The Right of States to Regulate and International Investment Law

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The Right of States to Regulate and International Investment Law Comment by Howard Mann, Ph.D. Associate and Senior International Law Advisor International Institute for Sustainable Development 1. Rethinking the Purpose of International Investment Agreements In what has now become shorthand for a complex set of issues, the concept of “the right to regulate” is increasingly seen as a critical element to understand the development of international investment law and policy. One driver for this is the role of civil society in raising questions over the apparently growing loss of national sovereignty in the face of broader and deeper trade and investment obligations being generated at the international level. A second but closely related driver is the growing body of cases where public welfare legislation has been challenged under trade and investment agreements. This comment begins with a challenge that goes to the very heart of the current debate on international investment agreements (IIAs) and the state right to regulate. The challenge can be phrased as a simple question that many believe must now be answered prior to further development of IIAs: should the objective of investment agreements be to protect foreign investment, or to promote and protect sustainable foreign investment? Civil society groups have, with few exceptions, mobilized forcefully against more negotiations on IIAs as a result of the experience under NAFTA’s Chapter 11 on investment and the successful opposition to the negotiations of the Multilateral Agreement on Investment in the OECD. While this experience cannot be chronicled here, it suffices to say that both the substance and process associated with NAFTA have caused worry on issues such as the right to regulate and the transparency and suitability of the investor-state dispute resolution process that determines whether investor rights have been breached by the exercise of the right to regulate. The underlying rationale for this opposition is that IIAs have become a charter of rights for foreign investors, with no concomitant responsibilities or liabilities, no direct legal links to promoting develop objectives, and no protection for the public welfare in the face of environmentally or socially destabilizing foreign investment. 1 At the same time, a growing number of observers have demonstrated the need for FDI as an essential component of sustainable development strategies at the national and global 1 This view was solidified for many civil society groups with the release of the Metalclad Corporation v. United Mexican States, Award, International Center for Settlement of Investment Disputes (Additional Facility), Case No. ARB (AF)/97/1, 30 August, 2000, where the Tribunal repeatedly refers to the investment promotion and protection purpose of NAFTA’s Chapter 11 in an environmental case of significant importance. 2
levels. Quite literally, hundreds of billions of dollars in investments are needed today if poverty alleviation and development opportunities are to be moved forward in the developing world. This is most obviously so for the least developed countries. In addition, hundreds of billions of dollars in FDI is needed if unsustainable natural resource management and industrial practices in developed and developing countries are to be turned into sustainable ones. Only by maximizing global investment opportunities can these two fulfill this requirement. Given this perspective, new thinking on the role of IIAs as a tool for promoting sustainable development – the only conceptual framework that links these two global economic requirements – is needed. This comment seeks to provide a basic understanding of how the notion of the right to regulate fits into a reconstruction of IIAs as investment agreements for sustainable development. 2. A Primary Consequence of This Change in Thinking for Addressing “The Right to Regulate” A primary consequence of proposing such a change in thinking is that the context for the policy issues under consideration at the Experts’ Meeting, as described in the Note by the UNCTAD Secretariat, may benefit from some revisiting. For example, the structure and direction for the paper seem to address just one half of the relationship between foreign investors and their host states and communities: the impact of the domestic setting on the investment. It pays much less attention to the dimension that is essential to address from a sustainable development perspective: the potential impact of foreign investments, especially FDI, on the local and host state economy, environment and social context. It is important to state at the outset that the impact of foreign investments are not always, and is certainly not necessarily, negative. Quite the contrary. The very context of suggesting IIAs as agreements for sustainable development focuses the mind on achieving the positive results that are available from FDI. Doing so, however, requires a continuity in design that links all areas of investment promotion and management, rather than segregating specific issues in the context of the right to regulate. For example, when discussing host country measures, the discussion paper focuses on promoting the local development relationships of FDI measures, but with no mention of local sustainable development relationships. This has several impacts. For example, it reduces or eliminates a potential focus on institutional development within the host state in areas such as environmental and labour management as part of the framework for attracting sustainable foreign investment, despite their critical relevance both to investors and to host states. It also reduces any discussion of the appropriate role of home countries, inside or outside IIAs, in supporting the development of these domestic legal regimes and institutions, or the potential to supplement host states laws in these areas with minimum standards of conduct for foreign investors. 3
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The Right of States to Regulate and International Investment Law

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