When I hear people claim that ISDS/investment protection "de-politicizes" investment disputes, in the sense that governments can avoid the unpleasant task of espousing diplomatic claims against other governments, I usually respond by pointing out that ISDS claims create political controversy of another kind, so at best the whole thing is a wash. But what if ISDS/investment protection does not even get governments out of the espousal business? This is the abstract of a new paper from Geoffrey Gertz, Srividya Jandhyala and Lauge Poulsen:
Empirical research on the impact of investment treaties has focused almost exclusively on their effect on foreign investment, with mixed results. Yet, another important promise of the treaties has been ignored altogether. Architects of the investment treaty regime, as well as many current proponents, have suggested that the treaties allow developing countries to de-politicize investor-state disputes; i.e. shield commercial disputes from broader political and diplomatic considerations with developed states. While this argument is widely accepted by legal scholars and practitioners and explicitly promoted by capital-exporting states, it has never been subjected to empirical investigation. We provide the first such test, using an original dataset of US diplomatic actions in 219 individual investment disputes across 73 countries as well as detailed case studies drawing on internal US State Department diplomatic cables. We find no evidence for the de-politicization hypothesis: diplomatic engagement remains important for investor-state dispute settlement, and the US government is just as likely to intervene in developing countries that have ratified investment treaties with the US as those that have not. Coercive American intervention in investment disputes is rare, but this is a general feature of American investment diplomacy after the Cold War, rather than one limited to investors with recourse to legalized dispute settlement procedures. These findings provide a critical corrective to our understanding of the investment treaty regime, and have important implications for understanding the effects of international legalization on developing countries.
An example from the paper may be helpful here:
In June 2006, the American investment company Iselo Holdings LLC, a small firm run by a former investment banker, purchased the Guatemalan telecommunications company Americatel Guatemala (‘Americatel’). The company had a pre-existing interconnection agreement with Telgua, the dominant telecom player in the country and part of Carlos Slim’s telecom empire. In October 2006, in the midst of a contractual dispute between the two firms, Telgua unilaterally disconnected 20 percent of Americatel’s capacity. This was a violation of the competition rules that Guatemala’s telecoms regulator – known by its Spanish acronym SIT – had agreed to as part of the Central American Free Trade Agreement (CAFTA), which had been ratified that same year. Americatel repeatedly appealed to SIT to enforce these regulations and filed injunctions against the regulator in Guatemalan courts. As SIT refused to act, the company turned to the US embassy for assistance, alleging that the regulator was discriminating against Americatel and failing to live up to its international legal obligations.
Officials from the United States Trade Representative (USTR) in Washington became involved in the dispute as well.21 In multiple meetings the embassy and USTR encouraged SIT to resolve the dispute by enforcing CAFTA’s competition rules. This had little effect, likely because Guatemala was in the midst of an election and change in administrations in late 2007 and early 2008. Frustrated with the lack of progress, Americatel began the formal procedures to initiate an ICSID claim based on CAFTA (interview with Americatel representative; 08GUATEMALA689).22 This prompted the Guatemalan government to act, as it preferred to rely on diplomatic negotiations rather than have the arbitration claim proceed (08GUATEMALA689). Several high-ranking USTR officials visited Guatemala and met with the Minister of Economy, the head of SIT, and officials from the Ministry of Communications (08GUATEMALA1036). American diplomats believed the Minister of Economy was motivated to settle the dispute, but saw “no indication” that the key agencies – SIT and the Ministry of Communications – wanted to change course and US officials thus predicted the ICSID claim would have to proceed (08GUATEMALA1036). Soon thereafter, however, the case was settled through the personal intervention of Guatemala’s President and Carlos Slim, who agreed to settle the underlying dispute between Telgua and Americatel – by buying out Americatel’s interests in Guatemala – and thereby obviate the looming CAFTA arbitration (personal interview with senior Americatel representative). While this did not address the broader shortcomings in Guatemala’s telecoms regulations, it ensured Americatel could salvage its investment.
As in the case of Oxy above, events in the Americatel case do not support the expectations of the de-politicization hypothesis. Access to investment arbitration provided a useful leverage point for the investor, but it was a complement rather than substitute for diplomatic interventions. Unlike in the Oxy case, the investor was not a major multinational but a relatively small firm owned by an individual, and it is implausible such a company would have the political power to bring pressure on the US government to intervene. Rather, American diplomats wanted to link – rather than compartmentalize – the dispute to broader Guatemala-US relations, namely the liberalization and effective regulation of Guatemala’s telecoms sector (08GUATEMALA1036). In fact, a senior Americatel representative reports that USTR was “disappointed” the case would not be going forward, because American officials “saw it as an opportunity from a broader perspective” (interview). The US did not explicitly threaten the host state government with a sanction or economic penalty – as in the Oxy case – and the Americatel dispute is thereby more similar to the majority of politicized diplomatic interventions observed in the cables. Yet the US government was still heavily involved in the dispute, despite the availability of investor-state arbitration.
