Towards Convergence of Trade and Investment Law? A Right to Take Prudential Measures For the Preservation of Financial Stability

• Author: Antoine P. Martin - Bryan Mercurio
• Position: Dr. Antoine P. Martin is a Senior Research Associate focusing on international trade, investment and financial services at The Chinese University of Hong Kong, Faculty of Law. - Bryan Mercurio is Professor, Associate Dean (Research) and Vice-Chancellor's Outstanding Fellow of the Faculty of Law, The Chinese University of Hong Kong.
• Pages: 555-586

Towards a Convergence of Trade and Investment

Law? A Right to Take Prudential Measures for

the Preservation of Financial Stability

A

NTOINE

P. M

ARTIN

*

AND

B

RYAN

M

ERCURIO

**

I. Introduction

The legal and political-economic literature has widely debated whether

and to what extent States should be allowed to take “prudential” regulatory

measures in order to safeguard their financial systemic interests from serious

threats of financial crisis. In the main, most commentators agree that States

should have the right to take prudential measures in derogation of their

trade commitments. But disagreements have emerged over the conditions,

necessity, timing, and length of such measures because there has been

virtually no case law applicable to the subject matter.

1

A recent dispute

involving financial services at the World Trade Organization (WTO)

provides an opportunity for this article to contribute to the doctrinal debate

on prudential measures by drawing a parallel between trade and investment

perspectives on the matter.

2

Indeed, investment cases relating to regulatory

measures taken in a “state of necessity” following the Argentinean economic

crisis of 2001 have briefly touched upon prudential measures in investment

tribunals.

3

* Dr. Antoine P. Martin is a Senior Research Associate focusing on international trade,

investment and financial services at The Chinese University of Hong Kong, Faculty of Law.

** Bryan Mercurio is Professor, Associate Dean (Research) and Vice-Chancellor’s

Outstanding Fellow of the Faculty of Law, The Chinese University of Hong Kong.

1. For background information on this debate, see IMF, Reference Note on Trade in Financial

Services, (Sept. 2010); Sydney J. Key, The Doha Round and Financial Services Negotiations

(2003); Inu Barbee & Simon Lester, Financial Services in the TTIP: Making the Prudential

Exception Work, 45 G

EO

. J. I

NT

’

L

L. 953 (2014); Thomas Cottier & Markus Krajewski, What

Role for Non-Discrimination and Prudential Standards in International Law?, 13 J. I

NT

’

L

E

CON

. L.

817, 817-835 (2010).

2. Appellate Body Report, Argentina – Measures Relating to Trade in Goods and Services, WTO

Doc. WT/DS453/AB/R (adopted Apr. 14, 2016) [hereinafter Argentina – Financial Services

Appellate Body Report]; Panel Report, Argentina – Measures Relating to Trade in Goods and Services,

WTO Doc. WT/DS453/R (adopted Sept. 30, 2015) [hereinafter Argentina – Financial Services

Panel Report].

3. See Urbaser S.A. v. Argentine Republic, ARB/07/26, Award (ICSID 2016); Cont’l Cas. Co.

v. Argentine Republic, ARB/03/9, Award (ICSID 2008); Sempra Energy Int’l v. Argentine

Republic, ARB/02/16, Award (ICSID 2007); Enron Corp. Ponderosa Assets, LP v. Argentine

Republic, ARB/01/03, Award (ICSID 2007); LG&E Energy Corp. v. Argentine Republic, ARB/

02/1, Decision on Liability (ICSID 2006); CMS Gas Transmission Co. v. Argentine Republic,

ARB/01/8, Award (ICSID 2005).

THE INTERNATIONAL LAWYER

A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW

554 THE INTERNATIONAL LAWYER [VOL. 51, NO. 3

While this article is not the first to focus on prudential measures, the

literature to date has largely focused on trade-related aspects and only lightly

touched upon the important contribution made by investment tribunals.

4

Moreover, no article to date discusses the potential convergence between

WTO case law and investment arbitral law on the issue of measures taken

for prudential reasons relating to economic duress. In this regard, this

article fills a gap in the literature by assessing and, in many respects, linking

the contribution of the recent WTO jurisprudence and the relevant

investment cases pertaining to the notion of prudential measures aimed at

ensuring the security and predictability of their financial system.

The article proceeds as follows: Part I provides background on prudential

measures in the GATS before reviewing the text and doctrinal debate on the

effectiveness of prudential measures.

Part II examines the recent and first WTO dispute which raises and

discusses a range of trade-related issues regarding prudential measures.

Argentina – Measures Relating to Trade in Goods and Services (Argentina –

Financial Services) is instructive in establishing the parameters of a wider

framework for financial regulatory intervention, particularly in times of

economic and systemic duress.

5

Discussions on necessity at the WTO have

not traditionally focused on prudential measures justified by economic

duress. Of course, the WTO Appellate Body is well-versed in the concept of

necessity as it relates to trade restrictiveness

6

and the scholarship has focused

accordingly on analysing whether a measure is necessary to obtain particular

objectives and meet the tests established and applied by the Appellate Body.

7

In contrast, the September 2015 WTO Panel Report in Argentina –

Financial Services and, more recently, the additional findings by the Appellate

Body in April 2016 have provided substance to what has been largely an

academic debate relating to financial services.

8

More specifically, the Panel

and Appellate Body reports in Argentina – Financial Services provided a

4. See, e.g., Andrew D. Mitchell, Jennifer K. Hawkins & Neha Mishra, Dear Prudence:

Allowances under International Trade and Investment Law for Prudential Regulation in the Financial

Services Sector, 9 J. I

NT

’

L

E

CON

. L. 787, 787–820 (2016).

5. See Argentina – Financial Services Appellate Body Report, supra note 2; Argentina – Financial

Services Panel Report, supra note 2.

6. See Appellate Body Report, Brazil – Measures Affecting Imports of Retreaded Tyres, WTO

Doc. WT/DS332/AB/R (adopted Dec. 3, 2007); Appellate Body Report, United States –

Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WTO Doc. WT/

DS285/AB/R (adopted Apr. 7, 2005) [hereinafter United States – Gambling Appellate Body

Report]; Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos-

Containing Products, WTO Doc. WT/DS135/AB/R (adopted Mar. 12 2001) [hereinafter

European Communities – Asbestos]; Appellate Body Report, Korea – Measures Affecting Imports of

Fresh, Chilled and Frozen Beef, WTO Doc. WT/DS161/AB/R – WT/DS169/AB/R (adopted

Dec. 11, 2000) [hereinafter Korea – Frozen Beef].

7. In relation to SPS issues, see Andrew D. Mitchell and Caroline Henckels, Variations on a

Theme: Comparing the Concept of “Necessity” in International Investment Law and WTO Law, 14(1)

C

HI

. J. I

NT

’

L

L. 93, 93-164 (2013).

8. See Argentina – Financial Services Appellate Body Report, supra note 2; Argentina – Financial

Services Panel Report, supra note 2.

THE INTERNATIONAL LAWYER

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2018] CONVERGENCE OF TRADE & INVESTMENT LAW 555

landmark contribution to the WTO’s approach to the handling of financial

services issues generally and more particularly prudential regulatory

initiatives taken for reasons of emergency or in a “state of necessity”.

9

Part III focuses on the investment perspective. The trade and investment

regimes are of course different and should not be read as interchangeable,

but it is nonetheless interesting to note that a certain degree of convergence

can be found between the trade and investment jurisprudence in regard to

prudential measures. At the same time, it must also be noted that important

gaps appear in the methodology and reasoning between the two regimes. In

more practical terms, while investment cases have tended to preserve the

right of host governments to regulate so as to preserve domestic financial

and economic stability over foreign corporate interests, the tribunals and

Annulment Committees have not been able to formulate a coherent and

robust legal reasoning as to what measures taken for prudential reasons

ought to be considered as valid.

10

Part IV concludes with a set of general remarks drawing upon recent

jurisprudence and offers confidence to governments wishing to preserve a

high degree of freedom in times of financial instability.

II. Background on Prudential Measures

Provisions allowing for the taking of exceptional measures—particularly

for prudential reasons—have long been part of international investment and

trade agreements. The language used and construction of such clauses

rarely differ much between various agreements, however, the structure and

wording of such clauses have raised questions as to the scope of their

applicability (with some viewing the language as self-cancelling and without

any practical effect). To date, the point has mainly been debated in academic

literature, but has only rarely been a point of issue in any international

dispute settlement forum. This section reviews the textual language of the

General Agreement on Trade in Services (GATS) and other agreements

before considering the differing interpretive positions on the practical effect

of such clauses.

A. T

HE

T

EXTUAL

L

ANGUAGE OF

P

RUDENTIAL

P

ROVISIONS IN

GATS

The GATS provides several general and specific carve-outs and exceptions

to liberalization commitments. This begins with the language of the

Preamble which protects and promotes “the right of Members to regulate,

and to introduce new regulations, on the supply of services within their

9. Id.

10. See infra Section III. For a similar conclusion, see Mitchell and Henckels, supra note 7, at

93-164.

THE INTERNATIONAL LAWYER

A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW