Rebalancing Global Trade: Challenges to Multilateralism in International Trade & Investment Law

The Post War construction of international economic law, built piece by piece around the institutions of Bretton Woods and the GATT, stands seriously off balance. The collapse of the Doha Development Round (now officially ongoing but considered moribund) has put the negotiating pillar into dormancy. The system of global trade and investment governance cannot survive the existing equilibrium; it must move towards one; this process calls for a sober legal assessment of the challenges to multilateralism.

Just as GATT Article XXIV and GATS Article V present a rule of law for integration among countries, conflicting and competing rules of origin and regulation—the ‘spaghetti bowl’—tear down the institutionalized framework of an integrated treaty system established in the Uruguay Round. The failure of the Doha Development Round-which while officially ongoing has been declared effectively dead-has put the negotiating pillar into a state of dormancy. The deficit has thus prompted the conclusion of a proliferation of bilateral free trade agreements and more importantly, plurilateral agreements between a subset of Members. As Article XXIV of GATT and Article V of GATS lay out a rule of law for integration of countries, the rise of competing, inconsistent rules of origin and regulatory standards–the spaghetti bowl–fragment the integrated treaty system that the Uruguay Round was trying to institutionalize. But what is constitutionally more concerning are the Joint Statement Initiatives on e-commerce, investment facilitation and domestic regulation in services: their status as non-consensual additions to the system as la carte WTOs poses an unresolved legal question on their status with regard to the MTO framework benefits, without a consensus amendment to the MTO itself. Their impact on the inherent erga omnes partes nature of WTO obligations has not been assessed; if it is deemed that such plurilateral don’t add value to MTO framework in any way other than by expanding membership beyond current ones, this aspect of the WTO system might be questioned in some of future cases.

The paralysis of the dispute settlement system has intensified this problem. The systematic obstruction since December 2017 of appointments of Appellate Body Members on the ground of alleged judicial overreach, violation of the 90 days rule, and issuance of unnecessary advisory opinions renders the star provision of the DSU inoperative since December 2019. While MPIA under DSU Article 25 offers a partial procedural workaround to the Members, a non-consensual outcome where one party does not have the option to refer a dispute to the Appellate Body gives the losing party the perfect out to not adopt and not comply with a report thereby denaturing the legal force of the decision, contra DSU Article 23. This clearly destabilises the WTO system that rests fundamentally on a commitment to rule based multilateralism that the AB has often emphasized over its years of service.

Another important challenge is the increasing reliance upon the national security exception. GATT Article XXI that was an effectively dead letter, primarily reserved for sovereign nations to act in genuine Défense crisis, has become central legal issue for some of the biggest trade wars. The AB through the Russia-Traffic in Transit dispute performed a scholarly exercise and reestablished its ability to exercise a legal authority on such claims. In this decision, it rejected purely self-judging claims and established that the chapeau to Article XXI(b) is subject to an objective review via the good faith requirement. Subsequent disputes such as Saudi Arabia-IPR, and US Steel and Aluminum case have reinforced the principle while establishing that there is indeed an overreach in an application of this exception if it is directed at economic warfare’s and economic coercion. However, US’s insistence that this cannot be reviewed under the DSU system and its unilateral action on tariff imposition, which is not in compliance with the DSU prohibition on unilateral measures, places the two fundamental tenets of the international trade system directly at loggerheads. The core legal need is a coherent body of interpretative law defining this exception for use in bona fide national security crises, while upholding the rule of law, and distinguishing these measures from protectionism.

Investment Law faces its own peculiar crisis of legitimacy. The world of over 2,500 BITs that were mainly enacted before 2000 have created an ad hoc and asymmetrically governed dispute settlement framework centered around ISDS and international arbitration tribunals created under the ICSID or UNCITRAL rules. These tribunals, despite producing an impressive volume of case law have had a systemically incoherent record particularly on topics such as fair and equitable treatment, indirect expropriation and necessity doctrine. Although, a case such as Philip Morris v Uruguay correctly reiterated the principle of police powers not equating to indirect expropriation if measures aimed at public welfare are non-discriminatory; nevertheless, many tribunals continue to employ overly broad interpretations that have led to ‘regulatory chill’ effect on environment and health and fiscal policy. In reaction to this, the EU has most creatively attempted to establish its own institutional framework for ISDS, termed the ICS with an Appellate mechanism that was established bilaterally through CETA and EU Vietnam trade agreement. Its ability to meet the challenges, though, has been critiqued on the basis that it does not do enough to restore the balance of power between host state and investors, and a bilateral approach might create more fragmentation within the system by only allowing specific few, as the main source of the problem is lack of multilateralism, which these BITs can only offer a piecemeal solution to.

At the most crucial multilateral negotiations in this context are the work of UNCITRAL Working Group III that looks into various aspects such as procedural reforms, permanent multilateral mechanism, appellate mechanism and the selection and ethical rules of adjudicators. More controversially however, they aim at implementing substantial reforms of investor obligations and introducing provisions on human rights, due diligence on environmental standards and corporate social responsibility. That the multilateral regime cannot ignore substantive law has been highlighted by the simultaneous update of the Energy Charter Treaty and subsequent withdrawal of many European states from it; in effect it has been perceived as a case of clashing investment protections and climate commitments under the Paris agreement. Restoring a stable framework calls for investment law that internalizes the idea of sustainability: investment protection must only be a means to the attainment of development, a lex specialist to the overarching norms of international law on human rights and environment.

A key development taking shape in other frontiers also adds pressure on the existing system: The EU’s Carbon Border Adjustment Mechanism which aims to avoid carbon leakage, raise significant question of GATT Articles I and III compliance, and applicability of Article XX(g) or (b) defence. Legality would be dependent on a proportionality test, and on how much funds it contributes towards climate initiatives in the developing countries, based on the common but differentiated responsibilities principle. Similar concerns have been raised over a movement towards codifying binding labour and environmental standards in trade deals. The first ever multilateral agreement under the WTO focusing solely on sustainability, the Agreement on Fisheries Subsidies, demonstrates how compromise is possible if political focus shifts from market access to global commons.

The rebalanced structure must be far more than a patchwork. Restoring a working AB requires reforms that deal with timeliness issues, clarity on the prohibition of obiter dicta, and a way for Members to express their collective opinions on systemic interpretations of WTO law without impairing judicial independence. Plurilateral arrangements should be absorbed into an Annex 4 approach with an explicit route for eventual multilateralization and a rule that reflects a singular legal order. In investment law, a permanent, public international law multilateral investment court with full-time, tenured adjudicators, interpreting a codified investment law that acknowledges the right to regulate would be a sea change from a private arbitration system. But above all, the sanctity of pacta sunt servanda needs to be upheld against unilateral revisionism, albeit informed by the wise knowledge that a certain policy space will be permitted to states as they try to cope with an unexpected crisis, whether it be environmental, sanitary, or political. The question is not so much one of design of institutions but the recovery of a sense of law as a public good with a belief in its capacity to guide the global economy without being intrusive to the needs of member countries.