Red hot smoky chilly treaty magik

The NYT just ran a truly rare look into the world of investment treaty arbitration, through the lens of tobacco regulation. By my count, this is only the fourth real press hit on investment arbitration in the Times in 20 years.

Here’s a snippet from the story that caught my interest:

Tobacco companies are pushing back against a worldwide rise in antismoking laws, using a little-noticed legal strategy to delay or block regulation. The industry is warning countries that their tobacco laws violate an expanding web of trade and investment treaties, raising the prospect of costly, prolonged legal battles, health advocates and officials said…

Alarmed about rising smoking rates among young women, Namibia, in southern Africa, passed a tobacco control law in 2010 but quickly found itself bombarded with stern warnings from the tobacco industry that the new statute violated the country’s obligations under trade treaties. “We have bundles and bundles of letters from them,” said Namibia’s health minister, Dr. Richard Kamwi. Three years later, the government, fearful of a punishingly expensive legal battle, has yet to carry out a single major provision of the law, like limiting advertising or placing large health warnings on cigarette packaging…

Uruguay has acknowledged that it would have had to drop its tobacco control law and settle with Philip Morris International if the foundation of the departing mayor of New York, Michael R. Bloomberg, had not paid to defend the law. (The company’s net revenue last year was $77 billion, substantially more than Uruguay’s gross domestic product.) Even developed countries like Canada and New Zealand have backed away from planned tobacco laws in the face of investment treaty claims, Mr. Bollyky said.

I think some of these governments are being a bit disingenuous, but let me return to that in a moment.

Taking a step back. The story of lawsuits chilling regulation in the NYT piece matches up with the popular narrative of investment treaties, and I am predisposed to believe it. However, there are a few links in the intellectual argument that need to be better teased out.

How exactly do investment treaties chill regulation? I think there are a few stories you can tell.

The first I would call a state-neutering story, which is a difficult to sell. The state neutering story is a sort of left-wing variant of a neoliberal fairy tale with the adjectives changed from positive to negative: states can’t act anymore because of some fundamental change in economic institutions.  But states are extremely powerful. These treaties don’t remove states’ fundamental capacities in their own territory.

A variant of the state neutering story focuses specifically on the lawsuits. In this version, states can continue to regulate, but only if they are not sued. Once they are sued, they become incapacitated. This story is difficult to sell as well, because states are sued all the time in their own courts. They manage to continue functioning despite these inconveniences. It is only states with weak or nonexistent courts and other domestic institutions for whom being sued is a novel form of pressure. (Or states like China that appear to be capable of pressuring multinationals to mediate disputes in private.)

The other variants of the regulatory chill argument are a transaction cost story or what I call a fetishization of law story.

The law fetishization story suggests that states (automatically or because they really really care) comply with whatever is deemed the rule of law. If arbitration tribunals deem that states actions violate treaties, they have no choice but to adjust their behavior. The problem with this story (above and beyond ascertaining what rule of law states will follow when international law conflicts with national law) is that arbitration tribunals typically order payment, not policy change. So “complying” with the award simply means paying the fine: the policy can continue. To tell this story, one needs to demonstrate that states are scrutinizing the content of awards, translating them into some sort of policy advice, and then following that to the letter. My own research suggests that states do not scrutinize the awards in this way, and that it is difficult to synthesize the awards into a clear and not-self-contradictory policy manual. Indeed, it seems that very few players are really doing that work at all.

The transaction cost account is intuitively appealing: states will regulate if the benefits outweigh the costs. Being sued in international court is a cost, and if the cost is high enough, states will choose not to regulate. This account jives with how most economists and political scientists would approach the question.

But a few things need unpacking here. First, the assumption that states are rational or unitary actors capable of making perfectly informed cost-benefit calculations is just that: it’s an assumption, not a demonstrated fact. Whose budget calculations are implicated when a state is sued? Except in the most kleptocratic countries, the leaders of government don’t financially benefit or lose from their policies. What is on the line in arbitration is “other people’s money”, namely, the taxpayers’ money. What is on the line in regulation is creating benefits that accrue to the public at large, also other people. Moreover, there are a mass of different government agencies making decisions to regulate or negotiate with foreign investors. In short, it is not straightforward to assume that states do (or even can) make cost-benefit calculations.

Nonetheless, if you accept in principle that governments can and do make cost-benefit calculations, you can go a bit further with the transaction cost story. Such as, the benefits to regulation accrue to diffuse actors and are difficult to quantify. The cost of arbitration are much easier to quantify, in terms of legal fees and a probability-adjusted damages assessment. All else equal, a cost you can quantify and a benefit you cannot might lead arbitration threats chilling regulation.

But you have to do more than just quantify the cost, you have to show that states actually care about the cost (which after all, will be borne by the taxpayers). You can make some sort of argument that government officials are guardians of their country’s reputation, and the arbitration awards harm that.

Putting aside the problem of quantifying nebulous concepts like reputation, do the awards actually harm reputation? As more countries are sued, and as these countries are increasingly high-growth and high-quality institution countries,  it is difficult to believe that the purveyors of international reputation wouldn’t discount the importance or novelty of being sued.

Moreover, you have to make an argument that states care more about their reputation as arbitration-avoiders than public interest regulators. I think this may be true in a number of cases. But in these cases, the “chill” from regulation isn’t really coming from the arbitration awards themselves, but from the ideological orientation of the policymakers themselves.

This comes full circle to my problem with the NYT’s characterization of the policymakers’ motivations. Maybe the countries that thought about regulating tobacco but then shelved the plans didn’t really plan to regulate at all. Perhaps the threat of arbitration is a convenient scapegoat for something they didn’t want to do anyway. To put a really nefarious spin on it, maybe governments even ask multinational investors to start making noises about arbitration in order to more easily derail regulation.

Let me be clear: I am not suggesting that arbitration has no impact on regulation. Again, I am predisposed to believe that it does. I just think that arbitration needs to be situated in a broader political economic landscape, so that we can better understand how legal threats to regulation intersect and play off of other types of threats.

In some ways, what I am suggesting is a blend of the law fetishization and reputation stories. It suggests that while states are sensitive to all manner of pressures (military, economic, etc.), they are particularly sensitive to legal pressures, perhaps because so many state officials are themselves lawyers. Also, because gunboat diplomacy is less common than it used to be, legal pressures are really the only type of pressure states feel in the international arena. State officials and other actors, knowing all of this, realize that law is a resource they can call upon to achieve their other goals. Notice that, in the Times’ story, it is lawyers that are mobilizing a story about how regulation violates treaties in order to advance outcomes-oriented agendas about tobacco control (or not) or treaty renegotiation (or not).

The causal mechanism affecting the yes or no of regulation, then, is not arbitration, but the distribution of economic and ideological capacities in society. If multinational companies are more powerful than other actors, they have a better chance of influencing the governments’ own priorities, and can call upon law and other tools to do so. Policymakers can resist or accommodate these pressures (depending on their own institutional characteristics), using legal or other justifications. Health advocates either have the muscle or not to stop the march, and they too will use legal, scientific and other arguments to do so. Investment treaties change the world, then, but primarily for the reason that they create a new way of making arguments.

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3 Comments

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3 responses to “Red hot smoky chilly treaty magik

  1. Interesting points of view. But doesnt this just scate over the real argument? That pro-consumer regulation is really difficult to get through, for any government, and the threat of long, resource demanding, law suits is the straw that breaks the camels back for many governments? Its just yet another tool in the industry lobbying tool box that is especially effective against those countries that have little time, will or resources to withstand such pressure.

    It seems that you might be making this more complicated than it really is. Or am i just a left-wing nut that just needs something to feed my confirmation bias?

    Love to hear your thoughts.

    • Thanks Marc. You have a valid point. I see it as similar to the one the NYT makes in its editorial today (“Namibia has not enforced tobacco regulations because it is not prepared to fight long and expensive legal battles against large companies.”), which I discuss in today’s blog post: http://bit.ly/1dGt4Sj.

      But I think your point is consistent with the basic matrix of regulatory chill objections to investment treaties I lay out, specifically the transaction cost arguments. You are saying: consumer regs are costly to do. Governments will promote these regs up to a certain point, but at some level of cost, it is no longer worth it.

      I concede that this absolutely a possibility, but there’s a few things to consider:

      1. What factors determine that inflection point for governments? I would suggest that this is not investment treaties, but the underlying politics of the country. If you live in a country where a government is not willing to incur any cost to regulate, then you live in a country that will not regulate, period. It is not investment treaties that are causing that. If you live in a country that doesn’t care about costs when it comes to regulation, investment treaties will not change that.

      2. Most governments are probably somewhere in the middle: willing to incur costs up to a certain (middle) point. And as you note, regulating is already an extremely costly affair. As I wrote in the post, governments are sued all the time in domestic courts, and some of them still plow forward with regulation. It could be very possible that these costs are already chilling regulation that would otherwise happen. In other words, (and as the Dodd-Frank roll out shows) we may already be on the other side of that inflection point – due very little to investment treaties.

      3. How I read your argument is that the cost-benefit balance is so delicately balanced, that investment treaties tip the balance against regulation. Again, I am sure this is true for some countries, but I have a hard time believing that most countries are exactly on that razor edge.

      4. If they are, this is because of some social factor other than investment treaties. And, at that razor edge, probably any type of pressure (military, lobbying, diplomatic, peer group) would be sufficient to chill the regulation. In that world, you don’t have an investment treaty problem, you have a much bigger governance problem.

      So, to return to your point, yes, absolutely these are another tool in investors’ toolboxes, and one that needs to be carefully scrutinized.

      But something besides investment treaties is going into whether countries have “time, will or resources to withstand such pressure.” Political will is something that is fought out on non-legal grounds. Countries that have little time or resources, that is a real issue. But that is an issue of poverty and institutional capacity that would cause a problem for regulation regardless of the specific tool that investors use. So, yes, investment treaties are a tool that can undermine that push for regulation in very poor countries – but so are many other tools. We would need to know more about the relative costs of being hit with these different tools, relative to national capacity. This calculation won’t be the same in all instances.

      (One final note: another reason people fight investment treaties is not because they are the only investor tool, but because they are a “new” one that we could head off in its infancy. I understand the tactical logic there. But you would want to explain why a system with 3,000 treaties that are tough to exit already on the books (and over 500 cases) would fit that criteria. I’m not saying it doesn’t, but you would want to look at the exact tactical argument.)

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