Increasing Host State Regulatory Flexibility in Defending Investor-State Disputes: The Evolution of U.S. Approaches from NAFTA to the TPP

• Author: David A. Gantz
• Position: Samuel M. Fegtly Professor of Law, Rogers College of Law, University of Arizona; Visiting Professor of Law, Georgetown University Law Center, Fall 2016. This article draws extensively on a paper written for a conference in Ottawa in September 2015, sponsored by the Center for International Governance Innovation (CIGI) in Ontario, 'Investor-...
• Pages: 231-259

Increasing Host State Regulatory Flexibility in

Defending Investor-State Disputes: The

Evolution of U.S. Approaches from NAFTA

to the TPP

D

AVID

A. G

ANTZ

*

Abstract

Building on the negotiation of U.S. bilateral investment treaties beginning in the

early 1980s, U.S. free trade agreements incorporating specific host-state obligations

to foreign investors and binding investor-state dispute settlement (ISDS) have been

a feature of U.S. trade and investment policy since 1992 (when the NAFTA

negotiations were concluded). Presidents Ronald Reagan, George H.W. Bush, Bill

Clinton, George W. Bush and Barack Obama have all endorsed ISDS, despite

opposition by many Democratic legislators, organized labor and environmental

groups.

Yet the content of these investment chapters shows a significant evolution from

NAFTA to the Australia-United States FTA (“AUSFTA,” without ISDS), the

United States-Chile FTA and the Singapore-United States FTA (2003) to the

Trans-Pacific Partnership (TPP) (2015). The changes have been driven largely by

the concerns of civil society and government officials over the dozens of NAFTA

investment claims filed against the NAFTA Parties. They also reflect the perceived

need for the United States and other host governments to maintain a higher level of

regulatory flexibility and discretion, particularly in such areas as protecting the

environment and maintaining public health. The United States’ Trade Promotion

Authority (TPA) legislation enacted in 2002 and 2015 also mirrors these post-

NAFTA changes. The newest iteration of the mechanism (Chapter 9 of the TPP),

should it eventually enter into force for all or most of the signatories or be

incorporated in other U.S. trade agreements such as a renegotiated NAFTA, would

thus afford host governments far more regulatory discretion than earlier agreements

such as NAFTA, along with increased transparency, making it more difficult for

foreign investors to prevail against host governments with claims of denial of “fair

and equitable treatment” and “regulatory takings.” The evolution of U.S.

sponsored investment protection provisions into a significantly more host government

friendly, regulatory friendly, process, is the principal theme of this paper.

* Samuel M. Fegtly Professor of Law, Rogers College of Law, University of Arizona;

Visiting Professor of Law, Georgetown University Law Center, Fall 2016. This article draws

extensively on a paper written for a conference in Ottawa in September 2015, sponsored by the

Center for International Governance Innovation (CIGI) in Ontario, “Investor-State Dispute

Settlement in U.S. Law, Politics and Practice: The Debate Continues.”

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232 THE INTERNATIONAL LAWYER [VOL. 50, NO. 2

I. Introduction and Historical Background

The United States was a latecomer to the negotiation and conclusion of

bilateral investment treaties (BIT). While Germany, the Netherlands, the

United Kingdom and other European nations began concluding BITs twenty

years earlier,

1

the United States did not sign the first BIT, with Panama,

until 1982,

2

with several others signed in 1983 following the completion of

the first U.S. model BIT.

3

But, unlike some of the early European BITs,

which did not include investor state dispute settlement (ISDS),

4

from the

outset the U.S. BITs incorporated (albeit in considerably different form from

more modern treaties) mandatory third party arbitration mechanisms to

resolve disputes between foreign investors and host countries.

5

Most U.S.

BITs (some forty-seven) were concluded between 1983 and 2000 by the

Reagan, George H.W. Bush and Clinton Administrations.

6

Only two, with

Uruguay and Rwanda, have been concluded since 2000.

7

The Obama

Administration has concluded none to date but is pursuing a BIT with

China.

8

It was not an accident that all U.S. BITs contained ISDS provisions. In

addition to the U.S. Government’s desire to afford greater protection for

U.S. investors in developing countries; to encourage needed investment in

the developing world; and to strengthen U.S. views that takings are

governed by international law, a significant driving force behind the United

States’ decision to abandon the formal or informal espousal process that had

been followed in recent years, particularly in Latin America in the 1970s.

1. For example, the first German BIT was concluded with Greece in 1961, with other early

BITs concluded in 1962 (Guinea), 1963 (Ceylon), 1964 (Ethiopia) and 1965 (Ecuador). See

UNCTAD I

NVESTMENT

H

UB

: G

ERMANY

, http://investmentpolicyhub.unctad.org/IIA/Coun

tryBits/78#iiaInnerMenu (last visited May 8, 2015). The Netherlands concluded agreements

with Cameroon and the Ivory Coast in 1965. See UNCTAD I

NVESTMENT

H

UB

:

N

ETHERLANDS

, http://investmentpolicyhub.unctad.org/IIA/CountryBits/148#iiaInnerMenu.

2. U.S. Bilateral Investment Treaties, U.S. D

EPT

.

OF

S

TATE

, http://www.state.gov/e/eb/ifd/bit/

117402.htm [hereinafter “US BITS”].

3. See K. Scott Gudgeon, U.S. Bilateral Investment Treaties: Comments on their Origin, Purposes,

and General Treatment Standards, 4 I

NT

’

L

T

AX

& B

US

. L

AW

. 105, 106 (1986) (discussing the

development of the model BIT).

4. See e.g., Treaty for the Promotion and Reciprocal Protection of Investments, Ger.–Ceylon,

Nov. 8, 1962 (since terminated), available at http://investmentpolicyhub.unctad.org/Download/

TreatyFile/1419.

5. See, e.g., Treaty Concerning the Treatment and Protection of Investment, Pan. – U.S., art.

VII(2), Oct. 27, 1982, available at http://www.state.gov/documents/organization/43582.pdf

(providing for arbitration under the previously agreed arbitral procedures, before the Inter-

American Arbitration Commission or other international arbitration mechanisms).

6. US BITS, supra note 2.

7. Id.

8. Toward a US-China Investment Treaty, P

ETERSEN

I

NSTITUTE FOR

I

N

’

L

E

CON

., at 3 (Feb.

2015), http://www.iie.com/publications/briefings/piieb15-1.pdf [hereinafter “Petersen-China

BIT”]; David A. Gantz, Challenges for the U.S. in Negotiating a Bit with China: Reconciling

Reciprocal Investment Protection with Policy Concerns, 31 A

RIZONA

J. I

NT

’

L

& C

OMP

. L. 203, 204

(2014) [hereinafter “Gantz–China BIT”].

THE YEAR IN REVIEW

AN ANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW