I. Introduction
Worldwide support for investor-state dispute settlement (ISDS) — a legal mechanism that permits foreign investors to pursue binding, third-party arbitration against a country over actions that harm their investments — has been under attack from Western democracies since at least 1998, when opposition by the U.S., Canada, and France led to the termination of negotiations toward a Multilateral Agreement on Investment (MAI). However, for more than two decades following this step, the EU and U.S. continued to negotiate bilateral investment treaties (BITs) and free trade agreements (FTAs) with ISDS provisions, including the 2015 Trans-Pacific Partnership (TPP) between the U.S. and 11 other nations and the 2016 Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada.
More recently, indications that new ISDS agreements may be coming to an end have proliferated, at least with the EU and U.S., as discussed in this report. But the most recent and, perhaps, clearest sign of ISDS losing its appeal for the largest capital exporting jurisdictions is the EU’s unanimous decision in April 2024, effective in May 2024, to withdraw from the 1994 50-plus member European Union Energy Charter Treaty (ECT). The fact that the ECT had been renegotiated in 2022 because of concerns about its inconsistency with government responses to climate change were apparently not decisive. For the EU, the ECT is essentially abandoned. The future of ISDS, even with substantial reforms, such as those being discussed by the seemingly endless United Nations Conference on Trade and Development’s (UNCTAD) Working Group III, remains uncertain, although many developing countries, such as Mexico, still see it as a valuable stimulus for foreign investment despite reservations.
The U.S. had concluded multiple FTAs and a few BITs as late as 2007. More recent agreements were the TPP and the United States-Mexico-Canada Agreement (USMCA). The U.S., under former President Obama, was among the principal supporters of the TPP in 2015 — an agreement that incorporated then-traditional ISDS provisions. However, the U.S. withdrew under the Trump administration in January 2017, and the TPP became the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The 2018 USMCA saw a radical reduction in the scope of investor protection, with ISDS eliminated between the U.S. and Canada entirely and circumscribed between the U.S. and Mexico, with the full range of enforceable protections limited to a handful of government concession agreements. Since 2018, the large majorities of the Democratic Party as well as many Republicans are opposed to new — and in some cases, existing — investor protection provisions, with the opposition led by former U.S. Trade Representative Robert Lighthizer and Democratic Sen. Elizabeth Warren of Massachusetts. While business groups continue to strongly defend ISDS provisions in U.S. FTAs, they have not prevailed over U.S. anti-ISDS policies.
That being said, the investment law bar and young lawyers who wish to join should take note: ISDS will be a feature of the international legal and investment world for decades to come. ISDS will still be of importance even if the U.S. avoids new agreements and withdraws from existing ones — the latter being difficult and, in my view, very unlikely, as discussed below — and if the EU and its members avoid new commitments. Why? Because worldwide, there are a total of about 2,222 BITs in force and 388 investment provisions in FTAs. Although a few International Centre for Settlement of Investment Disputes (ICSID) member countries, such as Bolivia, Ecuador, and Venezuela, have withdrawn from the ICSID Convention and terminated some of their BITs, the vast majority of ICSID members remain party. Several dozen new cases of BITs are still being registered each year.
To sort all this out, this report is structured as follows:
- Section II summarizes the content of typical BITs and their evolution in recent years.
- Section III analyzes the driving forces that led to the ICSID Convention’s establishment in 1964.
- Section IV traces the proliferation of BITs and FTA investment provisions after the ICSID went into force, to the golden age of awards, effectively spawned by the 1994 North American Free Trade Agreement (NAFTA).
- Section V addresses forces leading to the demise of ISDS, clearly in the U.S. and EU but not necessarily in other major capital exporting countries, such as Japan and Canada, and emphatically not with China.
- Section VI offers brief conclusions.
The reader should keep two major caveats in mind. First, the U.S. and EU, while leaders in foreign direct investment (FDI), are not the only sources, and EU and U.S. dominance in the investment field likely will decrease in the future with the expanding participation of South Korea, Singapore, China, and other major economies in Asia. Second, ISDS has been the subject of thousands of articles and hundreds of books. Any attempt, such as this one, to address these issues in a single piece, will reflect some critical omissions, for which I apologize in advance.
II. Content of Typical Investment Treaties and the EU Energy Charter Treaty
NAFTA and Its Successors
In this discussion, it may be useful to set out what we are discussing when we use the term “ISDS.” For this purpose, we will begin with NAFTA’s Chapter 11, as the standard example, in large part because it has been widely copied elsewhere, not only in subsequent agreements concluded by the three NAFTA parties. In the interest of brevity, procedural provisions and scope issues will be set aside as they are available by reviewing the text and voluminous academic and other commentary.
Key protections of NAFTA’s Chapter 11 include the following:
- Guarantees of national treatment.
- Most-favored-nation treatment.
- Minimum standard of treatment.
- Ban on performance requirements.
- Flexibility in the appointment of senior management.
- Financial transfer rights.
- Protection against direct and indirection expropriation.
- Exceptions for certain industries or sectors, depending on the agreement.
For purposes of this discussion, Section B: “Settlement of Disputes between a Party and an Investor of Another Party” of NAFTA’s Chapter 11 is also relevant, because it provides detailed rules for mandatory third-party arbitration of disputes between a NAFTA investor and another NAFTA government (ISDS).
While there have been many changes over the more than 20 years between NAFTA and TPP negotiations, the most significant updates relate to environmental concerns. For example, the TPP and many other investment chapters incorporate the following language: “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, except in rare circumstances.”
The Energy Charter Treaty
The original ECT as amended is more limited in scope, perhaps reflecting an early objective to encourage multilateral cooperation among many countries in the energy sector as the Cold War appeared to have disappeared. Key provisions include:
- Freedom to select key personnel for positions in an investment project.
- Compensation for losses related to war or other armed conflict.
- Protection against direct and indirect expropriations.
- Freedom to transfer funds.
- Subrogation of government investment guarantors when the host country has taken action covered by an investment guarantee.
However, the ECT does not provide national treatment, most favored nation treatment, or a guarantee of fair and equitable treatment like many more traditional ISDS agreements. It also contains specific recognition of “state sovereignty and sovereign rights over energy resources” and rather weak language on “sustainable development” and avoidance of environmental degradation. After briefly addressing transparency, taxation, state enterprises, and coverage of subnational authorities, along with certain exceptions and provision for economic integration agreements — e.g., FTAs and customs unions — the treaty also incorporates a broad investor right to international arbitration. In a major departure from BITs and FTA investment chapters, which usually provide only for actions by foreign investors against host government, the treaty provides for settlement of disputes between the state parties also via third-party arbitration.
III. The International Centre for the Settlement of Investment Disputes
The ICSID Convention, according to one of its principal negotiators and advocates, the late Andreas F. Lowenfeld, Herbert and Rose Rubin Professor of International Law Emeritus at New York University, reflected a lengthy debate in the U.N. between two main entities:
- Developing countries, most of which advocated “Permanent Sovereignty over Natural Resources” and rejected the application of international law to investment disputes.
- Capital-exporting countries, which sought mechanisms that would provide third-party arbitration for investment disputes and accept the international requirements inter alia of prompt, adequate, and effective compensation.
Industrial states, which were the principal donors at the World Bank, were no longer providing sufficient capital for development; rather, such funding depended increasingly on private investors. The result was a mechanism for addressing investment disputes, but no agreement on the principal obligations of host states to investors. After several years of debate on the idea of a convention, the World Bank’s executive directors approved a draft of what would become the ICSID in 1962. As Aron Broches, then the World Bank’s general counsel, noted, “If the parties had agreed to use the services of the Center for arbitration as the sole means of settling their dispute, the government party should not be permitted to refer the private party to the government’s national courts, and the private party should not be permitted to seek the protection of its own government and that government would not be entitled to give such protection … Finally, … the Convention would provide that such awards would be enforceable in the territories of the countries adhering to the Convention.”
Significantly, as the italicized phrase demonstrates, the parties to ICSID are not, by becoming parties, obligated to accept third-party arbitration under the ICSID Convention. Rather, consent must be registered separately, typically under a BIT, under a dispute settlement chapter of a trade agreement — such as NAFTA’s Chapter 11 discussed above — in an investment contract, or in an agreement between an investor and ICSID party for resolving a particular dispute.
The requirements and procedures for ICSID arbitration have been widely discussed elsewhere, including but not limited to ICSID’s own website. The treaty entered into force in 1966, and as of 2024, it includes 158 contracting states.
IV. The Golden Age of ISDS
While NAFTA itself resulted in more than 60 notices of arbitration and some 30 final arbitral decisions from 1994 through June 30, 2023, the total number of known treaty-based ISDS claims as of July 31, 2022, is reported to be 1,229. NAFTA was unusual for its time in that it provided for ISDS between two developed nations, Canada and the U.S. Over the period of NAFTA’s reach — January 1994 to June 2020 — there were more claims between Canada and the U.S. than between any other two parties. In the past, as noted earlier, the general assumption had been that ISDS would typically take place between developed country investors and developing country host governments. While this has certainly been the predominant pattern worldwide, several other major international agreements with ISDS provisions were concluded after NAFTA, including the ECT, which included most European and many developing nations, and the TPP, which is also a mix of developed and developing countries.
As an academic observer during most of this period and an arbitrator in two ISDS proceedings, my sense is that the explosion of ISDS cases under NAFTA and elsewhere was driven by a variety of factors, including increasing volumes of private FDI across borders. These included, in many cases, decisions by host governments to change the conditions under which the investments were originally made unilaterally and to increase environmental protection after mining concessions had been negotiated and granted, particularly with the installation of new, more environmentally conscious governments. In my view, the creativity of many U.S. and international investment lawyers was probably a factor as well, particularly under NAFTA. It is also significant that many developing countries have been persuaded that the existence of a BIT or FTA investment chapter with a capital-exporting country can be a major factor in attracting FDI in an increasingly competitive world.
This latter conclusion is sometimes reached despite the lack of any clear data, suggesting that the treaties were a controlling factor in attracting FDI, rather than simply one aspect of creating a favorable investment climate. As an UNCTAD summary noted, “Overall, developing countries stand to benefit from engaging in IIAs in terms of increasing their attractiveness for FDI, and therefore the likelihood that they receive more FDI. … Furthermore, — and this point cannot be emphasized enough — the conclusion of IIAs needs to be embedded in broader FDI policies covering all host country determinants of foreign investment. IIAs alone cannot do the job.”
This view seems supported by anecdotal evidence. For example, there is no investment treaty between the U.S. and China, Brazil, or India, yet U.S. investors over the past several decades have flocked to all three countries, at least as long as other aspects of the host country’s investment climate were generally positive — true in some periods but not in others — and the potential for financial gains was robust. That being said, it seems self-evident that an investment protection agreement can in some instances be decisive in encouraging an investor to pursue a project in a given country, with Mexico’s experience in NAFTA being a good example, as discussed below.
As of June 2024, the total number of cases submitted to ICSID arbitration was 1,020. However, while the first case was registered in 1972, no more than four cases were registered annually until 1997. From 1997 to 1999, 9 or 10 cases were registered each year, for a total of 29 cases. ICSID usage continued to expand in the 21st century, with 12 in 2000, 14 in 2001, 18 in 2002, and 57 in 2023. Twenty-one cases were registered in the first five and a half months of 2024. The expansion probably reflected several factors, including the pressures of multinational enterprises on their lawyers, and the replacement of public foreign investment with private FDI. Still, the most important reason for the increase may have been the proliferation of BITs and investment chapters of FTAs. According to the UNCTAD Investment Policy Hub, by 2024, 2,835 BITs had been negotiated, and 2,222 were in force, while another 462 investment provisions in trade agreements have been agreed upon, of which 388 are in force.
V. Summary of Forces Behind the Demise of ISDS
EU
EU members’ opposition to the ECT and other investment protection agreements with ISDS chapters seems to have been fueled significantly by a broadening populist trend that favors “sovereignty.” In this respect, a major critique of ISDS is that it authorizes private arbitrators rather than democratically chosen national or EU judges to make binding decisions. A widespread belief exists that ISDS is unfair because of the following:
- Is nontransparent.
- Is overly expensive leading to the exclusion of all but the largest enterprises.
- Allows investors to ignore or downplay environmental concerns.
- Does not offer workers and environmentalists a similar opportunity to seek arbitration against host governments.
However, in my opinion, a series of highly publicized arbitrations between developed European countries along with several decisions of the Court of Justice of the European Union (CJEU) seeking to prevent intra-EU arbitration are also responsible. While the European Commission (Commission) abandoned traditional ISDS in the CETA negotiations in 2015 in favor of its investment court mechanism, as discussed below, and has continued to advocate for a multilateral investment court, no EU member or other country has endorsed the project, as far as I am aware.
Opposition to ISDS is shared by the CJEU because the justices appear to view it as a usurpation of CJEU authority, although currently their case law applies only to intra-EU member arbitrations. As one international law firm explained in 2023,
“The European Union’s (‘EU’) policy against arbitration of intra-EU investor-State disputes remains largely cabined to its borders. Arbitral tribunals continue to reject objections to their jurisdiction on the basis of the CJEU’s Achmea, Komstroy and PL Holdings judgments, the sole exception being the Green Power decision, in which the tribunal was seated within the EU. The EU’s attempt to renegotiate the Energy Charter Treaty by, among other things, carving out intra-EU arbitration did not succeed, and the EU is now advocating for a coordinated withdrawal instead. And while EU Member States courts have set aside intra-EU awards issued by tribunals seated in their jurisdictions, U.S. courts have allowed requests for enforcement of intra-EU awards to proceed, showing that investors can still obtain relief outside the EU.”
This policy seems to have expanded despite the fact that some arbitral tribunals have refused to recognize the applicability of Achmea and related cases, although such rejection may not be absolute. For example, in Green Power v. Spain, the arbitral tribunal decided it had no jurisdiction over the claimant’s claims and dismissed the case, essentially on grounds that an arbitral tribunal operating under the ECT cannot override EU law, as reflected in the CJEU decisions, because EU law is lex superior.
To the best of my knowledge, no similar ISDS tribunal has taken this approach. However, in June 2024, the Commission and EU members formally declared that the ECT “cannot and never could serve as a legal basis for intra-EU arbitration proceedings,” further limiting the scope of ISDS as it affects EU member states. As no EU members remain party to the ECT and increasingly respect the CJEU rulings, there will be fewer opportunities for intra-EU arbitrations, although arbitrations under existing BITs with non-European countries remain available.
Significantly, under the Treaty of Lisbon enacted in 2009, EU member states were no longer authorized to negotiate their own BITs, FTAs, or many other international agreements. As a result, not only was intra-EU arbitration precluded by Achmea, but the change led the Commission to promote and seek to implement a new approach to ISDS, consisting of a permanent investment court and appellate mechanism. The investment court mechanism was initially included in the CETA and the FTA with Vietnam. However, a decade after entering into force provisionally, this CETA remains under provisional application, with the application of the investment provisions excluded. Ten of the 27 EU members have refused to approve it in part because it includes the EU’s novel investment court and appellate mechanism for resolving investor-state disputes, believed by many to be a challenge to national sovereignty like a traditional ISDS.
EU FTAs with Vietnam and Singapore that originally were to include ISDS mechanisms were restructured to isolate the ISDS provisions, which remain in limbo with Vietnam’s agreement, or shelved indefinitely for later negotiations with Singapore’s. While the Commission does not seem to have abandoned its investment court mechanism, no significant progress toward bringing the mechanism into force appears to have been made beyond agreeing with Canada on rules that would govern the investment tribunal, mediation, and binding interpretations, along with a code of conduct for the judges.
As far as the ECT is concerned, as of January 2024, Denmark, France, Italy, the Netherlands, Poland, Slovenia, and Spain had or were in the process of withdrawing from the ECT, with the Commission endorsing the withdrawals of all EU members. Regarding actual disputes, the ECT secretariat reported that as of May 2023, 158 known cases had been instituted under the treaty. Of these, as of June 2022, Russia, the Ukraine, or Moldova were respondents in only eight cases; more significantly, among the largest EU members, Spain was the respondent in 51 cases, Italy in 13, Poland in 5, and Germany in 4, while France and the U.K. were the respondent in no cases.
The ECT is one of a relatively few ISDS agreements, along with NAFTA, where one developed country’s investors can bring a claim against another developed country. Before NAFTA and the ECT, such claims were rare at best, mostly under BITs and FTAs, where despite reciprocal provisions, the principal purpose was to protect capital exporting country investors from arbitrary actions in developing countries with weak legal systems.
U.S.
Similar anti-ISDS views are prevalent in the U.S. Notably, U.S. Trade Representative Katherine Tai recently commented: “President Biden does not believe corporations should receive special tribunals in trade agreements that are not available to other organizations, and he opposes the ability of private corporations to attack labor, health, and environmental policies through ISDS. I share these views, and the United States is not currently pursuing any trade or investment agreements that would establish ISDS.”
Although such opposition did not represent a significant majority position in the U.S. Congress and with U.S. presidents until relatively recently, its origins go back at least as far as the negotiation of NAFTA in 1991–92. In a more recent statement at the time of the USMCA negotiations, such organizations as Public Citizen attacked the ISDS provisions of NAFTA as a “stunning corporate power grab: NAFTA grants rights to thousands of multinational corporations to bypass domestic courts and directly ‘sue’ the U.S., Canadian and Mexican governments before a panel of three corporate lawyers.” Sen. Warren has opposed ISDS in trade agreements at least since the TPP negotiations in 2015, while Lighthizer’s public opposition is somewhat more recent — albeit for different reasons — with the USMCA negotiations. As he observed in 2017, “The bottom line is business says ‘We want to make decisions and have markets decide. But! We would like to have political risk insurance paid for by the United States’ government.’ And to me that’s absurd. You either are in the market, or you’re not in the market. They’ll come in and say ‘Ambassador, the market’s dictating we go to Mexico to invest in certain things.’ And my reaction is, ‘Then go to Mexico and invest. That’s what the market’s for.’” What is most significant is that — for sharply differing reasons as noted in the introduction — the U.S. left and right has strongly opposed ISDS in both current and future trade agreements; many also are eschewing all significant trade agreements entirely, as has been the Biden administration policy.
However, strong opposition to the elimination of ISDS in existing and future agreements is widespread among business groups. As a letter from the Business Roundtable, National Association of Manufacturers, and the U.S. Chamber of Commerce at the time of the USMCA asserted: “ISDS does not infringe U.S. sovereignty. Rather, it upholds the same fundamental due process and private property guarantees protected by our Constitution, and it obligates other countries to uphold these precepts as well. ISDS 2 cannot overturn U.S. laws or regulations: All arbiters can do is award compensation when a government expropriates property or otherwise tramples on the rule of law.”
Such opposition has not been limited to business groups. A commentary published by the independent, nonpartisan Center for Strategic and International Studies (CSIS) has also advanced strong reservations, suggesting that administration and congressional opposition to ISDS is based on “shaky and short-sighted premises”; it argues that “the legal certainty and stability provided by ISDS mechanisms will prove critical in facilitating cross-border investment,” particularly with privately financed wind, solar, hydro, and nuclear power projects.
Still, under the circumstances, and despite the potential adverse impact on green power projects worldwide, in my view, it will be very surprising if the U.S. under either a Harris or a Trump administration negotiates any new ISDS provisions or other trade agreements in the foreseeable future.
Mexico
Although Mexico remains very much a developing country with a commitment to ISDS — weakened considerably in the case of the ISDS under the USMCA — Mexico merits discussion of its historical relationship to ISDS in NAFTA, the USMCA. and other agreements. Prior to the NAFTA negotiations, Mexico had long been legally and constitutionally committed to the Calvo Clause, which stipulates that disputes with foreign investors must be resolved by national courts and tribunals. It also bars recourse by foreign investors to the diplomatic protection of their home countries.
In the course of the 1991–92 NAFTA negotiations, Mexico’s adherence to the Calvo Clause was largely abandoned, with Mexico accepting ISDS in NAFTA’s Chapter 11, even though it did not become party to the ICSID Convention until 2018. This sea change in Mexico’s investment policies occurred apparently because officials were convinced that Mexico would not benefit fully from NAFTA’s duty-free, quota-free access to the U.S. and Canadian markets unless foreign investors had greater confidence in Mexico’s investment climate and the rule of law. Chapter 11 addressed, inter alia, the weakness of Mexico’s domestic foreign investment legislation, the mandatory requirements for majority Mexican ownership, and the uncertainty the existing system offered to foreign investors. Foreign investors won other major incentives in NAFTA, including commitments to national treatment of foreign investors and improved protection for intellectual property, which Mexico fulfilled.
Mexico has concluded 36 BITs, all post-NAFTA, as of 2021, including 15 with the U.K., Switzerland, and other European countries. In addition to Canada and the U.S., Mexico has trade agreements with nearly 50 countries, most of which include investment protection provisions. Two of the most important are trade agreements with the EU concluded in 2000 and Japan in 2004. The agreement with Japan incorporates an investment protection and ISDS chapter. The EU-Mexico Economic Partnership Agreement does not include this chapter, presumably because, as noted above, many of the then-existing EU members had separate BITs with Mexico.
Mexico is currently in FTA negotiations both with the EU and the U.K. A public draft of the EU-Mexico Global Agreement from 2018 indicates that the FTA, which was approved by the EU Council in September of 2020, incorporates the usual protections for foreign investors, but no ISDS. A separate statement on the agreement from the EU indicates that the Commission intends to include the investment court system in in its agreements with Mexico. However, efforts by the EU to amend the agreement in 2022 were apparently opposed by Mexico, which among other things wanted modernized investment protection to be included sooner rather than later, suggesting continued support for ISDS. Presumably, any ISDS provisions will be in a separate agreement when and if the trade agreement is concluded to avoid the delays experienced among EU member states in ratifying CETA.
The U.K. and Mexico signed a “continuity agreement” in 2021 which essentially replicates the 2000 agreement with the EU; negotiations of a broader FTA with or without ISDS provisions were initiated in July 2022 but apparently have not progressed.
Despite these last activities, for Mexico the most important consideration for foreign investors is not the availability of ISDS, but the fact that the López Obrador government has been highly critical and dismissive of foreign investment, even though the continuing viability of Mexico’s economy depends on it. President-elect Claudia Sheinbaum may be able to moderate the anti-capitalist rhetoric but could be unwilling or unable to change significantly Mexico’s dismal investment climate. She is promoting a new doctrine known as “Shared Prosperity Plan,” and no one knows what impact, if any, it would have on investors and their capital. Add to this the possibility of another Trump presidency, with its strong opposition not only to ISDS but to U.S. investment outside the U.S., and one wonders whether even significant actions by Sheinbaum to improve the investment would have the desired effect, at least for U.S. and other enterprises seeking to sell their products in the U.S.
Canada
Canada’s approach is more difficult to fathom. Canada has not concluded a new BIT since 2018, a few weeks after the USMCA was signed. In the USMCA negotiations, it agreed to eliminate ISDS between Canada and the U.S. entirely, although ISDS with Mexico is available under the revised CPTPP, as both countries are parties. Canada concluded a BIT with China in 2012 with modified ISDS provisions. The country concluded CETA with the EU in 2017, with the EU’s still pending arbitration court/appellate mechanism, and published a model BIT in 2021 with contemporary ISDS provisions.
There appear to be no trade or investment agreements concluded by Canada since December 2018. Still, as the 2021 model BIT indicates, Canada has not necessarily rejected ISDS for the future.
Elsewhere
China is the country with the most BITs concluded, as recently as 2023, as noted earlier; 146 are reportedly in existence, although some are not in force. It is not known how many are currently under negotiation. Japan, another major capital exporting nation, has negotiated only 38 BITs, the most recent in 2023; thus, it is too soon to predict whether Japan’s policy is under review. South Korea also appears active regarding BITs, with its most recent agreement concluded in 2023, the 105th it has negotiated. Singapore, another developed economy, remains a leader in concluding investment agreements with ISDS, including its 53 BITs and 42 FTAs, most recently concluded in 2023.
In the U.K., opposition exists to the ECT, as in the EU. However, views on ISDS seem unclear; in any event they have not been clearly articulated by the new Labour government. The U.K. accepted traditional ISDS in the negotiations with the CPTPP and in the continuation agreement with Canada. As one analysis concludes, “The UK’s position on the inclusion of ISDS seems ambivalent.”
VI. Conclusions
As noted earlier, several countries have withdrawn from the ICSID. Others such as South Africa, Brazil, and India have eschewed agreements with traditional ISDS provisions. But even if the EU continues to insist on their unique investment court and appellate mechanism approach to ISDS, many countries, including Canada, China, Hong Kong, Japan, Singapore, and South Korea, have not followed suit. If the capital exporting countries that are part of the EU and the U.S. oppose ISDS agreements in the future, and the Commission has no more success with its investment court mechanism than it has in the past, this could have a significant impact in the body of investment treaty law in the coming decade.
The impact on several thousand existing and new BITs and FTA investment provisions would be minimal, at least in the short and medium term, since renegotiation or termination of most such agreements is problematic. It is also possible that future U.S. policies may seek to broaden restrictions on outbound investments to China, Hong Kong, and Macao beyond current law for national security or other reasons.
EU or U.S. investors’ decisions to reduce their activities in countries where they enjoy no ISDS protection, whether for green energy or other long-term projects, would be more significant in their impacts. Given the fact that there are currently thousands of U.S. and EU private sector investments in China, Brazil, and India — where ISDS protections do not exist for the U.S. and in most cases for the EU — one hesitates to make such predictions. However, as long as the EU countries and U.S. investors account for a disproportionate share of FDI, the U.S. and EU countries, including former member the U.K., represented five of the top 10 foreign investors, with the others being Hong Kong, China, Japan, and Canada. Per World Bank data from 2012–22, the six accounted for 70% of the total — the anti-ISDS policy changes could ultimately have a significant impact.
A promise by developed countries to provide $100 billion annually to developing countries for climate action has not materialized. Thus, ironically, broad opposition to ISDS from environmental groups concerned with “sovereignty” or other related issues could backfire by discouraging new green investment, particularly in countries where the rule of law is uncertain, as in Mexico as well as much of Latin America and Africa.
To read the report as it was published on the Rice University’s Baker Institute for Public Policy webpage, click here