The Trans-Pacific Partnership Agreement and States' Right to Regulate under International Investment Law

By Zamir, Noam; Barker, Paul | Denver Journal of International Law and Policy, Winter 2017 | Go to article overview

The Trans-Pacific Partnership Agreement and States' Right to Regulate under International Investment Law


Zamir, Noam, Barker, Paul, Denver Journal of International Law and Policy


I. INTRODUCTION

The Trans-Pacific Partnership Agreement (TPP), (1) which was signed in November 2015 by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam, is said to establish new terms for trade and investment deals. (2) The TPP was intended to establish a free trade area in the Asia-Pacific covering nearly 40 percent of global GDP and a third of global trade. (3) The agreement also forms an integral part of broader geopolitical calculations in the region. (4) However, the TPP as currently drafted can only come into force if ratified by six or more of the States Parties representing at least 85% of the GDP of the twelve original signatories. (5) This prospect is now unlikely following the new U.S. administration's announcement in January 2017 that it will not ratify the treaty, (6) amidst a rising tide of anti-free trade sentiment around the world. (7) Nevertheless, other States Parties to the TPP continue to strive for ratification in one form or another, (8) and the TPP will arguably remain a benchmark for future trade deal negotiations.

The political response to, and widespread scepticism towards the TPP and other international investment agreements (IIAs) is complex and widely debated. This article will focus on one issue that has played an important role in framing the debate on the TPP: the potential impact of the TPP (and similar deals) on States' right to regulate public welfare under international investment law.

In response to a growing number of investment treaty arbitrations arising out of regulatory measures taken by host States, the recent trend in IIA practice (9) has been to include express language in the treaty preamble reaffirming the right to regulate, to provide greater guidance on the standards of investment protection as they apply to regulatory measures, and to carve out general exceptions, for example, measures taken for the protection of the environment, public health or financial stability. (10)

As the tribunal in Lemire v. Ukraine (11) stated, the host States enjoys an "inherent right to regulate (...) in order to protect the common good of its people. (12) Indeed, it is said that IIAs "may not be read as preventing States from bona fide regulation in the public interest" (13) and that it is necessary "to balance investment protection with competing policy objectives of the host State, and in particular, with its right to regulate in the public interest." (14) In a recent high profile award rejecting Philip Morris' claims against Uruguay relating to tobacco control measures, an eminent tribunal held that there is a "consistent trend" in awards and treaty practice differentiating an indirect expropriation from a non-compensable regulatory measure. (15) However, the circumstances in which a host State may still be obliged to compensate a foreign investor for a regulatory measure having an economic impact on a protected investment remain contested. In Daimler v. Argentina (16), for example, the Tribunal agreed that host States have the right to regulate the economy as they see fit, but held that:

  [W]here Argentina elects to exercise its powers in a manner that
  contravenes one of Argentina's voluntarily assumed international
  obligations to German investors under the German-Argentine BIT, and
  where such contravention specifically harms the Claimant's
  investment, Argentina must compensate the Claimant for the
  violation. (17)

Against this background, critics of investment treaty arbitration assert that tribunals illegitimately interfere with States' core public policy prerogatives and that an award of damages against host States can have a "chilling effect on future governmental conduct by preventing governments from adopting certain courses of action for fear of future liability." (18) These concerns have translated into heightened public scrutiny of investment treaty arbitration awards and of IIA negotiations, including the TPP. …

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