UNCITRAL and ISDS Reforms: The Divided West and the Battle by and for the Rest

By Anthea Roberts and Taylor St. John | Guest Blog | May 10, 2019

The UNCITRAL debates over ISDS reforms can serve as a real-world laboratory for observing changes in the national interests and policies of different countries, as well as shifts in their geopolitical weight and alignments. As part of a commitment to transparency, UNCITRAL decided to allow a wide range of observers in the room and to make recordings of the debates available. Such transparency gives non-state actors a chance to analyse these dynamics in real time and to consider not only what they mean for ISDS reforms but how they reflect and reinforce broader shifts in international economic governance. During the latest Working Group III meeting in April in New York, we observed a divided West and an emerging battle by and for the Rest.

The Divided West

The ISDS reform debates reached UNCITRAL despite a division within ‘the West.’ For multiple reasons, most notably that ad hoc investor-state arbitration had become politically toxic within Europe as a form of ‘private justice,’ the European Union proposed the creation of a multilateral investment court. Although initially reluctant to bring these issues to UNCITRAL, the European Union and Canada ultimately supported these reform debates going forward within a multilateral UN body. Other significant powers, including the United States and Japan, were opposed to both the creation of a court and these reform debates going forward in UNCITRAL.

As in other fora, like debates over the WTO Appellate Body crisis, the European Union is championing multilateral dispute resolution, whereas the United States is demonstrating scepticism. The United States and some others also objected to pursuing the discussions at UNCITRAL due in part to how its decisions are reached. UNCITRAL almost always operates by consensus. But if an issue is forced to the vote, only the 60 elected member states are able to vote. Currently, the European Union holds 12 of these votes. Those who oppose the EU’s court agenda are concerned that, if the issue comes to a vote, there is little they could do to stop a court from being created.

The West’s division has given rise to a tug-of-war dynamic. The European Union wanted to continue the ISDS reform debates in UNCITRAL and it has a clear and declared preference for the reform it ultimately wants to see adopted. The United States and Japan did not want the debates to be held in UNCITRAL. Having lost that battle, they and others, like Chile and Russia, arguably have an incentive to slow down the reform debates and to support the development of alternative reforms in UNCITRAL and elsewhere that might convince third states to accept an improved version of the existing system rather than trade it in for a new court model. In their telling, states have already been addressing some of the problems with ISDS through their bilateral and plurilateral treaties, including the recent CPTPP and USMCA; why not wait to see if these reforms are effective before embarking on a court proposal?

Many of the UNCITRAL debates so far have been marked by these pull-and-drag forces. Thus, for instance, should UNCITRAL request extra funding for additional meetings on ISDS reform? If you are a ‘puller,’ the answer is usually yes – there is a lot to do and we need to move forward to do it. If you are a ‘dragger,’ the answer is typically no – there is no need to sacrifice additional time and resources at this stage of the reform debates. The risk for the pullers is looking inflexible, as though determined to pursue their preferred option without listening to or accommodating others. The risk for the draggers is looking obstructionist, as frustrating the desire of other states for reform. Yet once the debates move to concrete reform proposals, this dynamic might shift again, with different states championing different procedural reform options in something more akin to a competitive race.

What of the Rest?

Power in international economic governance used to be primarily held by the G7 – Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States – or by the ‘Quad’ in WTO-speak – the United States, the European Union, Japan, and Canada. Until the mid-1990s, these major economies, which comprised the four largest in the world and represented a majority of the world’s economic output, were the major decision-makers. If they agreed on the terms of a deal, others typically fell into line. Although many states were represented in plenary meetings in various international organisations, these key players were typically the ones who participated in the smaller scrum or side games where deals were cut. Susan Block-Lieb and Terrance Halliday also found this dynamic in earlier UNCITRAL Working Groups; a core group of around 10 states dominated decision-making.

But we no longer live in a G7 world. The developed world’s share of the global economy has been shrinking and that of the developing world has been rising. Some developing economies are now among the largest economies in the world, including China and India. Consensus agreements can no longer be hammered out by the Quad and accepted by the rest, as evidenced by the failure of the Doha round at the WTO. Although true in general, this change holds particularly true when the major Western economies are divided, as they are with respect to ISDS reforms and WTO dispute resolution. Any attempt to develop consensus requires new alliances to be formed with states formerly excluded from this inner sanctum, including Argentina, Brazil, China, India, Russia, and South Africa. The movement from the G7 to the G20 illustrates this shift.

This shift is evident in Working Group III. An ‘inclusive process’ has become a catchphrase. Several real benefits can be gained from an inclusive process. First, the states that know investor-state arbitration best are often those that have faced many claims or mega-claims. Other states have much to learn from these states. The active engagement of Argentina in this process provides a good example. By contrast, when experts-designate from Argentina, Brazil, and India raised concerns during the drafting of the ICSID Convention, those concerns were brushed aside by European and American governments who didn’t think they would ever be respondents. Today, in contrast, all governments know they are (or may also be) respondents.

Second, ISDS suffers a ‘fundamental lack of trust by the public’, in the words of Cecilia Malmström, and regaining public trust requires a more inclusive, more transparent, and thus more legitimate process. The European Union, Germany, and Switzerland have replenished a travel fund administered by UNCITRAL to enable representatives from developing states to attend the meetings. IISD and CCSI, influential NGOs that have relationships with developing country officials, have helped facilitate the participation of those countries. The result has been impressive. The number of states participating in each meeting has continued to increase, reaching 116 in New York. Many developing states are actively taking part in the debates. Some, like Costa Rica, Morocco, and Thailand, have made detailed and thoughtful submissions. Multiple African states took the floor for the first time. Whatever emerges from this UNCITRAL process will come to a vote in the UN General Assembly – an outcome with powerful resonance and symbolic legitimacy, particularly for developing states.

Developing States as Pawns and Players

Inclusivity is also appealing for strategic reasons. The European Union is presumably betting that many developing states have compelling concerns about ISDS and might be persuaded to join its reform proposal. Their attendance in the plenary room helps to diminish the counterweight of the United States and its allies. The first part of that bet is proving correct; many developing states do have serious concerns about ISDS. The second part of the bet is riskier; whether these states would line up behind an eventual court is less clear, though they might be tempted to by various incentives (like an advisory centre).

The counter grouping also made strategic references to inclusivity, but arguably with less success. In opposing an additional week of Working Group meetings, for instance, Russia and Japan explained that such an addition would create a problem of capacity, particularly for developing states that might lack the time and resources to attend. These statements led to clear pushback from several developing states, including Malaysia and Argentina, which reminded the group that most developing states had spoken in favour of the extra time. The implication was hard to miss: developing states were in the room – and in large numbers, because this issue concerns them – and they were perfectly capable of speaking for themselves.

Capacity remains an issue. For example, turning up is one thing, but turning up consistently is another. This problem applies to both states and the individuals chosen to represent them; many networks are developed personally on an iterative basis, so repeat play is key. Sending a generalist to the meetings from the local embassy is also different from sending an expert in the subject matter from the capital. The question of which department is represented from capital is also an issue: the one that negotiates the treaties or the one that defends claims? Well-resourced delegations often send both, but that is not an option for many developing states. The presence of 116 states does not mean that all of them are likely to be actively involved in the formulation of reforms and compromise deals.

Nevertheless, as the positions of the key developed states are currently clear and divided, the real battle is going to be over what ‘the Rest’ decide to support. Non-Western and developing states are and should be key players in this debate. To work out and influence their positions, Western states probably need to pay less attention to battling each other and more attention to building alliances with third states. It remains to be seen whether the African group or other groups that operate in the WTO will form or if any states will emerge as spokespersons for larger groups.

Tension with UNCITRAL working processes

This development is likely to produce tensions with respect to UNCITRAL’s usual working processes. Although UNCITRAL generally works by consensus, when a division surfaces in the room, it is common for the Chair to call a consultation break to allow deals to be brokered. Typically, a scrum emerges as key players seek to negotiate a compromise, often then involving the Chair in the drafting of an agreed-upon way forward. The scrum cannot make a decision for the plenary–anything worked out must be taken back and put to discussion and consensus in the wider stadium. But this stadium versus scrum dynamic is a crucial element of UNCITRAL’s working processes.

How is that likely to play out here? Well, this week offered a key example. Faced with a division on the working plan, the Chair called a consultation break on Wednesday evening. A small number of the key protagonists stayed back to see if they could thrash out a deal. Most other members went home. A deal was brokered and the next morning the Chair circulated a proposed text to see if he had captured the agreement. A disagreement broke out and a collection of states, including representatives from Argentina, Australia, Bahrain, Chile, China, the European Union, Israel, Japan, Korea, Mauritius, the United States, Russia, Singapore, Switzerland, and Thailand, ended up in an informal consultation across the hall in a smaller room. (Think of this informal room as a side game, like the G20’s replacing the G7 but not becoming the General Assembly.) Hammering out a deal took two hours.

When the side game players returned to the stadium, hostility was in the air. Some other states felt that they had been excluded from the process; the side game was not inclusive, nor were the debates that occurred in it transparent. Morocco took the floor to say as much, as did Sierra Leone. Morocco said that it would have thought that at least states that had gone to the trouble of putting in a submission – like Morocco itself – should have been included in the discussions. Sierra Leone noted that the Secretariat had announced that informal discussions were under way in the corridor, but he had been to the corridor and hadn’t seen anyone. As a newcomer to UNCITRAL, he had not realised that these negotiations took place in a room across the corridor behind a closed door. The Chair assured everyone that side games are open and that nothing is agreed unless it is agreed on the stadium floor, but in practice, deals are hard to challenge once they are brought back to the floor.

Widening the Debate?

The divide between the United States and the European Union means that the views of developing states will shape the future of investor-state arbitration. The debates are wider than ever before in terms of participants. The debates are also wider in terms of options and questions on the table. In addition to the EU-led ‘pulling’ and the US-led ‘dragging’ in reform debates, we can also think about ‘wideners.’ These actors, including South Africa and many civil society groups, ask bigger questions and are seeking to widen the terms of the UNCITRAL mandate, which is limited to ‘procedural’ reforms. Many states agree that investor-state arbitration is due for systemic change. But what should be the starting point for discussions? What goals were investment treaties intended to achieve and what is the positive case for investor-state arbitration or an investment court in light of those goals? Do we need substantive reform and how is it possible to really separate procedural and substantive issues? What role should NGOs and affected communities be able to play in proceedings? Efforts will continue to bring these issues within the process and the existing mandate.

Shifts in geopolitical power demand notice given the declining power of the West and the rising power of the Rest. As the world’s largest economy in PPP terms, China has played an engaged and constructive role in these debates. It has been cautious but has clearly communicated concern that the existing approaches to consistency and correctness are insufficient, which seems to point toward its possible acceptance of an Appellate Mechanism. It also supports a greater focus on alternative dispute settlement. As in the WTO Appellate Body drama, China and the European Union seem potentially to have more in common with each other on the mechanisms for international economic governance (if not the substance) than with the United States.

In terms of other Asian states, Korea and Singapore have engaged considerably; both have leaned toward embracing the need for systemic changes but have been careful to take a measured approach, emphasizing the advisability of developing a sufficient consensus. Thailand submitted a thoughtful paper urging states to focus on reforms to investor-state arbitration; it suggested options such as a roster of arbitrators and an advisory centre, and it took the floor multiple times. Indonesia submitted a paper with a variety of ideas from requiring contractual consent to the filing of investor-state claims to requiring that investors exhaust local remedies and engage in mandatory mediation before bringing an international claim. India spoke from the floor much more than in any previous session. Pakistan made an eloquent intervention on the importance of considering multiple reforms in a holistic way.

Latin American, African and Middle Eastern states are also emerging as important actors, though we do not see the emergence of regional positions to date. Many more African states spoke up this time than at any earlier meeting of this Working Group, including Burkina Faso, Côte d’Ivoire, the Democratic Republic of the Congo, Guinea, Morocco, Nigeria, Sierra Leone, and Sri Lanka. Morocco provided considerable information on its new model treaty in its written submission. Francophone African states met on Wednesday and, after this meeting, several took the floor for the first time to provide a coordinated response to the one-track versus two-track work plan issue. Various Latin American states are also highly engaged. Argentina has spoken of the need for systemic reform, Costa Rica submitted a paper supporting targeted reforms of the arbitral model, and Mexico went on record in support of the Israel/Chile/Japan paper. Bolivia, Colombia, Ecuador, and Honduras took part in the discussion multiple times, raising issues like counterclaims.

Conclusion

In the end, these reforms may be spearheaded by the pullers and the draggers, but they will be decided by where the rest of the world’s states place their weight. As the West experiences declining power and internal divisions, it behoves these states now more than ever to engage meaningfully and constructively with a wide range of other states to determine which solutions best meet the needs of a range of players in the room. That is why, even though UNCITRAL’s process often feels like a battle within the West, it is increasingly apparent that it is really a battle for and by the Rest. The Rest seem to be ready or getting ready to share their views and shape whatever reforms emerge from this process. Those dynamics are the ones to watch for in the future.

Anthea Roberts attends UNCITRAL Working Group III as part of the Australian delegation, but she acts and writes in her independent academic capacity. Taylor St. John attends UNCITRAL as an observer from PluriCourts, University of Oslo. This post first appeared on the EJIL: Talk! blog.

Image courtesy of 123rf.com

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