Scrutinizing States’ Power in a Liberalized Economy: A Comparative Analysis of the International Investment Regime and the International Trade System

Abstract:     
The design of an institution affects both the way it functions and its outputs; from rulemaking to dispute resolution, institutional configuration plays a crucial role in the way an organization attains its ultimate goals. This paper will consider institutional design as an independent variable that has an effect on both the treatment and resolution of disputes in international economic law. It will focus particularly on how the lack of a proper institutional framework shapes the investment field, contrasted with the highly institutionalized trade system.

The investment and trade mechanisms share a core function which is to scrutinize state regulatory activity in its local economy, especially by discriminating legitimate regulation from arbitrary and illegal action. Their mission is very delicate: While economic globalization requires certainty and stability of certain rules across the world, this aim can only be achieved if states remain capable of correcting market failures and providing essential public goods.

As a consequence, this equilibrium requires scrutinizing state activity in order to secure the balance that the international community has adopted as fair and legitimate. In particular, such a function implies considering not only international commitments, but also legitimate domestic necessities like social values and development goals. In the international trade field, authors like John Ruggie and Jeffrey Dunoff focus on the importance of maintaining this equilibrium, which is accepted as a basic function of this system. Conversely, this element is missing in the investment field, which is signaled as a cause of concern by many authors, including William Burke-White, Ernst-Ulrich Petersmann, Brigitte Stern or Gus Van Harten. Primarily, the core critique lies on an alleged “unbalanced” interpretation of investment treaties, affecting the output of the dispute settlement mechanism and, therefore, distorting states’ abilities to pursue legitimate goals, like the implementation of policies designed to advance foreign investment benefits for the host economy.

Both trade and investment law are sources of concern for civil society, NGOs and developing countries. This article will argue that an institutionalized framework is better positioned to cope with these issues and achieve better solutions.

Presented at the SIEL 2010 Conference in Barcelona.

Number of Pages in PDF File: 63

Keywords: International investment, International trade, Public regulation, Political economy, Dispute settlement, State regulation, Liberal economy

JEL Classification: F02, F11, F12, F13, F21, F41

working papers series