A Research On The Transition Of The Investor-state Dispute Settlement(ISDS) Mechanism

Under the background that the world economic order is transforming from Neo Liberalism to Embedded Liberalism,the voice of questioning and criticizing investment arbitration as an ISDS mechanism is surging up.The investment arbitration is facing an unprecedented crisis.To solve the crisis,since November 2017,Working Group ? under the United Nations Commission on International Trade Law(hereafter referred as UNCTRAL)has launched a series of meetings to discuss the ISDS reform.Among the submissions from different countries,two options come into focus: one option is to establish the Multilateral Investment Court(MIC),by abandoning the investment arbitration,to make ISDS mechanism have its judicial nature;the other option is to add the appeal mechanism to the existent investment arbitration so as to let ISDS mechanism be quasi-judicial nature.The ISDS mechanism,which has been running for nearly half a century,needs to change.The investment arbitration is facing crisis,which is the starting point of transition.Started in the 1960 s,the investment arbitration mechanism is constructed based on the commercial arbitration.With the rise of the Neo Liberalism world economic order,investment arbitration became the mainstream of ISDS mechanism.With the coming of 21 st century,the investment arbitration encountered the crisis,which represented as follows: the challenges to the state regulatory power from tribunals;the systematic defect in the arbitrator's independence;the unpredictability of investment rules deepened by the inconsistent awards.Contemplating through the appearances,the following opinions will be deduced: First,examining investment arbitration with judicial standards,which is the origin of the crisis.Second,facing the deadlock in formulating investment substantive rules,the “Convention on the Settlement of Investment Disputes Between States and Nationals of Other State”(hereafter referred as Washington Convention)chooses the way of “procedure rules prior to substantive rules”,this choice resulted in consecutively increasing problems in investment arbitration,which is the formation of the crisis.The third,from the perspective of domestic political theories,scholars and politicians evaluate and criticize the investment arbitration,which is the deepening of the crisis.The ISDS mechanism transition is caused by the changing internal and external factors of investment arbitration.Within the investment arbitration: the start-up basis has changed from state contracts to International Investment Agreements(IIAs);the arbitrable subject has expanded from expropriation or nationalization to public policy;and the functional orientation of investment arbitration has changed from dispute settlement to interpreting vague treaty terms.Outside the investment arbitration: the political risks threatening the foreign investors has changed from expropriation and nationalization to policy risks.The factors such as human rights,environment protection and the rule of law,play more and more important roles in the policy making.Furtherly,ISDS mechanism transition embodies the value change,the value of sovereignty changes from unduly promise to national sovereignty,the value of order changes from limited breakthrough of domestic order to the construction of legal order,and the value of security is changing from neglecting to protecting economic security.The two options of the ISDS mechanism transition,are not only coming from the suggestion of international discussion,but also coming from the practice of the EU and USA.Since 2015,in the newly signed international economic and trade agreements,EU employs the bilateral investment tribunal instead of the investment arbitration,onthe purpose of granting the judicial nature to the ISDS.After 2002,in most of thenewly signed BITs and FTAs,USA has added the terms that the contracting partieswill start the bilateral negotiation on the establishment of appeal mechanism to theinvestment arbitration,on the purpose of granting the quasi-judicial nature to the ISDS.As the judicial nature option,establishing a multilateral investment court is along-standing dream of human beings.The Arab Investment court has accumulatedprecious experience for the establishment of a multilateral investment court,mainlymanifests as follows: one is the solid support from the League of Arab States;theother is the signing and enforcement of the Arab Investment Agreement.As thequasi-judicial nature option,an appeal mechanism to investment arbitration is a newmechanism,which we can take the WTO Appellate Body as the frame of reference.WTO Appellate Body has three advantages: fixed personnel,consistent rules and clearprocedures.Both options are facing the same problems: the lack of multilateralinvestment agreements and specialized international investment organizations.Bothoptions also share some common characteristics.Both will take the investor standard instead of state standard and restrain the diplomatic protection,which are the features inheriting from investment arbitration.Both have confirmed the partial revival of Calvo doctrine also.As to the progress of the ISDS mechanism transition,the EU and its economic and trade partners have made remarkable progress on the establishment of the bilateral investment tribunal.Within EU,in March 2018,the ECJ affirmed the priority of EU law and rejected the application of investment arbitration by the preliminary ruling on the Achmea case.Countries such as Sweden have different opinions.Outside EU,EU is determined to move away from the investment arbitration sys,EU replaces it with bilateral investment tribunal in the FTAs.The bilateral investment tribunal takes the ECJ as the frame of reference,it can avoid the basic contradictions of the investment arbitration.In April 2019,ECJ made it clear that the bilateral investment tribunal is in accordance with EU law,by answering the doubts from Belgium.Although the ISDS mechanism will be changed,the bilateral investment tribunal will still adhere to the investor standard and fork-in-the-road clause,its operation will still rely on the ICSID Secretariat and the investment arbitration rules,all these reflect the inherits of the investment arbitration.The trend of ISDS mechanism transition will depend on the game of impetus and obstacles.The general trend of ISDS mechanism transition will be incremental evolution rather than radical change.From the legal evolutionism,investment arbitration is deemed as a transitional design,which is similar to the platypus description in Darwin's evolutionism.The fragmentation and humanization in the international law have also provided sufficient impetus for the transition.Meanwhile,the reality of international law cannot meet all the ingredients for the construction of a new mechanism,such as the lack of Multilateral Investment Agreements(MIA),the absence of an international investment organization,and the limited jurisdiction of international judicial organs.The world economic order is transforming from Neo Liberalism paradigm to Embedded Liberalism paradigm.the FDI flows is changing in direction and mode.They are the practical impetus forces for the transition of ISDS mechanism.However,the international community is lack of the political consensus to build a new mechanism.The host country cherishes the state sovereignty,and is concerning over “the judicial rule-making”,“chilling effect” and state responsibility.Establishing a new mechanism needs even more political support than following the investment arbitration tradition.Based on the comparative analysis of impetus and obstacles,it is unlikely that investment arbitration will be abandoned completely,but ISDS mechanism will become more diverse,and still be dominated by bilateral.Due to the lack of political consensus,the establishment of a multilateral investment court will remain an ideal rather than a reality.Since the Reform and Opening-up,China has signed BITs with more than 100 countries.The acceptance of the investment arbitration as ISDS mechanism can be divided into three stages.Up to September 2020,there are 10 investment arbitration cases initiated by Chinese residents and enterprises(including Hong Kong and Macao).Four of them are the subsidiaries of the multinational enterprises owned by UK or USA,who initiate the cases from Hong Kong or Macao by the “nationality planning”.As the host country,China has encountered five investment arbitration cases.Under the background that the total number of investment arbitration cases in the world has exceeded 1000,the cases amount encountered by Chinese government and Chinese investors is not much.However,since 2015,we should be still alert to the trend of rapid growth in the case amount.Chinese government and investors are also deeply affected by the crisis and have a strong desire to support the ISDS mechanism transition.The main reasons are as follows: First,the inconsistency of the awards bothers Chinese investors.Secondly,investment arbitration affects the national regulatory power.The third,investment arbitration can't fully protect the rights and interests of Chinese investors,no matter it comes to Cross-border Mergers & Acquisitions or Green-field Investment.As a responsible country,China is a participant in the transition of ISDS mechanism rather than a bystander.China has actively participated in the UNCTRAL's multilateral diplomatic negotiations and submitted a proposal to support the appeal mechanism option.It was agreed in China-Australia FTA that negotiations on the establishment of an appeal mechanism would be initiated.There are commercial arbitration authorities in the China mainland which can accept investment arbitration cases now.China is making efforts to improve the laws relevant to the investment arbitration.In the transition of ISDS mechanism,China has unique needs.First,China needs to integrate dual legal culture: modern legal culture and traditional legal culture.Second,China needs to balance dual identity: capital importing country and capital exporting country.The third,China needs to coordinate two kinds of state immunity claims: absolute immunity and relative immunity.China should take the following stand to protect the national interests in the transition of ISDS mechanism.First,we must follow the general trend of incremental evolution and avoid radical revolution;Second,we cannot support the establishment of multilateral investment courts,and avoid establishing the bilateral investment tribunal as the ISDS mechanism when negotiating the China-EU FTA;Thirdly,we can apply the industry classified ISDS mechanism to solve the dual identity problem in the “belt and road” initiative.In particular,China should strengthen points in safeguarding overseas rights and interests of Chinese investors.There are three ways we can work on: First,appropriate use of diplomatic protection;Second,China's multinational enterprises should do the “nationality planning” in advance;Thirdly,China should promote our own investment arbitration institutions and make it available in BITs,FTAs and other international contracts we signed.