Populist governments need strong arbitrators – Dr Richard Happ looks at investment protection in a more nationalistic world
The last year has seen an astonishing rise of populist governments and movements in the USA and in Europe. Such governments tend to act short-sightedly and with an eye on the public mood, as exemplified by the new US administration’s varying stance towards the WTO and international instruments such as Transatlantic Trade and Investment Partnership (TTIP). In times such as these, international business is particularly dependent on a reliable legal framework independent from potentially volatile national norms.
International standard for arbitration proceedings is consolidated
Dr Richard Happ is a specialist in international arbitration proceedings and acts himself as arbitrator. He sees that such a framework has developed over the last 200 years in the form of investment protection law: holding governmental interference with business to an international minimum standard provides greater stability than a lottery based on a variety of national standards. For example, bilateral investment treaties became increasingly common during the period of decolonisation after WW II, as capital-exporting countries moved to create special treaties to protect their investments. Today, nearly 3500 of such treaties are assumed to exist, covering not only north-south or east-west relations, but also between Asian states themselves or Asian and African States.
This framework, however, is challenged by populist governments picking up the anti-globalization sentiment prevalent in the public. “It’s difficult to explain to the public that in order for their country’s companies to be able to claim compensation abroad, at some future point and from another state, they have to be prepared to pay compensation themselves to foreign companies,” explains Dr Happ. “A populist government can take a very short-sighted view.”
Restructuring investments via Mexico or Canada
The US approach to the Transatlantic Trade and Investment Partnership (TTIP) is another example of the “I win, you lose” philosophy, in contrast to EU trade commissioner Cecilia Malmström, who has said that “We see a trade agreement as, I win, you win.” TTIP would have provided numerous safeguards ranging from full transparency of investor-state dispute settlements through to the denial of benefits to sham corporations. In Germany, there is no investment treaty with the United States: the US-German Treaty on Friendship, Commerce and Navigation of 1954 is outdated and offers no real safeguards to investors. Dr Happ suggests that “companies worried about possible protectionist measures by the current US administration might wish to consider restructuring their investments in such a way that they are protected, e.g., by going through Canadian or Mexican subsidiaries to profit from NAFTA.” Similarly, companies worrying about their investments in Turkey should consider reviewing their available treaty protection and, if necessary, consider a restructuring.
Investment treaties will continue to protect investors
Dr Happ is confident that investors who have suffered loss will be able to continue to use lawyers rather than have their home states send gunboats – literally, in times past – to secure compensation. “While the past five years have seen rising criticism of investment treaties, the critical voices have been spectacularly silent since the election of President Trump. States will continue to modify the system – this clock cannot be rewound. Some changes will be hasty and some may be unwise,” he says. “But most importantly, the medium and long-term outcome will be better due to these changes than before because, in international law, no rule can exist without acceptance by those bound by it.” Stability for investments will always be a priority and no government, whatever its political complexion, wants to discourage inward investment or disadvantage its own investors.
While the current turmoil continues, however, confident arbitrators who know how to keep control over proceedings have an even more essential role. Stability in the system requires which enforce rules and do not fall prey to the current “due process”-paranoia which makes so many proceedings unnecessary lengthy, cumbersome and costly. Populist governments need strong arbitrators.
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