Jürgen Kurtz, 2 - History

2
History
2.1 Introduction
The story of the development of international law protections for foreign
trade and investment is complex and multi-faceted. When it comes to the
creation of modern standards, that historiography comprises three distinct
stages. Firstly, one can identify a joint birth as both protections were
developed, superficially at least, as part of a comprehensive effort to
entrench political and economic cooperation in the aftermath of the
Second World War. Section 2.2 traces this story of ‘inception’ (from
1945 to the 1970s) with a focus on the contingent political and economic
causes that led to a splintering between treaty coverage of international
trade (confined to the GATT) versus foreign investment (within a small
but growing number of bilateral treaties) at international law. Section 2.3
then examines the next historical stage of ‘expansion’ covering the 1980s to
late 1990s. Both systems are structurally characterized by growth and,
especially within the transition from the GATT to the World Trade
Organization (WTO), expanded scope of operation. Indeed, the comple-
tion of the Uruguay Round marks the first stage in a formal reunification
between the two fields given the inclusion of foreign investment issues in
select parts of the WTO. This, however, is only part of the phenomenon of
reconnection. Within investment law, the constitutive factors that had led
to the inception of the treaty system had largely eroded by the 1980s. As
a result, states parties begin to use investment treaties for a different
functionality from their original role of mediating entrenched political
and economic conflict. Investment treaties now constitute a means to
signal commitment to select liberal economic policies, including
extension of competitive opportunities to foreign investors, which
parallels a similar foundational promise made to international traders
originally in the GATT. Section 2.4 concludes with an assessment of the
contemporary period, described as one of ‘activation, engagement and
recalibration’. It begins by exploring the disjuncture between the
31
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32 h ist ory
adjudicative and legislative arms of the WTO. The dispute settlement

organs of the WTO, especially the Appellate Body, have proven to be
highly adept at fostering and building the legitimacy of their role in the
eyes of the member states. That story is itself of importance to the invest-
ment treaty system given the clear signs of dissatisfaction by member states
with the growth of investor-state arbitration during this period. WTO
treaty expansion, if understood as a needed development, however, has
proven elusive. The Doha Round of negotiations remains in stalemate
despite having commenced in 2001. This in turn has ushered in bifurcation
of trade policy with states supplementing WTO commitments with bilat-
eral and regional instruments. The latter offer the most tangible ‘engage-
ment’ between the two fields given the joint coverage of trade and
investment matters within the same institutional umbrella. But the influ-
ence of the WTO on investment law extends far beyond the story of FTAs.
The dissatisfaction of states parties with the quality of investor-state
arbitration has itself prompted deep (and overdue) ‘recalibration’ of the
classic BIT model. Recalibration in turn manifests itself in twin strategies
that link the two fields. States parties are increasingly seeking substantive
justifications – based on theoretical and instrumental grounds – for inclu-
sion of extra-domestic treaty protections for foreign investment. Relatedly,
investment treaty structures and their adjudication will be required – just
as they have in WTO law – to sensitively and sustainably balance key
economic objectives with competing public policy goals. It is these twin
challenges that will increasingly shape the future contours of the conver-
ging fields and, as such, occupy the focal points of attention throughout the
remainder of the book.
2.2 Inception: 1945 to the 1970s

2.2.1 What’s past is prologue
The contemporary set of international law rules on foreign trade and
investment have a long and storied common genealogy. By the nineteenth
century, foreign commerce (engaging both trade and investment) was an
important tool for fierce imperialistic competition among Western
powers. State-chartered companies traded with and invested in colonies.1
At the same time, the European powers as well as the United States blended
economic and diplomatic goals by concluding a growing number of
1
E.g. N. Ferguson, Empire – How Britain Made the Modern World (Penguin Books, 2003).
inc ep t ion: 1945 to the 1 970s 33
boilerplate Friendship, Commerce and Navigation (FCN) treaties, which

offered no distinction based on economic modalities. States typically
aimed to promote and protect both trade and investment via FCN treaties,2
often through an explicit guarantee of ‘freedom of commerce’. Even absent
such textual instruction, international courts would naturally rule in line
with dominant state practice of the period. In the Oscar Chinn Case, for
instance, the Permanent Court of International Justice was confronted
with a prototypical national treatment claim by the United Kingdom (on
behalf of Mr Chinn, a British subject) brought against Belgium.3 In 1929,
Mr Chinn had established a river transport and ship-building business in
the-then Belgian Congo.4 As a foreign investor, Mr Chinn operated in
competition with Unatra, a local transport concern, and argued that
Belgium had offered state support to Unatra that had ‘forced him entirely
to suspend both his transport business and his ship-building and repairing
business’.5 Tellingly, the PCIJ offered this unitary interpretation of a key
treaty protection:
Freedom of trade, as established by the Convention, consists in the right –

in principle unrestricted – to engage in any commercial activity, whether
it be concerned with trading properly so-called, that is the purchase and
sale of goods or whether it be concerned with industry, and in particular
the transport business; or, finally, whether it is carried on inside the
country or, by the exchange of imports and exports, with other countries.6
Oscar Chinn is by no means an outlier. In Oil Platforms, the International

Court of Justice was called on to interpret a 1955 FCN treaty between Iran
and the United States.7 The preamble to that treaty sought, inter alia, to
encourage ‘mutually beneficial trade and investments and closer eco-
nomic intercourse generally’.8 To pursue that unitary goal, the treaty
offered dedicated protections aimed both at investors (including national
treatment, fair and equitable treatment and a guarantee of ‘just
compensation’ in the event of expropriation) and traders (including a
prohibition on quantitative restrictions on import and export, as well as
2
K. Vandevelde, Bilateral Investment Treaties: History, Policy and Interpretation (Oxford
University Press, 2010), p. 38. See also H. Walker Jr, ‘Modern Treaties of Friendship,
Commerce and Navigation’ (1957–58) 42 Minnesota Law Review 805.
3
The Oscar Chinn Case (Britain v. Belgium), [1934] PCIJ (Ser. A/B) No. 63.
4
The Oscar Chinn Case, p. 70. 5 The Oscar Chinn Case, p. 75.
6
The Oscar Chinn Case, p. 84.
7
Case Concerning Oil Platforms (Islamic Republic of Iran v. United States of America),
Preliminary Objection, Judgment, ICJ Rep. 1996, p. 803.
8
Case Concerning Oil Platforms, p. 813.
34 h ist ory
most-favoured-nation treatment on tariffs and internal taxation).9 The

FCN treaty also provided for dedicated exceptions for state regulation
directed either at foreign investors specifically10 or foreign commerce
generally.11 Within the logic of unitary coverage, the FCN treaty natu-
rally offered – as was typical of this period – a general guarantee of
‘freedom of commerce and navigation’.12 The latter phrase came under
particular contestation in Oil Platforms, with the United States arguing
that that the word ‘commerce’ must be understood as ‘referring solely to
the actual sale or exchange of goods’.13 After reviewing the broad array of
economic activities plainly covered by the treaty, the ICJ rejected this
narrow (trade focussed) interpretation14 and concluded that such FCN
treaties ‘cover a vast range of matters ancillary to trade or commerce,
such as shipping, transit of goods and persons, the right to establish and
operate businesses, protection from molestation, freedom of communi-
cation, acquisition and tenure of property’.15
This unitary approach continues, but comes under significant pressure
by the mid twentieth century. Both trade and investment disciplines were
contemplated as part of the grand international project to transform
political and economic cooperation among states in the aftermath of
the Second World War. In 1948, the Charter for an International Trade
Organization (ITO) was presented to a meeting of fifty-six states in
Havana.16 The ITO was to have been the third pillar of post-war eco-
nomic reconstruction together with the International Monetary Fund
and the World Bank. Yet the political economy underpinning the ITO
negotiations was profoundly different from that of a typical FCN. The
ITO’s grand political and economic scheme was conceived at a time when
a broad array of states had begun to emerge from colonial strictures.
Many of these newly independent countries viewed foreign investment,
especially when it came to property held by nationals of the former
colonial power, as inimicable to the project of attaining economic inde-
pendence and/or their preferred development strategies. Those states
9
Treaty of Amity, Economic Relations and Consular Rights between the United States of
America and Iran, entry into force 16 June 1957, Arts IV(1), IV(2), IV(4) and VIII(1)–(2).
10
Treaty of Amity, Art. II(3). 11 Treaty of Amity, Art. XX.
12
Treaty of Amity, Art. X(1).
13
Case Concerning Oil Platforms, ICJ Judgment, para. 40.
14
Case Concerning Oil Platforms, ICJ Judgment, para. 45.
15
Case Concerning Oil Platforms, ICJ Judgment, para 46.
16
Final Act and Related Documents of the United Nations Conference on Trade and
Employment, Havana, Cuba, 21 November 1947 to 24 March 1948, UN Doc. ICITO/1/
4 (1948).
naturally opposed for the ITO the strong investment disciplines of the
sort found in an FCN treaty. Despite that opposition, the US delegation
eventually succeeded in its quest to include some coverage of foreign
investment within the Charter.17 However, the rights granted to foreign
investors were substantially diluted from earlier articles put forward by
the United States and those classically found in FCN treaties of the era.18
Not surprisingly, then, the ITO’s provisions on foreign investment19 are
far less detailed and comprehensive than those directed at cross-border
trade in goods.20
The overall structure of the Charter’s limited provisions on foreign
investment sought to balance the interests of host and home countries.
Investment disciplines were never intended to simply and only protect
foreign property rights. They were a functional vector whereby host
states could use foreign investment to achieve development outcomes,21
a vital imperative not only for newly independent states, but also for the
many European countries where war had devastated political, economic
and social institutions and patterns. Naturally, then, Article 11 specifi-
cally positions capital as one mechanism by which to promote ‘industrial
and general economic development’.22 It also seeks to strike a balance
between capital importers and exporters by (i) requiring members to
cooperate to ensure transfer of capital, while (ii) also providing that ‘no
Member shall take unreasonable or unjustifiable action within its terri-
tory injurious to the rights or interests of nationals of other Members in
the enterprise, skills, capital, arts or technology which they have sup-
plied’.23 This latter commitment is the only hard and operative constraint
on sovereignty of host states in this part of the ITO. The remaining
provisions on foreign investment are largely forward-looking in that
17
C. Wilcox, A Charter for World Trade (Macmillan, 1949), pp. 37–53.
18
For example, the early articles proposed by the US delegation at a meeting in Geneva in
1947 set out extensive rights for investors, including the obligation of host states to accord
national treatment as well as unqualified most-favoured-nation treatment. These exten-
sive rights provoked opposition by a number of countries, including the Czech
Government, which refused to give German investors the same status as investors of
other countries. The resulting compromise is reflected in Art. 12 of the Charter, which
significantly dilutes the liberalization commitments proposed by the US delegation.
Article 12(2) merely requires member states to ‘give due regard to the desirability of
avoiding discrimination as between foreign investments’. T. Brewer and S. Young, The
Multilateral Investment System and Multinational Enterprises (Oxford University Press,
1998), p. 67.
19
Havana Charter, Ch. III (Economic Development and Reconstruction).
20
Havana Charter, Chp. IV (Commercial Policy). 21 Havana Charter, Recitals 2 and 3.
22
Havana Charter, Art. 11. 23 Havana Charter, Art. 11.
36 h ist ory
they contemplate the future contingency of ‘bilateral or multilateral

agreements’ on various measures, including the extension of ‘just and
equitable treatment’ for foreign investors.24 Yet here too, the ITO offers a
portent of the growing sensitivity surrounding treaty provisions directed
at foreign investment in this period with explicit recognition of a number
of sovereign rights, not least the ability to take ‘any appropriate safe-
guards necessary to ensure that foreign investment is not used as a basis
for interference in its internal affairs or national policies’.25
Ultimately, the beginnings of the Cold War and resulting US domestic
political changes weakened the prospect that a new Republican Congress
would ratify the Charter so as to authorize US participation in the ITO.26
The Truman Administration then simply withdrew the ITO from con-
sideration by the US Congress on 6 December 1950. As the United States
accounted for roughly half of world trade at that time, this signalled the
death knell of the ITO project.
2.2.2 The General Agreement on Tariffs and Trade 1947

In the aftermath of the ITO’s defeat, the GATT was the only legal
instrument left standing. The GATT was signed as an interim tariff
reduction agreement in 1947 and intended to operate only until the
ITO was formally established. It made no attempt to deal directly with
foreign investment issues as its provisions were drawn largely from that
part of the Charter addressing cross-border trade in goods.27 This insti-
tutional separation of trade from investment issues in the multilateral
arena would continue until the commencement of the Uruguay Round of
GATT negotiations in the mid 1980s.
The GATT’s primary focus was to ensure market access for foreign
goods in an importing state. It did so by liberalizing border barriers that
would directly restrict the flow of international trade. With some impor-
tant exceptions,28 quantitative restrictions on the import (or export) of
goods are prohibited.29 Tariffs – taxes on foreign goods imposed at the
24
Havana Charter, Art. 12.2(b). 25 Havana Charter, Art. 12.1(c)(i) and (ii).
26
W. Diebold, ‘The End of the ITO’ in 16 Essays in International Finance (Princeton
University Press, 1952), pp. 1–37.
27
Havana Charter, Ch. IV (Commercial Policy).
28
For analysis of the flexibility in GATT Art. XI to impose short-term export restrictions for
food security reasons, see below Ch. 5, section 5.3.2 (‘Modelling from the law of
the WTO’).
29
GATT Art. XI.
inc e pt ion: 1945 to the 1 970s 37
border – were bound in schedules with members prevented from increas-

ing these bound tariff rates.30 The quantifiable and divisible nature of
tariffs made their reduction relatively easy over time given the political
importance of achieving a base level of reciprocity of concessions among
the membership.31 A reciprocal exchange of concessions is often funda-
mental to convincing domestic interests of the overall benefits of trade
liberalization.32 In successive and periodic negotiating rounds,33 mem-
bers would agree to reduce their tariff rates and any such reduction would
then be required to be extended to all other member states via the most-
favoured-nation (MFN) principle.34
There is a strong economic case for these constraints, especially MFN
treatment towards tariffs on trade in goods. The economic consequences
of tariffs as a form of discriminatory border tax levied only on imported
goods are well understood. Tariffs distort the working of the price
mechanism with both global and domestic efficiency implications.
Different tariff discrimination among countries causes a shift in
resources contrary to principles of comparative advantage. Demand for
a given good dependent on the pricing mechanism shifts from efficient
producers in a country subject to a high tariff rate to less efficient
producers who are favoured by a low tariff rate. An MFN principle of
equal tariffs for every foreign country provides for a more efficient
allocation of resources than would be the case if discrimination is prac-
tised.35 On an individual country level, the distortive effects of tariff
discrimination are likely to lead to higher cost imports. An MFN policy
allows a country to buy from the lowest cost and most efficient supplier
with consequent welfare-enhancing effects for individual consumers. Of
course, pure trade theory acknowledges that trade will yield losers.
Import competition may displace domestic industries and, if so, some
30
GATT Art. II.
31
B. Hoekman and M. Kostecki, The Political Economy of the World Trading System: The
WTO and Beyond, 2nd edn (Oxford University Press, 2001), pp. 25–33.
32
R. Hudec, ‘“Like Product”: The Differences in Meaning in GATT Articles 1 and III’ in
T. Cottier, P. Mavroidis and P. Blatter (eds), Regulatory Barriers and the Principle of Non-
Discrimination in World Trade Law (University of Michigan Press, 2000), pp. 108–109.
33
Hoekman and Kostecki, The Political Economy of the World Trade System, pp. 101–102.
34
GATT Art. I.
35
An alternative theoretical proposition would position trade law as restraining terms-of-
trade manipulation. Yet even here, the goal is ultimately one of efficiency (at least in global
allocation of resources). D. Regan, ‘What Are Trade Agreements For? Two Conflicting
Stories Told by Economists, with a Lesson for Lawyers’ (2006) 9(4) Journal of
International Economic Law 951–988.
38 h ist ory
workers will lose their livelihoods. The manner and extent to which those
who suffer loss from free trade are compensated is an important prism
through which to assess whether free trade maximizes overall social
welfare. Even with those distributional consequences in mind, a wel-
fare-based case has provided an important degree of substantive legiti-
macy to multilateral trade rules that focus on the explicit, price-distorting
effect of tariffs and comparable regulations.36
The strong economic case for MFN treatment was matched by a key
political motivation influential in shaping the perspectives of the
framers of the GATT. The inter-war period was characterized by wide-
spread departure from policies of economic liberalism. Despite its
position as the world’s leading creditor nation in the immediate post-
First World War period, the United States raised tariff levels with
trigger effects on devastated debtor nations in Europe.37 This increase
made it difficult for those countries to earn the dollars in which to make
required interest payments. The result was the so-called ‘beggar-thy-
neighbour’ policies of progressively extreme and ruinous forms of trade
protection. Although there was an attempt to ameliorate this tendency
at the World Economic Conference of 1927, these efforts ended without
result by the onset of the Great Depression in 1929.38 By the time of the
stock market crash in the United States, international considerations
became even more subordinate to national demands on fostering inter-
nal economic recovery. The infamous 1930 American Smoot-Hawley
increase in tariffs as a response to the Depression saw retaliation by
other governments leading to devastating levels of economic balkaniza-
tion.39 From 1931 to 1932, Great Britain – the political champion of
economic liberalism in the nineteenth century – shifted tack and turned
inwards by negotiating the Ottawa agreements to set up a system of
tariff preferences among the Commonwealth countries.40 The impact of
these protectionist policies on the international economy in the inter-
war years was severe; from 1929 to 1934, world trade levels declined by
36
R. Howse, ‘The Legitimacy of the World Trade Organization’ in J.-M. Coicaud and
V. Heiskanen (eds), The Legitimacy of International Organizations (United Nations
University Press, 2001), pp. 355, 365.
37
A. Brown, Reluctant Partners: A History of Multilateral Trade Cooperation 1850–2000
(University of Michigan Press, 2003), p. 69.
38
A. G. Kenwood and A. L. Lougheed, The Growth of the International Economy 1820–1860
(Routledge, 1971), p. 186.
39
Brown, Reluctant Partners, p. 73.
40
G. Winham, The Evolution of International Trade Agreements (University of Toronto
Press, 1992), p. 30.
i nc e pt i o n : 1 9 45 t o th e 1 9 7 0 s 39
66 per cent.41 These disastrous outcomes affirmed the fundamental

Kantian belief that economic discrimination engenders adverse politi-
cal consequences such as instability in trade policies and resulting
political irritation.42 Indeed, it is clear that the framers of the modern
international economic architecture attributed trade discrimination
practised in the inter-war period as one of the proximate causes of the
Second World War.43 MFN within the GATT in turn was to play a
central remedial role in international efforts to both reconstruct the
world economy and embed political cooperation.
By comparison with its extensive regulation of border restrictions
(such as quotas and tariffs), the GATT adopts a remarkably light-handed
approach to domestic (or what is sometimes called ‘behind the border’)
regulation. The obligation of national treatment in GATT Article III
operates only so as to protect the integrity of the bargain on tariff
reduction. Specifically, it prevents a state from circumventing its tariff
reduction commitments by substituting domestic tax44 or regulatory45
restrictions which discriminate against foreign goods. Indeed, this func-
tion is explicitly articulated in the telos underpinning national treatment
in trade law: under GATT Article III(1), the purpose of national treat-
ment is to constrain protectionism in the use of domestic taxes and
regulations.46 It is important to tease out the conservatism inherent in
the GATT’s oversight of domestic regulatory autonomy. Conceptually,
the GATT is best understood as an instrument of negative rather than
positive integration between states. It does not posit a minimum (posi-
tive) level of regulatory harmonization among the membership.
Domestic taxes and regulations are fully permitted under national treat-
ment subject only to the (negative) condition that they are not protec-
tionist devices that would distort the bargain on tariff reductions. This
41
Winham, The Evolution of ITAs.
42
Kant maintained high expectations of international trade. A country’s political leaders, he
argued, would be less inclined to go to war if their citizens have business interests abroad.
Under the beneficial effect of the ‘power of money’, states would perceive each other as
inter-connected rather than as potential military opponents. For Kant: ‘The commercial
spirit cannot co-exist with war, and sooner or later it takes possession of every nation. For,
of all the forces which lie at the command of a state, the power of money is probably the
most reliable. Hence states find themselves compelled . . . to further the noble end of peace
and to avert war.’ I. Kant, Perpetual Peace: A Philosophical Essay (1795) (translated by
M. Campbell Smith, 3rd edn, Allen & Unwin, 1917), p. 157.
43
R. Gardner, Sterling-Dollar Diplomacy (Columbia University Press, 1956), p. 4.
44
GATT Art. III(2). 45 GATT Art. III(4).
46
See further below Ch. 3, section 3.2 (‘National treatment across the WTO and interna-
tional investment law’).
40 his tor y
then is a system that allows for significant heterogeneity in regulatory

and redistributive conditions and experimentation.47 Moreover, under
the insightful compromise of ‘embedded liberalism’ that had been
heavily influenced by the experience of the US negotiators with New
Deal policies,48 various GATT provisions actively contemplate the
priority of domestic politics and intervention in certain situations to
safeguard domestic values and stability. Even the most significant
sovereignty constraint – being the per se prohibition on quantitative
restrictions – is subject to appropriate exceptions, most notably the
freedom to impose temporary export limitations to safeguard food
security.49 There is even concession afforded to developing states to
enable them to directly depart from the strictures of economic liberal-
ism in pursuit of developmental goals. Those states are permitted
flexibility under the GATT to increase tariff barriers (to effect import
substitution) for the purposes of ‘the establishment of a particular
industry’.50
In contrast to these detailed substantive provisions, the institu-
tional architecture of the GATT is sparse. This comes down to the
GATT’s status as an interim agreement with the framers intending
that it would eventually be folded back into the ITO. Yet the GATT
would however transform itself, incrementally, into a type of de facto
international organization. Eight negotiating rounds conducted
between 1947 and 1994 led to sizeable reductions in average tariff
levels. Yet the incompleteness of the GATT was especially evident in
its early dispute settlement mechanisms. In order to form an ad hoc
panel to hear a dispute, a consensus decision of all GATT members
was required.51 Thus, any party, including the respondent, could
block the panel’s formation. Even adoption of the panel ruling
required consensus so that any GATT member, including the losing
party, could veto the ruling. The GATT’s dispute settlement process
has thus been aptly described as effecting ‘diplomacy through other
47
For a similar perspective, see A. Afilalo, ‘Failed Boundaries: The Near-Perfect Correlation
between State-to-State WTO Claims and Private Party Investment Rights’ (Jean Monnet
Working Paper 01/13, 2013), p. 7.
48
A.-M. Burley, ‘Regulating the World: Multilateralism, International Law, and the
Projection of the New Deal Regulatory State’ in J. G. Ruggie (ed.), Multilateralism
Matters: The Theory and Praxis of an Institutional Form (Columbia University Press,
1993), pp. 125–156.
49
GATT Art. XI(2)(a). 50 GATT Art. XVII(2).
51
J. Jackson, The Jurisprudence of the GATT and the WTO (Cambridge University Press,
2000), p. 123.
means’.52 These ad hoc panels were composed largely of trade dip-

lomats who understood their task as the investigation and recom-
mendation of a proper solution to the disputants.53 In these first few
decades, GATT members had usually settled the underlying dispute
by the time those recommendations had even been developed.54
2.2.3 The emergence of bilateral investment treaties

In contrast with the treatment of trade in goods in the GATT, the failure
of the ITO marked a fundamental shift away from multilateralism in the
coverage of investment issues. By the late 1960s, BITs had become the
primary instruments for reaching agreement on foreign investment
between developed and developing countries.55 As touched on earlier,
one can trace a very distinct reason for that growth in bilateralism. As
many developing countries gained political independence from former
colonial powers, they also sought to achieve economic sovereignty. Yet
their productive capacity often remained dependent on infrastructure
and investment held by nationals of the former colony. Foreign invest-
ment came to be seen as a continuing proxy for colonialism, with
expropriation being used as a visible mechanism to complete the deco-
lonization process.56 A broad range of states were also experimenting
with development or political strategies starkly opposed to free entry and
operation of foreign investment. The infant industry model of pursuing
economic development was especially popular during this period and, as
we have seen, explicitly permitted under GATT rules.57 The development
of domestic industrial capacity pursuant to this strategy was predicted
not only on restriction on imports of competing goods, but also on
protection from competition by foreign investors operating in the state
52
J. H. H. Weiler, ‘The Rule of Lawyers and the Ethos of Diplomats: Reflections on the
Internal and External Legitimacy of WTO Dispute Settlement’ (2001) 35(2) Journal of
World Trade 191, 194.
53
M. K. Young, ‘Dispute Resolution in the Uruguay Round: Lawyers Triumph Over
Diplomats’ (1995) 29 International Lawyer 389.
54
J. Jackson, ‘GATT as an Instrument for the Settlement of Trade Disputes’ (1967) 61
American Society of International Law Proceedings 144.
55
UNCTAD, World Investment Report 1996 (United Nations, 1996), pp. 147–148.
56
L. T. Wells and R. Ahmed, Making Foreign Investment Safe: Property Rights and National
Sovereignty (Oxford University Press, 2007), p. 38; A. Chua, World On Fire: How
Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability (Anchor,
2003), pp. 120–121.
57
GATT Art. XVIII(2).
42 h ist ory
concerned. Separately, states such as Cuba that began to adopt Marxist

political principles were hostile to all forms of private property, whether
foreign or domestic. The confluence of these diverse factors was a sharp
rise in rates of expropriation of foreign investment in the immediate
decades following the Second World War.58
This generated significant political conflict between capital importing
and exporting states on whether and how traditional customary interna-
tional rules should apply to newer instances of forced taking of foreign
property and especially nationalization of industry.59 Using their increased
numbers in the United Nations, developing countries began to advance
claims to changes in the international legal rules on expropriation by the
1960s. In 1962, the General Assembly passed Resolution 1803 affirming a
moderate position that international law requires the payment of compen-
sation for both expropriation and nationalization.60 But the requisite
standard was merely ‘appropriate compensation’ distinct from the stron-
ger formula of ‘prompt, adequate and effective compensation’ that had
been developed by US Secretary of State Hull in 1938, which had been
understood as the operative standard at customary international law.61
‘Appropriate compensation’ would potentially offer some flexibility to a
nationalizing state by allowing it to balance the deprivation to the investor
with resulting social gain to the state.62 By the 1970s, developing states
presented even more radical claims as part of an ambitious project to
fashion a new international economic order.63 Under the 1974 Charter of
Economic Rights and Duties of States, for instance, compensation for
expropriation was to be determined largely in accordance with domestic
rather than international law.64
58
Brewer and Young, The Multilateral Investment System and Multinational Enterprises,
p. 53.
59
S. N. Guha-Roy, ‘Is the Law of Responsibility of States for Injuries to Aliens a Part of
Universal International Law?’ (1961) 55(4) American Journal of International Law 863,
866–886; C. F. Amerasinghe, State Responsibility for Injuries to Aliens (Clarendon Press,
1967), pp. 128–129.
60
Permanent Sovereignty over Natural Resources, GA Res. 1803, 14 December 1962, 2 ILM
223 (1963), para. 4.
61
‘Mexico-United States: Expropriation by Mexico of Agrarian Properties Owned by
American Citizens’, 193.
62
Amerasinghe, State Responsibility, p. 156.
63
Declaration on the Establishment of a New International Economic Order, GA Res. 3201,
1 May 1974, 13 ILM 715 (1974).
64
Charter of Economic Rights and Duties of States, GA Res. 3281, 12 December 1974, 14
ILM 251 (1975), s. 2.2(2)(c).
General Assembly resolutions do not themselves constitute customary

international law. They can, however, be evidence of the elements of
custom, particularly when framed as declaratory of international legal
principles.65 Lump-sum settlement tribunals examined the legal impact of
these various resolutions on the rules governing expropriation throughout
the 1970s and 1980s. In the 1974 TOPCO v. Libya award, the tribunal found
Resolution 1803 (and the standard of appropriate compensation) to con-
stitute ‘the state of customary law existing in the field’ after carefully
reviewing voting patterns as evidence of state support.66 Similar methodol-
ogies and findings underpin the 1982 AMINOIL award (involving the 1977
nationalization of Kuwait’s oil industry)67 and the 1994 Ebrahimi award (of
the Iran-US Claims Tribunal).68 Although not entirely uniform,69 the
dominant trend in the jurisprudence by the 1970s is of a customary position
on compensation largely favourable to capital importing states.70
Paradoxically, despite these significant advances in the multilateral
sphere, these same states began to slowly enter into bilateral treaties
with capital exporting states to increase protection of foreign investment.
The first BIT was concluded between West Germany and Pakistan in
1959,71 and soon thereafter, other European nations followed suit.72 Yet
in comparison to the frenetic treaty making of later periods, BIT growth
throughout the 1960s and 1970s proceeded at a ‘largely desultory pace’.73
There were only seventy-two BITs signed between 1959 and 1969, half of
which were concluded by Germany.74 The pace of negotiations
65
Case Concerning Military and Paramilitary Activities In and Against Nicaragua
(Nicaragua v. US), Judgment, ICJ Reports 1986, para. 188.
66
TOPCO v. Libya, Award 17 ILM 3 (1974), 31–37.
67
Government of the State of Kuwait v. American Independent Oil Co. (AMINOIL), Award,
21 ILM 976 (1984), paras 143–144.
68
Shahin Shaine Ebrahimi v. Iran, Iran-US Claims Tribunal Award 560–44/46/47–3 (12
October 1994), para. 88.
69
SEDCO Inc. v. National Iranian Oil Co. & The Islamic Republic of Iran (Interlocutory
Award), 10 CTR 180, 184–189 (1986-I), 25 ILM 629 (1986).
70
CME Czech Republic B.V. v. Czech Republic, Separate Opinion by Ian Brownlie on the
Issues at the Quantum Phase (UNCITRAL, 14 March 2003), paras 23–32.
71
J. Karl, ‘The Promotion and Protection of German Foreign Investments Abroad’ (1996)
11(1) ICSID Review 1.
72
Between 1960 and 1966, Belgium, Denmark, France, Italy, Luxembourg, the Netherlands,
Norway, Sweden and Switzerland all concluded their first BITs. UNCTAD, International
Investment Law Rule-Making: Stocktaking, Challenges and the Way Forward (United
Nations, 2008), p. 11.
73
K. Vandevelde, ‘The Political Economy of a Bilateral Investment Treaty’ (1998) 92
American Journal of International Law 621, 627.
74
Vandevelde, ‘Political Economy’, 627.
44 h isto ry
accelerated slightly throughout the 1970s, with a further 166 BITs con-
cluded by the end of 1979.75 The United States was a comparative late
starter as it had folded investment commitments into FCN treaties76 and
only launched its own specific BIT program in 1981.77
These early BITs are characterized by striking asymmetry in economic
and power relationships. The vast majority were initiated by European
capital exporters and directed towards developing states with a high
degree of uniformity in many substantive provisions, especially the
rules concerning expropriation. Those rules reflect the long-standing
preference of developed states to the protection of private property by
adopting the older Hull standard of ‘prompt, adequate and effective’
compensation rather than the evolving customary notion of ‘appropriate’
compensation in the event of expropriation of foreign assets.78 In this
respect, the animating ethos of investment treaties is fundamentally
different from that of the GATT. For developed states, the clear goal is
to substitute treaty protections for, and at the margins contest, the down-
ward shift in the customary standard of property protection articulated
by newly independent states.
Indeed, the sovereignty constraints imposed by early BITs have a
remarkably distinct conceptual orientation when compared to the nega-
tive integration bargain of the GATT. Take the manner in which a typical
BIT of this period regulates the contentious practice of state takings of
private (foreign) property. Even if a state is acting for a public purpose
and in a non-discriminatory fashion, compensation must be paid to the
foreign property holder.79 Notably, the guarantee of compensation is
even extended beyond the paradigmatic case of direct expropriation to
encompass domestic regulatory or tax measures that might be considered
‘indirect’ forms of expropriation.80 There is no attempt within early BIT
practice to delineate the level of disruption or impact on a foreign
investor sufficient to trigger the positive obligation to pay compensation
for ‘indirect’ expropriation. A similar hard constraint on regulatory
75
UNCTAD, International Investment Law Rule-Making, p. 13.
76
C. Lipson, Standing Guard: Protecting Foreign Capital in the Nineteenth and Twentieth
Centuries (University of California Press, 1985), p. 97.
77
K. Vandevelde, United States Investment Treaties: Policy and Practice (Kluwer, 1992).
78
UNCTAD, Taking of Property: Series on Issues in International Investment Agreements
(United Nations, 2000), pp. 28–31.
79
1994 US Model BIT, Art. III extracted in C. McLachlan, L. Shore and M. Weiniger,
International Investment Arbitration: Substantive Principles (Oxford University Press,
2007), p. 388.
80
Ibid.
pluralism is evident in the obligation to accord foreign investors ‘fair and

equitable treatment’.81 Once again, we find no attempt within early BIT
practice to delineate the outer contours of this amorphous standard. At
best, certain formulations – especially in treaties concluded by the United
States – link its coverage to particularized treatment at international
law.82 It too comprises an absolute standard of protection for foreign
investors which applies irrespective of how the host state treats its own
nationals. BITs thus require states to extend minimum levels of domestic
regulation of foreign investors and their property rights. Ignoring for the
moment the question of how those provisions have been interpreted, the
underlying philosophy of this system was to plainly entrench a certain
level of positive integration between states in their treatment of foreign
economic actors.
Indeed, when compared to its prominence in the GATT, national
treatment had a decidedly minimal role in the early stages of the BIT
movement. Most BITs (other than those of the United States) failed to
extend a liberal guarantee of market access, such as national treatment on
the question of establishment of investment.83 Even on a post-establish-
ment basis, the sparse text of the usual formulation simply obliges a host
state to treat foreign investors/investments ‘no less favourably’ than
certain domestic investors/investments, and the objects of comparison
must typically stand in ‘in like circumstances’.84 There is a fundamental
absence here when measured against GATT Article III. We have no
explicit guidance as to what specific form of discrimination is to be
disciplined, such as the direction against protectionism in the GATT.
The absence of an interpretative guide on the role of national treatment
in investment treaties is not accidental, but tracks the dominant ethos at
play in the inception of the system. We have already explored the clear
desire of capital-exporting states to carve out a zone of protection for
their economic actors, especially against hostile expropriatory behaviour.
The role of relative standards of treatment – like national treatment – was
a marginal one in this strategy. There is little comfort to capital-exporting
states if their actors are treated equally with domestic nationals, but that
treatment still constrains private property rights, especially in systems
experimenting with Marxist political theory. The strategic emphasis lay
81
UNCTAD, International Investment Instruments: A Compendium Volume 1 (United
Nations, 2004), pp. 209–233.
82
NAFTA Art. 1105(1). 83 Vandevelde, Bilateral Investment Treaties, p. 58.
84
NAFTA Art. 1102; R. Dolzer and C. Schreuer, Principles of International Investment Law
(Oxford University Press, 2008), pp. 178–179.
46 hi sto ry
instead on fixing strong and absolute protections that would apply

irrespective of how the host state treats its own domestic nationals.
In a similar vein, broader notions of balancing treaty commitments
with regulatory heterogeneity – which underscore the embedded liberal-
ism compromise of the GATT – were sacrificed to this overarching goal
of carving out a zone of protection for foreign investment. This is starkly
illustrated by the very absence of exceptions that might operate to allow
states to exempt themselves from the strictures of investment treaty
protections. In the classic BIT model, there is no equivalent of the
flexibility for state action that had been in operation in certain FCN
treaties and expanded in the GATT to counter-balance the remarkably
strict obligations formed during this inception period.
Lastly, the dispute settlement processes under BITs offer an especially
stark insight into the project of carving out a zone of protection for
foreign investors. These provide the greatest normative departure from
the pre-existing customary regime, and are significantly different from
the exclusively state-to-state precepts of the GATT. The customary rules
on diplomatic protection of aliens controlled when a state could bring
international action for harm to its nationals, including investors operat-
ing abroad. The right to exercise diplomatic protection is vested exclu-
sively in the state of the injured national and remains a discretionary
power which the state is under no obligation to exercise.85 Aside from the
sovereign election to champion the cause of the injured national, custom
required the exhaustion of local remedies as a further prerequisite to the
exercise of diplomatic protection.86 The compelling rationale here was to
ensure that ‘the State where the violation occurred should have an
opportunity to redress it by its own means, within the framework of its
own domestic system’.87
Both of these customary predicates are eroded in the new dispute
settlement processes of BITs, but only after a slow period of maturation
of the investment treaty movement. Early generation BITs maintained
the classic public international law default of state-to-state mechanisms
as the sole means of resolving disputes in this field.88 The first BIT
(between Italy and Chad) to break from this mould and include a radical
85
Case Concerning the Barcelona Traction Light and Power Co. Ltd (Belgium v. Spain),
Second Phase, Judgment, ICJ Reports 1970, 44.
86
Interhandel Case (Switzerland v. United States of America), Preliminary Objections, ICJ
Reports 1959, 6.
87
Interhandel Case, Preliminary Objections, 27.
88
Dolzer and Schreuer, Principles of International Investment Law, pp. 122–129.
i n c e p ti o n : 1 9 4 5 t o t he 1 9 7 0 s 47
new form of dispute settlement – investor-state arbitration – did not

enter into force until 1969.89 And it is only by 1974 that we can discern a
clear trend for the inclusion of investor-state arbitration in investment
treaties.90 Under these newer structures, foreign investors as private
claimants are given privileged standing to bring action in international
fora for breaches of treaty norms by host signatory states and there is no
requirement for them to first exhaust domestic legal processes. This
dramatic elevation of private commercial interests is finessed through
the artificial conception of arbitration ‘without privity’.91 State signa-
tories to investment treaties offer their consent, in advance, to the
jurisdiction of an arbitral tribunal to hear disputes between investors
and host states. Jurisdiction is crystallized when a foreign investor elects
to commence a claim for breach against a signatory state. This structure is
a conceptually distinct and far more expansive use of arbitration than its
traditional role of resolving discrete disputes in negotiated contracts
between commercial parties. The standing consent offered in most
investment treaties is usually to a range of private systems of dispute
settlement at international law, such as the New York Convention of
1958, the ICSID Convention of 1965 and the UNCITRAL Arbitration
Rules of 1976.92 The most prominent and invoked of these is the World
Bank-based ICSID, an arbitral institution that specializes in international
investment disputes. ICSID was formed in the eye of the storm of
expropriatory behaviour in the developing world and provides a self-
contained system for settlement of disputes between foreign investors
and host states. Where there is crystallized consent to ICSID processes,
the right of a state to exercise diplomatic protection is specifically
excluded93 and any ICSID award ‘shall not be subject to any appeal or
to any other remedy except those provided for in this Convention’.94
The zone of protection afforded by early BITs thus reaches its apotheo-
sis in the system of investor-state arbitration. By the mid 1970s, foreign
investors could elect to exit the domestic judicial system and adjudicate a
dispute solely in the international sphere. In doing so, they were given the
89
A. Newcombe and L. Paradell, Law and Practice of Investment Treaties: Standards of
Treatment (Kluwer, 2009), p. 45.
90
J. Yackee, ‘Bilateral Investment Treaties, Credible Commitment and the Rule of
(International) Law: Do BITs Promote Foreign Direct Investment?’ (2008) 42 Law &
Society Review 805, 815.
91
J. Paulsson, ‘Arbitration without Privity’ (1995) 10 ICSID Review 232.
92
G. Van Harten, Investment Treaty Arbitration and Public Law (Oxford University Press,
2007), pp. 50–52.
93
ICSID Convention Art. 27. 94 ICSID Convention Art. 53.
48 h ist ory
privileged right to claim breach of the strong protections struck in the

treaty bargain negotiated by the signatory states against a set of distinct
historical conditions. Adjudication in this setting has its origins in inter-
national commercial arbitration whereby ad hoc tribunals are constituted
to hear discrete claims with no appellate mechanism to check for legal
error and build consistency in jurisprudence.
2.3 Expansion: the 1980s to the late 1990s

By the 1980s, both systems had entered into a period of expansion
measured in growth of underlying instruments and substantive commit-
ments. Intriguingly, there are also the first steps towards reconnection
between the two disparate fields driven by a deep ideological belief in the
benefits of a liberal economic model.
2.3.1 The Uruguay Round (1986 to 1994) and the establishment

of the WTO
By the late 1970s, a number of GATT members had begun to advocate for
greater disciplines on non-tariff barriers to international trade. The
United States in particular had become concerned about decreasing
benefits from the GATT in light of the economic resurgence of
Western Europe and Japan and the concomitant erosion of American
comparative advantage in some mass production and technology-inten-
sive sectors. A very early attempt by the United States to include invest-
ment in the GATT Tokyo Round negotiations (1973 to 1979) failed due
to the opposition of developing countries.95 In the lead up to the Punta
del Este GATT Ministerial Meeting in March 1986, the United States
again put forward a proposal for a comprehensive agreement on invest-
ment in the GATT.96 This approach was resisted by developing
countries,97 with the resulting compromise to limit negotiations to
‘trade-related investment measures’. Developing countries (with some
exceptions) also opposed the US proposal to include trade in services in
the negotiations.98 However, these countries eventually agreed to the
inclusion of trade in services in the 1986 Punta del Este declaration
95
Brewer and Young, The Multilateral Investment System and Multinational Enterprises,
p. 122.
96
T. Stewart, The GATT Uruguay Round: A Negotiating History (Kluwer, 1993), p. 2069.
97
Stewart, The GATT Uruguay Round, p. 2070.
98
Stewart, The GATT Uruguay Round, pp. 2354–2358.
e x p a n s i o n : t h e 19 8 0 s t o t he l a te 1 9 9 0s 49
launching the Uruguay Round negotiations on condition that the ser-

vices talks would take place on a separate track from those on goods, with
a clear development orientation.99
The Uruguay Round concluded in December 1993 and led to the
formation of the WTO in 1995. At a substantive level, the member states
had agreed to a significant expansion of the scope of the international
trading system. Two of the final sets of legal instruments in the WTO
include direct provisions dealing with foreign investment issues. Firstly,
there is the TRIMs Agreement, which focuses on the imposition of
certain performance requirements imposed on a foreign investor after
entry into the host state. Performance requirements are classically
imposed by developing states on foreign investment as a means of
extracting or influencing developmental gains. But some of these are
also often inherently trade-restrictive. For the latter reason, the TRIMs
Agreement sets out an illustrative list of performance requirements –
encompassing, inter alia, local content and purchasing conditions, trade
balancing requirements, foreign exchange restrictions and export per-
formance requirements – and deems these to be inconsistent with
GATT Article III (national treatment) or XI (prohibition on quotas).
On one view, the TRIMs Agreement is merely an elaboration of the
long-standing position that certain GATT rules can extend to a narrow
range of investment measures with direct and identifiable impacts on
trade. In Canada – Administration of the Foreign Investment Review Act,
a GATT Panel had ruled that the Canadian practice of enforcing certain
undertakings given by foreign investors in order to gain regulatory
approval to invest in Canada breached the obligation of national treat-
ment in GATT Article III(4).100 The panel found that local content
undertakings by foreign investors to purchase goods of Canadian origin
excluded the possibility for those investors to purchase available
imported products so that the latter were clearly treated less favourably
than domestic products in contravention of the national treatment
obligation.101 Yet the TRIMs Agreement clearly goes beyond this
defined subset to potentially encompass a much broader set of measures
with little direct impact on trade flows – yet those same conditions could
potentially be seen (by host states) as delivering key developmental
99
M. Gibbs and M. Mashayeki, ‘The Uruguay Round Negotiations on Investment: Lessons
for the Future’ (1999) 33(6) Journal of World Trade 1, 1–26.
100
Canada – Administration of the Foreign Investment Review Act (Canada-FIRA), GATT
Panel Report, L/5504, BISD 30S/140, adopted 7 February 1984.
101
Canada-FIRA, paras 5.8–5.9.
50 h ist ory
gains.102 An illustrative list holds open the possibility, for instance, that
a WTO panel might find that technology transfer requirements
(imposed on foreign investors) fall within the potential scope of the
TRIMs Agreement. Indeed, mature investment treaty instruments (such
as NAFTA Chapter 11) will often explicitly prohibit this type of perfor-
mance requirement, evidencing once again the growing entanglement
between the two fields.103
The second key legal outcome of the Uruguay Round directly engaging
foreign investment is the GATS. While the GATS ostensibly pertains only
to ‘trade in services’,104 it contains detailed provisions concerning FDI.
This reflects the strategic fact that FDI tends to be especially important in
service industries that are heavily regulated (such as banking), as it is
often the only legally permissible modality for firms to enter and supply a
foreign market. Indeed, the services sector is typically the largest recipi-
ent of FDI, such that in 2012, for instance, the service sector accounted
for a majority of total inward global FDI stock.105 Reflecting this eco-
nomic reality, FDI through ‘commercial presence’ is included as one of
the four modes of service supply covered by the GATS.106 Yet while the
GATS covers foreign investment in the services sector, its legal structure
and orientation is significantly different from that of a BIT. The GATS is
certainly an instrument of economic liberalization, as it obliges WTO
members to offer market access to their service sectors.107 The invest-
ment treaties of a limited number of states – especially the United States
and Canada – similarly encompass guarantees of market access typically
by extending national treatment and/or MFN to the pre-establishment
phase.108 Yet those investment treaties (such as NAFTA Chapter 11 and
other instruments entered into by the United States and Canada) will
adopt a negative list approach to scheduling commitments to market
access.109 This aggressive top-down structure means that the investment
102
N. Kumar, ‘Performance Requirements as Tools of Development Policy: Lessons from
Developed and Developing Countries’ in K. Gallagher (ed.), Putting Development First
(Zed Books, 2005). For an argument that export performance requirements (that necessa-
rily distort trade flows) may increase host state welfare, see D. Rodrik, ‘The Economics of
Exports Performance Requirements’ (1987) 102 Quarterly Journal of Economics 633.
103
NAFTA Art. 1106(1)(f). 104 GATS Art. I(1).
105
UNCTAD, World Investment Report 2013 (United Nations, 2013), p. 9.
106
GATS Art. I(2)(c). 107 GATS Art. XVI.
108
I. Gómez-Palacio and P. Muchlinski, ‘Admission and Establishment’ in P. Muchlinski,
F. Ortino and C. Schreuer (eds), The Oxford Handbook of International Investment Law
(Oxford University Press, 2008), pp. 239–245.
109
Gómez-Palacio and Muchlinski, ‘Admission and Establishment’, p. 243.
e x pa ns i o n : th e 1 980 s t o t h e la te 1 9 9 0 s 51
treaty’s liberalization commitments encompass every part of the state’s

economic system and national laws unless specifically (negatively)
exempted.110 In contrast to this expansive strategy, the GATS adopts a
hybrid structure, engaging elements of a conservative bottom-up
approach. Using a positive-list method, WTO members can opt in to
legal coverage by either making horizontal commitments (across all
service sectors) or sector-specific commitments (which cover a particular
economic sector) to both the market access111 and national treatment112
obligations in the GATS.113 This structure provides WTO members with
significant latitude in determining when and in what manner to open up
their service sectors to foreign competition. Indeed, analyses of commit-
ments scheduled under the GATS show that developing countries have
utilized this structure to significantly control the extent of their liberal-
ization efforts in the services area,114 which has included scheduling
sectoral commitments by reference either to domestic laws on FDI
and/or their BIT obligations.115 Flexibility to pursue domestic preroga-
tives is given further impetus through exceptions where the GATS con-
tinues and deepens the embedded liberalism orientation of the original
GATT. The GATS drafters notably expand the list of bases upon which to
exempt an otherwise inconsistent measure, including a new freedom to
regulate for ‘public order’.116 As part of this exception strategy, the
GATS framers exhibit a remarkably prescient understanding of thorny
challenges faced by WTO members when regulating foreign
investment.117
Within the broader calculus of substantive trade-offs to result from the
Uruguay Round, the TRIPs Agreement deserves particular attention as it
reveals an especially stark departure from the conservative negative
integration model that had underpinned the GATT. Certain forms of
intellectual property protection (especially patents) are an inherent
trade-off between incentives for innovation on the one hand and
110
NAFTA Art. 1108 (Reservations and Exceptions). 111 GATS Art. XVI.
112
GATS Art. XVII.
113
GATS Art. XX; WTO, Revision of Scheduling Guidelines (SC/CSC/W/19, 5 March 1999).
114
B. Hoekman, ‘Assessing the General Agreement on Trade in Services’ in W. Martin and
L. A. Winters (eds), The Uruguay Round and the Developing Countries (Cambridge
University Press, 1996), pp. 88–124.
115
R. Adlung, P. Morrison, M. Roy et al., ‘FOG in GATS Commitments: Boon or Bane’,
World Trade Organization: Staff Working Paper, ERSD-2011-04 (March 2011),
pp. 10–11.
116
GATS Art. XIV(a).
117
See below Ch. 5, section 5.3.1 (‘Deep integration via ‘incorporation by reference’).
52 h ist ory
economic efficiency plus distribution of income on the other.118 Yet the

TRIPS Agreement requires intellectual protection at a high level for all
WTO member countries regardless of their needs and the abilities of
their citizenry to pay for the affected products.119 This is obviously
problematic for most developing countries, where innovation is not a
major source of economic activity. On the whole, developing countries
are more likely to benefit in terms of consumer welfare in permitting
cheap domestic imitations of innovations created elsewhere.120 While
there are targeted flexibilities that ameliorate this trade-off scattered
throughout the TRIPs Agreement, dissatisfaction with its overall impact
would later prompt the WTO membership to seek amendment of key
components.121 The TRIPS is not the only outcome of the Uruguay
Round to require a level of regulatory harmonization among the WTO
membership. Both the Agreement on Technical Barriers to Trade122
(TBT) and the Agreement on the Application of Sanitary and
Phytosanitary Measures123 (SPS) usher in a harder positive integration
edge to WTO commitments. In the latter, for instance, even non-
discriminatory laws directed at human, animal or plant life or health
can be challenged because they impose greater burdens on producers in
an exporting state.124 These newer commitments offer a potential parallel
with key investment treaty commitments (such as fair and equitable
treatment), an intriguing dimension explored in Chapter 4.
Finally, the Uruguay Round ushered in institutional transformation to
the manner in which disputes would be resolved under the WTO. The
new Dispute Settlement Understanding (DSU) creates a reverse
118
A. Deardorff and R. Stern, ‘Enhancing the Benefits for Developing Countries in the Doha
Development Agenda Negotiations’ (Policy Brief No. 1, William Davidson Institute,
University of Michigan Business School, 2003), pp. 5–6.
119
As a targeted example of this base level of harmonization on patents, consider the fact
that TRIPS mandates that ‘[t]he term of protection available shall not end before the
expiration of a period of twenty years counted from the filing date’ (TRIPS Art. 33).
120
M. Trebilcock and R. Howse, ‘Trade Liberalisation and Regulatory Diversity:
Reconciling Competitive Markets with Competitive Politics’ (1998) 6 European
Journal of Law and Economics 5, 18–21.
121
See below section 2.4 (‘Activation, engagement and recalibration: the 2000s’).
122
Agreement on Technical Barriers to Trade, Annex 1A, Marrakesh Agreement
Establishing the World Trade Organization, 15 April 1994, Final Act Embodying the
Results of the Uruguay Round of Multilateral Trade Negotiations.
123
Agreement on Sanitary and Phytosanitary Measures, Annex 1A, Marrakesh Agreement
Establishing the World Trade Organization, 15 April 1994, Final Act Embodying the
Results of the Uruguay Round of Multilateral Trade Negotiations.
124
Ibid., Art. 2.2.
ex pa nsion: the 1 980s to the l at e 1 990 s 53
consensus rule so that adoption of a panel ruling can only be blocked if no

WTO member objects.125 This includes, obviously, the winning party,
such that WTO dispute settlement is made effectively automatic.
Compulsory adjudication and binding outcomes were also supplemented
and counter-balanced by a new layer of institutional review. The DSU
establishes an Appellate Body with an explicit mandate to correct legal
error.126 As we will see later, the Appellate Body would play an increasingly
vital role (particularly in light of the weakness in the WTO’s legislative
settings) of balancing and reconciling trade and non-trade values.
2.3.2 Exponential growth in bilateral investment treaties

By the late 1980s, the strategic factors that had driven certain states to use
BITs to manage deep political and ideological conflict had begun to erode.
Firstly, expropriatory behaviour declined sharply as newly independent
states had largely completed the post-colonial project of acquiring control
of natural resources and infrastructure.127 Secondly, states had begun to
move away from political and developmental models predicated on oppo-
sition to foreign and private capital. The continuing feasibility of the
import substitution approach to economic development had always
depended on its ability to generate successful and competitive industrial
champions. By the late 1980s, it became clear that this model was produ-
cing disappointing results for those countries (especially in Sub-Saharan
Africa and Latin America) that had chosen this development path.128 On
the other hand, policies linked to export growth and market openness had
led to demonstrable economic growth in the newly industrializing coun-
tries of East Asia.129 Meanwhile, the collapse of the Soviet Union weakened
the case for Marxism as a realistic alternative to economic and political
liberalism. And, finally, the sovereign debt crisis of the 1980s reduced
developing state access to private bank loans. Unable to borrow to finance
policies of economic development, developing states increasingly sought to
attract FDI for their development needs.
125
DSU Art. 16(4). 126 DSU Art. 17(6).
127
M. Minor, ‘The Demise of Expropriation as an Instrument of LDC Policy 1980–1992’
(1994) 25 Journal of International Business Studies 177.
128
Trebilcock and Howse, The Regulation of International Trade, pp. 486–487.
129
These countries, however, did not simply adopt policies of unconstrained market
liberalization, but also offered a range of targeted industrial policies, including export
incentives to specific firms (Trebilcock and Howse, The Regulation of International
Trade, p. 488).
54 h ist ory
The net effect of these trends was the emergence of ‘a consensus in the
developing world about the desirability of attracting foreign investment
through free market policies’.130 This is illustrated firstly and sharply by
the direction of changes in domestic laws. States take unilateral steps to
liberalize domestic restrictions on the entry and operation of foreign
investment throughout the 1990s. Between 1991 and 2006, out of 2,533
national legal and regulatory changes relevant to foreign investment, 91
per cent were in the direction of making the host country more favour-
able for FDI.131 This trend encompassed widespread expansion in prac-
tices of positive discrimination, as both developed and developing states
offered locational incentives to attract foreign capital into their jurisdic-
tions.132 Even for those developing states that remained skeptical of the
market model, the harsh structural adjustment policies imposed on them
by international financial institutions left many with little alternative but
to liberalize their domestic economies.133
The constellation of these various factors drove explosive growth in
investment treaty-making throughout the 1990s. States parties had con-
cluded a relatively modest 385 BITs in the thirty years from 1959 to
1989.134 In comparison, 1,857 BITs were concluded in the next ten
years.135 With this dramatic expansion of the BIT network, José
Alvarez has argued that ‘[t]he 1990s, not the 1980s and certainly not
the 1970s, were the era when the modern investment regime was
born’.136 Interestingly, we find stability in the underlying form and
structure of treaty making as the basic features and content of the classic
BIT model continue to be replicated in this fertile growth period.137
Despite this replication, there are now nuanced shifts when it comes to
130
K. Vandevelde, ‘Sustainable Liberalism and the International Investment Regime’ (1998)
19 Michigan Journal of International Law 373, 390.
131
L. Sachs and K. Sauvant, ‘BITs, DTTs and FDI Flows: An Overview’ in K. Sauvant and
L. Sachs (eds), The Effect of Treaties on Foreign Direct Investment: Bilateral Investment
Treaties, Double Taxation Treaties and Investment Flows (Oxford University Press,
2009), p. xlix.
132
UNCTAD, Incentives and Foreign Direct Investment (United Nations, 1996).
133
R. Gilpin, Global Political Economy: Understanding the International Economic Order
(Princeton University Press, 2001), pp. 313–317; J. Bhagwati, ‘The Capital Myth: The
Difference between Trade in Widgets and Dollars’ (1998) 77 Foreign Affairs 11, 11–12.
134
UNCTAD, Bilateral Investment Treaties 1959–1999 (United Nations, 2000), p. 1.
135
UNCTAD, BITs 1959–1999.
136
J. Alvarez, ‘The Once and Future Foreign Investment Regime’ in M. Arsanjani,
J. K. Cogan, R. D. Sloane et al. (eds), Looking to the Future: Essays on International
Law in Honor of W. Michael Reisman (Brill, 2010), p. 15.
137
Alvarez, ‘The Once and Future Foreign Investment Regime’, p. 20.
ex pa nsion: the 1 980s to the l at e 1 990 s 55
the justifications for states parties to enter into BITs during this period
which begin to parallel the long-standing economic rationale for the
discipline of key trade barriers in the GATT and later the WTO.
2.3.2.1Functional evolution: the BIT as a commitment

to liberal economic policies
For developed states, the continuing suitability of the classic form of
treaty device logically follows the static direction of capital flows in this
period. The bulk of foreign capital continued to originate from a range of
developed countries.138 Thus, while bilateral norms offered the theore-
tical potential for reciprocity of legal complaint, these treaties effectively
operated in a mono-directional fashion to protect investors of capital
exporting states in a transitional counterparty. There is, however, an
important shift in the motivation of developing states when entering
into BITs in this period. Investment treaties no longer have a simple
function of carving out a zone of protection for the foreigner as part of a
larger inter-state bargain to anticipate and dampen political and ideolo-
gical conflict. Developing state usage of BITs is now increasingly tied to
deep and structural policy shifts in the construction of a liberal market
economy. BITs become a mechanism to allow those states, in behavioural
economics terms, to engage in a pre-commitment strategy. They consti-
tute a credible commitment to foreign investors and other stakeholders
that their newly liberalized markets are open to foreign investment and
that those domestic liberalization efforts would not be easily reversed.
The close connection between the various aspects of domestic market
reform and entry into BITs is clearly evident in this account given by a
former Costa Rican treaty negotiator:
The negotiation of every IIA is not only an international event, but also a
manifestation of the domestic political economy of the signatory coun-
tries. In this regard, it is important to recognize that over the last two
decades, most developing economies have undertaken deep and signifi-
cant economic reform that has generated complex political and social
dynamics within their own borders. The negotiation of IIAs is then, to a
great extent, the result of such domestic dynamics.139
138
UNCTAD, World Investment Report 1999 (United Nations, 1999), p. 21.
139
R. Echandi, ‘What Do Developing Countries Expect from the International Investment
Regime?’ in J. Alvarez, K. P. Sauvant, K. G. Ahmed et al. (eds), The Evolving International
Investment Regime: Expectations, Realities, Options (Oxford University Press, 2011), p. 6.
56 h ist ory
For these developing states, BITs become an essential mechanism to ‘lock

in’ the processes of domestic economic reform and reduce the risk of
short-term reversal to that policy path driven by vested interests.140
The strength of the commitment represented by entry into a BIT is
especially important where the country concerned has a chequered
history of relations with foreign investors. Argentina, for example, has
a long history of defaulting on its foreign debt obligations141 and had
given birth to the Calvo and Drago doctrines in the late nineteenth to
early twentieth centuries.142 In 1989, however, Argentina initiated a
radical shift towards liberal economic policies in response to decades
of stagnation and hyperinflation.143 By 1992, it had abolished all price
controls and slashed average tariffs on imported goods from over 40 to
about 9 per cent.144 And by 1994, over 90 per cent of state enterprises
had been privatized,145 with the Argentine Government actively seek-
ing to attract foreign investors into newly privatized industries.146
When it comes to investment treaty practice, Argentina is one of the
twelve most active BIT signers of capital-importing states across the
period 1959 to 1999.147 Importantly, there is a close temporal connec-
tion between Argentina’s choice to begin signing BITs and its domes-
tic reform strategy. Argentina’s first BIT was signed in 1990,
immediately after the 1989 election to liberalize its domestic
economy.148
We find similar patterns of intense clustering of BIT activity across
large numbers of developing states throughout the 1990s, where entry
into BITs is clearly tied to domestic economic and political reforms. In
Eastern Europe, Russia and the Czech Republic are among the most
active BIT signers149 and their BIT programs commenced in the wake
140
Echandi, ‘What Do Developing Countries Expect?’, p. 13.
141
C. Marichal, A Century of Debt Crises in Latin America (Princeton University Press,
1989).
142
Newcombe and Paradell, Law and Practice of Investment Treaties, pp. 8–14.
143
P. Blustein, And the Money Kept Rolling In (and Out): Wall Street, the IMF and the
Bankrupting of Argentina (Public Affairs, 2005), p. 23.
144
Blustein, And the Money Kept Rolling In, p. 24.
145
Blustein, And the Money Kept Rolling In, p. 24.
146
LG&E Energy Corp. and others v. Argentina, Decision on Liability (ICSID Case No. ARB/
02/1, 3 October 2006), para. 49.
147
Z. Elkins, A. Guzman and B. Simmons, ‘Competing for Capital: The Diffusion of
Bilateral Investment Treaties 1969–2000’ (2006) 60 International Organization 811,
821 (Fig. 5).
148
UNCTAD, BITs 1959–1999, pp. 26–27.
149
Elkins et al., ‘Competing for Capital’, 821 (Fig. 5).
exp ansion: the 1 980s to the l at e 1 990 s 57
of market building following the end of the Cold War.150 Similar patterns on
BIT signings are evident throughout a range of other Central and Eastern
European states, including Albania,151 Armenia,152 Belarus,153 Latvia,154
Lithuania155 and Slovakia.156 For many Central and Eastern European
states, the signal represented by the BIT was also aimed at select supra-
national institutions and their member states. Most of their BITs were
concluded with members of the European Union, as part of a strategy of
using BITs to signal the depth of their commitment to market structures
and thereby facilitate accession into the European Union.157 For these states,
investment treaties offered an established external and therefore legitimate
normative standard for the transition to a market-based economy.
Outside of Europe and Latin America, there are equivalent stories in
the investment treaty practice of both South Africa and India. South
Africa’s first BIT was signed in late 1994, immediately after the first
universal elections were held in that country.158 A review by the South
African Department of Trade and Industry of the South African BIT
program described the decision to enter into BITs as ‘within the broader
mandate of the [Republic of South Africa] to attract FDI and open up its
economy, post-democracy’.159 For much of the post-Second World War
150
The Czech Republic’s first BIT was signed in 1992 and by the end of 1999, the Czech
Republic had signed a total of fifty-two BITs. The Russian Federation’s first BIT was
signed in 1989 with Finland. By the end of 1999, the Russian Federation had signed fifty-
two BITs. UNCTAD, BITs 1959–1999, pp. 45–46, 96–98.
151
Albania’s first BIT was signed with Greece in 1991. By the end of 1999, it had signed a
total of twenty-nine BITs. UNCTAD, BITs 1959–1999, pp. 25–26.
152
Armenia’s first BIT was signed with China in 1992. By the end of 1999, it had signed a
total of twenty-one BITs. UNCTAD, BITs 1959–1999, pp. 27–28.
153
Belarus’ first BIT was signed with Poland in 1992. By the end of 1999, it had signed a total
of twenty-seven BITs. UNCTAD, BITs 1959–1999, p. 31.
154
Latvia’s first BIT was signed with Finland in 1992. By the end of 1999, it had signed a total
of thirty-five BITs. UNCTAD, BITs 1959–1999, pp. 75–76.
155
Lithuania’s first BIT was signed with Germany in 1992. By the end of 1999, it had signed
a total of thirty-six BITs. UNCTAD, BITs 1959–1999, pp. 77–78.
156
Slovakia’s first BIT was signed in 1992. By the end of 1999, Slovakia had signed a total of
twenty BITs. UNCTAD, BITs 1959–1999, p. 100.
157
The Czech Republic is a case in point. Following the Velvet Revolution in 1989, the
Czech Republic concluded BITs with every member of the European Union by 2002.
Eastern Sugar BV v. The Czech Republic, Partial Award (UNCITRAL Ad Hoc
Arbitration, SCC No. 088/2004, 27 March 2007), paras. 1–2 (statistics on BIT use by
the Czech Republic); 235–247 (detailing the Czech Republic’s implementation of EU
agricultural quotas in the lead up to accession to the Union).
158
UNCTAD, BITs 1959–1999, pp. 101–102.
159
Republic of South Africa (Department of Trade and Industry), Bilateral Investment
Treaty Framework Review: Government Position Paper (2009), p. 15.
58 h ist ory
period, Indian economic policy had been dominated by a mix of central

planning and import substitution and, as a result, was overtly opposed to
the entry and operation of foreign investment.160 But in 1991, India
began to gradually liberalize its economy, and soon thereafter signed its
first BIT, with the familiar pattern of acceleration of its investment treaty
commitments throughout the remainder of the 1990s.161
The close connection between domestic market reform strategies and
entry into BITs is especially visible in the shape and evolution of Chinese
investment treaties. China is an important state within the system
because, after Germany, it has concluded the second highest number of
BITs,162 comprising a total of 130 as at the end of 2014.163 Chinese BIT
practice also commenced well before many of the countries surveyed
above. Yet, on close analysis, we find that Chinese investment treaties are
similarly sequenced and develop in step with critical changes in domestic
economic reform. During the 1950s to late 1970s, the Chinese economy
remained closed to foreign investment given China’s strong adherence to
Marxist precepts during this period. In 1979, however, China began
to slowly open up its economy to foreign investment, eventually leading
to its first BIT with Sweden in 1982.164 These early Chinese BITs reflect,
as Stephan Schill has aptly described, ‘a certain hesitance with regards to
two strands of international investment protection’.165 In particular,
those early Chinese BITs systematically fail to offer strong guarantees
on national treatment166 and would either omit or heavily qualify
mechanisms of investor-state arbitration.167 Indeed, while China’s
inaugural BIT with Sweden incorporates guarantees of fair and equitable
treatment,168 most-favoured-nation treatment169 and payment of
160
B. DeLong, ‘India Since Independence: An Analytic Growth Narrative’ in D. Rodrik
(ed.), In Search of Prosperity: Analytic Narratives of Economic Growth (Princeton
University Press, 2003).
161
India’s first BIT was signed with the United Kingdom in 1994. By the end of 1999, it had
signed a total of thirty-five BITs. UNCTAD, BITs 1959–1999, p. 64.
162
Sachs and Sauvant, ‘BITs, DTTs and FDI Flows’, p. xxxv.
163
UNCTAD, International Investment Agreements Navigator (http://investmentpolicy-
hub.unctad.org, accessed 23 December 2014).
164
S. Schill, ‘Tearing Down the Great Wall: The New Generation Investment Treaties of the
People’s Republic of China’ (2007) 15 Cardozo Journal of International and Comparative
Law 73, 78–81.
165
Schill, ‘Tearing Down the Great Wall’, 82.
166
Schill, ‘Tearing Down the Great Wall’, 94–97.
167
Schill, ‘Tearing Down the Great Wall’, 89–91.
168
Agreement on the Mutual Protection of Investment, Sweden–PRC, 29 March 1982, Art. 2(1).
169
Sweden–PRC Agreement, Art. 2(2).
e x p a n s i o n : t he 1 9 8 0 s t o th e l a t e 1 9 90 s 59
compensation in the event of expropriation,170 it does not extend national

treatment (and, in line with Schill’s account, confines dispute settlement to
state-to-state processes).171 This first BIT is by no means an outlier.
China’s 1984 BITs with Norway172 and the BENELUX states173 similarly
omit national treatment and only vary from the China-Sweden BIT by now
including highly qualified rights to investor-state dispute settlement.174 To
the extent that they are even included in early Chinese investment treaties,
national treatment clauses take a highly restrictive form by merely requir-
ing goodwill efforts, rendering the promise of liberalization largely sym-
bolic.175 The resistance to national treatment across this older generation
of Chinese BITs is understandable when we consider that they were
concluded during the very early stages of heterodox economic reform in
that country, which involved appending a market system to the scaffolding
of a planned economy.176 By heavily qualifying national treatment, the
Chinese Government could uphold existing privileges of state-owned
enterprises and, given their importance in the domestic economy, shield
them against competition by foreign investors.177 Yet by 1993, China had
undertaken much deeper liberal reforms, culminating in the introduction
of a provision in the Chinese Constitution that would formally classify the
country’s economic system as a ‘socialist market economy’.178 Those
domestic reforms, coupled with China’s increased interest in protecting
her own investment ventures abroad, triggered a shift in Chinese BIT
practice on national treatment throughout the 1990s.179 By the turn of
170
Sweden–PRC Agreement, Art. 3. 171 Sweden–PRC Agreement, Art. 6.
172
Agreement between the Government of the People’s Republic of China and the
Government of the Kingdom of Norway on the Mutual Protection of Investments,
Norway–PRC, 21 November 1984.
173
Agreement between the Government of the People’s Republic of China and the Belgian-
Luxembourg Economic Union on the Reciprocal Promotion and Protection of
Investments, Belg.–Lux.–PRC, 4 June 1984.
174
Belg.–Lux.–PRC Agreement, Art. 10(3).
175
Q. Kong, ‘Bilateral Investment Treaties: The Chinese Approach and Practice’ (1998–99)
8 Asian Yearbook of International Law 105, 124; W. Shan, ‘National Treatment for
Foreign Investment Enterprises and the Conditions for Its Implementation’ (1998) 5
Social Sciences in China 128, 132.
176
L. Lau, Y. Qian and G. Roland, ‘Reform without Losers: An Interpretation of China’s Dual-
Track Approach to Transition’ (2000) 108(1) Journal of Political Economy 120, 120–143.
177
J. Zhou, ‘National Treatment in Foreign Investment Law: A Comparative Study from A
Chinese Perspective’ (2000) 10 Touro International Law Review 39, 48–114.
178
Schill, ‘Tearing Down the Great Wall’, 100.
179
Agreement on the Encouragement and Reciprocal Protection of Investments between
the Government of the Republic of Korea and the Government of the People’s Republic
of China, Korea–PRC, 30 September 1992, Art. 4.
60 his tor y
the century, China’s newer-generation BITs now encompassed both com-

prehensive national treatment commitments and rights to investor-state
dispute settlement.180
This strategy of using BITs to secure lock-in and/or complement
domestic efforts towards market liberalization extends beyond transition
states. Büthe and Milner interviewed European government officials who
conveyed their view of BIT negotiations as ‘an opportunity to have a
series of conservations about the political, administrative and economic
conditions that are needed for foreign investment’.181 According to these
officials, those conversations ‘sometimes take place in the context of a
liberalization of economic efforts; at other times, they lead to such a
liberalization, as “considerable learning takes place” on the part of the
LDC government in the course of negotiations’.182 The United States has
even more clearly expressed its intent to use entry into BITs as a device to
encourage and strengthen liberal economic policies in developing states.
In 1998, Jeffrey Lang as Deputy US Trade Representative described US
investment treaty goals as follows:
The BIT program’s basic aims are to: 1) protect U.S. investment abroad
in those countries where U.S. investors’ rights are not protected
through existing agreements; 2) encourage adoption of market-orien-
tated domestic policies that treat private investment fairly; and 3) sup-
port the development of international law standards consistent with
these objectives.183
Lang then went on to outline the ‘six basic guarantees found in U.S. BITs’,
beginning with national and most-favoured-nation treatment:
First, our BITs ensure that host governments treat U.S. companies as
favorably as their competitors. U.S. investors receive the better of national
or most favored national (MFN) treatment both when they seek to initiate
investment and throughout the life of the investment, subject to certain
limited and specifically described exceptions listed in annexes or protocols
to the treaties.184
180
Schill, ‘Tearing Down the Great Wall’, 91–94; 97–100.
181
T. Büthe and H. Milner, ‘Bilateral Investment Treaties and Foreign Direct Investment: A
Political Analysis’ in Sauvant and Sachs (eds), The Effect of Treaties on Foreign Direct
Investment, p. 211.
182
Büthe and Milner, ‘BITs and FDI’, pp. 211–212.
183
J. Lang, ‘Keynote Address’ (1998) 31 Cornell Journal of International Law 455, 457
(emphasis added).
184
Lang, ‘Keynote Address’, 457 (emphasis added).
exp ansion: the 1 980s to the l at e 1 990 s 61
There is a close and logical connection between Lang’s second basic aim
of US BITs (to encourage adoption of ‘market-orientated domestic poli-
cies’) and his description of the fundamental role of national treatment
(to ensure US companies are treated as favourably as their domestic
‘competitors’). Lang’s outline of the market-supporting goals of the US
BIT program is also formally reflected in the background documents of
US investment treaties.185
We have, then, a distinct evolution in the function of investment
treaties from their beginnings in the post-Second World War period. It
is historically incorrect to describe BITs in this fertile period as instru-
ments designed to only achieve investment protection.186 There is now
an important shared functionality with the law of the GATT and now
WTO. The explosion in numbers of BITs from the late 1980s to the early
1990s reflects a growing consensus on the value of a liberal market model
and developing states are using entry into BITs to communicate their
commitment to the strict economic transitions of the post-Cold War
period. Viewed in this light, the replication without amendment of the
classic BIT model in this period is unsurprising. The stringency of that
model reflects the depth of policy realignment undertaken by, or imposed
on, those states in this period. As we have seen, the use of BITs to support
market structures in developing states is also a key strategy of developed
states in this period. This historical and analytical account is to some
degree predicated on a dyadic treaty structure that couples a developed
state-capital exporter with a developing state-capital importer, with the
latter facing a significant reputational deficit vis-à-vis prospective foreign
investment. Yet the growth period of the late 1980s to early 1990s
also witnessed the inception of a triadic structure with a very different
grouping of states parties.
185
Investment Treaty with Albania, US-Albania, 11 January 1995, S. Treaty Doc. No.
104–19 (1995). (In the Message from the President of the United States Transmitting
the Treaty between the Government of the United States of America and the
Government of the Republic of Albania Concerning the Encouragement and
Reciprocal Protection of Investment with Annex and Protocol Signed at Washington
on 11 January 1995 to the US Senate for ratification, President Clinton stated: ‘The
bilateral investment treaty (BIT) with Albania will protect US investment and assist the
Republic of Albania in its efforts to develop its economy by creating conditions more
favourable for US private investment and thus strengthen the development of its private
sector.’)
186
Cf. N. DiMascio and J. Pauwelyn, ‘Non-Discrimination in Trade and Investment
Treaties: Worlds Apart or Two Sides of the Same Coin?’ ’ (2008) 102(1) American
Journal of International Law 48, 53–56 (distinguishing between the goals of the GATT
(liberalization) and BITs (protection)).
62 h ist ory
2.3.2.2 The puzzle of NAFTA Chapter 11

In 1993, Mexico, Canada and the United States completed negotiations
towards the NAFTA, a multi-issue accord with various commitments
including on trade in goods, technical barriers to trade, rules on govern-
ment procurement and intellectual property. Within that accord,
NAFTA Chapter 11 incorporates investment disciplines that draw on
the classic BIT model as well as the investment chapter in the earlier 1987
Canada-US Free Trade Agreement (CUSFTA). There are, though, sig-
nificant departures in both country pairings and substantive coverage
across these different regimes. BITs had historically been assumed to
operate in a mono-directional fashion, reflecting the distribution of
capital flows in the immediate post-war period; that is, to insulate
economic actors of a developed state against legal and political risks of
operation in a developing host state. But an investment chapter in the
NAFTA would just as easily protect a US national or company in Canada
(and vice versa) than the usual bilateral assumption of protecting the
developed state investor in a transition economy – here, Mexico.
Moreover, unlike the CUSFTA,187 the NAFTA’s substantive commit-
ments were enforceable not only through state-to-state dispute settle-
ment,188 but also via investor-state arbitration.189
One might then logically expect that the framers of the NAFTA would
modify BIT precepts to reflect the high levels of legal protection already
in operation in the developed state partners. Given the undefined nature
of those bilateral norms, there is the risk that enterprising investors
would use textual ambiguity to challenge incidental impacts of the
thick regulatory apparatus in both the United States and Canada. A
reassessment, however, clearly did not occur, as the structure and sub-
stantive provisions of NAFTA Chapter 11 substantially mirror the pro-
tective bilateral model of the post-war period. We might explain the strict
transplant of bilateral norms into the NAFTA by the political sensitivities
at issue. It may have been politically difficult for the United States and
Canada to insist that an item such as investor-state dispute resolution
apply only to Mexico. Then again, there were clearly reciprocal strategies
by which the negotiating partners could have ameliorated the breadth of
operation of the NAFTA compact. An obvious tactic would have been to
include a carve-out for regulation, much like a GATT Article XX. Yet
187
On CUSFTA, see M. Kinnear, A. Bjorklund and J. Hannaford, Investment Disputes under
NAFTA: An Annotated guide to NAFTA Chapter 11 (Kluwer, 2006), General Section 30.
188
NAFTA Ch. 20. 189 NAFTA Ch. 11, s. B.
e x p a n s i o n : t he 1 9 8 0 s t o t he l a t e 1 9 9 0s 63
tellingly, no such attempt was undertaken in NAFTA Chapter 11, which

has no general exemption.190
There is little evidence to indicate why the framers of NAFTA
Chapter 11 decided to forego such a counter-balance. They may have
concluded that the negative-list approach to scheduling market access
commitments would be a sufficient tool to anticipate and limit key
challenges by foreign investors.191 However, this suggestion ignores
the temporal overlap in NAFTA’s negotiation with the Uruguay
Round that led to the creation of the GATS in the WTO. The GATS is
an important site of comparison given, as we have seen, its express
coverage of foreign investment in service industries. The same three
NAFTA member states must have been cognizant of the charged debate
within the Uruguay Round negotiations on the broad reach of the
GATS192 and the resulting decision not only to adopt a more conserva-
tive positive-list approach to scheduling commitments, but, more fun-
damentally, to include a general exception in the form of GATS Article
XIV. Indeed, a comparison with other chapters of the NAFTA clearly
shows that the drafters saw a strategic need for such an exemption in
specific subject areas.193
The answer to the puzzle of the replication of the strict BIT model in
NAFTA Chapter 11 may ultimately turn on three related factors. Firstly,
there is evidence that – at least in the United States – the merits of an
investment chapter attracted significantly less attention both in the
negotiations and general public debate than other parts of this multi-
issue accord, especially trade remedies.194 Secondly, there may have been
190
There is a limited exception for regulatory measures on environmental and health
reasons in Art. 1106(6), yet this only applies to the obligation to refrain from imposing
performance requirements on investors. Article 1114(1) deals with environmental mea-
sures, yet its language is decidedly non-binding. It provides that Chapter 11 should not
be construed to stop a NAFTA state adopting an environmental measure ‘otherwise
consistent with this Chapter’. Aside from Chapter 11, Chapter 21 of the NAFTA sets out
a variety of general exceptions. However, these are largely inapplicable to the provisions
of the investment Chapter 11. Thus, Art. 2101(1)(a) incorporates GATT Art. XX for
purposes of ‘Part Two (Trade in Goods), except to the extent that a provision of that Part
applies to services or investment’ (emphasis added). NAFTA Arts 1106(6), 1114(1) and
2101(1)(a).
191
NAFTA Art. 1108.
192
W. Drake and K. Nicolaidis, ‘Ideas, Interests and Institutionalization: “Trade in Services”
and the Uruguay Round’ (1992) 46 International Organization 37, 64–65.
193
NAFTA Art. 1410(1).
194
Kinnear et al., Investment Disputes under NAFTA, p. 36; A. Liptak, ‘Review of US Rulings
by NAFTA Tribunals Stirs Worries’, New York Times (18 April 2004), A1 (‘When we
debated NAFTA’, Senator John Kerry of Massachusetts, the presumptive Democratic
64 hi sto ry
an expectation that, despite the tripartite structure of the new treaty, it

would in practice still operate much in the same direction as the tradi-
tional BIT model (that is, to only protect investors of developed home
states (here, Canada and the United States) in the underdeveloped legal
and judicial system of the transition partner (here, Mexico)).195 Thirdly,
it is also worth bearing in mind dominant political currents in this
period. Reagan and Thatcherite policies that had gained currency across
much of the developed world called for a greatly reduced role for the state
and presented often, as an alternative, market solutions in the form of
privatization and deregulation. Proponents dismissed ideas of market
failure that had, in the past, guided government intervention and own-
ership in diverse network industries such as electricity, gas and telecom-
munications services.196 The tenor of policy-maker belief then also falls,
to some degree, naturally in line with strong BIT commitments and may
have further contributed to its ready acceptance among the NAFTA
negotiators.
Some of these assumptions – especially the direction of operation of
the NAFTA Chapter 11 protections – have proven to be fundamentally
mistaken. The rapid initiation of NAFTA challenges against the United
States and Canada has now prompted a shift to recalibrate and moderate
the substantive protections of Chapter 11, which has in turn influenced
the contemporary treaty practice of other countries. Before examining
this shift and its role in driving broader recalibration of investment law
(including through close engagement with key tenets of WTO law), there
is one further portent of dissatisfaction with the classic investment treaty
model that deserves our attention.
2.3.2.3
The ill-fated draft OECD Multilateral Agreement
on Investment
In 1995, two years after the finalization of the NAFTA, the member states
of the Organisation for Co-operation and Development (OECD) com-
menced negotiations towards a Multilateral Agreement on Investment
presidential nominee, said in 2002, ‘not a single word was uttered in discussing
Chapter 11. Why? Because we didn’t know how this provision would play out. No one
really knew just how high the stakes would get’).
195
S. Ratner, ‘Regulatory Takings in Institutional Context: Beyond the Fear of Fragmented
International Law’ (2008) 102 American Journal of International Law 475, 513.
196
J. Stiglitz, The Roaring Nineties: A New History of the World’s Most Prosperous Decade
(Norton, 2003), p. 91.
e x p a n s i o n : t he 1 9 8 0 s t o t he l a t e 1 9 9 0s 65
(MAI).197 Those negotiations were abandoned without result in late

1998.
The provisions of the draft MAI significantly resemble the classic BIT
model.198 This OECD initiative can thus be seen in similar terms as the
elevation of that model into the NAFTA. Unlike the NAFTA states,
however, the commitment of the OECD grouping to the strong liberal-
ization and protection guarantees of the MAI rapidly began to erode.
During the negotiations, there was growing concern among the OECD
member states that these guarantees would unduly impinge on their
ability to regulate in the public interest, evidencing once again the critical
importance (to states parties) of appropriate mechanisms (both at the
levels of textual framing and jurisprudential choice) to safeguard core
aspects of public policy. The erosion of commitment to the MAI negotia-
tions was sparked by appearance on the public record of the first set of
arbitral cases under the NAFTA.199 Other targeted concerns included the
impact of investment disciplines on regulatory autonomy, especially in
the desire of France and Canada to insert a specific cultural exemption in
the MAI.200
Interestingly, attempts were made – late in the negotiations – to respond
to this level of growing dissatisfaction. In March 1998, the Chair of the
MAI Negotiation Group released a package proposing changes to the draft
MAI ‘to achieve balance between MAI disciplines and other important
areas of public policy of concern to MAI Parties and to avoid unintended
consequences on normal regulatory practices’.201 None of these is in the
nature of a binding exemption from MAI disciplines. They do, however,
offer a range of interpretative notes on various MAI disciplines, including
the combined most-favoured-nation and national treatment clause. A key
part of that clarification reads as follows:
The fact that a measure applied by a government has a different effect on
an investment or investor of another Party would not in itself render the
measure inconsistent with national treatment and most favoured nation
treatment. The objective of ‘in like circumstances’ is to permit the
197
OECD, The MAI Negotiating Text, Final Version, DAFFE/MAI(98)7/REV/1 (24 April
1998).
198
J. Kurtz, ‘A General Investment Agreement in the WTO? Lessons from Chapter 11 of the
NAFTA and the OECD Multilateral Agreement on Investment’ (2002) 23(4) University
of Pennsylvania Journal of International Economic Law 713, 761–768.
199
Ethyl Corp. v. Canada, Award on Jurisdiction (UNCITRAL, 24 June 1998).
200
Kurtz, ‘A General Investment Agreement in the WTO?’, 756–761.
201
OECD, Chairman’s Note on Environment and Related Matters on Labour, DAFFE/MAI
(98)10 (9 March 1998), p. 2.
66 hi stor y
consideration of all relevant circumstances, including those relating to a
foreign investor and its investments, in deciding to which domestic or
third country investors, and investments they should appropriately be
compared.202
We have, then, the first potent sign of dissatisfaction with the classic
BIT model, as well as an attempt to rebalance its terms. That rebalan-
cing process extends not only to absolute standards of protection
(including those directed against expropriatory behaviour), but also
to the assumed softer and easier norm of national treatment. Notably,
it directly opposes a broad reading of national treatment, that disparate
adverse impact suffered by foreign investor is a sufficient condition of
breach. A disparate impact approach of this sort, which paradoxically
finds hard reflection in later arbitral cases, would prove corrosive to
many instances of legitimate regulatory intervention.203 These belated
attempts to strike a sustainable balance between investment protection
and regulatory autonomy were ultimately insufficient to save the MAI
negotiations. That broader objective, however, eventually begins to find
crystallization – often via the use of new exception provisions directly
modelled on WTO law – in the extensive recalibration of bilateral and
regional investment treaties in the early 2000s.
2.4 Activation, engagement and recalibration: the 2000s

Since the completion of the Uruguay Round, dispute settlement has
comprised the most active part of the WTO. In its first decade of opera-
tion, WTO members brought 314 disputes to the WTO for resolution,
which is more than in almost half a century of GATT dispute settle-
ment.204 In that same period, panels and the Appellate Body circulated
103 and 63 reports respectively.205 The raw numbers (both in activation
and outcome) mask, however, a more nuanced development. The
Appellate Body has proven to be highly adept in fostering and deepening
member state acceptance of the expansive judicial power ushered in by
the DSU. The strong degree of judicial power delegated to WTO panels
and the Appellate Body is underscored by the relatively limited
202
OECD, Chairman’s Note, p. 5 (emphasis added).
203
For a critique of the disparate impact approach to national treatment, see below Ch. 3,
section 3.4.3 (‘Is protectionist purpose required as a condition of breach?’).
204
P. Van den Bossche, The Law and Policy of the World Trade Organization: Text, Cases
and Materials (Cambridge University Press, 2005), p. 284.
205
Van den Bossche, The Law and Policy of the WTO, p. 287.
a c t i v a t i o n , en g a g e m en t an d r e c a l i b r a ti o n 67
‘legislative’ oversight that can be employed by the WTO members as a

collective group. Of course, WTO members can amend texts when they
disagree with interpretation by a WTO panel or the Appellate Body. But
this is difficult as agreements can only be changed with the consensus of
the large body of the WTO membership. Although the formal WTO rules
also contemplate specific amendment or formal interpretation with less
than a consensus vote (but still more than a bare majority), these voting
rules have not been greatly used in practice.206 The prospect of legislative
oversight of judicial action in the WTO is thus severely limited, certainly
in comparison to a domestic legal system. Where a domestic court rules
on a legal rule that is not constitutionally entrenched in some way, the
legislature (especially in a parliamentary system) can normally override
or amend that ruling merely by simple majority.
One can discern, from a close reading of WTO dispute settlement
cases, a clear understanding by the Appellate Body of the sensitive
position it holds by virtue of this sizeable grant of judicial power with
little risk of legislative veto. The Appellate Body has consistently
shielded itself from allegations of judicial activism by both repeatedly
invoking the formal constraints of WTO dispute settlement under the
DSU,207 together with its own strategic prioritization of clear herme-
neutic choices. Most visibly, it has emphasized and required of panels
that the text of the WTO treaties should always comprise the start-point
of a fuller interpretative process.208 Of course, that commencement is
itself part of the customary rules on treaty interpretation as codified in
Article 31(1) of the VCLT and is expressly incorporated into WTO
dispute settlement by the DSU. The Appellate Body has often empha-
sized textual interpretation as part of the mandate to uncover the
ordinary meaning of WTO treaty text even going so far as to draw on
dictionary definitions.209 While criticized by some commentators,210
that strategy is arguably a prudent one given the expansive zone of
discretion afforded to WTO judicial actors by the DSU. A prominent
focus on text necessarily gives primacy to the choices of the ‘legislative’
206
See below Ch. 6, section 6.2 (‘Judicial power, politics and legitimization from the GATT
to the WTO’).
207
‘Recommendations and rulings of the [Dispute Settlement Body] cannot add to or
diminish the rights and obligations provided by the covered agreements’ (DSU Art.
3(2)).
208
Japan – Alcohol, Report of the Appellate Body, p. 17.
209
US – Gasoline, Report of the Appellate Body, p. 20.
210
Weiler, ‘The Rule of Lawyers and the Ethos of Diplomats’, 206–207.
68 h isto ry
branch that formulated the treaty, and thereby shields the Appellate
Body from a charge of expansive judicial activism.
The project of legitimation of WTO dispute settlement is further
evident in the Appellate Body’s sensitive mediation between trade and
other public values. This is visibly on offer in its first decision in US-
Gasoline. While the Appellate Body ultimately struck down the United
States’ gasoline purity regulation, it explicitly acknowledged the legiti-
macy of the American policy objective (being the preservation of clean
air).211 What the Appellate Body faulted was the method by which that
policy was applied, which plainly discriminated against gasoline produ-
cers in Brazil and Venezuela, while putting domestic actors at an advan-
tage.212 The Appellate Body has also sought to mediate between trade and
other values through careful attention to systemic frictions at interna-
tional law. It famously declared in US-Gasoline that the treaty texts of the
WTO are ‘not to be read in clinical isolation from public international
law’.213 And to that end, it has (usually impliedly) engaged the require-
ment under VCLT Article 31(3)(c) that ‘any relevant rules of interna-
tional law applicable in the relations between the parties’ be brought to
bear on interpretation of a WTO treaty text. The US–Shrimp case pre-
sented a charged factual question of whether certain species of sea turtles
constituted an ‘exhaustible’ natural resource for the purpose of an
exemption from treaty obligations in GATT Article XX(g). While the
disputants and third parties conceded this to be the case, the WTO
Appellate Body pointedly went on to rule that this factual position was
confirmed by the very fact that all seven recognized species of sea turtles
were listed as ‘threatened with extinction’ under a dedicated environ-
mental treaty.214 This external dimension has been especially important
in enhancing the legitimacy of adjudication of competing values, by
requiring non-WTO international legal rules to be considered in the
interpretation of WTO treaties.
Looking to the future, the case docket of the WTO also evidences a
growing entanglement of trade and investment issues. Since the early
GATT panel decision in Canada-FIRA, there has been a steady number
of cases assessing the consistency of performance requirements with the
211
United States – Standards for Reformulated and Conventional Gasoline, Report of the
Appellate Body (WT/DS2/AB/R, 29 April 1996), pp. 29–30.
212
US – Gasoline, Report of the Appellate Body, pp. 22–29.
213
US – Gasoline, Report of the Appellate Body, p. 17.
214
United States – Prohibition of Certain Shrimp and Shrimp Products, Report of the
Appellate Body (WT/DS58/AB/R, 12 October 1998), para. 132.
a c t i v a t i o n , en g a g e m e nt a nd r e c a l i b r a t i o n 69
TRIMS Agreement. In the early stages of WTO dispute settlement, this

typically involved the use of local content conditions for investment in
the automotive sector.215 Recently, these cases have engaged the politi-
cally complex use of local content requirements in the construction of a
renewable energy sector. As with Australia’s plain packaging laws, some
of these hybrid measures (with tied environmental and protectionist
elements) have triggered concurrent complaint both before the
WTO216 and through dedicated investment law protections.217
The pace and quality of judicial law making in the WTO has contrasted
sharply with the scarce output of its legislative branch. At the 2001 Doha
Ministerial, the WTO members agreed to launch a new negotiation
round218 which triggered the first attempt to push back the ideological
constraints imposed during the Uruguay Round. The TRIPs Agreement
became an understandable flashpoint for developing countries both at
Doha and the later 2003 Cancún Ministerial. TRIPs attracted public
scrutiny at the Doha Ministerial due to the human suffering and deaths
connected with the HIV/AIDS pandemic, particularly in Sub-Saharan
Africa. The strong patent protections mandated by the TRIPs Agreement
had served to drive up drug prices, putting medicines out of reach of the
poor citizenry of developing countries.219 The public nature of this issue
led to a political statement supportive of public health as part of the Doha
Ministerial Declaration.220 Not surprisingly, the issue did not disappear
after Doha. In the weeks leading up to Cancún, WTO members agreed to
a landmark relaxation of the stringent patent protection mandated by the
TRIPs Agreement, despite the opposition of the pharmaceutical lobby.221
215
Indonesia – Certain Measures Affecting the Automobile Industry, Panel Report (WT/DS/
54/R, WT/DS554/R, CSD59/R, DS64/R, 23 July 1998); India – Measures Affecting the
Automotive Sector, Report of the Appellate Body (WT/DS146/AB/R, WT/DS175/AB/R,
19 March 2002).
216
Canada – Certain Measures Affecting the Renewable Energy Generation Sector, Canada –
Measures Affecting the Feed-in-Tariff Program (WT/DS412/AB/R, WT/DS426/AB/R, 6
May 2013).
217
Mesa Power Group v. Canada, Notice of Arbitration (UNCITRAL, 4 October 2011).
218
Ministerial Declaration, WTO Doc. WT/MIN(01)/DEC/1 (14 November 2001).
219
On the high cost of medication to treat HIV/AIDS in developing countries, see
S. Hensley, ‘Pfizer Makes Aid Pledge, Breaks Aid Pact’, The Wall Street Journal (12
November 2003), B1.
220
Declaration on the TRIPS Agreement and Public Health, WTO Doc. WT/MIN(01)/DEC/
2 (20 November 2001).
221
Implementation of Paragraph 6 of the Doha Declaration on the TRIPS Agreement and
Public Health – Decision of 30 August 2003, WTO Doc. WT/L/540 (2003); ‘WTO
Countries in Deadlock on TRIPS’ (26 October 2001) 1(43) Inside US Trade 1, 22–23.
70 h isto ry
Under this agreement, small countries that have insufficient manufactur-

ing capacity in the pharmaceutical sector are allowed, in cases of public
health emergency, to import low-cost generics produced under compul-
sory licence in other WTO member countries.
The opposition posed to TRIPs is not the only contemporary challenge
faced by the WTO. At a macro level, states parties are beginning to bifurcate
their trade policy by negotiating bilateral and regional FTAs due to the
difficulties of concluding the multilateral round of Doha negotiations in
2001. Those difficulties lie partly in the greater complexity of the subject
matter of the new negotiating round. But they are also indicative of a
greater assertiveness by those WTO members that had felt sidelined by
the final stages of the Uruguay Round. There is, to put it simply, a trade-off
at play between input and output gains in these types of complex negotia-
tions.222 Smaller WTO members are insisting on greater transparency and
participation in the negotiations, which, given the need to reach consensus
among the large membership of the WTO, is adding to the difficulty of
completing the round. The reality, then, is that bilateral and regional out-
comes comprise a key feature of the future trade landscape. Even the WTO,
which has inherent incentives to champion the cause of multilateralism, has
conceded that the preferential trade agreements are critical mechanisms to
achieve deep levels of economic integration.223 This development is given
powerful momentum by a key economic vector. In the hyper-globalized
economic landscape of today, global value chains have reinforced the
organic links between trade and foreign investment. Economic actors –
especially multinational enterprises – splice production choices (particu-
larly in sectors such as car manufacturing) to locate them in jurisdictions
that offer the greatest prospect for efficiency gains. This has strategic
importance for developing states, which naturally seek to extract develop-
mental benefits by joining these chains through specialization in the labour
components of manufacturing in which they have a natural comparative
advantage. We have then vital and growing complementarity between trade
and investment as mechanisms for penetrating international markets.224
222
R. Keohane and J. Nye, ‘Redefining Accountability for Global Governance’ in M. Kahler
and D. Lake (eds), Governance in a Global Economy: Political Authority in Transition
(Princeton University Press, 2003), pp. 409–410.
223
WTO, World Trade Report 2011– The WTO and Preferential Trade Agreements: From
Co-Existence to Coherence (WTO Secretariat, 2011).
224
UNCTAD, Global Value Chains and Development: Investment and Value Added in the
Global Economy (United Nations, 2013); WTO, Trade Patterns and Global Value Chains
in East Asia: From Trade in Goods to Trade in Tasks (WTO Secretariat, 2011).
activa tion, e ngagement and recalibration 71
Not surprisingly, this new economic reality has profoundly influenced the
content of bilateral and regional FTAs that now encompass key disciplines
on both trade and investment.225 It would seem almost inconceivable to
retain the old institutional division when confronted with this fundamental
shift in political economy. As aptly described by the WTO Director General
Roberto Azevêdo, ‘a more globalised world rewards policy coherence – and
punishes incoherence’.226 Overlapping treaty coverage has significant
implications for the nature of the growing connection between interna-
tional trade and investment law. The co-mingling of ‘trade’ and ‘invest-
ment’ treaty negotiators within the same institutional context begins, as we
will see later, to produce a more diverse and nuanced set of perspectives on
what investment commitments should contain.
In parallel to the WTO, the onset of the twenty-first century has
marked a significant shift in the operation of the investment treaty
regime. For one thing, several emerging economies (Brazil, China,
India, the Russian Federation and South Africa) have become capital
exporters as well as capital importers. Much of their outward investment
finds destination in other developing countries, frequently within the
same region, leading to sizeable growth in South-South BITs.227 At the
same time, the deep economic reforms undertaken in developing states
(throughout the late 1980s to the 1990s) have had a decidedly mixed track
record in contributing to improvements in living standards.228 This in
turn feeds into a more cautious approach to the conclusion of BITs by
many developing states, some of whom have publicly acknowledged that
they did not realize the full import of investment treaties that they were
signing during the expansion period.229
While WTO dispute settlement had reached critical mass by the late
1990s, it is only by the turn of the century that one can discern rapid
225
D. Steger, ‘International Trade and Investment: Towards a Common Regime?’ in
R. Echandi and P. Sauve (eds), Prospects in International Investment Law and Policy
(Cambridge University Press, 2013), pp. 162–163.
226
WTO News: Speech, ‘Linking up to Trade and Investment Networks Can Help Fast-
Track Growth – Azevêdo’ (15 October 2014).
227
UNCTAD, ‘South-South Investment Agreements Proliferating’, IIA Monitor No. 3
(United Nations, 2007), p. 1.
228
D. Rodrik, ‘The Global Governance of Trade as if Development Really Mattered’ (United
Nations Development Programme, 2001).
229
L. S. Poulsen and D. Vis-Dunbar, ‘Reflections on Pakistan’s Investment Treaty Program
after 50 Years, An Interview with the Former Attorney-General of Pakistan, Makhdoom
Ali Khan’, Investment Treaty News (16 March 2009) (www.investmenttreatynews.org,
accessed 10 September 2010); Republic of South Africa, Bilateral Investment Treaty
Framework Review, p. 5.
72 h ist ory
escalation of investment treaty claims. The first reported arbitral award

was issued in 1990230 and, up until 1998, there were only fourteen BIT-
related cases that had been brought before the ICSID.231 But since the late
1990s, the growth in known treaty-based cases has been exponential, with
cumulative numbers rising to 568 by the end of 2013.232 The expansion in
case law reflects the growing number of investment treaties in place by
the new century. As news of successful awards has spread, a feedback
loop was constituted whereby investors have been naturally encouraged
to initiate treaty actions and seek compensation for claimed harm.
NAFTA Chapter 11 has been especially important in accelerating activa-
tion of treaty protections. Enterprising legal advisers (often under con-
tingency fee arrangements) have used the undefined language in NAFTA
Chapter 11 to advance a large number of aggressive claims against
general regulatory and even judicial measures in the United States and
Canada. The assumption that the broad NAFTA Chapter 11 provisions
would operate largely to protect US and Canadian investors in Mexico
has proven seriously mistaken. The developed country partners in the
NAFTA have found themselves in the unfamiliar territory of acting as
defendants in an extensive range of investment treaty cases.
Many of these early NAFTA Chapter 11 challenges ventured into
sensitive areas of governance. In 2003, for example, a Canadian company
initiated a claim against the United States arguing that a Mississippi state
court judgment constituted a denial of justice in breach of NAFTA’s fair
and equitable treatment guarantee.233 The notion that an international
economic tribunal could sit in review of a domestic American judgment
was in itself a surprise to many American jurists.234 Consider the deep
impact of the impression that an ad hoc arbitral panel could act as an
assessor of the capacity of a sophisticated legal system, with multiple
levels of appellate review to deliver ‘justice’ among the parties. The
substance of the legal claims mustered in these early NAFTA challenges
were also, at times, of a clearly speculative nature.235 Their fact patterns
230
Asian Agricultural Products Ltd v. Sri Lanka, Award (ICSID Case No. ARB/87/3, 27 June
1990).
231
UNCTAD, Investor-State Dispute Settlement and Impact on Investment Rule-Making
(United Nations, 2007), p. 7.
232
UNCTAD, ‘Recent Developments in Investor-State Dispute Settlement’, IIA Issues Note
1 (United Nations, 2014), p. 1.
233
The Loewen Group, Inc. and Raymond L. Loewen v. US, Award (ICSID, 26 June 2003).
234
Liptak, ‘Review of US US Rulings’ (recording interviews with US judges in the aftermath
of the NAFTA Chapter 11 awards in Mondev v. USA and Loewen v. USA).
235
Ratner, ‘Regulatory Takings in Institutional Context’, 513.
ac tiva tio n, e ngag ement and r ec alib ra tion 73
certainly did not always engage the paradigmatic concern of direct taking
of property motivated by entrenched hostility to foreign capital. Instead,
what was often at issue was general regulation passed by a member state
for ostensibly legitimate objectives that had caused some consequential
loss to a foreign investor. In 2005, for example, a Canadian producer of
methanol challenged a Californian environmental ban on a methanol-
based gasoline oxygenate passed after extensive scientific inquiry.236 The
claimant put forward a range of broad legal readings and speculative
allegations of corruption in the Californian regulatory process.237 Cases
such as this have highlighted problematic absences in the classic invest-
ment treaty model. Older investment treaties (and their successors such
as NAFTA Chapter 11) contain no GATT Article XX-type environmen-
tal exception. Had the NAFTA project been marked by a sense of balance
at its inception measured by the inclusion of such an exception, this sort
of aggressive case may never have arisen.
Aside from the speculative nature of some of these early challenges, the
reasoning adopted by arbitral tribunals often reflected a blunt pro-
investor tendency, crudely in line with the ethos of earlier periods and
mirroring GATT-era hermeneutics. This certainly stands in vivid con-
trast with the careful interpretative practices of the Appellate Body and
has greatly contributed to the slow erosion of state commitment to the
investment treaty regime. Take, for example, the default notion expressed
in the 2004 ICSID Tribunal in the SGS v. Philippines that ‘[t]he BIT is a
treaty for the promotion and reciprocal protection of investments . . . [i]t
is legitimate to resolve uncertainties in its interpretation so as to favour
the protection of covered investments’.238 Pro-investor readings have led
to an understandable concern that host states will be found liable even
when regulating in the public interest and without hostile intent. In the
2004 Occidental v. Ecuador award, an Ecuadorian tax was found to have
breached a BIT obligation of national treatment even though the
Ecuadorian tax authority was characterized as a ‘professional service’
that had acted without the express purpose of discriminating against
the foreign investor.239 Perhaps most significantly, there are the multiple
236
Methanex v. US, Final Award.
237
Methanex v. US, Final Award, Pt II, Ch. I, p. 29 (criticizing the investor’s conduct of the
case as having ‘offended basic principles of justice and fairness required of all parties in
every international arbitration’).
238
SGS Société Générale de Surveillance v. Republic of the Philippines, Decision on
Jurisdiction (ICSID Case No. ARB/01/13, 29 January 2004), para. 116.
239
Occidental v. Ecuador, Final Award, para. 177.
74 h ist ory
claims for compensation brought by foreign investors against Argentina

in the aftermath of that country’s 2001 to 2002 financial crisis. Many of
these arbitral awards reject Argentina’s invocation of a BIT exception
entitling it to pass emergency measures ‘necessary’ for the maintenance
of ‘public order’ or the protection of ‘essential security interests’. In
opposing Argentina’s defence, these tribunals instead adopt a highly
distinct and problematic interpretative method. They forego careful
examination of the specific terms of the treaty exception (as required
by the customary rules on treaty interpretation) and instead simply
conflate its operation with the stringent customary plea of necessity.240
These poor juridical leanings have been coupled with an increasing
deficit in the functionality of investment treaties. For developing states,
acceptance of the significant constraints on their sovereignty imposed by
these treaties had always been balanced against a fundamental expecta-
tion that they would increase foreign investment into the state.241 Yet the
empirical evidence has cast doubt on whether entry into certain types of
investment treaties is causally related to greater flows of foreign invest-
ment.242 In fact, this literature further evidences the importance of a key
connectivity between the two fields that, as we have seen, finds its
strongest manifestation in bilateral and regional FTAs that integrate
trade and investment disciplines. FTAs typically extend national treat-
ment to the question of investment admission (comprising a form of
market access), thereby liberalizing border restrictions to entry of foreign
capital. Targeted empirical evidence has shown that this latter type of
national treatment potentially engages fundamental consequential gains
to the host state, especially statistically significant increases in levels of
foreign investment.243
The problematic methodologies and jurisprudential leanings of these
early cases have triggered state dissatisfaction and a resulting push to pare
240
See below Ch. 5, section 5.3.3.1 (‘Methodologies of conflation’).
241
J. Salacuse, The Law of Investment Treaties (Oxford University Press, 2010), pp. 110–111.
242
For a comprehensive and recent overview of the principal empirical studies, see
J. Yackee, ‘Do Bilateral Investment Treaties Promote Foreign Direct Investment? Some
Hints from Alternative Evidence’ (2010) 51 Virginia Journal of International Law
405–414. For one of the latest studies in this abundant stream of secondary literature
(which post-dates Yackee’s summary), see T. Allee and C. Peinhardt, ‘Contingent
Credibility: The Impact of Investment Treaty Violations on Foreign Direct
Investment’ (2011) 63 International Organization 401, 401–432.
243
A. Berger, M. Busse, P. Nunnenkamp et al., ‘Do Trade and Investment Agreements Lead
to More FDI? Accounting for Key Provisions Inside the Black Box’ (2013) 10
International Economics and Economic Policy 247, 268.
ac tiva tio n, e ngag ement and r ec alib ra tion 75
back the expansive protections offered by the classic BIT model. There has
been targeted intervention within older treaties such as the NAFTA, where
the member states have invoked the authority of the inter-governmental
Free Trade Commission (FTC) to make binding interpretations of
Chapter 11.244 During the course of the Pope & Talbot arbitration,245 the
FTC issued a ruling designed to override the broad reading on the fair and
equitable standard adopted in the first part of that award.246 Recalibration
has also manifested itself in a range of prospective changes by states parties
to newer investment treaties. In 2004, the United States revised its Model
BIT to include a new annex on expropriation that has since been replicated
in the investment chapters of various free trade agreements.247 This annex
directly counters parts of the early NAFTA jurisprudence such as
Metalclad v. Mexico that had adopted expansive and flawed readings of
the broad guarantee against indirect expropriation.248 These newer treaty
standards offer greater elaboration on the precise conditions by which
general regulation would be sanctioned as indirect expropriation.249 WTO
law has pride of place in this complex strategy of recalibration of invest-
ment treaties. The post-Doha right of states to issue compulsory licences
over patent rights for public health purposes is now classically shielded
from investment treaty challenge.250 We also now have an especially
striking departure from earlier periods as select newer instruments contain
substantive and binding exceptions for host state conduct modelled on
WTO law. We saw earlier that Canada is a strong proponent of such
flexibilities, with similar exceptions in the treaty practice of Japan,
Australia and the ASEAN states.251 The United States, on the other
244
NAFTA Art. 1131(2).
245
The Pope & Talbot Tribunal issued its award on the merits on 10 April 2001. Pope &
Talbot v. Canada, Award on the Merits of Phase 2 (UNCITRAL, 2 April 2011). The FTC
Interpretation was released on 31 July 2001 before the Pope & Talbot Tribunal had ruled
on the damages component of the dispute.
246
NAFTA FTC, Notes of Interpretation of Certain Chapter 11 Provisions, Pts B(1)–(2).
247
2004 US Model BIT, Annex B(4).
248
Metalclad Corp. v. Mexico, Award (ICSID Case No. ARB(AF)/97/1, 30 August 2000),
para. 111; P. Sands, Lawless World: America and the Making and Breaking of Global Rules
(Allen Lane, 2005), pp. 136–138.
249
Contrary to the blunt approach in Metalclad, the purpose of the governmental action is
now central in delineating expropriatory behaviour from legitimate regulation. The
‘character of the government action’ is a mandatory factor to be considered along with
its ‘economic impact’ and interference with ‘reasonable investment-backed expectations’
in determining whether a regulatory measure could constitute an indirect expropriation.
2004 US Model BIT, Annex B(4).
250
2004 US Model BIT, Art. 6(5).
251
See above Ch. 1, section 1.3 (‘Five convergence factors’).
76 h ist ory
hand, has resisted broad-scale exemption of this sort. Yet it too includes
specific carve-outs for select obligations such as indirect expropriation.252
Moreover, in the aftermath of the investor-state challenges brought against
Argentina, the United States amended its model BIT to ensure that
invocation of the treaty exception for ‘essential security interests’ becomes
a matter of competence for signatory states alone.253 Even for the United
States, there are clear signs of the influence of the WTO model in its
recalibration strategy. On systemic reform, the United States and other
countries (such as Australia) have publicly signalled a desire to parallel
institutional developments in the WTO by requiring its treaty partners to
begin negotiations on the establishing of an appellate mechanism for
investor-state arbitration.254
The project of recalibration is not entirely a stable one of only effecting
technical amendment to the treaty instruments. It has also manifested
itself in selective forms of exit by states from the investment treaty
system. This again tends to track the episodic experience of particular
states as respondents in investor-state adjudication, highlighting the
critical importance of a jurisprudential system that builds and engenders
state confidence in international law constraints. Part of the challenge
here is to construct an adjudicatory system that carefully and sustainably
mediates between investment protection and other public policy goals. In
2007, Bolivia withdrew entirely from the ICSID255 following an adverse
ruling on jurisdiction in a highly sensitive case concerning the privatiza-
tion of the water system in Bolivia’s third largest city.256 Ecuador, the
respondent state to the Occidental award, originally planned to only
withdraw its consent to ICSID arbitration over specific disputes on
investments in natural resources.257 By 2009, however, Ecuador had
followed Bolivia’s lead and submitted a full denunciation of its ICSID
membership.258 Ecuador has further initiated termination of its BITs,
252
2004 US Model BIT, Annex B(4)(b). 253 2004 US Model BIT, Art. 13.
254
2004 US Model BIT, Annex D.
255
ICSID News Release, ‘Bolivia Submits Notice of Denunciation under Article 71 of the
ICSID Convention’ (16 May 2007) (http://icsid.worldbank.org, accessed 1 March 2009).
256
Aguas del Tunari, SA v. Republic of Bolivia, Decision on Jurisdiction (ICSID Case No.
ARB/02/3, 21 October 2005). On the sensitivities of this case, see G. Palast, ‘New British
Empire of the Damned: Bolivia’s Water Supply is the Latest Acquisition of Thirsty
British Firms in the Service of Uncle Sam’, The Observer (23 April 2000).
257
ICSID News Release, ‘Ecuador’s Notification under Article 25(4) of the ICSID
Convention’ (5 December 2007) (http://icsid.worldbank.org, accessed 1 March 2009).
258
ICSID, ‘List of Contracting States and Other Signatories to the ICSID Convention’
(http://icsid.worldbank.org, accessed 18 December 2010).
co nc lusion 77
while Nicaragua and the Bolivarian Republic of Venezuela have

denounced select investment treaties and also withdrawn from the
ICSID.259 Most recently, Argentina has publicly threatened non-
compliance with a broad range of ICSID awards issued, which has
triggered a further, unexpected connection with WTO law. In early
2012, President Obama suspended Argentina from the US Generalized
System of Preferences (GSP) program specifically because of Argentina’s
failure to enforce arbitral awards issued to US actors.260 According to
public reports, US imports from Argentina benefiting from GSP treat-
ment in 2011 totalled US$477 million and comprised approximately 11
per cent of total imports from Argentina.261
It is clear, then, that we are in a crux period with growing and corrosive
instability across the network of investment treaties. Now more than
ever, negotiators and adjudicators are confronted with the fundamental
question of whether and how important lessons from the WTO can be
used to build legitimacy in the eyes of the stakeholders to investment law
and arbitration.
2.5 Conclusion
We have seen that the earliest stages of treaty-based international eco-
nomic law disciplines (throughout the nineteenth century) were char-
acterized by unified coverage of trade and investment issues. This logical
orientation is separated by the ‘inception’ of modern trade and invest-
ment rules by the mid twentieth century. The GATT as an instrument of
trade liberalization became constituted on a multilateral basis with BITs
designed more to protect foreign investors against growing hostility in
transition and newly independent states. The political and development
causes of hostility to foreign investment were always temporally limited
and/or contingent on outcomes. By the late 1980s, most of these factors
had eroded, with both systems rapidly ‘expanding’, driven by growing
commitment (whether voluntarily or imposed) to the benefits of a liberal
economic model. Critically, here, the functionality of investment treaties
259
UNCTAD, ‘Denunciation of the ICSID Convention and BITs: Impact on Investor-State
Claims’, IIA Issues Note 1 (United Nations, 2010).
260
Proclamation No. 8788, 77 Fed. Reg. 18, 899 (29 March 2012); C. Rosenberg, ‘The
Intersection of International Trade and International Arbitration: The Use of Trade
Benefits to Secure Compliance with Arbitral Awards’ (2013) 44 Georgetown Journal of
International Law 504, 510–528.
261
Rosenberg, ‘The Intersection of International Trade and International Arbitration’, 524.
78 h ist ory
shifts to reconnect with international trade law. Both regimes are now, at
first instance, mechanisms to embed economic transitions and extend
competitive opportunities to foreign traders, service providers and inves-
tors. Yet by the late 1990s, the ‘activation’ of their respective dispute
settlement systems had revealed starkly different pictures. The careful
juridical methods adopted by the new WTO Appellate Body soon gar-
nered growing state confidence in the new dispute settlement structures
of the WTO. The loose and sometimes pro-investor claims of arbitral
tribunals, reminiscent of GATT-era practices, have begun to trigger
distinct levels of state dissatisfaction. The new institutional shift to
FTAs (with common ‘engagement’) is an obvious first vote of state
unease with the single-issue BIT network, while also reflecting a powerful
contemporary economic logic. More fundamentally, that growing dis-
satisfaction manifests itself in a strategic desire to better ‘recalibrate’
investment law disciplines so that they approximate the balanced trade-
offs in the WTO. Two key strategies are clearly at play to achieve this
important goal. There is now logical desire to match individual treaty
provisions with a compelling conceptual case for inclusion being some
underlying theoretical and instrumental justification. Relatedly and cen-
trally, states parties are exploring strategies to achieve a better and more
sophisticated accommodation between investment protection/liberaliza-
tion and competing public values. Here, too, WTO law is placed, as we
will see throughout the remainder of this book, front and centre in that
strategic goal.

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2

adjudicative and legislative arms of the WTO. The dispute settlement

2.2 Inception: 1945 to the 1970s

boilerplate Friendship, Commerce and Navigation (FCN) treaties, which

Freedom of trade, as established by the Convention, consists in the right –

Oscar Chinn is by no means an outlier. In Oil Platforms, the International

most-favoured-nation treatment on tariﬀs and internal taxation).9 The

they contemplate the future contingency of ‘bilateral or multilateral

2.2.2 The General Agreement on Tariﬀs and Trade 1947

border – were bound in schedules with members prevented from increas-

66 per cent.41 These disastrous outcomes aﬃrmed the fundamental

then is a system that allows for signiﬁcant heterogeneity in regulatory

means’.52 These ad hoc panels were composed largely of trade dip-

2.2.3 The emergence of bilateral investment treaties

concerned. Separately, states such as Cuba that began to adopt Marxist

General Assembly resolutions do not themselves constitute customary

pluralism is evident in the obligation to accord foreign investors ‘fair and

instead on ﬁxing strong and absolute protections that would apply

new form of dispute settlement – investor-state arbitration – did not

privileged right to claim breach of the strong protections struck in the

2.3 Expansion: the 1980s to the late 1990s

2.3.1 The Uruguay Round (1986 to 1994) and the establishment

launching the Uruguay Round negotiations on condition that the ser-

treaty’s liberalization commitments encompass every part of the state’s

economic eﬃciency plus distribution of income on the other.118 Yet the

consensus rule so that adoption of a panel ruling can only be blocked if no

2.3.2 Exponential growth in bilateral investment treaties

2.3.2.1Functional evolution: the BIT as a commitment

For these developing states, BITs become an essential mechanism to ‘lock

period, Indian economic policy had been dominated by a mix of central

compensation in the event of expropriation,170 it does not extend national

the century, China’s newer-generation BITs now encompassed both com-

2.3.2.2 The puzzle of NAFTA Chapter 11

tellingly, no such attempt was undertaken in NAFTA Chapter 11, which

an expectation that, despite the tripartite structure of the new treaty, it

(MAI).197 Those negotiations were abandoned without result in late

2.4 Activation, engagement and recalibration: the 2000s

‘legislative’ oversight that can be employed by the WTO members as a

TRIMS Agreement. In the early stages of WTO dispute settlement, this

Under this agreement, small countries that have insuﬃcient manufactur-

escalation of investment treaty claims. The ﬁrst reported arbitral award

claims for compensation brought by foreign investors against Argentina

while Nicaragua and the Bolivarian Republic of Venezuela have

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