Moreover, the system's current corrective mechanisms were “defective” and did not provide a “systematic and effective … institutionalized correction arrangement.”56 China thus recommended that UNCITRAL study how to ensure the availability of an effective corrective mechanism, including by looking at whether a “new correction mechanism” should be adopted and, if so, how it should be constructed.57
In addition, China stressed that the “fundamental difference” between investment and commercial arbitration was that the former deals with the government, whereas the latter concerns private rights only.58 China worried that international commercial arbitrators might lack an understanding of how governments operate. Investment arbitrators do not need to be “pro-government,” China indicated, pointing to its own dual interests as a capital importer and exporter. Rather, they must “protect the legitimate rights and interests of investors in strict compliance with treaties.”59 China therefore concluded that investment arbitrators should be required to have a “background in public international law or legal knowledge regarding investment treaties.”60