Disputes in International Investment and Trade

Abstract

International investment agreements employ dispute settlement procedures that differ markedly from their counterparts in trade agreements. We develop parallel models of trade and investment agreements and employ them to study these differences. We find that many of the observed differences can be understood as deriving from the fundamentally different problems that trade and investment agreements are designed to solve. The typical dispute settlement process in trade agreements - emphasizing state-to-state dispute settlement, tariff retaliation, and prospective damages - can be justified based on the government-to-government nature of trade agreements. The typical dispute  settlement process in investment agreements - emphasizing investor-state-dispute settlement, cash damages, and retrospective damages - can be justified based on the government-to-investor nature of investment agreements. We also identify important qualifications to the wisdom of these design features, particularly with respect to investment agreements, thereby offering a potential explanation for the strong political controversy they cause.

Keywords: Investor-State Dispute Settlement, State-to-State Dispute Settlement, Trade Agreements, Bilateral Investment Agreements