Jonathan C. Hamilton, International Arbitration: Friend or Foe of Corporations? Recent Rule Changes And Legal Developments, American University Business Law Review (2020)

The emergence of investment arbitration was specifically designed to create a way to resolve problems derived from cross-border investment, and thereby incentivize cross-border investment, de-politicize disputes, and facilitate a long-term focus on the rule of law.

The end of the Cold War was the most pivotal moment in post-World War II history, at least until now. We will see what happens next. One of the reasons that it was critical was because it led to a broad policy consensus, known as the Washington Consensus related to trade and investment, to freedom and free markets. This was reflected in policies of multilateral institutions as well as policies of the U.S. and other governments in the aftermath of the Cold War, regarding the best way to try to develop economies. If you looked at Eastern Europe after the end of the Cold War, you saw a massive transformation both politically and economically.

Latin America moved in a similar direction, following a difficult decade, politically and economically, in the 1980s.  When something seems broken, there is a greater opening to try to fix it.  In that context, the North American Free Trade Agreement (NAFTA) was a watershed moment.  It launched what can be understood as a “NAFTA Era,” stretching from the early 1990s and the consensus at the end

One of the things that was particularly interesting about NAFTA, if you look at the event for the signing of NAFTA in Washington, D.C. – and notwithstanding the debates of the day over NAFTA - you see not only President Bill Clinton, but you see former Democratic and Republican presidents, you see Democratic and Republican leaders of the House, and Democratic and Republican leaders of the Senate all joining together in a literal moment of Washington Consensus.  A far cry from where we stand today in the city of Washington.

The issues has been presented as to whether international arbitration is a friend or foe of corporations.  With that in mind, it is important to consider NAFTA from a few angles. If you look at the preamble of NAFTA, and indeed most investment protection treaties, it’s clear that the aim is not to help corporations or states, but rather to promote development. For example, I once was in a hearing, and a party said, “This treaty exists to protect investors.” That is one component of what an investment protection treaty does. A related component, of course, broadly construed, is to nurture development, in the broadest sense over a long period of time. That is why their impact should be weighed not be short-term data but by the long-term benefits of advancing the rule of law and providing dispute mechanisms to resolve problems as they arise.

That was part of the Washington Consensus, that through openness of investment, free trade, creating new vehicles for promoting the rule of law, we would help states, corporations, citizens, and all stakeholders. One of the things that is a critical element, of course, of NAFTA is access to international arbitration.

What happened, before the past quarter century or so, if there was a dispute between an investor and a state prior to these treaties? In most instances, there was no clear framework for resolving those disputes. So, you can look back through the 20th century, and you can find examples littered through history of the problem of not having a clear framework for resolving cross-border disputes other than the most obvious default — go to the local court— which was not a sufficient risk management tool to facilitate investment. Ad hoc mechanisms, which were used from time to time, were not enough.

So, think of it in the simplest terms. If you go to the World Cup, you need some basic rules, you need to know where the arbitrators are going to be to resolve your problems. So, the emergence of investment arbitration was specifically designed to create a way to resolve problems derived from cross-border investment, and thereby incentivize cross-border investment, de-politicize disputes, and facilitate a long-term focus on the rule of law. A lot of the matters that I have worked on over the past twenty-five years show up on the front page of international newspapers. It just happened a couple of days ago. So, establishing a more neutral forum to resolve these disputes is important.

That’s not only of benefit to investors, it’s a benefit to states because it is a burden on states to have diplomatic pressure, political pressure, coming from the United States, the United Kingdom, or whatever government they may be dealing with in trying to resolve a dispute related to foreign investment. One of the interesting things about the era of the Washington Consensus was after NAFTA, the dream was much bigger. The vision was that NAFTA was a step toward what would become the FTAA — the Free Trade Agreement of the Americas. So, we start off with NAFTA: we’ve got Canada, United States, Mexico, and then we’ll move on throughout the rest of the region.

That never happened. Instead, what happened over a period of time was a series of bilateral agreements and CAFTA, the Central American version of NAFTA. Then you had treaties with Chile, with Peru, with Colombia, with Panama. So, it was done on a bilateral basis but not a regional integration basis until the Trans-Pacific Partnership.

The Trans-Pacific Partnership was theoretically on the verge signature and ratification prior to the presidential election. The big focus is usually on, “What does it mean for China?” Which was not, and is not, part of the TPP. But the fascinating thing about the TPP is that it effectively constituted a new NAFTA and a free-trade agreement of the Americas. For the first time you saw likeminded countries, Canada, United States, Mexico, Peru, Chile, aligning on a free trade agreement that spans the western hemisphere. The vision was that once TPP would be in place, others would follow. Most certainly Colombia would have come, Panama would have come, maybe even the post-Kirchner era of Argentina would have come.

That’s particularly noteworthy because it reflected twenty-five years, almost, after NAFTA, a victory for the Washington Consensus, as well as the reasonable modernization of components of NAFTA. What has played out over the last couple of years has been basically a path to see what happens after the TPP, which basically died a difficult political death really crossing party lines.

It’s noteworthy that it has been a risk, that there could be a hard exit from NAFTA. Hard exit just like a hard Brexit from the EU for England, really. What are the other states that have had hard exits or terminations, enunciations, of these kinds of investment protection treaties? They have been Venezuela of Hugo Chavez, Ecuador of Rafael Correa, and Bolivia of Evo Morales. You can see these explosions, which were basically movements away from these treaties and this consensus.

In many ways, there are components of the new NAFTA that are TPP elements repackaged and sold differently. But what is particularly noteworthy is that, for the first time, the United States has taken a significant step away from its position of the past twenty-five years with respect to investment arbitration. Now, there have long been debates about the efficacy of investment arbitration. We can address those, but on a bipartisan basis, administration after administration has favored investment arbitration.

Now, for the first time, through Chapter 14 of the USMCA, we see the United States taking a step away from investment arbitration, restricting the scope of investment arbitration.

What has yet to be seen is does this mark the end of the Washington Consensus? A permanent move by the United States away from that Consensus? Or is it simply a hiccup in that road? That’s what the fight will play out right here in Washington in the next year, as we see what direction we’re going to head. It’s tied up with a lot of broader questions about globalization and where things head next for corporations, for states, for the United States, and for people.

Does this mark the end of the Washington Consensus? A permanent move by the United States away from that Consensus? Or is it simply a hiccup in that road? That’s what the fight will play out right here in Washington in the next year, as we see what direction we’re going to head. It’s tied up with a lot of broader questions about globalization and where things head next for corporations, for states, for the United States, and for people.

Jonathan C. Hamilton