A Public Statement on the International Investment Regime, signed by a group of forty eight academics from around the world, has added, “We have a shared concern for the harm done to the public welfare by the international investment regime, as currently structured, especially its hampering of the ability of governments to act for their people in response to the concerns of human development and environmental sustainability”. [2] It argues, inter alia, that investment treaty arbitrations are unfair and unbalanced,[3] and that states should withdraw from investment treaties.[4] International investment law has even been described by a distinguished academic as “a law of greed”.[5]

Although perhaps somewhat exaggerated, these critiques are certainly not baseless. Several recent developments, most notably the disputes between tobacco giant Philip-Morris and the governments of Australia and Uruguay, indeed demonstrate how foreign investors can abuse the system of international investment law. But, as previously argued in this blog,[6] it could well be that these critics overlook the possibility that this system can also support sustainable development goals.

An alternative perspective of the ‘regulatory chill’

While the above mentioned critics often claim that investment treaty law restricts governments’ regulatory flexibility and their ability to adopt stricter environmental and social laws, it should be noted that similar ‘restrictions’ can also stop governments from reducing their standards on these very issues. For example, in recent investment arbitration a Canadian investor, who invested in an eco-tourism facility in Barbados, argued that Barbados authorities’ failure to enforce environmental laws and commitments, on which he legitimately relied, led to the pollution of his site.[7] The prospect of paying compensation in such cases can ‘chill’ governments’ will to  lower environmental standards, and thus support environmental objectives.

Similar claims can also be made with respect to climate change policies. Investment in low-carbon technologies, for example, often requires governmental support. This is partly due to market distortions like those resulting from high fossil fuels subsidies.[8] Another reason is the immature state of these technologies that often renders them unprofitable in strictly financial terms. Therefore, without state support many investors may choose other, more profitable alternatives. Indeed in order to promote climate-friendly investment, many states have adopted support schemes so as to cover the existing ‘gap’ between the public need for private investment in this field, and the current unprofitability of these technologies.

Investors rely on these governmental support schemes when deciding whether to invest in new low-carbon technologies. Governments’ ability to ‘fulfill their promises’ of support is therefore crucial for investors. When these promises are not kept after an initial heavy investment has been made, investors’ discontent can be understood. Even more troubling, at least from the public’s point of view, is that ‘un-kept promises’ can also discourage investors from making similar investments in the future.[9]

In light of the above, it can be argued that (to use the Guardian’s words) the existence of such a “legal weapon that gives corporations the edge on government”, may not necessarily be a bad thing. Having the option of claiming compensation in cases of governmental ‘betrayal’ can reduce the risks of relying on governmental promises, and encourage investors to invest in low-carbon technologies.

Recent developments:

Lately this present discussion has become a reality. On November 2011 a group of fourteen foreign investors filed a notice of arbitration against the Spanish government (based on the Energy Charter Treaty), following the latter’s substantive cuts in its feed-in tariffs (“FIT”) scheme. The cut in the FIT scheme was made due to the financial hardships Spain is currently facing.[10] The exact legal arguments raised by the foreign investors in this case are unknown to the author,[11] but a legal brief prepared by a certain leading law firm suggests that they may have relied on the “fair and equitable treatment” and “national treatment” standards of protection, as well as on the protection from expropriation, as stipulated by the Energy Charter Treaty.[12]

The Spanish example, however, reveals also the other side of this story. Spain is currently facing a difficult financial crisis. The solar industry, according to several publications, received 2.6 billion Euros in subsidies in 2010 alone,[13] and it is doubtful whether a state in such a condition should be forced to allocate these amounts to, of all things, renewable energy.

On the other hand, it is also discouraging that when facing financial difficulties, environmental causes are too often the first to be sacrificed. It can also be added that while Spain’s admittedly difficult financial situation should perhaps be considered when resolving this dispute, other, less ‘financially challenged’ states, like the UK, are making similar cuts.

In the author’s view, investment treaty law’s role in such cases is not necessarily negative. It provides assurances that in light of the low priority environmental considerations often receive, especially in times of financial turbulence, environmental ‘promises’ may still be respected. This is important for the prospect of green technologies, and for the future of our planet. This, however, is not to say that the system is flawless. Struggling states such as Spain should be allowed some flexibility when facing economic crises. And as demonstrated by several investment awards decided in the past against Argentina, it is possible that many investment treaties are simply not suitable for dealing with these situations. But, and this is important to remember, the arbitrations against Argentina and the mentioned case against Spain involve financial crises of historical proportions. This may not, usually, be the typical case in future claims.

Conclusion:

The prospects for the UN ‘green-economy’ vision depends on the successful fusion between private commercial interests and public environmental and social goals. Providing the private sector with the ability to efficiently claim compensation from states that do not live up to their environmental commitments, does not conflict with this vision. This is especially true in the case of low-carbon technologies, in which the private sector’s involvement is crucial.

Those criticizing the investment regime should continue to do so. This system, like many others, is not perfect. At the same time the benefits of this system should not be overlooked, especially when the voices calling for its revision grow ever-louder.

[2] Public Statement on the International Investment Regime, 31 August 2010, online: Osgood <http://www.osgoode.yorku.ca/public_statement/documents/Public%20Statement.pdf> [Public Statement].

[3] Public Statement, supra note 10 at para 8.  These critiques mostly claim that investment treaties represent only the commercial interests of foreign investors, and ignore public interests of states.

[4] Public Statement, supra note 10 at para 14.

[5] M. Sornarajah, ‘A Law for Need or a Law for Greed?: Restoring the Lost Law in the International

Law of Foreign Investment’, Int. Environ. Agreements 123 (2006): 329 [Sornarajah, ‘A Law for Need or a Law for Greed?] at 331.

[6] “Environmental exceptions in the future EU investment policy. Perhaps more than meets the eye?”, Legal Frontiers, June 10.

[7] Peter A. Allard v. The Government of Barbados, (Notice of Dispute) 8 September, 2009 online: Graemehall <http://graemehall.com/legal/papers/BIT-Complaint.pdf> [Allard].

[8] Ben Sills, “Fossil Fuel Subsidies Six Times More Than Renewable Energy”,  Bloomberg, 9 November 2011, online: Bloomberg <http://www.bloomberg.com/news/2011-11-09/fossil-fuels-got-more-aid-than-clean-energy-iea.html>.

[9] In a statement made by the UK Solar Trade Association following the U.K. government’s decision to modify its FIT scheme it was argued: “Such deep cuts to the tariff would kill the UK solar industry stone dead.” The UK Renewable Energy Association has added: “The renewables industry is really not confident at all. These changes undermine confidence across all energy-related investments, even CCS [carbon capture and storage] and nuclear, as we need to be confident that the government will honour their commitments and not chop and change.” See Uk Parliament Briefing Paper, Elena Ares, Oliver Hawkins and Paul Bolton, Science and Environmental Section, “Feed-in Tariffs: Solar PV”, online: UK Parliament <www.parliament.uk/briefing-papers/SN06112.pdf> at 14, and Damian Carrington, Feed-in tariff cuts ‘will kill solar industry stone dead’”, The Guardian, 31 October 2011, online: The Guardian <http://www.guardian.co.uk/environment/2011/oct/31/feed-in-tariff-cuts-industry>.

[10] Tim Webb, “Spain’s financial crisis claims another victim: the solar power industry” The Guardian, 30 March 2011, online: The Guardian <http://www.guardian.co.uk/world/2011/mar/30/new-europe-spain-solar-power>. Please note that other states, like the U.K., have also modified their FIT schemes for similar reasons. In the U.K. these measures were legally challenged (successfully, for the moment) by solar industry. See Energy Efficiency News, “High court rules UK government’s solar feed-in-tariff cuts are illegal”, 22 December, 2011, Energy Efficiency News, online: <http://www.energyefficiencynews.com/i/4745/>.

[11] To the best of the author’s knowledge, these have not been published yet.

[12] See a brief prepared by Freshfields Bruckhaus Deringer, “Tariff changes for photovoltaic solar power in Spain” March 2011, online: <http://www.freshfields.com/publications/pdfs/2011/mar11/29871.pdf>.

[13] Tim Webb, “Spain’s financial crisis claims another victim: the solar power industry” The Guardian, 30 March 2011, online: The Guardian <http://www.guardian.co.uk/world/2011/mar/30/new-europe-spain-solar-power>.

Numbers that the Americans are debating include a levy at 0.15% for 10 years on all financial institutions with more than $50 billion in consolidated assets.

With Germany and England ready to take action and implement similar levies, and with Obama seeking to push the US to do the same, it’s unclear what kind of overall effect these levies would have on banking if they are carried out on a piecemeal, domestic basis. These financial institutions are international in character. Their activities transcend national borders, and thus any attempt at regulation will need to account for the cross-border transactions and international nature of the institutions. Will domestic regulation really solve the inherent problem of big banks making big investments without thinking about the potentially big (and devastating) consequences?  Probably not.  So then what’s the point?

Edwin M. Truman, Senior Fellow at the Peterson Institution for International Economics in Washington, proposes a different analysis. He says, “There are two dimensions — paying for the past and paying for the future.”  Instead of seeing the tax as a sure-fire way to implement reform in the banking industry, he would see it as a way for governments to recoup their bailout cash and to provide a cushion for future bailouts.

One other contentious factor in the taxing of banks is the worry that levies will create further competition for banking jurisdictions. While when it comes to corporations law, Roberta Romano has deemed this competition for jurisdiction the genius of American corporate law, it is not clear that there is a direct parallel for the banking sector. For a financial institution, its bottom line may more readily be finding the jurisdiction with the lowest tax, as opposed to a jurisdiction with great legal experience in banking affairs. Starting competition between major governments as to who could offer the lowest levy won’t address the major internal reforms sought for the entire banking system.  Banks are also usually backed by some kind of governmental guarantee (at least to a certain amount), which complicates a government’s interest in hosting a foreign bank seeking to evade that nation’s bank levies.

So what can these levies do so long as there is no unified global approach? The answer is, in short, insurance.

In the case of Sweden, the insurance role of the levy  funded by those financial institutions creating the risks is clear.  According to measures adopted late last year, the government plans to raise roughly 2.5% of the GDP in the form of bank levies over the next 15 years. The annual levies begin at 0.018% of the institution’s liabilities (equity capital and some junior debt securities excepted.) Starting in 2011, the levies will rise to 0.036%. Sweden has based these numbers on what they project a potential future banking crisis would cost. As such, money collected under these taxes is allocated into a stability fund. If a future crisis were to arise, bailouts would come from this fund and not from the public purse.

Meanwhile, the world awaits to see if there will be a global reaction to these proposed levies. All eyes will be on the G-20 meetings in Washington later this month when the IMF delivers a report on bank levies.  While it still remains a contentious matter, there may still be hope for a more unified approach in order to revolutionize responsibility undertaken by financial institutions.

The idea was subsequently picked up by UK PM Gordon Brown and presented to the G20 at their meeting in St Andrews, Scotland on Nov 7th.  Brown presented the tax as an instrument to fund future bank bailouts.  Moreover, he sees the tax as increasing accountability in the financial sector.   However, the idea was not received as well as had been hoped.  The USA has rejected the idea, and Canadian Finance Minister Jim Flaherty also came out against the tax.

While things looked dismal for the tax proposal following the G20, it seems that at least as far as the US is concerned, the idea in principle may still be kicking around Congress.  U.S. House of Representatives Speaker Nancy Pelosi has spoken out in favor of a similar proposal, affectionately named the Wall Street tax, from which funds would be used for job-creating legislation sought to be passed in December.  The Democratic proposals are citing nearly a $150 billion per year fund to help with economic recovery. However, the US is staunch about the necessity of the tax being an international one, otherwise it stands the risk of losing financial jobs to markets overseas.

So what would these taxes practically look like? Democrat Representative John Larson proposes a 0.25 percent tax on over-the-counter (OTC) derivatives transactions.  But once again, we see the Democrats in favour of the tax being adamant about applying this potential tax internationally.  These OTC derivative transactions go on primarily between banking and financial institutions and include interest rate contracts, credit default swaps, foreign exchange contracts, commodity contracts and equity contracts among others.    To contrast, France was looking at roughly 5 cents on every 1,000 euros.

As long as the US dollar remains as a standard trading currency, there is an opportunity to achieve the goals set out by this potential tax proposed by some Democrats.  Even when money is traded in US dollars between two foreign banks, the transaction passes through New York.  However, a potential tax only on USD transactions thus would tally another minus for the already weakening use of the USD as a currency of trade.

However, it leaves one to wonder how feasible a truly solidified global financial tax really is.  While places like New York and London have been seats of financial power for ages, there’s no telling what might happen if the tax isn’t uniformly implemented.  All it takes is one or two countries with a relatively stable currency to withhold to cause a great threat to the goals of the tax.  The danger is not just in the abandoning of the US dollar as a currency of trade, but rather corporations moving operations overseas.  Like the phenomenon of ships leaving the US to be registered under Flags of Convenience, a non-uniform global tax might cause corporations to do the same.  And that certainly wouldn’t help raise funds for stability or any future bank bailouts, nor would it help create more jobs in this continued time of high unemployment.

As we are all well aware, the international credit crisis, which came to the fore in 2008, resulted in the collapse or near-collapse of financial institutions and sources of credit for businesses around the world – causing trade levels, investment and global output to plummet, and thousands of jobs to disappear. In the fall of 2008, there were fears that a depression similar in intensity to the Great Depression of the 1930s was looming. In response, many states announced significant injections of capital into troubled financial institutions and industrial sectors to avoid their collapse, and to facilitate access to credit by industry. They also adopted measures to stimulate domestic demand.

Global leaders, particularly those representing the G20 group of countries, also moved to take a coordinated approach to the crisis. The G20 leaders first met in November 2008 for a Summit on Financial Markets and the World Economy, where they issued a Declaration in which they promised to “work together to restore global growth and achieve needed reforms in the world’s financial systems”.[3] As part of this declaration, the G20 leaders made four trade-related commitments:

1. To refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing WTO-inconsistent measures to stimulate exports.
2. To minimize any negative impact on trade and investment of our domestic policy actions, including fiscal policy and action in support of the financial sector.
3. To notify promptly the WTO of any such measures; and
4. To call upon the WTO, together with the Organization for Economic Cooperation and Development (OECD) and the United Nations Conference on Trade and Development (UNCTAD) to monitor and report on their adherence to these undertakings.

In late September, the WTO, the OECD, and UNCTAD released their second report on the G20 countries’ adherence to these undertakings: Report on G20 Trade and Investment Measures.[4] The report identifies approximately 280 measures undertaken by G20 countries between April and September. The report expressly reserves opinion as to the legality of the measures under WTO rules, or their trade-distorting nature. While the authors did not find “widespread” resort to trade and investment restrictions as yet, they did find “policy slippage” and pointed to multiple examples of protectionist measures adopted by G20 members, including agricultural export subsidies, tariff increases, new non-tariff measures, and trade defence mechanisms.[5]

In June 2008, the UK-based Centre for Economic Policy Research launched Global Trade Alert (GTA), a service providing real time information on state measures taken during the current global economic downturn that are likely to discriminate against foreign commerce. The GTA also issued a report shortly before the G20 meeting in September with its own analysis of the extent to which the G20 has “kept its promises” to avoid protectionism. The report, Broken Promises: a G-20 Summit Report by Global Trade Alert, identifies over 400 trade-related, state initiatives undertaken in the wake of the crisis.[6] It distinguishes between three types of measures:  those that almost certainly discriminate against foreign commercial interests; those that may discriminate against foreign commercial interests; and those that are either non-discriminatory or involve liberalization.[7] The study finds that “the overwhelming picture is one of planned and implemented state initiatives that reduce foreign commercial opportunities and reverse the 25-year trend towards open borders.” It estimates that worldwide, the number of discriminatory measures being implemented outnumbers the liberalizing measures by five to one.[8] The GTA finds that the impact of these measures is cause for significant concern: fewer than 5 percent of product categories, 20 percent of economic sectors, and a small number of trading jurisdictions have not been affected by any significantly restrictive measures.[9]

The two reports offer slightly different views as to the current intensity of trade protectionism. However, they are in agreement that the main challenge associated with the current protectionist mindset is the fact that many more protectionist measures are ‘in the pipeline’- planned and approved, but not yet implemented. They both stress that the main risk to the trading system is that states will continue to cede to protectionist pressures. Both caution that the continued implementation of protectionist measures will further erode trade liberalization achievements, and, more importantly, will hamper the global economic recovery. Both urgently recommend that governments plan a coordinated exit strategy to eliminate these elements as soon as possible.

The G20 leaders have announced their intention to prepare exit strategies.[10] However, they have merely agreed to implementation “when the time is right”. In light of the many trade protectionist measures still in the pipeline, their failure to commit to a timeline could contribute to aggravating the contraction of world trade and investment, which would undermine confidence in an early and sustained recovery of global economic activity. Stronger action is required.

[2] G20 Summit Declaration, “The Global Plan for Recovery and Reform”, London, 2 April 2009.  Accessed online October 25, 2009 at http://www.g20.org/Documents/g20_summit_declaration.pdf.

[3] Ibid.

[4] Report on G20 Trade and Investment Measures, September 2009. Accessed online October 25: http://www.pittsburghsummit.gov/documents/organization/129863.pdf.

[5] Ibid, at page 6.

[6] Simon J. Evenett (ed), Centre for Economic Policy Research, 2009. Accessed online October 25:  http://www.globaltradealert.org/sites/default/files/Broken_promises_GTA_second_report.pdf.

[7] Ibid, at page 18.

[8] Idem, at page 13.

[9] Idem, at page 4.

[10] http://www.g20.org/Documents/pittsburgh_summit_leaders_statement_250909.pdf.