The Political Economy of the Investment Treaty Regime The Political Economy of the Investment Treaty Regime Jonathan Bonnitcha Lauge N Skovgaard Poulsen Michael Waibel Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © Jonathan Bonnitcha, Lauge N Skovgaard Poulsen, and Michael Waibel 2017 The moral rights of the authors have been asserted First Edition published in 2017 Impression: All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence or under terms agreed with the appropriate reprographics rights organization Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America British Library Cataloguing in Publication Data Data available Library of Congress Control Number: 2016962495 ISBN 978–0–19–871954–0 (hbk.) 978–0–19–871955–7 (pbk.) Printed and bound by CPI Group (UK) Ltd, Croydon, CR0 4YY Links to third party websites are provided by Oxford in good faith and for information only Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work OUP CORRECTED PROOF – FINAL, 27/6/2017, SPi ■ PREFACE In 2007, the German city of Hamburg allowed a Swedish energy company to place a large coal-fired power plant on the banks of the Elbe river The company, Vattenfall, began construction of this power plant; however, against the background of growing opposition among civil society groups and local politicians, the urban planning agency decided to impose significant restrictions on the plant’s water usage in return for final approval The measures were costly, but according to local authorities all companies operating along the river were subject to them, and they complied with European and German law In March 2009, Vattenfall challenged the decision based on the 1991 Energy Charter Treaty (ECT) The treaty gave Vattenfall extensive protections against a broad range of state measures and was backed up by a powerful dispute settlement mechanism: investment treaty arbitration The ECT allowed Vattenfall to take Germany directly to international arbitration Here, three private arbitrators could hear the dispute and potentially award significant damages to the investor Vattenfall claimed the measures amounted to indirect expropriation and unfair treatment and asked for more than US$1.5 billion plus arbitration costs and interest The arbitration enraged non-governmental organizations (NGOs) and German politicians The deputy environment minister said it was ‘unprecedented how we are being pilloried just for implementing German and EU laws’ (Müller quoted in Knauer 2009) Had Germany lost the arbitration and failed to comply with the tribunal’s award, however, Vattenfall could have enforced the award against Germany’s commercial assets around the world Also, Germany has signed dozens of bilateral investment treaties (BITs) since 1959, and German companies have increasingly relied on the treaties to resolve disputes with foreign states Refusing to comply with an arbitral award would question Germany’s continued commitment to the investment treaty regime In March 2011, the parties settled Hamburg lowered the environmental requirements on the power plant in exchange for Vattenfall dropping the arbitration and German court proceedings (Verheyen 2012) In 2017, the European Court of Justice found that the original decision to authorize construction of the power plant breached EU law because it was not supported by a sufficiently comprehensive environmental impact assessment In 2012, Vattenfall filed a second arbitration against Germany, also based on the ECT This time Vattenfall asked for US$6 billion, and the subject of the dispute was Germany’s decision to phase out nuclear power after the 2011 nuclear disaster at Fukushima in Japan As this book goes to press, the arbitration remains pending, but its political fallout was clear: NGOs, newspapers, and vi PREFACE politicians across Europe were outraged that multinational corporations could bypass domestic courts and use a little-known treaty to foil Germany’s phase-out from nuclear power, or at least make it a very costly reform The two Vattenfall arbitrations have been part of a broader trend Since the early 2000s, foreign investors have increasingly relied on the global network of more than 3000 investment treaties to file international arbitrations against states It is impossible to say with accuracy just how many arbitrations investors have filed, as some investment treaties allow disputes to be adjudicated in confidence However, by 2016, we knew of more than 700 arbitrations against almost 100 states, at a rate of more than 50 arbitrations annually in the last five years Although these figures are low compared to litigation in domestic courts, they are high compared to other international law regimes In the World Trade Organization (WTO), for instance, its 164 member states filed less than 15 disputes annually in 2014 and 2015 As to the substance of the disputes, investors have used the treaties to ask for compensation for a very wide range of government conduct, including taxation, changes to the pricing of key utilities, public health, environmental and financial regulation, and much more This has made investment treaty arbitration highly controversial Developing countries have been subject to the clear majority of arbitrations thus far, and some have attempted to renegotiate their treaties on more favourable terms A few have decided to go further and terminate their treaties Unilateral exit is difficult, however, as many treaties include ‘survival clauses’ that ensure that treaty protections remain in force for investments made prior to termination Sometimes these clauses can ‘lock in’ treaty protections for up to twenty years In developed states, as well, investment treaty arbitration has become a salient topic because of cases such as Vattenfall In 2014, growing public discontent led the European Commission to hold a public online hearing about its plans to include investment treaty arbitration in the Transatlantic Trade and Investment Partnership (TTIP) Of the responses, 97% opposed investment treaty arbitration, as almost 150,000 European citizens agreed with NGOs that this mechanism did not belong in TTIP or, many argued, any other international agreement Yet, despite the mounting criticisms, only a few states have decided to cancel their treaties altogether, and states around the world continue to negotiate treaties allowing foreign investors to file arbitrations based on farreaching substantive protections Investment treaties are here to stay This raises important political, economic, and legal questions What are the costs and benefits of investment treaties for investors, states, and other stakeholders? Are they critical instruments to promote economic and political development, or are they simply a subsidy to already powerful multinationals? Is it a good idea for private arbitrators to be able to review state regulation and award compensation to foreign investors? And why did states sign these treaties in the first place? This book tries to provide the answers ■ ACKNOWLEDGEMENTS The idea for this book was born out of a workshop that Lauge Poulsen and Michael Waibel hosted at the London School of Economics in April 2012 In writing this book over the last four years, we accumulated debts to many academic colleagues, policy-makers, and our students at Cambridge, LSE, UCL, and UNSW who generously contributed their time and expertise We are very grateful for their help Of course, we are solely responsible for any remaining errors For comments on draft chapters we are grateful to participants at the ILAP seminar at UCL, as well as to Lorand Bartels, Markus Burgstaller, Jacob Eisler, Yoram Haftel, Jean Ho, Matthew Hodgson, Steffen Hindelang, Roland Kläger, Andreas Kulick, Nikos Lavranos, William Magnusson, Ola Mestad, Federica Paddeu, Sergio Puig, Dávid Pusztai, Pedro Saffi, Stephan Schill, Andrew Sanger, Esmé Shirlow, Taylor St John, Todd Tucker, Valentina Vadi, Ingo Venzke, Pierre-Hughes Verdier, André von Walter, Jorge Viñuales, Yanhui Wu and Rumiana Yotova Emma Aisbett, John Bell, Peter Harris, Donald Rakestraw, Diana Rosert, Jay Sexton, Rajesh Ramloll, and Veronika Fikfak were generous with their time to discuss different aspects of our analyses Wolfgang Alschner, Joachim Pohl, and David Gaukrodger at the OECD, Sergio Puig, and Zoe Williams kindly shared their data Margherita Cornaglia, Anne-Christine Barthelemy, Damien Charlotin, Hannah Dixie, Christina Gort, Emilija Marcinkeviciute, and Veena Srirangam-Nadhamuni provided excellent research assistance, and Nicholas Turner assisted with compiling the index For financial support, we thank The British Academy (Small Grants Scheme SLA–U632, Lauge Poulsen and Michael Waibel), and The Leverhulme Trust (Prize PLP-2014-133, Michael Waibel) We have been most fortunate in our editors at Oxford University Press We thank Adam Swallow and Aimee Wright for believing in this project from the beginning, and to Katie Bishop and Aravind Kannankara for their great skill and patience in bringing it to conclusion We are also grateful for the support of John Louth and Merel Alstein viii ACKNOWLEDGEMENTS We dedicate this book to our children—Alasdair, Kai, Johan, and Sonia—all of whom were born while we were working on this book So far, they seem to be coping very well without worrying about the political economy of the investment treaty regime Jonathan Bonnitcha Lauge Poulsen Michael Waibel Sydney, London, and Cambridge November 2016 OUP CORRECTED PROOF – FINAL, 16/6/2017, SPi ■ TABLE OF CONTENTS LIST OF FIGURES LIST OF TABLES LIST OF AGREEMENTS LIST OF DECISIONS The Investment Treaty Regime in Context xi xiii xv xxiii Foreign Investment: Economic and Legal Foundations 33 Investment Treaty Arbitration 59 Standards of Investment Protection 93 The Microeconomics of Investment Treaties 127 Investment Treaties, Foreign Investment, and Development 155 Politics of Investment Treaties in Developed Countries 181 Politics of Investment Treaties in Developing Countries 207 Legitimacy and Governance Challenges 233 BIBLIOGRAPHY 261 315 INDEX .. .The Political Economy of the Investment Treaty Regime The Political Economy of the Investment Treaty Regime Jonathan Bonnitcha Lauge N Skovgaard Poulsen... China–Japan–Korea Trilateral Investment Agreement, Agreement among the Government of Japan, the Government of the Republic of Korea, and the Government of the People’s Republic of China for the Promotion,... between the Government of the Arab Republic of Egypt and the Government of the State of Qatar for the Reciprocal Promotion and Protection of Investments, 12 February 1999 230, 251 Energy Charter Treaty,