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The Global Financial Crisis: Will State Emergency Measures Spark International Investment Disputes?

Columbia FDI Perspectives - Number 3

Perspectives on topical foreign direct investment issues by the Vale Columbia Center on Sustainable International Investment

The Global Financial Crisis: Will State Emergency Measures Trigger International Investment Disputes?
By Anne van Aaken and Jürgen Kurtz
 
Media contact: Nancy Goldfarb 212-854-1584 nancy.goldfarb@law.columbia.edu
Public Affairs Office 212-854-2650 publicaffairs@law.columbia.edu

New York, April 6, 2009 — Australia, Germany, Ireland, the United Kingdom, and the United States have all introduced emergency measures to mitigate the effects of the global financial crisis. While these measures are still in flux – often undergoing changes by the executive branch – a survey we have conducted across a range of emergency measures implemented by these and other states reveals potential violations of international investment law. A number of these measures may well lead to more disputes under international investment law.
 
The two emergency measures that have already passed and are most likely to engage international investment law are:

(1) Measures designed to bolster the stability of the financial services industry by increasing the confidence of market participants and ensuring the continuation of bank funding. They encompass liquidity support, recapitalization (through share purchases or otherwise), purchase of specific assets (including “toxic” bank assets), inter-bank (wholesale) lending guarantees, and increases in retail deposit guarantees.

(2) Measures directed at the financial services industry, but structured to increase the availability of credit to other sectors of the economy. Both the United Kingdom and Germany have structured their plans so that participants should support lending to credit-worthy borrowers – mainly small- to medium-sized enterprises – as a condition of the receipt of governmental support.
In each of these categories, there is early but widespread evidence of preference accorded to domestic financial institutions over foreign economic actors.

Implications under International Investment Law

There are approximately 2,800 bilateral and regional investment treaties (including investment chapters in free trade agreements) across the globe. Except for Ireland, the countries we have surveyed have all entered into multiple investment treaty commitments largely with developing countries. Many of these treaties allow for direct claims of foreign investors before an international arbitral tribunal. There are older Treaties of Friendship, Commerce and Navigation in operation and concluded between the OECD countries (which may be especially pertinent given the pattern of capital flows between developed states). These treaties allow disputes to be brought before the International Court of Justice and, at least in the case of the U.S., may be self-executing as a matter of U.S constitutional law potentially giving investors of a State Party the ability to initiate claims before U.S courts.

There is widespread evidence of differentiation between domestic financial institutions and foreign bank branches in the laws we have surveyed. This may constitute a violation of the obligation not to discriminate against foreign investors in applicable treaty instruments. Some of these treaties provide for exemptions (including for subsidies and security interests), but these are narrowly tailored and may not shield states from liability at international law.
 
Despite the public commitment of the G-20 to free market principles, including open trade and investment, it is apparent that states continue to resort to discrimination against foreign actors in the domestic sphere. 
 
These characteristics serve as a timely reminder to revisit the lessons associated with the outbreak of protectionism leading to the Great Depression in the inter-war period.
 
The preparedness and rapidity by which states are now adopting protectionist measures raise serious questions of whether our existing system is a sufficient check against those problematic tendencies. Ultimately, these sensitive issues may be addressed – in less than optimal ways – in legal rather than diplomatic fora. The 2001 Argentine financial crisis triggered a wave of international litigation against that state. If the trends we are seeing continue, there is no reason to expect any difference in current emergency responses to the global financial crisis.
 
The full version of this Perspective is available here: http://www.vcc.columbia.edu/pubs/documents/Perspective3-vanAakenandKurtz-FINAL.pdf.
 
The Vale Columbia Center on Sustainable International Investment (VCC), led by Dr. Karl P. Sauvant, is a joint center of Columbia Law School and The Earth Institute at Columbia University. It seeks to be a leader on issues related to foreign direct investment (FDI) in the global economy. VCC focuses on the analysis and teaching of the implications of FDI for public policy and international investment law.
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