Working Group III (WG III) is one of several working groups operating under the umbrella of the United Nations Commission on International Trade Law (UNCITRAL). Currently, WG III is tasked with reforming the investor-state dispute settlement (ISDS) system.
The proposals being considered include a special set of rules for investment disputes, a standing mechanism for the appointment of tribunals in investment disputes (including appellate tribunals), and an advisory centre to guide developing countries, such as Pakistan.
WG III was initiated in 2017, triggered by a consensus that ISDS reform was necessary to address the concerns of many countries, particularly developing countries, regarding the fairness of the ISDS system.
At the same time, one of the most interesting aspects of WG III sessions is the disparity between delegations. To elaborate, the major capital exporting nations (and groups like the EU) send teams of specialists to every meeting. Each of those delegates is either a lawyer specialising in international disputes or a government official intimately familiar with international trade. And when those teams change, they typically ensure that any incoming member is fully up to speed.
By comparison, a significant number of the most vulnerable developing countries do not appear to understand the importance of WG III. Many developing countries, for example, do not participate in WG III at all. Further, to the extent that developing countries do send representatives to WG III, many such representatives prefer not to actively participate in discussions.
In truth, ISDS reform is a particularly specialised branch of an already specialised discipline. To make any sort of meaningful contribution, participants need not only to be technically familiar with investor-state disputes but to remain continuously engaged. The provisions considered at each session are themselves the product of multiple discussions conducted over multiple previous sessions. Participation in individual sessions is therefore a daunting task, especially for non-specialists.
The net result of a developing country's lack of interest (or effective ability to participate) is that WG III has devolved into a conversation between developed countries and other developed countries. In other words, a well-intentioned process dedicated to reforming the ISDS system has wound up being dominated by the very entities accused of benefiting from the distortions currently present in the ISDS system.
The deformation of the reform process is also ironically reminiscent of the inherent contradictions of the BIT project.
To recap, the logic behind BITs is that if developing countries provide enhanced protection to foreign investors, they will, in turn, benefit from enhanced levels of foreign investment. The logic is impeccable. It is also invalid.
BITs are illogical because they presume developing countries can be induced to behave more like developed countries by the promise of enhanced investment. In other words, all that is required to get developing countries to improve their governance systems is to offer them money.
Let us set aside the inconvenient fact that BITs do not actually lead to increased investment. The bigger picture point is that developing countries don’t operate in a linear fashion.
Developing countries are not stupid; they are just dysfunctional. They already know that improved governance will help them grow economically. Signing a BIT changes none of the underlying reasons why developing countries are dysfunctional. Hence, the assumption that a developing country will turn into Switzerland if promised more money is unwarranted. If a developing country could change its behaviour in response to the promise of enhanced investment, it would already have done so.
The phrase ‘cruel optimism’ is often used by writers to describe how systemic problems get downplayed through suggestions that the answer lies in individual will. For example, tech companies argue that people can avoid the harms of social media by turning their phones off, an argument which ignores the fact that the entire might of Silicon Valley is dedicated to making social media ever more addictive.
Similar systemic contradictions are evident when it comes to BITs and ISDS reform. BITs are predicated on the assumption that the behaviour of host states can be beneficially modified through the right incentives, even though the inability of developing countries to respond to incentives is one of the prime reasons why they remain undeveloped. ISDS reform is supposed to be a dialogue in which developed countries listen to the problems of developing countries. But the level of development required to participate in that dialogue effectively is one many developing countries lack.
So, should all BITs be discarded? That question is too complicated to address in this article. However, one option for host states to consider is to adopt a more proportionate approach to investor protection, for example, by providing BIT-type protections only to investors in select projects. One model for such a graduated approach is provided by Pakistan’s Foreign Investment (Protection and Promotion) Act, 2022, which offers BIT-type protection to qualified investments of $500 million or more.
In the meantime, assuming that BITs are here to stay, should the WG III process be abandoned? No. A reform process in which representatives of the Global North earnestly debate themselves is not ideal, but it is still better than no reform process.
Take, for example, the controversial concept of a standing mechanism for appointments. Yes, a permanent tribunal robs countries of their autonomy by depriving them of the right to appoint arbitrators of their choice. But by the same token, a standing mechanism negates the possibility of developing countries appointing the types of ‘exotic arbitrators’, who are in turn ignored by the other members of the tribunal. And even as currently proposed, the standing mechanism would eliminate ‘double-hatting’ by prohibiting arbitrators from also acting as counsel in ISDS cases.
More generally, it is unfair to blame developed countries for the continuing failure of developing countries to pursue their own interests. Yes, many former colonies inherited structural barriers to progress from their former rulers. But to be a ‘sovereign’ nation is, by definition, to claim that you – as a nation – can govern yourself and make decisions in your best interest. One cannot wish away the fact that sovereignty comes with consequences and responsibilities. Even otherwise, there is no substitute for organic development, regardless of how well-intentioned the assistance may be.
How then does one resolve the current conundrum of Working Group III? One way forward is for less engaged countries to participate collectively through small, regionally focused groupings. Note the word ‘small’. While developing countries certainly have some broad concerns in common, a group of 134 countries (such as G77) is perhaps too diverse and too broad to be collectively represented in WG III. By comparison, a more narrowly focused approach will enable practitioners within a region to collaborate effectively in developing coherent policy positions.
Another option is to make it easier for developing countries to participate. Currently, participation in WG III meetings requires participation in person. Individuals can observe remotely but not participate. However, participation in person is expensive. And to the extent a country considers it necessary, there is the attendant risk of non-experts availing of the travel opportunity for other than professional reasons. Allowing full participation to remote participants is thus one simple reform for UNCITRAL to consider.
The writer is a lawyer of the Supreme Court. The views expressed in this column do not represent the views of his firm. Twitter/X: laalshah