Investor-State Dispute Settlement in Modern Regional Trade Agreements and Reducing the Risk of “Regulatory Chill”

January 4, 2018

It is now nearly always the case that regional trade agreements (RTAs) include provisions designed to facilitate and protect foreign direct investment (FDI).  Controversially, an RTA feature of investment protection is the possibility of investor-state dispute settlement (ISDS) which non-governmental activists and some governments criticize as contributing to “regulatory chill” – meaning that a government might hesitate to pursue certain worthwhile public policies due to fear of being sued by foreign investors.


According to the United Nations Conference on Trade and Development (UNCTAD), a record number of 70 ISDS cases were filed in 2015, bringing the cumulative number of ISDS cases to 696 by the end of 2015.  A large percentage of these cases involve claims of “indirect expropriation” resulting from a host country government not abiding by its “fair and equitable treatment” obligations.  How these claims arise is explained by the interpretation given to these obligations by the International Law on Foreign Investment Committee which holds that the actions of a host country government must be “…without arbitrariness and in accordance with the principle of good faith… non-discriminatory and proportionate to the policy aims involved… and consistent with the observance of the legitimate commercial expectations of the investor.”


In at least one ISDS case, the investor’s legitimate commercial expectations were argued to include the right to pollute the environment.  In another, more recent case, the Australian Government’s action requiring cigarettes to be sold only in ugly green packaging without logos or fancy trademarked material was challenged by a tobacco company as amounting to the indirect expropriation of its intellectual property.  Given these challenges and others, it is easy to see why civil society groups and governments would object to ISDS and its potential creation of “regulatory chill” in RTA investment chapters.


However, there is no need to be fearful of ISDS in an RTA due to “regulatory chill” if negotiators are skillful in crafting the text of the agreement.  How the risk can be reduced is seen in the Australia – Korea free trade agreement where in Annex 11-B (“Expropriation”) paragraph 5 provides “Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.”  Further, a footnote clarifies that the above listing of “legitimate public welfare objectives” is not exhaustive.  The Australia – Korea deal is not unique.  In Annex 9-B of the Trans-Pacific Partnership (TPP) it is stated (a bit less equivocally) that “Non-discriminatory actions designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriation except in rare circumstances.”  A footnote to this TPP language further clarifies the reference to public health.


Whether ways can be found to bring the TPP into force in the wake of Trump’s ill-advised decision to pull the United States out of the accord and whether a surviving TPP will still contain this progressive approach to ISDS and indirect expropriation remains to be seen.  But the stage has certainly been set now and it seems clear that negotiators of modern RTAs have found a way to reduce the risk of “regulatory chill” resulting from the inclusion of ISDS procedures in the agreements.


* The opinions of this article are only of the author and do not bind any of the institutions with which he is affiliated.

Andrew L. Stoler is a consultant on international trade and investment issues and negotiations.  He serves on the Advisory Committee of the European Centre for International Political Economy and is a member of the International Academic Advisory Board of the United States Studies Centre (USSC) at the University of Sydney.  In 2012-2014, Mr. Stoler was the Theme Leader for the USSC’s Alliance 21 project’s Trade and Investment Theme.  From January 2003 until the end of 2011, Mr. Stoler was the foundation Executive Director of the Institute for International Trade at the University of Adelaide.  Prior to relocating to Australia, Andrew Stoler was Deputy Director-General of the Geneva-based World Trade Organization (1999-2002).  Earlier, he had a long career as a negotiator with the Office of the United States Trade Representative in Washington and Geneva (1979-1999).



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