- International investment law — Regional trade — Specific trade agreements — Fair and equitable treatment standard — Non-discrimination — National treatment
Published under the auspices of the Max Planck Foundation for International Peace and the Rule of Law under the direction of Rüdiger Wolfrum.
1 The term ‘mega-regionals’ describes a trend in international trade law to negotiate free trade agreements (‘FTAs’; Free Trade Areas) among countries encompassing a considerable share of world trade. Unlike regional trade agreements, they span across sub-regions. Cases in point are the Transatlantic Trade and Investment Partnership (‘TTIP’) between the United States and the European Union, accounting for almost half of global GDP; the Regional Comprehensive Economic Partnership (‘RCEP’) between the Association of Southeast Asian Nations (ASEAN) members and the countries with which ASEAN has FTAs in place, ie Australia, China, India, Japan, Korea, and New Zealand; and the Trans-Pacific Partnership (‘TPP’) between twelve Pacific-rim countries, to wit: all North American States (Canada, the United States, Mexico), the Asian countries Brunei Darussalam, Japan, Malaysia, Singapore, Vietnam, and the South American countries Peru and Chile, as well as Australia and New Zealand. The Canada-EU Comprehensive Economic and Trade Agreement (‘CETA’) can also be counted among those mega-regionals. So far, only CETA and the TPP have been concluded. TTIP and RCEP are under negotiation. Considering that Mexico already has an FTA with the EU (EU-Mexico Economic Partnership, Political Coordination and Cooperation Agreement), all parties to the North American Free Trade Agreement (1992) will have FTAs with the EU in the future, forming a massive trade bloc to which Turkey is also linked (through a customs union agreement with the EU) as well as Iceland, Liechtenstein, Norway (through the European Economic Area Agreement), and Switzerland (through bilateral agreements with the EU) (Hufbauer and Cimino-Isaacs 680; Hoekman  247).
2 The development in this area of international law is rapid, with the more recent agreement seeking to learn lessons from earlier agreements. This is particularly apparent from the protection of foreign investments and the question how to enforce investors’ rights and before which forum. It is fair to say that NAFTA served as a model for the TPP, and CETA is regarded by the EU as a stepping stone for their free trade negotiations with the United States.
3 Whereas TPP and RCEP are agreements between developed and developing countries, TTIP and CETA include only industrialized nations. Not surprisingly, the latter do not contain a chapter on development. No African country forms part of one of the mega-regional projects mentioned above. It should be noted, however, that African countries attempt to create a mega-regional of their own by consolidating three regional economic communities (East African Community [EAC], Common Market for Eastern and Southern Africa [COMESA], Southern African Development Community [SADC]) in one Tripartite Free Trade Area, covering 26 Member States with a population of almost 600 million people. In Latin America, MERCOSUR (Argentina, Brazil, Paraguay, Uruguay, Venezuela) and the Andean Community of Nations (CAN) (Bolivia, Colombia, Ecuador, Peru) concluded an FTA within the framework of the Latin American Integration Association (ALADI).
4 In the following some cross-cutting themes shall be elaborated concerning all mega-regionals in some form or other.
B. Mega-Regionals and the WTO
5 This trend towards mega-regionals is fuelled by the failure of the Doha Round, where it has proved significantly more difficult to reach agreement due to the single undertaking approach in the World Trade Organization (‘WTO’) (Hoekman  243, 249; Gantz  46 et seq). The clearest sign of this failure is that governments have reallocated resources away from the WTO negotiation table to bilateral and plurilateral negotiations (Hufbauer and Cimino-Isaacs 696).
6 The level of liberalization aimed for in mega-regionals exceeds that of the WTO, for example, with regard to technical barriers to trade or government procurement, which according to the WTO makes up on average between 10–15% of the GDP of a national economy. Besides, mega-regionals have explicit rules on ‘trade and’ topics, such as labour and the environment (Barbee and Lester 213, 223), which may influence the exegesis of other chapters in mega-regionals, as those agreements are to be read as a whole. Art. 9.3 TPP, for instance, regulates the relationship between the investment chapter and other chapters: ‘In the event of any inconsistency between this [Investment] Chapter and another Chapter of this Agreement, the other Chapter shall prevail to the extent of the inconsistency.’ The TPP is the first agreement to proactively tackle currency manipulation, see the Joint Declaration of the Macroeconomic Policy Authorities of Trans-Pacific Partnership Countries. This is important because currency manipulation offsets trade liberalization efforts (Hufbauer and Cimino-Isaacs 693). Moreover, both TPP and CETA contain disciplines on competition policy. Competition law is trade-related because private entities, too, can block market access.
7 As a result of this, the Agreement Establishing the World Trade Organization (‘WTO Agreement’) only sets the framework within which mega-regionals then operate, connected with the WTO through Art. XXIV General Agreement on Tariffs and Trade (‘GATT’) and Art. V General Agreement on Trade in Services (‘GATS’), see eg Art. 1.1 TPP. In the future, most of world trade will be governed by those mega-regionals. This is amplified by the fact that the TPP provides for the accession of third countries, Art. 30.4. CETA makes provision for any future EU Member States, Art. 30.10.
8 In the past, the discussion on FTAs focussed on the relationship between these agreements and the WTO and the question of whether the former are conducive to the latter or a threat to it. In the context of mega-regionals, the focus is on the implications mega-regionals have for the domestic legal order. For those mega-regionals are not undisputed, either within the participating countries or in third countries. Third countries fear that trade (eg within value chains) will be diverted away from them (World Bank 227 et seq; World Trade Report 9, 14; Freund 57: ‘no evidence of trade diversion’) or that they will be compelled to follow standards set by others (World Economic Forum 27). Leycegui notes that agricultural producers in MERCOSUR countries might be among the losers, as the TTIP will be liable to erode their competitiveness vis-à-vis US producers in the EU market (World Economic Forum 38). Even so, there may be positive spill-over effects for third countries thanks to increased economic activity and the overall reduction in the number of standards that require adaptation of third-country companies (World Economic Forum 24, 34 et seq).
9 Constituencies in participating countries are worried about the loss of sovereignty that ensues from the accession to an international regime like a mega-regional. This concerns the political question of how much of their sovereignty countries are willing to give up for the sake of economic integration and global governance. When the participating country is a democracy the question of democratic feedback is raised. The discussion typically centres on the intellectual property (‘IP’) and the investment chapters of mega-regionals, as they lead to harmonization across the border (positive integration) and give foreigners private rights.
10 Furthermore, it is feared that the increased economic activity prompted by trade liberalization will have damaging effects on the environment. This concern has been rebutted from the 1990s with the environmental Kuznets curve (Krugman Obstfeld and Melitz 306 et seq). It could be shown that the protection of the environment becomes an important public welfare goal once a nation has achieved a particular level of development, see eg Art. 3 (3) Treaty on European Union (‘TEU’), stating as one of the objectives of the EU ‘a high level of protection and improvement of the quality of the environment’. All industrialized nations have implemented environmental policies. By what justification could one deny developing countries intent on joining mega-regionals (TPP or RCEP) the opportunity to reach that State?
11 The same is true with respect to labour standards: the level of protection afforded by labour laws correlates with the economic development of a country. CETA and TPP contain commitments to observe the core labour standards as set out in the ILO Declaration on Fundamental Principles and Rights at Work, Art. 23.1 CETA, Art. 19.3.1 TPP, and to not encourage trade or investment by lowering national labour standards, Art. 19.4 TPP, Art. 23.4 CETA. Importantly, the benchmark as to the latter is domestic labour laws. So contracting parties are obliged under existing mega-regionals to effectively enforce their labour laws, Art. 19.5 TPP, Arts 23.4.3, 23.5.1 CETA.
1. Rationale of Trade Liberalization
12 One has to distinguish between the general rationale of trade liberalization and the specific rationale of mega-regionals. Broadly, the arguments in favour of trade liberalization can be summarized as follows:
13 Firstly, in the wake of trade liberalization foreign companies enter the national market, thereby intensifying competition, with all its ensuing positive side effects of better-quality products and/or lower consumer prices (competition rationale). Secondly, there is the human rights rationale according to which economic freedom includes the right to trade (Qureshi and Ziegler 4-004, contra Arjay Associates Inc v Bush, 891 F.2d 894, 898 (Fed Cir 1989)), see eg Sec 5 Protocol on the WTO Accession of the People’s Republic of China. One might even query the proposition that the freedom to trade needs specific justification, and not conversely the absence thereof, viz protectionism. Thirdly, good trade relations are conducive to peaceful political relations because they raise the opportunity cost of war for the simple reason that countries have more to lose in the event of war (political rationale). The European integration process is the prime example in this respect (European Union, Historical Evolution). This point cannot be emphasized enough in times of burgeoning nationalism in Asia and other parts of the world (World Economic Forum 35 et seq). In the same vein, international trade rules increase legal certainty, making it easier for both exporter and importer to assess their business risks.
14 In accordance with the prevailing economic view, trade liberalization has a neutral effect on the labour market taken as a whole because of the intervention of the central bank that will either loosen its monetary policy with a view to spurring economic activity or tighten it in an attempt to slow down the economy, depending on the situation (Sawyer and Sprinkle 432; Krugman Obstfeld and Melitz 68, 399). Having said that, trade liberalization rearranges the mix of jobs by shifting them from import-competing sectors to exporting sectors. This is a consequence of the ensuing restructuring of the national economy. The welfare gains attributable to trade liberalization are through generally lower consumer prices. Besides, export-related jobs tend to be higher-paying. Both free trade and protectionist theories come with costs to society. But the costs of the latter are higher, so the welfare gains made by liberalizing trade can be described as the difference between the costs of protectionism, on the one hand, and the costs of free trade, on the other hand (Krugman Obstfeld and Melitz 237 et seq).
2. Specific Rationale of Mega-Regionals
(a) Economic Integration
15 Under the WTO, the primary goal was to liberalize trade, cf recital 3 Preamble WTO Agreement (‘directed to the substantial reduction of tariffs and other barriers to trade’). This is still a driving force behind mega-regionals as well. From an economic perspective, the greatest gains could be achieved by mega-regionals’ quashing of ‘regulatory distinctions without a difference’ and duplication of procedures (Alemanno 626, 639). This is borne out by the fact that tariff barriers are already low between TPP parties, and even lower between the US and the EU (Hufbauer and Cimino-Isaacs 680 et seq, 692).
(b) Regulatory Integration
16 The political thrust seems to have shifted towards common rule- and standard-setting (World Economic Forum 20 et seq, 37; Barbee and Lester 217 et seq). In particular, the US Government is intent on defining rules and standards (eg with respect to risk and conformity assessment procedures) that will become the global norm (Hufbauer and Cimino-Isaacs 693; Barbee and Lester 220). In view of the fact that the Asia-Pacific markets (through the TPP) and the European markets (through TTIP) will be aligned to the US market, this endeavour does not seem unrealistic. Consequently, the chapters on regulatory cooperation and coherence are of huge significance (Hoekman  609, 611).
17 That said, it may be true that the US dominated the TPP negotiations (Barbee and Lester 217), but in the case of the TTIP they face an equally strong and experienced trading partner in the EU. Not even in the context of the TPP negotiations was it possible for the US to ‘write the rules’ and, for example, achieve a longer term of protection for patents (aside from a patent term extension to compensate for unreasonable delays, Art. 18.46 TPP).
18 There is a plethora of bilateral FTAs between parties to mega-regionals that will remain in force unless the parties agree otherwise. Mega-regionals seek to cut through this spaghetti bowl of regulations in an attempt to lower transaction costs for businesses within the respective trade bloc (Barbee and Lester 213). As far as investment law is concerned, they have the potential to actually consolidate the patchwork of bilateral investment treaties (‘BITs’) (Alschner 273 et seq).
(c) No Political Integration
19 Mega-regionals do not pursue the goal of political integration. The lack of a secretariat, ie institutional infrastructure, in CETA and TPP speaks volumes. Furthermore, provisions like Arts 28.22 TPP and 30.6 CETA are intended to preclude the possibility that mega-regionals develop in the same direction as the EU Treaties, namely into ‘a new legal order of international law’ the provisions of which are ‘adapted to produce direct effects’ (Van Gend & Loos Case [European Court of Justice] 12 et seq). On a related note, footnote 1 to Art. 1.2 TPP referencing the ‘treatment of goods, services, investments or persons’ is reminiscent of the four elements that make up an internal market within the meaning of in Art. 26 (2) Treaty on the Functioning of the European Union (‘TFEU’), which draws on the ‘movement of goods, persons, services and capital’.
E. Negotiation Process
20 The negotiation of mega-regionals has been criticized for not being more transparent (Petersmann 594). For instance, the TPP negotiations were subject to a confidentiality agreement. Only after considerable public pressure and a Decision of the European Ombudsman to that effect (OI/10/2014/RA) has the European Commission released its TTIP negotiating documents.
21 The traditional approach to the negotiation of FTAs is not too different from the way a national statute comes into existence: before a new legislative project is presented to the legislature, a draft is first developed by the executive in camera. By the same token, government officials negotiate trade deals which will subsequently be tabled in the national legislature for approval.
22 In truth, later changes to the legal text are not realistic. Hence, legislatures can either approve of the trade deal or reject it altogether (fast-track procedure in the US). What is more, the negotiation of mega-regionals is different from other FTA negotiations, as they are of systemic importance. They have constitutional and societal implications, and in view of their scope, deal with questions that are part of the normal political discourse. Petersmann refers to them as ‘international treaties with legislative functions’ (596, 603). Mega-regionals not only determine how to do business internationally but also nationally, since States will apply the set standards to purely national transactions as well so as not to put their own nationals at a disadvantage. To change these parameters in the future would require the consent of the other contracting parties.
23 Generally speaking, democracy is a hollow concept if a newly elected government cannot change the law as a result of international strictures. Such a restriction would make a mockery of the general election, putting global governance at variance with the principle of democracy, at least until the principle is realized at the international level as well. To solve this problem, the sovereign must be involved from the start (Petersmann 589). It is short-sighted to assume that the ratification of the finished agreements satisfies the need for democratic feedback. At the very least, negotiation teams should include representatives of the legislative branch to mitigate the power shift towards the executive.
F. Implications for National Sovereignty
24 No trade agreement regulates all trade-related areas. An area that is covered is IP, where the Agreement on Trade-Related Aspects of Intellectual Property Rights (‘TRIPS Agreement’) sets an international minimum standard, Art. 1.1. The regulatory gap caused by the paucity of harmonization measures is left to the national legislatures to fill. The crux of the matter is whether sufficient policy space is left to the States to regulate issues such as public health, environmental protection, and consumer safety, among others.
25 In the wake of the plain packaging cases (see, eg, Philip Morris Asia Limited v Australia [Award on Jurisdiction and Admissibility] [17 December 2015]), States have become more conscious of the implications that international obligations may have for their national legal order. One of the main criticisms levelled at the conclusion of FTAs in general, and mega-regionals in particular, is that they encroach too much on the regulatory freedom of national legislatures. If those legislatures are democratically legitimized, the conclusion of ever more integrative agreements might come into conflict with the principle of democracy, as elaborated above. This was the main reason why the US Congress rejected the Havana Charter (1948) in 1950, which would have created the International Trade Organization (Trebilcock Howse and Eliason 24). In particular, the dispute settlement mechanism provided for in investment chapters, which gives private entities legal standing, is hugely controversial (Lester 211 et seq).
26 Besides, the Regulatory Cooperation chapters contain built-in provisions for future approximation of laws at governmental level. This circumvention of the national legislatures leads to a democratic gap, which can only be closed by having parliamentary representation on the regulatory cooperation bodies established by mega-regionals (Regulatory Cooperation Forum in CETA; Committee on Regulatory Coherence in the TPP; Regulatory Cooperation Body in TTIP as proposed by the EU). As the law stands, those bodies are merely made up of government representatives, Art. 25.6.1 TPP, Art. 21.6.3 CETA.
27 It bears emphasizing that the restriction of national sovereignty, as enshrined in Art. 2 (7) Charter of the United Nations (‘UN Charter’), is inherent in any international law solution and not specific for international trade and investment regulation. When States ban a carcinogenic pollutant in a treaty, they thereby limit their sovereignty to the effect that they no longer allow the use of that particular pollutant within their territory. Entering into international obligations always implies the duty to perform those in good faith, Art. 26 Vienna Convention on the Law of Treaties (1969) (‘Vienna Convention’). The basic idea is that States partly relinquish their sovereignty in order to achieve a common goal, be it international human rights or environmental protection (Cottier 658). This point, however, does not answer the question of how to resolve the dilemma of ensuring a functioning trading system while at the same time securing the necessary policy space for participating States. There are different ways, procedural and substantive, in which the drafters of mega-regionals can preserve the regulatory autonomy of national legislatures:
1. Direct Effect and Domestic Courts
28 Most people would agree that rules need to be enforceable in order to be effective. This is true of national as well as international law. Different dispute settlement options are available to enforce international rules, ranging from inter-State dispute settlement, to investor-State dispute settlement (‘ISDS’), to domestic courts.
29 As a preliminary point, it should be noted that mega-regionals are not concerned with the economic rights of nationals. For instance, the rights and freedoms of EU citizens within the EU are governed by EU law as an internal matter. That is, the EU cannot violate CETA vis-à-vis EU citizens. This may lead to reverse discrimination.
30 As for trade rules, the dispute settlement mechanisms in CETA and TPP are modelled on the WTO Dispute Settlement Understanding (‘DSU’). The TPP is, however, without an appellate review process; this is different for investment disputes under CETA. Non-compliance comes with considerable costs for the perpetrating State in the form of suspended concessions, ie legalized trade barriers. This has as a corollary that, when it comes to their observance, trade rules have a better track record than, for example, human rights (Cottier 664, 667).
31 The investment chapters in CETA and TPP give foreigners legal standing, with the consequence that they can assert their rights before international tribunals. Opponents of ISDS contend that it is not acceptable that international tribunals review the legality of acts of parliament (de Mestral  647 et seq). Instead, domestic courts should be in charge of ensuring compliance with mega-regionals (Petersmann 598 et seq). Yet, this would presuppose that either domestic courts apply mega-regionals or domestic law provides foreigners with a similar level of protection.
32 Granting direct effect would be the most powerful compliance mechanism (Petersmann 583). In truth, the national legal order is shielded from any direct effect as far as trade and investment rules are concerned, see Art. 30.6 CETA and Art. 28.22 TPP. Monist systems like the EU (ie, systems in which international and national rules are treated as belonging to one body of law, Art. 216 (2) TFEU) would explicitly deny direct effect for those kind of rules (see Art. 8 Council Decision 2011/265/EU: the EU-South Korea FTA ‘shall not be construed as conferring rights or imposing obligations which can be directly invoked before Union or Member State courts and tribunals’). Dualist systems, such as those found in common law countries, could not remedy a treaty violation because national rules are not measured against international law. Direct effect is not conceivable in a dualist system (Jackson 338). Domestic courts can only provide redress as long as the domestic law is in conformity with the international agreement.
33 The purpose of denying direct effect is to give governments the possibility to break out of their international obligations. Thus, the denial secures policy space for the benefit of national (democratically legitimized) legislatures (contra Petersmann 590 et seq).
34 Due to the lack of direct effect, domestic courts could not apply the provisions of mega-regionals, nor could a claimant invoke them before domestic courts (Treaties, Direct Applicability). Notwithstanding that, the principle of good faith as embedded in Art. 26 Vienna Convention obligates States, provided there are alternative interpretations, to choose an interpretation of their national laws that is consistent with their international obligations (doctrine of consistent interpretation or indirect effect). This obligation is not foreclosed by Art. 28.22 TPP and Art. 30.6 CETA.
35 Even if a monist system did not negate direct effect, this does not say anything about the status international rules have in the internal hierarchy of norms. Should they be at the same level as statutes, as is the case more often than not, they would not take precedence over an act of parliament that is inconsistent with international law. That is, without an ISDS clause, foreign investors are left with arguing their case on the basis of a violation of national law. This raises the question of whether national law provides the same guarantees as international law would.
36 In the context of the TTIP negotiations, the argument was put forward that both contracting parties, the US and the EU, have an independent court system well capable of dispensing justice to investors from the other party (Petersmann 599 et seq). Interestingly, the suspended Canada-US FTA did not contain an ISDS clause. With respect to some rights and obligations included in investment treaties, this argument may be true. For instance, both parties recognize a right to property which encompasses the property of foreigners. Both legal systems acknowledge an obligation of the State to compensate when the State dispossesses someone of its property (for the EU, see Art. 17 (1) Charter of Fundamental Rights of the European Union ; for Council of Europe Member States, see Art. 1 (1) Protocol 1 to the European Convention on Human Rights [‘ECHR’]; for the US, see the 5th Amendment). Both guarantee a right to be heard in their national laws (for the EU/Member States, see Art. 41 (2) (a) Charter of Fundamental Rights and Art. 6 (1) ECHR; for the US, see the 5th Amendment and the 14th Amendment, Sec 1). Importantly, both orders acknowledge that those rights also apply to non-citizens (the respective legal texts speak of ‘person’ or ‘everyone’, see also Art. 1 ECHR). In the case of the US and the EU, the aforementioned rights have constitutional status. But there are other rights that are not equally reflected in the national legal orders, for example, fair and equitable treatment (‘FET’). Those investors’ rights would lack a remedy without ISDS and require the involvement of the investor’s State of nationality.
37 Other mega-regionals may have members in the legal order of which the rights of non-citizens are not easily discernible or subject to change. Furthermore, the definition of what constitutes ‘property’ in national legal orders is not congruent with the international understanding of ‘investment’. Concessions, for instance, would be regularly included in the definition of ‘investment’ (eg Art. 9.1 TPP, Art. 8.1 CETA), whereas national law does not consider concessions as a proprietary right. It follows that the revocation of a concession may only be qualified as an expropriation (of an investment) under international law.
2. Jurisdictional Carve-outs
38 A possible compromise would be to accept ISDS in principle but to curtail the jurisdiction of international tribunals, ie to carve out particular policy fields, such as public health or environmental measures, and declare them non-actionable. The TPP gives the option to deny tobacco companies legal standing in Art. 29.5 TPP. The issue here is that negotiators might miss some sensitive measures or, on the other extreme, that they might limit the jurisdiction to an extent that completely undermines locus standi.
3. Investor-State Dispute Settlement
39 Another way to curb the risk of litigation, contemplated by eg Australia and India, is to scrap ISDS altogether (Trakman 344 et seq). The fact that foreign investors have an additional avenue to pursue their interests, namely by relying on international law, is contested, for that is not possible for national businesses (Lester 217 et seq). While supporters of ISDS acknowledge the importance of pre-empting frivolous claims (see Art. 9.23.4 TPP, Art. 8.32 CETA), they do submit that ISDS is still needed in cases where one of the contracting parties cannot guarantee a fair trial, for example, because the national court system is not independent from the government or is notoriously biased towards national interests (Dolzer and Schreuer 235). The primary purpose of international investment law is to protect foreigners, not nationals who have a say in the national law-making (Cottier 658). It is the involvement of a foreigner that makes a matter international in the first place.
40 Moreover, investment chapters are disputed because they mainly serve business interests and allegedly do not take sufficient account of other legitimate societal values and interests of the host State (Lester 217). As a side note, that the TPP was signed in a casino in Auckland in February 2016 did not exactly help to convince critics otherwise. It bears noting that it is mostly multi-national companies that take advantage of ISDS. Those companies will be regularly listed on the stock market, and it is therefore theoretically possible for anyone to own them. As a result, the line between a foreign and a domestic company becomes blurred (Lester 214 et seq). What is true is that ISDS favours particular entities that possess the necessary resources to make use of the ISDS process.
41 In this context, another issue has been addressed in both TPP and CETA, namely the lack of transparency of arbitral proceedings. Art. 9.24.2 TPP and Art. 8.36.5 CETA provide for public hearings; decisions of the tribunals will be made available to the public in accordance with Art. 9.24.1 (e) TPP and Art. 8.36.1 CETA in conjunction with Art. 3 (1) UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration (United Nations Commission on International Trade Law [UNCITRAL]).
42 When private entities cannot sue governments for violations of their investment obligations, this raises other questions: that private entities can take legal action against government measures that encroach on their rights emanates from the rule of law, being itself closely connected to the principle of democracy. This reveals a potential conflict between individual freedom, on the one hand, and democracy and majority decisions, on the other hand. So is it undemocratic not to grant private entities legal standing (see Petersmann 580 et seq)?
43 The ability to assert one’s rights is an important feature of the rule of law. For one thing, one might argue that it is undemocratic to limit the demos. But then, depriving private persons of their remedies may be at odds with the principle itself, mindful that making international commitments is an expression of sovereignty as well. In fact, ISDS does not divest States of their sovereignty. It is the substantive rules of the treaties that limit a State’s regulatory autonomy (Lester 216). Justiciability ensures compliance with the substantive rules but does not add to the obligations of States arising therefrom. Legal standing does not expand investors’ substantive rights but it sets the stakes for non-compliance higher. This suggests that a prudent approach would be to focus on the formulation of the substantive law.
44 The problem is rooted in the fact that international courts and tribunals deal with individual cases, while national legislatures are charged with weighing up competing societal interests in the abstract in light of scarcity of resources. Tribunals are not democratically controlled but independent of popular influence (for good — due process — reasons). This observation raises the question of standard of review. An international court or tribunal can either accept the legislative outcome as presented or substitute its own weighing-up for that of the legislature or scrutinize whether the legislature acted arbitrarily (eg by not taking into account all relevant interests). If a tribunal simply accepted the legislative outcome, even if the result of a democratic process, the tribunal would not live up to its mandate. On the other hand, if the tribunal nolens volens replaced the legislative weighing-up with its own, it would not show any deference to the democratic decision. In the author’s view, the solution is to be found in the proper calibration of the proportionality test (Henckels 224 et seq).
45 The EU and Canada have taken a new approach to ISDS in CETA: a permanent investment dispute resolution system with an appeal mechanism. Only time will tell how this system will develop.
4. Exception Clauses
46 The underlying question is at which level of the legal analysis to consider competing societal values and interests, such as public health or the environment. Societal values and interests can be taken into account at two stages: in the delineation of the scope of the substantive rights and obligations and/or in exception clauses. The exception clauses in mega-regionals are modelled on Art. XX GATT and Art. XIV GATS. The Appellate Body clarified that the exception clauses are not to be interpreted narrowly as a rule (US — Gasoline [Report of the Appellate Body] 18; EC-Hormones Case [Report of the Appellate Body] 104). This would only be the case if the agreements pursued only one predominant objective, which they do not pursuant to their preambles. Rather, exception clauses are the place where conflicting societal interests are weighed up, commensurate with the principle of proportionality, with a view to optimizing the realization of the interests at stake (US — Shrimp [Report of the Appellate Body] 159; EC — Tariff Preferences [Report of the Appellate Body] 94 et seq).
47 The mega-regionals, however, import a problem that exists under the WTO agreements, to wit: the catalogue of legitimate policy objectives in Art. XX GATT/Art. XIV GATS that can justify an infringement is limited and cannot be extended by way of interpretation. The only way out in WTO law is to request a waiver, which provides merely a temporary remedy, Art. IX WTO Agreement. The similar issue in European primary law was solved by the European Court of Justice by developing the doctrine of mandatory requirements in Cassis de Dijon (Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein) (1979). There, the interpretation of the prohibition of discrimination as a prohibition of restrictions, and consequently the further intrusion into the regulatory autonomy of EU Member States, called for broader exceptions. The Court, therefore, read important societal values and interests into the scope of fundamental freedoms in the form of inherent limitations, as the policy objectives covered by the exception clauses in the TFEU (Arts 36, 45 (3), 52 (1), 65) are restricted.
48 The Appellate Body paved the way for a similar development in WTO law in the EC-Asbestos case. In that case, the national treatment obligation, Art. III:4 GATT, was at issue along with the identification of the legal implications of the health risks associated with asbestos. In short, societal values and interests can be taken into account in the likeness test or the ‘less favourable treatment’ element (EC — Asbestos [Report of the Appellate Body] 100, 113 et seq; Trebilcock Howse and Eliason 164).
49 This case law shows that there is an interplay between the scope of exceptions and the scope of rights and obligations. The broader the scope of the exceptions, the more broadly the scope of the rights and obligations can be interpreted. In other words, the breadth of the substantive rights and obligations must be matched by equally broad exception clauses (for CETA see de Mestral  642). An example from investment law illustrates this: the FET standard in Art. 10 (1) Japan-Korea BIT is not confined to customary international law and is consequently broader than the FET standard in Art. 5 (1) Trilateral Agreement between those two countries and China. By the same token, the Japan-Korea BIT has public health and public order exceptions in Art. 16 (1) (c) and (d), unlike the Trilateral Agreement that only contains security exceptions in Art. 18 thereof (Alschner 288). When rights and obligations are interpreted broadly, but the scope of exception clauses is limited, adjudicatory bodies have to resolve the mismatch by connecting societal interest and values to particular elements of the former.
50 So far, only the legal texts of the investment chapters in CETA and TPP are available. Those agreements do not provide any exceptions to the FET standard or the duty to compensate in case of expropriation. As a result, host States must treat foreign investors fairly and equitably at all times. Equally, they must always compensate them in cases of expropriation. Consequently, violations of the FET standard or the right to compensation can only be justified on the basis of customary international law, ie force majeure (Art. 23 Draft Articles on Responsibility of States for Internationally Wrongful Acts [‘Articles on State Responsibility’]) and necessity (Art. 25 Articles on State Responsibility). Following the above, the scope of those rights and obligations must be narrowly defined.
51 The clarification of an indirect expropriation in para. 3 (b) Annex 9-B TPP that ‘[n]on-discriminatory regulatory actions by a Party … to protect legitimate public welfare objectives … do not constitute indirect expropriations’ falls short of an exception clause (‘except in rare circumstances’). But it is more than just window dressing. The phrase ‘in rare circumstances’ provides a guideline for treaty interpreters to interpret the requirements of an ‘indirect expropriation’ restrictively as far as public health measures, environmental measures, and other measures designed and applied to protect legitimate public welfare objectives are concerned. The same holds true for para. 3 Annex 8-A CETA.
52 Having a closer look at the general exception clauses in CETA and TPP, one notices a stark difference between them. While CETA provides exceptions for the establishment of investments and non-discriminatory treatment in Art. 28.3, Art. 29.1 TPP does not encompass the investment chapter. Only the provision on performance requirements has a specialized exception clause in Art. 9.10.3 (d) and (h) TPP. The TPP thus adopted the traditional approach: whereas the general exception clause in the TPP applies to the chapters dealing with trade, a treaty interpreter of the investment chapter will have to consider societal values and interests when delineating the scope of investors’ rights.
53 Moreover, Art. 9.16 TPP, just like Art. 1114 (1) NAFTA, does not constitute a fully-fledged exception clause by reason of the limitation contained in the wording (‘otherwise consistent’). The formulation is reminiscent of Art. 8 (1) TRIPS Agreement (‘provided that such measures are consistent with the provisions of this Agreement’). No inconsistencies could be justified on that basis; no investors’ rights could be overridden. The only purpose that can be ascribed to provisions of that kind is that they put beyond dispute that particular policy objectives (environment, health) are to be considered as legitimate. This is of significance for the interpretation of, for example, the concept of indirect expropriation (‘legitimate public welfare objectives’ in para. 3 (b) Annex 9-B TPP). In light of Art. 31 (2) Vienna Convention, Art. 9.16 TPP does not add anything to preambular para. 9 in terms of regulatory content.
5. The Right to Regulate
54 An attempt to preserve State sovereignty can also be seen in Art. 2.1 of the TTIP investment chapter as proposed by the EU: ‘The provisions of this section shall not affect the right of the Parties to regulate within their territories through measures necessary to achieve legitimate policy objectives, such as the protection of public health, safety, environment or public morals, social or consumer protection or promotion and protection of cultural diversity.’ This poses the question of whether the formulation chosen, ie ‘the right of the Parties to regulate’, is actually capable of achieving that goal of preserving State sovereignty.
55 As a preliminary point, the proposed text does not contain an express limitation like, eg, Art. 1114 NAFTA, which only guarantees the right to regulate through measures ‘otherwise consistent’. So could measures inconsistent with the investment chapter in TTIP be upheld by the contracting parties? In other words, does Art. 2.1 TTIP provide a real exception clause along the lines of Art. XX GATT and Art. XIV GATS or does it merely reaffirm the policy space that the contracting parties have in any event? The European Court of Human Rights (ECtHR) has interpreted a similar formulation in the ECHR (‘the right of a State to enforce such laws as it deems necessary’ in Art. 1 (2) Protocol 1) as an exception clause (Mellacher v Austria [ECtHR] 45, 53). The concept of ‘margin of appreciation’ employed by the European Court of Human Rights is equivalent to the concept of ‘policy space’ used in the WTO (see eg China — Rare Earths [Report of the Panel] 7.137). This would mean that States could expropriate on that basis without having to pay compensation or they could justify a violation of the FET standard on grounds of environmental protection, public health, or other legitimate policy objectives listed in Art. 2.1 TTIP. It should be noted that the list of objectives recognized as legitimate is not exhaustive. Following that, the level of investor protection in TTIP would remain below the customary minimum standard. It is clear that countries may derogate from customary international law. Hence, the TTIP would constitute lex specialis vis-à-vis the customary minimum standard.
56 What might speak in favour of an exception clause is the fact that Art. 2.1 TTIP is phrased quite differently from, eg, the second sentence of Art. 2.2 Agreement on Technical Barriers to Trade. With regard to this provision, the Appellate Body clarified that the reference to a ‘legitimate objective’ establishes an additional requirement which a measure must fulfil for it to be WTO-consistent, not an exception (US — Tuna II [Mexico] [Report of the Appellate Body] 318). Nevertheless, it is not apparent from reading the text of Art. 2.1 TTIP that the right to regulate trumps the provisions of the investment section; it merely states that this section ‘shall not affect’ that right. The right to regulate has always been acknowledged in international investment law. That is, an investment tribunal might read it as an affirmation of existing case law and not, as desired, a norm ensuring additional policy space for democratic legislatures. Art. 8.9.1 CETA is even couched that way (‘the Parties reaffirm their right to regulate’).
6. Authority to Adopt Interpretations
57 As a last resort, State Parties can take back control by adopting authoritative interpretations that are binding on ISDS tribunals, Arts 9.25.3, 27.2.2 (f) TPP, Art. 8.31.3 CETA. The power to adopt authoritative interpretations is also found in NAFTA, Art. 1131 (2). In this way State Parties can even influence pending proceedings. In other words, the parties’ right to regulate is given more weight than due process when it comes to ISDS.
G. International Protection of Foreign Investments
1. Right to Property
58 The international protection of foreign investments has become subject to close scrutiny. It is axiomatic that property cannot exist outside the law. The international protection of foreign investments is the expansion of legal protection of property to foreigners and the internationalization thereof. The entity obliged is the host State. The ultimate objective of investment protection is to rein in arbitrary law-making of the host State. The underlying issue is to find the right balance between regulatory freedom, on the one hand, and investors’ rights, on the other hand (Wagner 36).
2. Rights of Foreign Investors
59 All investment chapters contain relative and absolute standards. They guarantee non-discriminatory treatment, ie national treatment and most-favoured-nation treatment (‘MFN’; Most-Favoured-Nation Clause), as well as a minimum standard of protection. Only the latter is an absolute standard in the sense that its level of protection is not contingent on the treatment of others. MFN (prohibiting the better treatment of nationals of third countries as compared to nationals of the complainant) only becomes relevant in the (rare) event of discrimination of nationals. Ordinarily, it is national treatment that secures the rights of foreigners, as governments will always strive not to treat any foreigners better than nationals. When, for example, a respondent discriminates against investors of the complainant as compared to nationals of third countries and the treatment granted to foreign investors overall remains below the level accorded to nationals, the national treatment obligation will be invoked. Minimum standards come into play only if domestic law should fall below them. As long as the level of protection granted by domestic law is above the level required by minimum standards, foreigners will regularly rely on national treatment, as it guarantees them more extensive rights.
60 Another controversial aspect of the international protection of foreign investments concerns the concept of indirect expropriation. However, it is important that indirect expropriation be covered. Otherwise, it would be too easy for States to circumvent the obligation to pay compensation: they would always dispossess the investor of its property without formally taking the title. Having said that, the indirect expropriation must be equivalent to expropriation. That is, the government action must amount to an expropriation with the only exception of the formal title remaining untouched. Anything less, eg, a mere reduction in value of the investment, would not qualify as an indirect expropriation.
3. Obligations of Foreign Investors
61 States are to be reined in with a view to ensuring personal freedoms of foreigners. It is sometimes criticized that international investment law guarantees investors’ rights without concurrently imposing obligations on foreign investors, eg, with respect to human rights or environmental protection. Treating private entities not only as right holders under international investment law but also as obliged parties is a new dimension, which raises the question of where to enforce those international obligations of foreign investors.
62 The straightforward way would be to implement, for example, core labour standards in national law, thus making them applicable to foreign as well as national investors. The foreign investor would then be unable to invoke the doctrine of legitimate expectations should it seek to evade core labour standards, as its legitimate expectations are based on the law, including the international law, as it stood when the investment was made. Expectations of the foreign investor to the contrary would not be considered as legitimate. So a host State would be free to obligate a foreign investor to observe core labour standards as long as it did not discriminate. This would not be the case if a general law of the host State applied to foreign as well as national investors alike.
4. Foreign House Buyers
63 A big problem in some metropolises, such as Auckland and Vancouver, is rising house prices. Foreign buyers are partly blamed for spurring demand. Governments in those countries are under pressure to inhibit foreigners from buying residential property. Such governmental measures, however, would be at odds with the national treatment obligation in investment chapters, unless indicated as non-conforming measures. A violation of the national treatment obligation would presuppose that foreign house buyers qualify as investors and market access was granted.
64 The definitions of ‘investment’ in TPP and CETA include as a characteristic ‘the expectation of gain or profit’. Additionally, Art. 9.1 (h) TPP lists ‘mortgages’ as a form that an investment may take. However, not every stand-alone property right amounts to an investment. The presumption in Art. 9.1 TPP is rebuttable. That is, for the purchase of a house to be an investment the transaction must have been effected with the intention of making a profit. Purchasing a house with a view to speculating on an increase in value would meet that requirement. That the definition of ‘enterprise’ in Art. 9.1 in conjunction with Art. 1.3 includes a legal entity not for profit does not militate against this finding, as non-profit organizations may invest by way of exception and shall enjoy investors’ rights in those cases.
65 Market access is not automatically granted in investment chapters (Investments, International Protection), as the national treatment obligation is often limited and does not perforce include the admission of investments. The right of admission is distinguished from the right of establishment (Gómez-Palacio and Muchlinski 230). The issue is whether the pre-entry stage of the establishment is covered. Commensurate with Dolzer and Schreuer, the right of establishment does not give a right of entry, but is concerned with ‘the conditions under which the investor is allowed to carry out its business’ (88). They mention by way of example the payment of taxes. According to the United Nations Conference on Trade and Development (UNCTAD), the right to establishment combines the ‘right to carry out business transactions in the host country’ with the ‘right to set up a permanent business presence’ (UNCTAD  12).
66 CETA provides for market access through establishment (influenced by EU parlance regarding freedom of establishment, Art. 49 TFEU); a similar provision is lacking in the TPP. Art. 9.4 TPP is modelled on Art. 1102 NAFTA. It is accepted that Art. 1102 NAFTA encompasses the pre-entry stage (Gómez-Palacio and Muchlinski 243 et seq). In the Annexes to the investment chapter, Australia and New Zealand explicitly reserve the right to approve (and refuse) investments beyond a particular threshold, as set out in their respective foreign investment regimes. The annexes show by implication that, in principle, market access was granted. But according to Annex II—New Zealand (p. 32), ‘New Zealand reserves the right to adopt or maintain any taxation measure with respect to the sale, purchase or transfer of residential property’; and pursuant to Annex II—Canada (p. 3), ‘Canada reserves the right to adopt or maintain a measure relating to residency requirements for the ownership by investors of a Party, or their investments, of oceanfront land.’ In the final analysis, governments reserved the right to intervene in the housing markets in Auckland and Vancouver, respectively.
H. International Protection of Intellectual Property
67 Aside from the investment chapter, the international protection of IP is most controversial because of the TRIPS-plus approach taken in mega-regionals (Intellectual Property, International Protection). As compared to the TRIPS Agreement, terms of existing IP rights have been extended (eg for copyright ‘not less than 70 years from the end of the calendar year of the first authorized publication’ in Art. 18.63 (b) (i) TPP as compared to ‘50 years from the end of the calendar year of authorized publication’ in Art. 12 TRIPS) or new rights are created (eg data exclusivity respecting pharmaceuticals in Art. 18.50 TPP as compared to protection against unfair commercial use in Art. 39.3 TRIPS). As a consequence, IP-importing countries fear an increase in costs. What is sometimes forgotten in the discussion about IP protection, though, is Art. 27 (2) Universal Declaration of Human Rights (1948), which establishes an obligation to protect ‘the moral and material interests resulting from any scientific, literary or artistic production’ (Yu 1061 et seq). That is, there is an obligation under international law to protect intellectual achievements that can be attributed to an ‘author’ (see Art. 15(1)(c) International Covenant on Economic, Social and Cultural Rights ). The IP chapters in mega-regionals reinforce that obligation. What is disputed, and this is an economic rather than a legal argument, is where the right level of protection is to be set.
68 Longer terms of protection entail that IP-protected material are priced for a longer period of time before entering the public domain (and thus before being available for free). A one-time transaction of an IP product would not necessarily become more expensive for the individual consumer as a result of longer terms (as IP holders have more time to amortize), but consumers in general will have to pay a price for IP products for a longer period, increasing the overall costs of IP products for society (eg for patients that suffer from a chronic disease and are reliant on a particular medicament).
69 It is true that excessive IP protection might spoil the balance between the different interests of IP users (in free access) and IP holders (in amortization and remuneration). This balance is delicate, as the lack of protection might hamper investments in research & development, while excessive protection might have the same ramifications and lead to welfare losses. Importantly, the TRIPS-plus standards embodied in mega-regionals will have to be multilateralized, because, unlike GATT and GATS, the TRIPS Agreement does not contain an economic integration exception clause (Bernstein and Hannah 792).
I. Multi-layered Governance
70 A problem in the future will be to harmonize the different sets of rules stipulated in mega-regionals, eg, different rules of origin, that distort trade and may amount to non-tariff barriers to trade (Menon 471 et seq; Gantz  244). What further complicates the matter is that bilateral FTAs among the signatories to mega-regionals will remain in force unless otherwise agreed. These agreements are dovetailed with each other via their respective MFN clauses. Barring an explicit derogation clause, they step-by-step increase the level of trade liberalization for signatories beyond the MFN level of the WTO Agreement which forms the starting point.
71 Several issues arise under the heading of ‘clash of jurisdictions’ resulting from this spaghetti bowl of trade and investment regulation (Gantz  244), with legal uncertainty being the overarching problem (Alschner 288). Three issues will be examined more closely in the following: forum shopping, the suspension of trade concessions, and the tobacco carve-out under the TPP.
1. Forum Shopping
72 If an investor is a multinational company, it can usually rely on more than one treaty, as exemplified in the CME/Lauder case (horizontal overlap; see also International Courts and Tribunals, Multiple Jurisdiction). A Vietnamese investor in Malaysia will be able to rely on the BIT between Malaysia and Vietnam, the ASEAN Comprehensive Investment Agreement (‘ACIA’), and the TPP (vertical overlap). Both ACIA (Art. 44) and TPP (Art. 1.2.1 (b)) affirm existing rights and obligations. That is, the lex posterior rule as set out in Art. 30 (3) Vienna Convention does not apply. Should the final text of RCEP contain an investment chapter, as is more likely than not, there would also be a fourth option. Not surprisingly, UNCTAD stated that ‘[w]ith thousands of treaties, many ongoing negotiations and multiple dispute-settlement mechanisms, today’s [international investment agreement] regime has come close to a point where it is too big and complex to handle for governments and investors alike’ (World Investment Report xvii).
73 A vertical overlap is not conceivable in the context of Canada and the EU. According to Art. 30.8.1, CETA replaces all BITs that EU Member States have with Canada. Art. 8.24 regulates a possible horizontal overlap for CETA: the ISDS proceedings under CETA are to be stayed or have to take account of the proceedings pursuant to another international agreement.
74 As far as the TPP is concerned, a provision along the lines of Art. 8.24 CETA is lacking and the fork-in-the-road clause in Art. 28.4.2 TPP does not cover ISDS disputes (only disputes between the Parties). Instead, the TPP avails itself of the principle of estoppel: Art. 9.21.2 (b) TPP requires a claimant to waive ‘any right to initiate or continue before … any other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach’. Another dispute settlement procedure in that sense would be, for example, a tribunal established under a BIT. The same regulatory technique, incidentally, is used in Art. 1121 (1) (b) NAFTA (Alschner 291).
2. Suspension of Concessions
75 When the WTO has authorized the suspension of concessions under the DSU, it is questionable whether, by making use of the authorization, the suspending State violates an FTA between the parties to the dispute. Conversely, when a party suspends benefits under an FTA, the question arises whether, in doing so, it violates the WTO Agreement.
76 Under TPP and CETA, the contracting parties reaffirm their rights and obligations under the WTO Agreement, Art. 1.2.1 (a) TPP, Art. 1.5 CETA. At the same time, both TPP and CETA declare the choice of forum as final, Art. 28.4.2 TPP, Art. 29.3.2 CETA, so as to prevent divergent decisions. This rule is akin to Art. 2005.6 NAFTA and establishes a pactum de non petendo between the disputing parties with respect to other forums not selected. The question is if Art. 30 (4) (a) Vienna Convention applies to the effect that the fork-in-the-road rule takes precedence over Art. 23 DSU, which prescribes the exclusivity of the multilateral system (Canada — Continued Suspension [Report of the Appellate Body] 371; US — Section 301 Trade Act [Report of the Panel] 7.43).
77 This issue was left open by the Appellate Body in Mexico — Soft Drinks (para. 54) and only decided for the constellation where a fork-in-the-road clause was missing in the FTA (Argentina — Poultry [Report of the Panel] 7.38; Trebilcock Howse and Eliason 125, 128 et seq). As long as the FTA is permitted by Arts XXIV GATT and V GATS, the WTO adjudicatory bodies should show deference to the choice of forum made by the disputing parties (de Mestral  42 et seq, 47 et seq).
78 CETA clarifies in Art. 29.3.4 that: ‘Nothing in this Agreement shall preclude a Party from implementing the suspension of obligations authorized by the WTO Dispute Settlement Body. A Party may not invoke the WTO Agreement to preclude the other Party from suspending obligations under this Chapter.’ A regulation to the same effect as the first sentence can be found in Art. 29.1.4 TPP. A regulation along the lines of the second sentence is lacking in the TPP, however. Here, the choice of forum clause comes into play, stipulating a pactum de non petendo regarding the suspension of the TPP.
79 The above concerned the enforcement of trade rules. What about investment rules, given that BITs will remain in force as well (Alschner 274, 279)? Could the home country of a foreign investor choose as a countermeasure to freeze trade concessions with a view to enforcing diplomatic protection? Let us assume that the party affected by the suspension (also the violator of the BIT) brings a case against the suspending State before a TPP/CETA panel, arguing that the countermeasure violates the obligations it has assumed under the suspended trade agreement. Would such a panel take the alleged violation of the BIT into account or are trade rules immune from being suspended under the law of State responsibility? This would mean that trade rules are somehow elevated above other rules of international law; but the question of how to justify such a result would still need to be answered. As the track record of the WTO illustrates, the suspension of trade concessions is an effective tool to enforce international obligations. Not being able to use trade sanctions (except on the grounds of Art. 41 UN Charter) would markedly hamper the enforcement of international law.
80 First of all, in accordance with Art. 28.11.3 TPP and Art. 29.17 CETA, the panels apply the customary rules of interpretation as set out in the Vienna Convention, ie Arts 31 and 32. Secondly, from the international law perspective, the suspension of legal obligations in the form of countermeasures is permitted, Art. 22 Articles on State Responsibility. The legal issue is that, in order to establish whether the countermeasure was lawful or unlawful, a TPP/CETA panel would be required to adjudicate on a violation of the BIT, Art. 49 (1) Articles on State Responsibility. Whether a panel is allowed to do so is determined by its jurisdiction. That the TPP Member States have contracted out of general international law regarding the enforcement mechanism of the TPP, Art. 28.20 TPP, is a different matter and only becomes pertinent when the panel finds that the suspension by the respondent violates the TPP Agreement. Under WTO law, the adjudicating bodies are precluded from deciding on the violation of non-WTO law (Mexico — Soft Drinks [Report of the Appellate Body] 56, 78). The Appellate Body based its reasoning on Art. 3.2.2 DSU according to which the dispute settlement system of the WTO ‘serves to preserve the rights and obligations of Members under the covered agreements, and to clarify the existing provisions of those agreements’.
81 In the same vein, the dispute settlement system of the TPP only applies ‘with respect to the avoidance or settlement of all disputes between the Parties regarding the interpretation or application of this Agreement’ pursuant to Art. 28.3.1 (a) TPP. Furthermore, Art. 28.12.3 TPP stipulates that a TPP panel shall consider the TPP Agreement. The Article does not include other sources of international law, aside from WTO case law germane to incorporated WTO provisions. Art. 9.25 TPP on the governing law expressly refers to ‘rules of international law’ but this provision is confined to disputes under the investment chapter (Chapter 9).
82 The same holds true for CETA. According to Art. 29.2 CETA, the dispute settlement system of CETA ‘applies to any dispute concerning the interpretation or application of the provisions of this Agreement.’ Art. 29.17 CETA is the equivalent of Art. 28.12.3 TPP.
83 Another question is whether a panel established under a mega-regional could take account of a violation of a BIT when the violation had been established, eg, by a tribunal under the auspices of the International Centre for Settlement of Investment Disputes (ICSID). By analogy with Argentina — Poultry, a panel would not be bound by the ICSID ruling (Argentina — Poultry [Report of the Panel] 7.42). It would be desirable, however, for the panel to show more deference than the Appellate Body in Brazil — Tyres (para. 228). For reasons of comity, trade forums must not turn a blind eye to violations of other areas of international law.
3. Tobacco Carve-out under TPP
84 The question here is what the tobacco carve-out in Art. 29.5 TPP means for ISDS under NAFTA: Can tobacco companies resort to NAFTA tribunals with a view to circumventing the TPP carve-out? All NAFTA States are also TPP members. Pursuant to Art. 1.2.1 (b) TPP, the TPP is intended to coexist with NAFTA. Yet, each NAFTA party merely ‘affirms’ its rights and obligations under NAFTA. Art. 1.2.1 (b) TPP does not specify that the TPP ‘is not to be considered as incompatible with’ NAFTA in terms of Art. 30 (2) Vienna Convention. Rather, the TPP has a specific conflict clause: should the TPP be incompatible with NAFTA, Art. 1.2.2 TPP provides a special consultation procedure, which is modelled on Art. 2 (3) (Chapter 18) ASEAN-Australia-New Zealand FTA. Footnote 1 to Art. 1.2.2 TPP States that ‘the fact that an agreement provides more favourable treatment of … investments … than that provided for under this Agreement does not mean that there is an inconsistency’. In other words, this footnote clarifies that NAFTA prevails wherever it provides more favourable investment protection. Consequently, the TPP carve-out does not apply to NAFTA parties, as the more favourable treatment of tobacco investments in NAFTA does not amount to an inconsistency within the meaning of the TPP.
85 It bears emphasizing that the tobacco carve-out is not mandatory. The TPP parties ‘may’ opt out of ISDS with respect to tobacco control measures as defined in footnote 13 to Art. 29.5 TPP. That is, they have discretion. The exercise of this discretion is restricted for NAFTA parties by virtue of Art. 1.2.1 (b) TPP. In the final analysis, NAFTA parties do not benefit from the tobacco carve-out under the TPP. Once the TPP enters into force, there can still be disputes relating to tobacco control measures between an investor from a NAFTA State and another NAFTA State, but not other TPP members, nor between an investor from a TPP member that is not a NAFTA party and a NAFTA party.
86 Judging the public arguments exchanged in trade negotiations, it becomes apparent that mega-regionals are only partly premised on economic considerations (eg regarding tariff reductions and supply chains). Otherwise, participating States could have concluded a plurilateral agreement along the lines of the Information Technology Agreement under the auspices of the WTO (Hoekman  623; Hoekman  255 et seq). The political and cultural dimension appears to be far more important. Governments tend to negotiate FTAs with friendly governments with shared values and mutual cultural understandings. In contrast, Schwab and Bhatia emphasize the economic motivation behind the negotiation of mega-regionals (World Economic Forum 18). For example, an FTA between New Zealand and the United States is hugely controversial in New Zealand, whereas the launch of FTA negotiations with the EU in 2015, likely to envision similar provisions, went ahead undisturbed. This difference bolsters the impression that the cultural dimension is paramount in trade negotiations. Common values can smooth the way politically. When these are present, the preferential trade and investment relationship to be created has a sound foundation (Cottier 659).
87 Exceptions confirm the rule. That the EU could negotiate FTAs with Singapore and Vietnam with relative ease, while at the same time EU citizens take to the streets against TTIP, can be explained with the size of the economies of the former as compared to the EU and the ensuing imbalance in bargaining power (Gantz  245). FTA negotiations are no longer about economics alone but about shared values and political cooperation. This is particularly true of mega-regionals, which are about to become the most significant building block of the world economic order.
88 One can see the building of that order as the struggle to strike a balance between the regulatory autonomy of States, on the one hand, and the necessities of a functioning trading system, on the other hand (Wagner 15). Nevertheless, a change of paradigm can be observed; in modern understanding, it is about the allocation of responsibilities at the right level of governance (Cottier 656). Which level of governance (international, national, regional, municipal) is best suited to protect the environment, the consumer, and other interests is the fundamental question. There can be no doubt that for a trading system to function, international cooperation is imperative, which in turn requires the participating States to let the exercise of their sovereignty rest to some degree. Some understanding on common rules is needed to realize economic freedom on the international plane.
89 All things considered, the debate surrounding mega-regionals boils down to the proper allocation of competences. Nationally, this task is performed by constitutional law; internationally, it is often left to adjudicators to draw the dividing line. One cannot help noticing that international trade regulation leads to a more centralized national governance, eg, through regulatory cooperation bodies or services liberalization affecting sub-federal regulations.
90 In the author’s view, the scope of the exception clauses in the mega-regionals will be key. These are the parameters within which the negotiators have to make a decision: the broader the exceptions, the greater the autonomy of States. The more flexible the exceptions are designed to be, the less legal certainty prevails. It is sensible to model the exceptions in mega-regionals on the tried and tested WTO exceptions, thus incorporating the wealth of WTO case law. But neither TPP nor CETA remedies the problem that only particular policy objectives can justify an infringement.
91 Two points should be considered for TTIP and RCEP, respectively: firstly, the list of legitimate policy objectives that can justify a violation should not be exhaustive; secondly, the exceptions should be applicable to the investment chapter as well. As to the first point, having a non-exhaustive list would make the development of mandatory requirements à la Cassis de Dijon superfluous. It would streamline the legal analysis. As to the second point, pronouncements in both directions can be found. In Pope & Talbot v Canada, the tribunal noted that ‘a blanket exception for regulatory measures would create a gaping loophole in international protections against expropriation’ (Interim Merits Award 99). Contrariwise, the tribunals in SD Myers v Canada (First Partial Award 263) and Lemire v Ukraine (Decision on Jurisdiction and Liability 505) referenced the ‘high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders’. The Award in Feldman v Mexico ties in with that: ‘governments must be free to act in the broader public interest through protection of the environment … Reasonable governmental regulation of this type cannot be achieved if any business that is adversely affected may seek compensation …’ (103). What seems to be clear is that the exceptions to investors’ rights under customary international law (force majeure, necessity) are not sufficient to ensure the right balance between international protection of foreign investments and regulatory autonomy, as adjudicating bodies tend to interpret substantive rights and obligations (eg non-discrimination, FET) broadly and exceptions under customary international law narrowly (see eg CMS v Argentina [Award] 315 et seq with respect to necessity in terms of Art. 25 Articles on State Responsibility). As seen, the argument against ISDS stems from the worry for sufficient policy space for national legislatures. To guarantee that space is the very function of exception clauses. That is, having a broad exception clause (encompassing the investment chapter) makes the discussion on ISDS less acute; even the need for a tobacco carve-out, given that such a clause will always include health, would be less pressing. By way of example, the investment chapter in the China-Australia FTA contains a general exceptions clause, Art. 9.8.
92 Many underscore the desirability of a multilateral approach. However, bearing in mind the political dimension, it makes sense to try out a higher level of integration with a smaller number of States first, before multilateralizing some of the tested concepts (Hoekman  253). Gaining some experience in this way should increase the predictability of these concepts when they are applied at the WTO level. The WTO and mega-regionals thus cross-fertilize each other with respect to legal concepts and regulatory techniques (Hoekman  621 et seq; Hufbauer and Cimino-Isaacs 696). Although not yet even concluded, there is already talk about a possible merger of RCEP with the TPP in the future (World Economic Forum 34; Barbee and Lester 216).
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