Conceptualizing change in the international investment ... - SSRN

Conceptualizing change in the international investment regime complex Amy Janzwood1

Prepared for the International Studies Association (ISA) Annual Convention, San Francisco, 4-7 April 2018

Abstract Dozens of countries are reviewing their extant international investment agreement commitments, fueling the global debate about the future of investment protection in trade and investment agreements. Although the rate of new international investment agreements has slowed, intra-developed country agreement negotiations are on the rise. This paper contributes to the nascent literature on conceptualizing change in the international investment regime complex. I first outline the contours of state-led reform efforts to show they are procedural and incremental in nature, rather than substantive and transformative. I then argue we can understand the incremental evolution of the international investment regime complex through the lens of political legitimacy. Political legitimacy is not a static condition and its requirements change over time. The politicization of international investment agreements and the expansion of the community to whom legitimacy is owed create space for new legitimacy requirements for the regime complex. However, the ability of states to fulfill these requirements is heavily mediated by the existing social structure and institutionalized norms of the regime complex.

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Amy Janzwood is a Ph.D. candidate in Political Science and Environmental Studies at the University of Toronto and a Research Associate at the Munk School’s Environmental Governance Lab.

Electronic copy available at: https://ssrn.com/abstract=3214724

I. Introduction In October of 2016, the Belgian county of Wallonia threw the negotiations for the Comprehensive Economic Trade Agreement (CETA) into chaos by refusing to sign the agreement. Wallonia’s primary concern with CETA was the deal’s potential constraints on regulatory autonomy through the investor-state dispute provisions. Wallonia opposed the deal despite the fact the European Commission had tried to quietly re-write the investment chapter to include the new Investment Court System (ICS) to appease concerns about the legitimacy of the agreement and the international investment regime complex. The European Union (EU) decided to go forward with the ratification process while it awaits a legal opinion – submitted by Belgium (Kingdom of Belgium, 2017) – on the compatibility of the ICS with the European Treaties to the Court of Justice of the European Union (Hardt 2017). This case is the most recent in a global debate about the future of investment protection in trade and investment agreements, and dozens of countries are reviewing their extant international investment agreement commitments. This case also throws up an interesting puzzle: why do developed countries with wellestablished legal systems continue to sign agreements with investor-state dispute with each other, given the substantial concerns about the legitimacy of the regime complex? In addressing this puzzle, I first outline the contours of state-led efforts to reform to illustrate that we are seeing incremental and procedural change rather than transformational and substantive change in the international investment regime complex. In other words, the vast majority of developed countries have sought to balance competing interests – protecting regulatory space and foreign investment – by tweaking their model international investment agreements or introducing incremental processbased reforms. I then outline a two-step argument that explains this trend. In the first step, I identify the self-reinforcing dynamics of the arbitral epistemic community as a structural barrier to transformational and substantive change within the regime complex. I suggest this epistemic community has a unique form of authority and that states have bestowed them with political legitimacy through the development of thousands of international trade and investment agreements. In the second step, I suggest that changing political legitimacy requirements leads to reform within investment regime complex. I highlight how these state-led efforts have given way to procedural, rather than substantive change efforts given the social structure and institutionalized norms of the regime complex. This paper develops a model of change for international investment regime complex and thus contributes to the nascent literature on conceptualizing change in the trade and investment regime. This paper draws on experiences from developed countries, as mega-regional agreements have arguably attracted the most civil society participation and contention about the legitimacy of investor-state arbitration and the international investment regime complex. The international investment regime complex Similar to Meunier and Morin (2017), I describe the governance of international investment as a regime complex.2 A regime complex is “an array of partially overlapping 2

Meunier and Morin (2017) treat use the term “trade and investment complex.” While the trade and investment regimes are intimately connected and it has become the norm for trade agreements to include

1 Electronic copy available at: https://ssrn.com/abstract=3214724

and nonhierarchical institutions governing a particular issue-area” (Raustalia and Victor 2004). The investment regime complex involves a body of international arbitration law, a network of bilateral, regional and multilateral agreements that provide for investment arbitration, sets of rules for international arbitration (The International Centre for Settlement of Investment Disputes [ICSID] and United Nations Commission on International Trade Law [UNCITRAL]), international organizations like the World Trade Organization (WTO) and the United Nations Conference on Trade and Development (UNCTAD), and a transnational community of arbitrators. International investment law and arbitration has undergone significant changes since its infancy in the post WWII era (see for example Pauwelyn 2014a; 2014b; Miles 2013; Johnson and Gimblett 2012; Vandevelde 2010). At present, foreign investors are protected through a dense network of international treaties and a set of international legal principles like most-favoured nation, national treatment, fair and equitable treatment and full protection and security (see for example Salacuse and Sullivan 2009, 112). These norms are embedded in a vast and ever growing network of international investment agreements (IIA) – since 1959, there are almost 2400 bilateral investment treaties (BITs) and 300 other treaties include investment provisions in force (Investment Policy Hub 2018). The 1990s saw the fastest rate of growth and over 1400 BITs were negotiated between 1989 and 2000, compared to fewer than 200 concluded between 1959 and 1982 (UNCTAD 2015; Jandhyala et al. 2011). As Jandhyala et al. (2011) document, BIT negotiations have slowed after 2001. Most BITs are signed between developed and developing countries. This is because international investment agreements were developed by industrialized capital exporting countries to protect their nationals and companies abroad, singularly in newly decolonized countries. However, in recent years there has been a sharp increase in BITs between countries from the Global South (see Poulsen 2010). The North American Free Trade Agreement (NAFTA) was the first time a developed country, Canada, was party to investor-state dispute settlement (ISDS) (Gantz 2016, 6). Investor-state arbitration was also included in the International Energy Charter of 1994, and in several BITs between developed democracies in Europe (de Mestral 2015, 6). Developed countries are increasingly signing investment protection agreements with each other, and in megaregional trade agreements like CETA, Transatlantic Trade and Investment Partnership (TTIP) – the fate of which remains uncertain – and the Trans-Pacific Partnership (TPP). The international investment regime complex has arguably been most effective at providing compensation for investors. Countries have been taken to arbitration tribunals at an unprecedented rate. Since 2008 there have been 316 ISDS cases, more than in the nearly two decades prior combined (Allee and Lugg 2016). A few major players – namely the United States – bring most of the cases under a few agreements like NAFTA, the Energy Charter Treaty, and a handful of BITs (Van Harten 2015; European Commission 2015). Developed countries have been often been caught off guard when arbitration is used by foreign investors in their own borders (e.g., Bonnitcha et al. 2017). For example, as Mark Clodfelter, a senior U.S. State Department official at time of NAFTA’s signing reflected, the parties “took a very big step into the unknown when they signed onto Chapter 11” (cited in Gantz 2016, 9). And the domestic backlash to ISDS in and ISDS provision, I focus primarily on the investment arbitration mechanism itself and the institutions that support it, thus I use the term international investment regime complex.


recent mega-regional agreements has taken countries by surprise. For example, EU Commissioner for trade, Commissioner Cecilia Malmström, noted her surprise that ISDS received the most concern of any issue in the TTIP negotiations (cited in Pelc 2017, 561). The increase in ISDS cases against developed countries has spurred significant debate about the legitimacy3 of the system and led to reforms, which I explore below. II. Mapping changes in the investment regime complex Countries are increasingly responding to concerns about their international investment agreement networks. Countries typically have two options: they can exit the system by withdrawing from ICSID and terminating all agreements, or they can engage in reform by re-negotiating agreements, developing new model treaties, or drafting treaties with more stringency (see St. John 2018, 239).4 Several countries – Cuba, Nicaragua, Venezuela, Ecuador, Australia, India, Indonesia and South Africa – have made declarative statements along “exit” lines but only Bolivia, Ecuador, Venezuela and South Africa “remain committed to repudiating ISA [investor-state arbitration]” (Trakman and Musayelyan 2016, 96). Notably no developed country has made a sustained effort to exit the system. The closest example was Australia when the government announced in 2011 that it would not include ISDS provisions in future agreements. However, after a change of government in 2014, Australia backed away from its “exit” stance, preferring instead to assess the need for investor-state arbitration on a case-by-case basis (Funce 2015, 7-8). Instead of exiting the system, it is much more common for countries to “engage” with the regime complex, or review and renegotiate their agreements or develop new model treaties. Since 2012, over 100 countries have or are currently undertaking a review of their extant international investment agreement commitments (UNCTAD 2015, xi). Countries can also renegotiate existing treaties – there have been approximately 200 renegotiations between 1986 and 2010, with a sharp increase in renegotiations beginning in the mid 2000s (Broude et al. 2018). Countries can develop new model BITs – templates or framework for the agreement – with modified provisions to better balance the rights of states and investors. Since 2012, at least sixty countries have developed or are developing new model IIAs (UNCTAD 2016, 14). Notable reforms of IIAs in developed countries include those undertaken by Norway (2015), the United States (2004; 2012) and Canada (2004; 2012). More generally, the broader institutional architecture, evidenced positions of UNCTAD, the Organisation for Economic Cooperation and Development (OECD) and the World Bank, favors incremental change (Berge 2017, 136). As Peinhardt and Wellhausen (2006, 527) summarize, it thus appears that the “backlash against ISDS has taken the form of recalibration rather than rejection.” While we see the general trend is to engage in reform, little effort has been made to take stock of the types of reforms that are being made. I divide reform efforts into two categories: (i) procedural change or changes affecting the processes by which arbitration is conducted and (ii) substantive change or changes affecting the outputs or performance of the regime. While these categories are not necessarily mutually exclusive, and procedural change may lead in some cases to substantive changes, I use them as starting 3

See Appendix 1 for a summary of the academic debates about the legitimacy of the investment regime complex. 4 St. Thomas (2018) includes interpretive statements and renegotiation of treaties as “exit” options, while I consider them to be indicators of states willing to engage with the regime complex.


points. I begin by reviewing procedural issues on democratic participation, transparency, and the independence of arbitrators. I then overview three substantive approaches, those that seek explicitly to change the outcomes of the regime complex: (i) post-hoc Notes of Interpretation or clarifications for agreement provisions, (ii) more careful drafting, and (iii) the use of safeguards like exceptions and carve-outs. I draw particular focus on the case of CETA and the ICS as it is seen as the most significant effort to bolster the legitimacy of the regime complex. Procedural changes in the investment regime complex The nature of participation in the investment regime complex has not significantly changed since inclusion of amicus curiae briefs by third parties in arbitral proceedings. The first time this was successfully done was the Methanex case brought under NAFTA in 1999 (Levine 2011, 209). In 2006, the ICSID amended its Arbitration Rules to allow for the inclusion of amicus briefs (see Saravanan and Subramanian 2016). After reviewing how tribunals have allowed non-governmental organizations (NGOs) to participate in arbitrations through written submissions, Levine suggests the rationale for their participation “has been more procedural than substantive” (ibid. 212). More over, the impact of amicus briefs on case outcomes is not clear (De Brabandere 2011). While amicus curiae briefs are not limited by definition to written submissions, this has the practice in investment disputes to date. There has been considerable activity within the regime complex on the issue of transparency. Arguably, there is an emerging norm around transparency in investor-state disputes (Schill 2014; Bianchi and Peters 2013). In 2001, the NAFTA parties agreed to issue Notes of Interpretation to address, among other things, transparency proceedings on publication of documents, recognition of amicus submissions, and opening hearings to the public (de Mestral and Vanhonnaeker 2016, 3). Additionally, both Canada – through the 2004 Model Foreign Investment Protection and Promotion Agreement (FIPA) – and the United States – through the Model BIT in 2004 – strengthened their transparency proceedings along these lines (ibid. 5). The ICSID Arbitration Rules were modified in 2006 to increase transparency although this was largely only if the parties consented (e.g., awards published or open hearings) (ICSID 2016). In 2014, changes to the UNCITRAL Arbitration Rules came into effect through the Mauritius Convention on Transparency (UNCITRAL 2014). These changes are similar to ICSID and the 2004 U.S. Model BIT (European Commission 2015). The new UNCITRAL rules are extremely limited in application – they only apply to treaties concluded after April 2014 (unless the parties agree to their application) and only if the parties do not opt out (Schill 2014; Leathley and Paez 2015). Thus while there is a shift towards openness, it is an incremental one (Johnson and Bernasconi-Osteralder 2013, 7). Notably, recent empirical work on transparency by Hafner-Burton et al. (2017) casts doubt on the substantive outcomes of these procedural changes. Lastly, only very recently have states addressed the issue of arbitrator independence. Notably tribunals and arbitrator challenges concerning their independence and conflict of interest have been brought forward about NAFTA, although they have not been addressed (de Mestral and Vanhonnaeker 2016). The appointment process is partially addressed in Canada’s Model FIPA, introducing a code of conduct for


arbitrators that must be agreed upon by the parties (ibid., 7). The most changes have been enacted through the ICS in CETA, a point to which I will return. Substantive changes in the investment regime complex In terms of substantive changes, three approaches are of note. First, states can add legally binding interpretive notes on substantive provisions in their IIAs. In response to concern about the expansive interpretation of the minimum standard of treatment, the NAFTA parties developed Notes of Interpretation in 2001 (de Mestral and Vanhonnaeker 2016, 13). These notes sought to clarify only one provision, Article 1105, and there is debate about whether it limited the flexibility of interpretation (de Mestral and Vanhonnaeker 2016; Johnson and Razbaeva 2014). Some have even suggested that the Notes of Interpretation worsened the legitimacy crisis (see de Mestral and Vanhonnaeker 2016, 18). A second approach – one utilized only recently – involves more careful drafting of particular IIA provisions. For example, the China-Australia Free Trade Agreement (ChAFTA) – which entered into force in 2015 – does not provide a minimum standard of treatment, limiting what can be brought under an investor-state dispute (Korzun 2017, 388). In the case of the United States, after the 2002 Trade Promotion Authority (TPA) (or fast track authority) was enacted, the United States-Singapore free trade agreement (FTA) adjusted the scope of indirect expropriation provisions and clarified the fair and equitable treatment (FET) provision. Notably, the United States was unwilling to depart from the 2002 TPA language in order to make more substantive changes (Gantz 2016). A more careful approach has also been taken to the FET and indirect expropriation provisions in the 2011 Investment Protocol between Australia and New Zealand, and the 2011 Japan-India Economic Partnership Agreement. However, legal commentators suggest that based on previous experience, at least in the Canadian case – one of the most experienced countries in responding to investor-state disputes – it appears unlikely that these drafting changes will successfully avoid challenges to a government’s right to regulate. This is because there is significant room for arbitrators to interpret these provisions and because corporate strategies in bringing IIAs are changing (Côté 2016a, 19; Pelc 2017).5 States can take a third approach, including safeguards that range from preambular language to carve-outs. The right to regulate is most commonly safeguarded through general exceptions (Korzun 2017, 373). General exceptions are provisions that “reserve for the state to adopt and enforce measures necessary for the protection of legitimate public welfare objectives, such as human life, health, the environment, or public morals” (ibid., 389). For example, the U.S. Model BIT includes the right to regulate on environmental protection (Korzun 2017, 388). The Canadian Model FIPA includes a rare general exception for a modified GATT Article-XX – that protects human, or plant life or health – that applies to the entire model treaty (Sabanogullari 2015). General exceptions do not encourage tribunals to balance competing objectives between investment and noninvestment concerns but rather “directs the tribunal to balance specified objectives in determining whether a given breach is excused on the basis of the general exception clause” (Spears 2011, 287). In other words, the tribunal still has a significant authority to 5

Pelc (2017, 580) argues that investors are incentivized to bring weak investor-state cases in order to “temper” a country’s “regulatory ambitions.”


interpret provisions on a case-by-case basis. In an arbitration tribunal, states have found it difficult to prove that the measure in question is necessary for public policy (Korzun 2017, 392). More substantively, carve-outs are used to exclude a subject, sector or country from a chapter or article of the treaty (ibid., 395). The most recent and controversial carve-out was for tobacco in the TPP after the Philip Morris case against Australia. Finally, non-precluded measures similarly provide regulatory states for the state but through annexes or lists of measures to which the treaty will not apply (ibid., 396). In sum, these measures, particularly ones that have the potential to protect a government’s right to regulate, are used fairly infrequently, and remain largely untested (Côté 2016a, 21; see also Sabanogullari 2015). For example, Tienhaara and Tucker (2016, 279) find that in the treaties with investment chapters between 2005 and 2015 (n=257), 83 percent do not have regulatory expropriation safeguards. According to a recent empirical study by Broude et al. (2016) – drawing on a data set of 196 renegotiated BITs – most states have not recalibrated BITs to preserve state regulatory space. The ICS and the evolving investment regime complex Arguably the most significant changes to the regime complex have occurred through the CETA and EU-Vietnam FTA (re)negotiations with the hurried adoption of the ICS. The Investor Court System was notionally born out of consultation on TTIP but appears to have been more or less unilaterally imposed on Vietnam and Canada (Mortensen 2017; Meunier and Morin 2017). The ICS goes some way to address concerns about the investment regime complex. Two procedural changes are of note. First, the CETA Joint Committee, rather than the disputing parties, selects the tribunal members, thus addressing concerns about the independence of arbitrators (Puccio and Harte 2017). Moreover, tribunal members are publicly appointed judges, not private arbitrators. Second, the ICS, similar to WTO’s dispute settlement body, has an appellate body that can review appeals. While it is unclear how the appeals procedure will occur/be rolled out, this reform represents a significant procedural change (Diependaele et al. 2017, 7). Other procedural innovations in CETA include provisions to prevent forum shopping and more expeditious rejection of frivolous claims (Puccio and Harte 2017). While CETA was the first treaty to incorporate UNCITRAL Transparency Rules, unlike the proposed TTIP, CETA does not allow third-party intervention (T&E 2016). In terms of more substantive claims, progress has been less clear. Like other recent agreements, the treaty pre-amble re-affirms the right to regulate. While the preamble language is not legally binding, Article 8.9 reaffirms a “balance” between right to regulate and obligations towards investors. However, this provision is not a carve-out, which is considered to be a more substantial protection (T&E 2016, 2; see also Tietje and Crow 2017). And while the treatment of indirect expropriation does include a carve-out, it applies only to measures that do not “appear manifestly excessive,” which has been criticized by civil society groups (T&E 2016, 3). Notably, unlike the exception in Canada’s FIPA, the exceptions in CETA only apply to some sections of the investment chapter. CETA also attempts to enhance legal predictability by clarifying the expropriation and FET provisions (Sabanogullari 2015). However, CETA does not significantly change FET but rather, reaffirms investors’ frustration of “legitimate expectations” (Puccio


2017). While, the Joint Committee can adopt interpretations of an agreement that is binding, they have not yet done so. These concerns, and others, led to the Joint Interpretive Instrument signed by both the EU and Canada. Notably the Declaration is a political statement, and not a legally binding “interpretative declaration” like the 2001 NAFTA Notes of Interpretation (see also Van Harten 2016; TNI 2016). While there are a number of procedural improvements in the proposed ICS, many elements of the regime complex remain unchanged. While it is too soon to tell how these procedural changes will affect the regime complex or its legitimacy, some argue the ICS is not “sufficient to solve the most fundamental problems” with the regime complex (Diependaele et al. 2017, 16). Others similarly argue that the novelty of the ICS is only at surface level given the constraints of the system (Meunier and Morin 2017; Levesque 2016). Many have pointed to shortcomings with the current reforms around judicial independence, procedural fairness, a balance in investor rights and responsibilities, and respect for domestic institutions (e.g., Van Harten 2016; 2017; Mertins-Kirkwood et al. 2016; Mestral and Vanhonnaeker 2016; Schneiderman 2016; Henckels 2016). Although the development of ICS is an attempt to thicken the governance of the regime complex, the approach is one that is procedural rather than substantive, and one that focuses on incremental reform, rather than more transformational change. States have undoubtedly made an effort to respond to the unintended consequences of the regime complex (though notably, over time, foreign investors have done the same, see Pelc [2017]). These changes are directly a response, public relations or otherwise, to the so called “legitimacy crisis” of the regime complex. For example, analysis of the UNCITRAL Working Group elsewhere suggests the rules were a strategic response to “‘court publicity’ for tribunals in order to legitimize their authority” (Shirlow 2016, 647). And significantly, the European Commission proposed the court explicitly to re-legitimize the ISDS system (Puccio and Harte 2017). Although the pendulum has certainly swung “toward host governments and away from unfettered investor rights,” this shift has been slow and incremental (Gantz 2017, 12). As Sauvant and Ortini (2014, 68) conclude, “recent IIAs do not seem to have engendered a much higher level of clarity and predictability; thus the meaning of most of the traditional investment protections remains controversial.” Looking at the development of the regime complex over time, we see that at key moments of reform, for example with the American and Canadian model IIAs or Obama’s renewal of trade promotion authority (formerly known as fast track negotiating authority) in 2015, more substantive reforms at various points were axed in favor of incremental and procedural change (see Gantz 2016; Mestral and Vanhonnaeker 2016). While there is no shortage of suggestions for more substantive changes (see for example Sauvant and Ortini 2014; Schill 2015; Garcia et al. 2015), powerful states have chosen only incremental reform, preferring process-based changes to transformative and substantive ones. III. Explaining incremental change in the investment regime complex There is little literature on why developed countries continue to sign IIAs (with the exception of Dür and Elsig [2015]), particularly among each other, or why they take the forms they do. As Bonnitcha et al. (2017) suggest, “research on the politics of developed countries’ investment treaty programs remains in its infancy.” Existing literature describing why developed states have changed specific provisions, or undertaken other


reform efforts, refer passingly to how states make compromises between competing interests and interest groups (e.g., Gantz 2017; Berman 2011) or learn from arbitration tribunals (de Mestral and Vanhonnaeker 2016, 17), or the importance of bureaucratic politics (Basedow 2017). While these factors no doubt shape the regime complex, we are lacking a more theoretically driven account that reflects the relationship between structure and agency, and the nature of the regime complex. Such an account is necessary if we are to understand why reform efforts have taken the direction and shape they have, and the implications for the future of the regime complex. Recent scholarly contributions on the evolution of the investment regime complex provide helpful hints for explaining change. Pauwelyn (2014a, 381) conceptualizes the regime complex as a complex adaptive system, which he describes as decentralized and emerging organically or emerging “without major constitutional moments.” These constitutive properties help explain why the system “continues to thrive and evolve,” despite being highly contested (ibid., 381). Pauwelyn thus illustrates both the durability and flexibility of the system. Recently, Meunier and Morin (2017), exploring the transformational potential of the 2009 Lisbon Treaty for the investment regime complex, conclude that actors are constrained by the “space-time continuum,” or the effect of past, present and future agreements. Both of these works imply that there is incremental adaptation or evolution in the regime complex. However, Pawuelyn’s account does not tell us much about what will cause change and under what conditions, only suggesting the regime complex is “highly sensitive to initial conditions that can be disturbed both by seismic events of major crisis and minor mutations” (2014a, 375). The mechanisms through which change is expected are underdeveloped. And while Meunier and Morin (2017) helpfully explain how the institutional framework shapes the politics of foreign investment policy in the EU, they are not looking specifically at investment regime complex reform on substantive issues related to IIAs. I build on these contributions by drawing attention to the authority of the arbitral epistemic community and the political legitimacy of the investment regime complex. The authority of the arbitral epistemic community I suggest that we can think of the community of arbitrators as an epistemic community in the traditional sense used by Ruggie (1975).6 Drawing on the work of Foucault, Ruggie (1975) defines epistemic communities as social groups composed of individuals with interrelated roles and intersubjective knowledge, which constitute reality. The central characteristic for Ruggie (1975, 570) is the shared body of consensual knowledge or “episteme” on which arbitrators draw. Ruggie again borrows from Foucault to understand an episteme as “a dominant way of looking at social reality, a set of shared symbols and references, mutual expectations and a mutual predictability of outcomes” (ibid., 569-70). The investment regime complex contains an epistemic community at its core; this understanding provides some insight into the structural barriers to reform of the regime complex. I argue that international arbitrators produce and reproduce specialized 6

I prefer Ruggie’s original and sparser conceptualization from which Haas draws. Arbitrators are not “giving policy advice” as the term is often used to connote by Haas (1992); rather, they interpret a body of legal knowledge and also reinforce it and change it.


technical knowledge and norms that shape the regime complex with self-reinforcing dynamics. It has been well documented that international arbitrators have constructed a transnational legal order. In their seminal work, Dezalay and Garth’s (1996, 10) treatment of international commercial arbitrators in Dealing in Virtue offers a historical and qualitative analysis of the emergence of international commercial arbitration, particularly how competition between predominantly European “grand old men” and predominantly American “arbitration technocrats” transformed the field. This account is consistent with recent accounts of the history of ICSID where commercial arbitrators were institutionalized by the World Bank in the 1960s in order to solve a complex problem, how to protect foreign investment from Western countries (Parra 2012; St. John 2018). World Bank elites successfully created a binding enforcement system to protect the rights of foreign investors, which was considered an exceptional development (Montt 2012, 136). Importantly, the birth of the investment arbitration has given rise to new constituencies of actors, the cadre of corporations and law firms that “dominate” the regime complex today (St. John 2018). Second, there is a general consensus in the international arbitration law community about the principles and norms on which international investment law has developed such as fair and equitable treatment, protection from expropriation and national treatment. This consensus persists, despite that fact that tribunals have provided at times conflicting interpretations. As Adler and Bernstein (2005, 296) note, “epistemes do not create uniformity of a group or community, but organize their differences around pervasive understandings of reality.” This consensus is not surprising given that arbitrators draw largely on the same background knowledge of commercial law (Sornarajah 2015, 27). More critically, Kurtz (2004, 871) suggests “[u]nderlying many recent arbitral awards is an oft-unstated and uncritical assumption of the value of investment liberalization and protection in itself.” The practice of interpretation reflects the knowledge of both individual arbitrators and collective understandings within the social group. Arbitrators interpret a body of legal knowledge and also reproduce it through norms and practices. The extent to which international arbitrators see themselves as creating law in the context of investor-state disputes is debated (Tucker 2015). However, arbitrators “arrive at their own conclusions [with…] little reference to states” (ibid., 143). Empirically, Puig (2014, 391) finds, using social network analysis, the arbitrators involved in the ICSID are “a dense network that reinforces prevailing norms and behaviours and insulates its most important members from outside influence.” This creates self-reinforcing dynamics through the reproduction of norms and practices.7 I thus use the term epistemic community to describe a deep cognitive form of institutionalization among arbitrators – that is, their roles in protecting or upholding institutionalized understandings of norms around rights of investors and the movement of capital. The term epistemic community captures the social embeddedness of knowledgebased communities. The term epistemic community can also capture “common sense” or social doxa that constituted and reproduce “dominant knowledge structures” through socialization and institutionalization (Cutler 2013, 722; see also Hafner-Burton et al. 7

Notably St. John (2018) also uses self-reinforcing dynamics to explain outcomes in the international investment regime complex but only in reference to the material incentives of arbitrators.


2012;). Like Cutler (2016), I draw attention to the role of economic elites in shaping outcomes, although her argument is about the expansion of private power and authority, rather than an argument about institutional change. I suggest that the power of the arbitration episteme and epistemic community helps explain the lack of substantive challenges to the principles that the regime complex rests. I argue that the self-reinforcing dynamics and the reproduction of knowledge and practices as structural barriers to substantive reform. However, the existence of this epistemic community alone is not sufficient to explain the absence of substantive change in the investment regime complex. Here I draw on Bernstein’s (2011) concept of political legitimacy for greater explanatory leverage. As Bernstein (2005 cited in 2011, 20) writes, political legitimacy is “the acceptance and justification of shared rule by a community.” The requirements for legitimacy thus cannot be understood apart from the actors involved and their perceptions of the political legitimacy of an actor or institution. By understanding the political community involved in the making legitimacy claims, and the social structure in which these claims are made, we can understand the relationship between authority and legitimacy (Bernstein 2011, 20). As Reus-Smit (2004, 41) writes, “all political power is deeply embedded in webs of social exchange and mutual constitution; that stable political power…ultimately rests on legitimacy; and that institutions play a crucial role in sustaining such power.” In this case, the epistemic community of arbitrators forms the social structure, and the institutionalized norms are the protection and promotion of investment. Crucially however, the legitimacy of the regime complex rests on states. States have been bestowed this legitimacy to the arbitral epistemic community over decades as they have collectively signed thousands of bilateral treaties through a largely apolitical and bureaucratic process (see for example Poulsen 2015). Thus while arbitrators derive authority from their shared episteme, importantly they are also bestowed political legitimacy by states when they sign new agreements. This bestowed legitimacy limits viability of reforms that challenge the power and knowledge structures of the epistemic community of arbitrators. Disrupting the investment regime complex? Politicization and contentious politics I suggest that changing political legitimacy requirements lead to reform within investment regime complex. Drawing on the concept of political legitimacy (Bernstein 2011), I argue these reform efforts are filtered through, interact with, and build on the social structure – formed by the epistemic community of arbitrators – and institutionalized norms of the regime complex (Figure 1). This leads to procedural, rather than substantive change. I suggest that two factors contribute to changing political legitimacy requirements: (i) politicization of the regime complex through ISDS claims (which challenges norms of the complex) and (iii) the expansion of the political community involved through the politicization of negotiations of new IIAs by civil society. I explore each in turn.

Figure 1: Model of change in the investment regime complex


To borrow an expression from Poulsen and Aisbett (2013), it is often “when the claim hits” that countries respond to the investment regime complex with reform. Recent scholarship shows that once countries are faced with ISDS cases, they are more willing to renegotiate, slow down signing, or review these agreements (Trakman and Musayelyan 2016). However, some countries are hit with a single claim and undergo significant reforms (e.g., Australia), while others are hit with many claims and undergo more moderate reforms (e.g., Canada). Variation in how states responds depends on a number of factors such as the perceived importance of FDI at home and abroad, ideological differences, state-society relations, and institutional veto points.8 ISDS claims have successfully challenged the norm of investment protection and promotion and brought to light an emerging norm about the right of governments to regulate in the public interests. Although the right to regulate has always existed in international public law (Titi forthcoming), it is through competing provisions like FET and indirect expropriation that states are now more concerned about protecting and institutionalizing the right to regulate. ISDS claims thus create an incentive within developed countries to more carefully balance investment protection and safeguarding regulation. In the parlance of Thelen and Streeck (2005), states thus ‘layer’ onto existing principles in commercial law to respond to the changing legitimacy requirements of the regime complex. At the same time, civil society has successfully politicized negotiations of megaregional IIAs like CETA, TTIP and the TPP. These new agreements change the “political opportunity structure” – the mix of opportunities and constraints external to social movement actors – and thus provide new opportunities for mobilization (e.g., Tarrow 2011). As Meunier and Morin (2017) argue, the Treaty of Lisbon consolidated authority for investment, and contributed both to the politicization of these negotiations and conditions for transnational contention around mega-regional agreements. Civil society actors were successful in breaking through the technical nature of the negotiations to politicize the issues they saw at stake. Campaigns against TTIP and CETA focused largely, but not exclusively, on ISDS and framed the agreements as a threat to democracy and the rule of law (Siles-Brügge 2018). Recently, civil society groups framed the ICS as a “poison pill” (The Monitor 2018). More generally, these campaigns deride the influence of corporate power on political and legal systems. This mobilization has effectively broadened the political community to which legitimacy is bestowed. Mobilization successfully halted the TTIP negotiations and, in part, led to the creation of the ICS to respond to the changing legitimacy requirements of the regime brought by civil society. However, the results of these campaigns remain uncertain. As Hannah (2018) suggests, the transformational potential of civil society to address the challenges of the trade and investment regime complex is mediated by the social structure in which they operate. And the success of campaigns depends in large part on how lithely the target responds. In the case of CETA and the ICS, the European Commission developed a counter-narrative about public nature of the new system that coopted the NGO narrative around the legitimacy crisis and pushed NGOs to into a more technical debate about the proposed reforms (Siles-Brügge 2018). The uncertain future of 8

Calvert (2018) studies government responses to investor-state disputes in Argentina and Ecuador and argues that ideological differences and state-society relations drive variation in state strategies.


TTIP, as well as the decentralized ratification process for CETA (and last minute deals with dissenting states like Belgium) has also changed the political opportunity structure for mobilization. While there were transatlantic campaigns against CETA and TTIP in Canada and the United States, respectively, the movement against investor-state arbitration saw the greatest traction in Europe, not least because of the unusual openness of the DG trade to civil society input (Strange 2017). Notably civil society has played an important role not just in Europe, and there is a longer history of contentious politics in global trade and investment governance on which these movements build (see Strange 2017). For example, in Australia, there was significant mobilization by civil society around the government’s approach to IIAs particularly after the Philip Morris brought the infamous plain packaging suit in 2011 (see Nottage 2016). While more substantive reform options gained traction, a change in government reduced the campaign’s momentum. And in the United States, there was a robust civil society campaign against the TPA and the TPP, although these efforts were largely seen as unsuccessful in effecting substantive reforms (see Gantz 2016). These reform efforts failed, not because the epistemic community necessarily lobbied against them but because the structural power of the epistemic community has shaped the terms of the range of possible outcomes that are politically feasible. While this explanation cannot account for all outcomes of reform efforts, and more carefully comparative empirical work is needed, this explanation can account for the general dynamics of reform in the regime complex. IV. Conclusion To return to the initial puzzle – why do developed countries continue to sign agreements with each other with investor-state dispute given the substantial concerns about the legitimacy of the regime complex – I argue that states see their interventions and reform efforts as a way to mediate the risks and costs associated with investor-state arbitration. Yet, as I highlight, these reforms are incremental and procedural (and untested) rather than transformational and substantive. I suggest that we can understand the incremental evolution of the international investment regime complex through the lens of political legitimacy. Legitimacy is not a static condition and the requirements for political legitimacy change over time. The politicization of IIAs and the expansion of the community to whom legitimacy is owed expand the legitimacy requirements for the regime complex. However, these requirements are heavily mediated by the existing social structure and institutionalized norms of the regime complex. While the most significant change to the regime complex to date has arguably been the introduction of the ICS, it remains doubtful that this new system will address more substantive elements of the regime complex given the structural barriers in place, even if it does become multilateralized, as the EU intends. The current state of research on the politics of investor-state arbitration reform is quite underdeveloped, and there are several promising avenues for future research that flow from this paper. First, more empirical work is needed to compare cases of attempted reforms. This research should trace the dynamics that shape the reform process and the outcomes. This research would highlight how the policy dynamics unfold in areas characterized by entrenched knowledge structures. Second, more work is needed to understand how governments and non-state actors perceive the norm of the right to


regulate and changing legitimacy requirements of the regime. More research is needed to understand how these actors come to understand their interests as the regime complex evolves. Relatedly, more research is needed on the relationships between legitimacy demands by civil society, how the demands are framed, and the outcomes of the reform efforts. In particular, comparative work is helpful in understanding the role of civil society mobilization in a variety of contexts. In sum, with the increasing politicization of the international investment regime, more research is needed to fully understand the implications of this trend for the future of the regime complex.


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