Author: Todd Tucker

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.

Continue reading “Red hot smoky chilly treaty magik” →

Obamacare has too many moving parts. Too big to fail rules are too complex to implement. Global trade talks have become a multi-level game where no one knows if deals serve their interests.

What all these diverse policy areas have in common (besides the not-unconnected influence of business interests in each) is that ambitious reforms take shapes that are so mangled and compromised that they undermine political support, if not administrative workability.

This insight might have useful lessons for international investment law.

For instance, in response to criticisms that investment treaties are too weighted towards business interests, governments (including the US‘) have added in more and more clauses and annexes to make the obligations more bounded and (arguably) more precise, so that arbitrators and judges can more clearly enforce the will of the government signatories.

But some recent developments suggest that more clauses do not necessarily equal more balance towards government respondents. For instance, Argentina required investors to litigate for 18 months in Argentine courts before launching an investor-state case. Despite this relatively clear additional requirement, neither investment arbitrators nor US Supreme Court justices have found fit to give it much weight.

What if, instead of making investment treaties more complex, we make them simpler? After all, behavioral scientists have shown that simpler rules are often easier to follow.

Right now, investment treaty arbitration is making few people happy. Investors take years to launch and litigate them, and, best case scenario, they get payment – usually far less than what they asked for. Governments are certainly not happy: even having one of the cases brings their reputation into question, not to mention considerable financial resources to defend themselves and pay out.

So, and I am just spitballing here, instead of a 42-page, 13,975-word Model Bilateral Investment Treaty (as the US currently uses), how about the following roughly 250 words (or about 10 tweets):

• Continue reading “Simpl-icsid-y” →

The UN investment agency (@UNCTADwif) just published a piece of mine. A preview:

The field of development economics has taken a significant shift over the last several decades towards institutional explanations for economic growth, with scholars attributing a key explanatory role to independent judiciaries capable of constraining political branch discretion.[1] But the compatibility of this type of “branch autonomy” with international law has been called into question in a series of recent disputes under international investment agreements (IIAs). These lawsuits challenge domestic legal proceedings and show potential conflict between international and domestic law. Even when domestic courts function as “good institutions” from a social science point of view, they may find their decisions reviewed by international tribunals empowered under IIAs signed by other branches of government.

Judge Gregory Mize, a former DC judge appointed by the first President Bush and a respected advocate for improving subfederal and foreign courts, writes in response:

Circling back to the case law cited by Todd Tucker, I believe it would be prudent for the negotiators of international investment treaties, no matter which country they represent, to be mindful of the roots of their domestic court systems when contemplating the creation of judicial forums un-tethered to established courts. I hope professional negotiators appreciate that, if the consumers of traditional domestic court services around the globe come to see private parties and their national government executives have garnered an invincible, penthouse-level justice system for themselves, then there can well be a plummeting of public trust and confidence in judicial systems generally. That is a risk not worth taking.

From another perspective — if sovereign domestic courts in some countries are not up to the task of delivering fair and impartial justice, then governments hosting those courts should first set about improving their judiciaries rather than isolating them. Is that not what smart business managers do when faced with underperforming key components of their enterprises?

Go to the UN site to see the full piece, and Judge Mize’s response.

Is party switching a solution to the government shutdown?

The math doesn’t seem to favor any resolution to the crisis so long as Boehner controls the House, many GOP having little electoral incentive to compromise, and Harry Reid drawing some lines in the sand of his own.

The last two don’t seem likely to change, but the first could change if Boehner lost the majority. Other than waiting for the next election, this would happen if at least 17 to 18  Republican House members switched their party affiliation to Democratic.

The math: there are 232 Republicans, with two vacancies in GOP-leaning districts.There are 200 Democrats, with one vacancy in a Dem-leaning district.In a 432-member House, whoever controls 217 votes (half plus one) has a majority. If 17 Republicans became Democrats, this could happen – although one more would make the margin durable to the likely make-up of a full 435-member House.

This type of massive party switch seems highly unlikely.While as many as 20 GOP are ready to side with Democrats to reopen the government, many of these members are very conservative and would be loath to switch parties more permanently. Of the 20 GOP, it appears that only six are considered vulnerable to losing their seat to a Democrat: Davis, Fitzpatrick, Grimm, Meehan, Rigell and Young. (Although as many as 23 more GOP are in competitive elections, according to the Cook Political Report.)

Also, major partisan realignments typically happen through elections and are very rare. And while around 160 House members have switched parties while in office, the majority of these changes happened at election time. (It seems that between 20 and 30 have changed while in office, although I haven’t seen a totally reliable tally.) In the modern party era, the most members that have switched in a single year have been 5: in 1919, 1935 and 1995, and none of these were blocs going from GOP to Democratic.

However, at times of great turmoil, party switching isn’t unheard of. As Timothy Nokken and Keith Poole write:

King and Benjamin (1986) study party defections over a wide swath of American history (1789-1984). They find that party switching is most likely to coincide with important political events such as changes in partisan control of political institutions, with changes in key economic indicators, and in times of military conflict. In recent Congresses, it is the ideologically cross-pressured members who are most likely to change parties (Castle and Fett, 1996). In spatial terms, some Democrats (Republicans) might find themselves closer to the median member of the Republican (Democratic) Party, hence such cross-pressured members may find a party switch appealing for ideological reasons. During the past 30 years, the Republican Party sought to facilitate the party defection of a number of conservative Southern Democrats at both the national and sub-national level with an active recruitment process to join the GOP (Canon, 1992).

These 20 GOP House members will consider what wins out in the battle of political loyalty, electoral pressures, ideas about rationality in government, and adherence to right leaning ideological traditions.

This last factor should not be overlooked. While many on the left find it impossible to contemplate how the GOP could come to the conclusions it does about health care and deficits, their recent actions show that ideology as a source of social power is alive and well. Michael Mann, who has written extensively about this issue, writes:

An ideological movement that increases the mutual trust and collective morale of a group may enhance their collective powers and be rewarded with more zealous adherence. To monopolize norms is thus a route to power…

Knowledge purveyed by an ideological power movement necessarily “surpasses experience” (as Parsons puts it). It cannot be totally tested by experience, and therein lies its distinctive power to persuade and dominate. But it need not be false; if it is, it is less likely to spread. People are not manipulated fools. And though ideologies always do contain legitimations of private interests and material domination, they are unlikely to attain a hold over people if they are merely this. Powerful ideologies are at least highly plausible in the conditions of the time, and they are genuinely adhered to…

Ideological power offers a distinctive sociospatial method of dealing with emergent social problems… ideologies of class or nation (the main examples) with their distinctive infrastructures, usually extensive and diffuse, contributed importantly to the exercise of power from the times of the ancient Assyrian and Persian empires onward.

POSTSCRIPT, 3 pm: For any of this party-switching to occur, Democrats would have to make clear that the new caucus members would get to occupy a position like the Blue Dogs used to occupy, before they got wiped out. And, some pretty sweet deals like committee chairmanships. And, they’d have to all jump at once, so no single one of them could be overly targeted.

The Syria crisis has people digging for legal guidance. Is the use of chemical weapons really “illegal” under international law, and what does that mean? Is UN Security Council support necessary for an intervention to be “legal” under international law, and what does that mean? Doctrinal, empirical and ethical explorations along these lines come from Ian Hurd, Oona Hathaway and Scott Shapiro, Erik Voeten, and Andrew Gelman.

These debates have prompted me to reflect on my own research into the international law of investment, and why it seems to be so hotly debated.

After all, corporations and other powerful interests influence affairs through many channels: coups, street fights, hostile takeovers, salary negotiations, campaign donations. However, when I outline the phenomenon of companies suing countries in transnational courts over environmental and other policies, many liberal intellectuals and ordinary folk are aghast. I often wonder about what sparks that particular outrage. It’s no secret that corporations influence affairs – they sue governments in domestic courts all the time. What’s so egregious about international lawsuits?

On the one hand, nothing, as some skeptics argue. At best, the outcome that corporations get in investor-state cases is a bit of money – often a lot less than what they asked for. As Susan Franck wrote a few years back:

Recent systematic, descriptive quantitative research makes several points. First, governments can and did win investment disputes. In fact, governments (57.7%) were more likely than investors (38.5%) to win cases and have no damages awarded for alleged treaty breaches. Second, the average amount awarded (approximately US$10 million) was a fraction of what investors typically requested (approximately US$343 million).

There’s little evidence that laws are changed because of these rulings, and for the most part, lives aren’t changed (anymore than they were due to the underlying dispute context in the first place). Most journalists don’t report on investment claims, and most legislators aren’t aware of them. These facts would seem to indicate that investment law is a big nothing burger that has little or no independent impact on social or economic reality. When corporate clients finally figure this out, the cases will probably dry up… as the story goes.

On the other hand, isn’t there something special about being able to achieve one’s goals with the imprimatur of the law? When one facilitates a coup, one gets criticized and ostracized. Your share price may take a hit. Your third wife may love you a little less. Your minister will eye you suspiciously in the church pew. In contrast, using the law has more legitimacy, and may also be a way to get the buy in of institutions in rich countries: US judges will readily back up corporations that win international arbitrations.

So, there’s some currency and power in using the law, which is presumably why the Obama administration and its allies are expending considerable effort trying to convince Congress and the world that a “red line” has been crossed with chemical weapons in Syria. At present, it seems that conventions around domestic use of chemical weapons relate more to norms than laws. This is not nothing: in international law, norms can morph into laws. The importance of investment treaty arbitration seems tied to this as well: an effort to use disputes to shape what is “normal” in the global economy, in the hopes that these norms will develop some of the bindingness of law – above and beyond the payments that are ordered or not in a given case. Whether or not disputes create norms is an empirical question – and not one that is easy to answer.

What is government capable of doing?

As previous posts suggest, both Marxists and institutional economists often believe that government is but an instrument of ruling classes and cohorts.

At the same time, some of history’s most spectacular developmental successes have been the outgrowth of bureaucracies operating with seeming independence from society.

Peter Evans details how this works in Embedded Autonomy, a book of case studies on the IT policies of Korea, Brazil and India. Government officials set up channels to learn from and coordinate with business. When it worked well, officials were not co-opted by the businesses they worked with, but had a functional division of labor.

Evans’ book is a classic account of the potential and pitfalls for government support in the industrial sector, and the need for the autonomy of government as a whole from the private sector. But autonomy could also be examined from the standpoint of independent branches of government.

For instance, Alec Stone-Sweet in Governing With Judges writes about judicial autonomy in France, Germany, Spain and Italy during the post-war period. But while Evans examined bureaucrats’ relations with business, Stone-Sweet examines constitutional judges’ interactions with other groups in government. Both authors have little use for bright lines and formal distinctions between the different spheres: there is two-way influence and identity formation. Stone-Sweet, however, sees “autonomy” as not only the ability of agents (judges) to operate independently from their principals (parliaments), but also as the ability to shape principals’ discourse and way of looking at the world.

Before the second World War, parliamentary supremacy was favored by most European legal scholars and lawmakers: courts merely applied statute. However, partially at US insistence during the reconstruction phase, Germany and Italy (and later Spain and France) developed constitutional courts that could rule on the legality of state action.

Stone-Sweet details how constitutional judges began exercising increasing levels of influence on parliaments and ordinary courts, which began to use the language of constitutional law in their own projects. Whether one examines the trajectory of abortion rights in Germany, transsexual rights in Italy, women’s electoral representation in France, or Catalan language rights in Spain, constitutional courts were able to intervene and shape political processes. One reason they were able to do this is because opposition parties can refer (or threaten to refer) majority party legislation to the constitutional courts – something that creates an ongoing relationship between politicians and judges.

This is an example of the pay-off from legal discourse that can only come from government apparatuses, and how institutional choices (sometimes in the distant past) define the scope for law-flavored politics.

A US court ruled against Argentina’s bond policies last week, showing that international tribunals aren’t the only judicial bodies complicating life for developing country governments.

As the LA Times reports:

The long-anticipated ruling, handed down by the U.S. 2nd Circuit Court of Appeals in New York, said that Argentina must pay a group of holdout investors in full if it wishes to continue making bond payments to holders of other bonds it has issued.

That payment would exceed $1.3 billion, including principal and back interest. However, the court also placed a stay on the ruling to allow the U.S. Supreme Court time to decide whether it will hear an appeal on a related matter.

The dispute between the South American nation and a group of investors led by hedge funds Elliott Management and Aurelius Capital Management, has drawn wide attention in the world of international finance. Supporters of Argentina’s side, including the International Monetary Fund, worry that the ruling could make it harder for poor counties to restructure unsustainable debt loads. Many investors, meanwhile, believed that a win for Argentina would have undermined confidence in U.S. capital markets.

The decision, which upholds a District Court judge’s decision from last November, “confirms that Argentina is not above the law,” said Theodore B. Olson, lead attorney for the holdout investors.

The fight was triggered by Argentina’s record default on nearly $100 billion in bonds in late 2001. Although the country was able to exchange the vast majority of that debt with investors at a discount, a small group — representing about 7% of the total value — refused the swap.

Those holdout investors have since taken Argentina to court in various jurisdictions, demanding face value on their original bonds. Some have attempted creative measures to recover value, at one point convincing a judge in Ghana to temporarily seize an Argentine warship at port in a bid at extracting a ransom.

(For more on the Ghana story and naval ship fun, see here.)

This isn’t the only time Argentina has been hammered by US courts and so-called vulture funds in recent days. A few days earlier, the Second Circuit ruled against Argentina in a case brought by Blue Ridge Investments LLC, a subsidiary of Bank of America. That company had bought up the claim on a nearly decade old $133 million investment treaty award from CMS Gas Transmission Company, a US investor in Argentina’s privatized utility sector.

These cases highlight the growing role that a small group of US judges play in legal matters of importance to developing countries. The Second Circuit judges hearing the NML appeal were Rosemary Pooler, Reena Raggi, and Barrington Parker (who wrote the decision). The original decision being appealed was decided by Judge Thomas Griesa. In the Blue Ridge case, Judge Parker joined Jose Cabranes, in hearing an appeal from a decision made by Paul Gardephe. (Cabranes made news recently by being appointed to the so-called “spy court” by US Supreme Court Chief Justice John Roberts.)

Some of the reasoning in these cases suggest that US judges are not necessarily more sensitive to regulatory needs of developing nations than their counterparts in the investment treaty world – who get a lot of heat for their supposed unaccountability and corporate bias. Indeed, the tag-teaming courts are proving to be something of an “complementary directorate” influencing global economic affairs far beyond US borders.

Continue reading “Posse vulturtatus” →