Can India Save Democracy in Global Economic Governance? The case of the WTO Investment Facilitation for Development Agreement
Showdown at MC-13
While wide-ranging talks are talking place at the UN (UNCITRAL Working Group III) on reforming global governance of investment disputes, a sub-set of WTO Members-over a hundred, but with others like the US notably absent-have come up with a still secret agreement that has a different take on regulating foreign investment. They intend to unveil the Agreement at MC13, the upcoming WTO Ministerial in Abu Dhabi, which starts late this month. And they also propose to ask the WTO Membership to integrate it by consensus into the WTO legal framework as a plurilateral agreement under Annex 4 of the WTO Agreement (that’s where the plurilateral Government Procurement Agreement is listed, for example).
As part of the effort to save something from the fiasco of the Cancun WTO Ministerial in 2003, developed country Members agreed to the removal of investment (as well as anti-trust) from the WTO negotiating agenda. Nevertheless, even though a work programme or negotiating mandate was not after that re-established for investment, informal discussions on “investment facilitation” started up. These then mushroomed into a full scale negotiating effort among a subset of WTO Members, almost by stealth.
Given the well-known legitimacy issues with ISDS and the related problems with treaties such as the Energy Charter Treaty and BITs, the investment facilitation concept is a promising one. Instead of giving foreign capital rights to litigate against host states, claiming under these treaties various forms of misconduct and winning inflated damages awards that fleece the treasuries of developing nations and create regulatory chill, better to head off disputes by improving the way that host states engage in their relations with foreign investors, boosting their FDI-related governance mechanisms. This dispute-avoidance approach could easily replace ISDS, and make everyone better off-including foreign investors who are good corporate citizens. These firms would much rather have workable governance mechanisms that resolve early the kinds of problems and disputes that might lead to litigation, rather than going to international arbitrators, who are notoriously expensive, slow and unpredictable in the way in which they handle disputes.
It is ironic that an agreement that emphasizes values such as due process and transparency has itself become entangled with questionable governance practices within the WTO’s own house. I have already mentioned one of them, the bootstrapping of informal dialogue into full-blown negotiation of a legal text without a clear mandate of the Membership based on consensus which is the WTO’s bedrock decision-making practice on matters concerning new rule-making. In a communication to the WTO Membership, India has made this point emphatically, but also questioned more fundamentally the logic of moving forward on multiple issues through plurilateral negotiations. These, by definition, only involve the participation of a sub-set of Members yet they consume institutional resources and may have an opportunity cost in terms of efforts to resolve other issues, which must be dealt with multilaterally in the Organization, such as dispute settlement reform.
I have long been a supporter of plurilateral initiatives within the WTO, recognizing the difficult of getting a consensus for rules in emerging areas among such a large and diverse Membership, now 165+ states of all sizes, levels of development, and political ideologies. To be reconcilable with the multilateral Grundnorm of non-discrimination, such agreements should be open to all WTO Members, negotiated transparently, and based on the unconditional MFN principle, so that even Members who choose not to bind themselves will be able to have the benefit of the Agreement. The Information Technology Agreement (ITA) qualifies on all of these, and has gone successfully into its second iteration already. Other scholars, such as Bernard Hoekman and Charles Sabel have articulated openness in plurilateral WTO agreements somewhat differently. But the larger issue is that no such ground rules had been set by the WTO Membership before the IFD Agreement was negotiated, or for that matter other plurilateral initiatives, such as on e-commerce.
India has a point in challenging the WTO Membership to articulate how it wants to do more plurilateralism-and on what subjects. The conventional wisdom in many quarters is that the WTO is dead, on its last legs, or simply irrelevant. This view depends heavily on the notion that the vitality of the WTO is determined by successfully negotiating more and more treaties enforced through dispute settlement. However unsound that attitude is-I believe it is profoundly wrong-it creates immense pressure to be seen to be active in branching out into new areas and running new negotiations. This without a great deal of thought as to whether a multilateral trade governance body like the WTO is the right global forum for these initiatives. There has to be some check on this desperate search to be relevant. In a recent article Joanna Langille and I have argued that the WTO should evolve with the shape of the global economy & international politics through drawing on its traditional strengths and foundational principles rather than attempting aimless mission creep.
The number one reason that the WTO is relevant, without any new agreements, is that it offers an increasingly professional and capable institution to oversee the existing and substantial commitments of the vast bulk of the world’s nations to legal limits on protectionist measures such as tariffs. While Preferential Trade Agreements like CPTPP have been trendy for a while, around 75% of world trade takes place on the basis of the WTO rules framework. It is true that populist ideology, (legitimate) concerns with economic security and national security, and the challenge of applying the rules to climate change policies, are testing the existing framework in some economic sectors, especially with the cloud over WTO dispute settlement from the demise of the Appellate Body. It is also true that plurilateral negotiations on “new” issues will not likely succeed to address these pressures, and further true that despite the pressures there’s a lot of resilience in the system. The proof there is in the trade stats.
Issues like climate, gender, access to trade financing need to be discussed in the WTO-but within the existing areas of the legal framework and work mandates-like subsidies and technical regulations and standards, for instance. Flashy new work programmes or plurilateral initiatives that silo these topics, or ghettoize the concerns in question, are not really progressive, though they seem so cutting edge as to almost be “woke”. They would mostly be intended to scream “hey, we’re still relevant” through a megaphone.
But let’s circle back to the IFD Agreement. Improving domestic governance of foreign investment has been an activity area for UNCTAD, UNCITRAL (e.g. the model law), and the OECD for decades. Starting up a full-throttled treaty negotiation at the WTO in a vacuum, without considering the relationship of the WTO to these other established institutional contexts for “investment facilitation,” seems bizarre. Similarly, based on the leaked (still secret) November draft of the IFD Agreement, the drafters have take every effort to completely silo it off from other global governance arrangements for foreign investment,1 including the current UNCITRAL talks, subject only to a throw-away provision near the end of the text that says the (to be created) WTO Committee on Investment Facilitation “shall maintain close contact with other international organizations in the field,” including UNCTAD, the World Bank and the OECD. The awareness of the competence in investment facilitation of these other organizations makes it even more perplexing that the WTO negotiations would be started, not building on or incorporating these other efforts, but from a kind of tabula rasa.
There are certainly a number of positive features in the November draft, including an innovative approach to providing assistance to countries with limited capacity and resources to build new improved governance mechanisms to deal with FDI. This approach seems inspired by the already in force WTO multilateral agreement on Trade Facilitation. The provisions on responsible business conduct place obligations on Parties to encourage investors operating within their territory to operate in accordance with voluntary codes of corporate responsibility, and to practice due diligence for responsible business conduct, including with their supply chains. Because the obligations are on all Parties to the IFD Agreement, that means not only host states but home states as well have these duties, an important advance over traditional investment norms that do not put any responsibility on home states for how their companies operate in foreign jurisdictions. Home states of multinationals may often have more tools available to control the offshore conduct of these firms than the countries receiving the investment. The burden should not be all on host states for ensuring good governance and corporate responsibility for foreign investment.
This brings me to the question of democracy and the future of the IFD Agreement. As I noted at the outset, the participants are asking already the WTO Membership for a consensus decision to place the IFD Agreement under Annex 4 as a plurilateral agreement. But, still secret and only to be revealed publicly at MC13, the final legal text has never, obviously, been the subject of public debate in any of the participant countries; it has never been put before any of their legislatures. The November text provides for the IFD Agreement to come into force after 75 participants have ratified it. So there is obviously, at least in the November text, an assumption that there will be domestic processes by which legislatures, where appropriate, will consider, an give their approval, to the Agreement.
What then is the implication of asking for entrenchment in the WTO legal framework now? Why not wait until the 75 ratifications to resolve the place, if any, of the IFD Agreement in the WTO legal architecture? Is this an attempt to force the hand of parliaments, presenting the IFD Agreement as a done deal that cannot be opened up? Given that legislatures, much less the public, have had no chance to shape the agreement through reacting to draft texts (all of which have been secret), that would be a scourge on democracy. Especially so since many of the governance innovations proposed would involve on-budget expenditures, as well as changes to domestic administrative law and regulatory practice. For instance, Article 20 requires participant state to “maintain or institute judicial, arbitral or administrative tribunals which provide at the request of an affected investor, for the prompt review of, and where justified, appropriate remedies for, administrative decisions affecting investment activities” and which are “impartial and independent of the authority entrusted with the administrative decision concerned,…”
Another motivation for forcing the issue of placing the IFD Agreement under Schedule IV at MC13 could be to call India’s bluff: India maintains that given the IFD Agreement has not emerged from a multilateral agreed negotiating mandate, it is illegal-not compatible with the WTO’s constitution, as it were. As such it cannot be validly placed under Annex 4. The IFD participants have sought to blunt this by agreeing that they are asking now for consensus and that they do accept that it is required for integrating the IFD Agreement into the WTO legal framework through Annex 4. In other words, despite the legitimacy deficit in the manner in which the Agreement arose without a multilaterally agreed negotiation mandate, it can be fully legalized and legitimized by a consensus now.
If that were the case, then multilateral consensus-based control of the WTO’s negotiating agenda, priorities, and work programmes could be entirely undermined. An interested group of WTO Members could start up talks on anything they wanted then eventually expect that if they reach an agreement with enough Members they could end up with a Plurilateral Agreement fully integrated into the WTO legal framework through an ex post consensus on Annex 4. This is not the way to reconcile flexibility that plurilateralism can offer with the non-discriminatory multilateralism that is the WTO’s raison d’etre.
Acknowledgement: Much of my thinking on this topic has been influenced and informed by the reflections of Peter Ungphakorn in his Trade Beta blog at https://tradebetablog.wordpress.com/.
One aspect of this silo approach is legitimate-the language that addresses the fear that ISDS arbitrators will import the content of the IFD Agreement into e.g. the fair and equitable treatment standard in international investment agreements(IIAs) like BITs. Arbitrators have often, and arguably abusively, used MFN provisions in IIAs to allow investors to cherry-pick-giving MFN the meaning that the investor is entitled to the better treatment that the host state has negotiated in a different IIA with a third state. To those familiar with the functionality of MFN in international trade law this (ab)use of it give a claimant a right to invoke selectively more favorable provisions of an altogether different treaty (under which the claimant has no rights as such) may well seem bizarre. But that is how ISDS arbitrators work. No legal formula in the IFD Agreement, however, can actually stop ISDS arbitrators from importing the obligations in the IFD Agreement into another treaty (an IIA), which they have the jurisdiction to interpret and apply. To achieve this effect, the parties to IIAs that have MFN clauses, and thus where there is the risk in question would have to either amend the IIAs or if possible issue understandings or authoritative interpretations of the IIAs that indicate that the meaning of MFN does not extend to importation by arbitrators of the obligations in the IFD Agreement. Here I draw on unfinished early work that Mithatcan Aydos and I began to do at previous phases in the development of the IFD Agreement.