New OECD-Emerging Markets Dynamics in regards to Investor-State Dispute Settlement Provisions

Investor-State Dispute Settlement (ISDS) provisions are increasingly becoming the bane of Free Trade Agreements (FTAs). Wary at the prospect of being sued by foreign investors in special tribunals, governments are reacting against such provisions in mega-regionals like the Trans-Atlantic Trade and Investment Pact and the European Union-Canada FTA.

The issue has eluded consensus among Trans Pacific Partnership members as well. The ISDS appears to have created rifts between Organization of Economic Cooperation and Development (OECD) countries negotiating the mega-regionals with Germany and Australia expressing concerns over these clauses. Canada and the United States (US), on the other hand, are more amenable to its inclusion given that it already features in the North American FTA and various US FTAs. The difference in opinion among the OECD countries has interesting implications for investment regulations in the FTAs these economies are negotiating with emerging markets. In the not-too-distant past, emerging markets like China, India and Brazil would have been apprehensive of ISDS provisions. As primarily capital importing economies, they would have, nonetheless, had to agree to some such measures in the various bilateral investment protection agreements they would sign with developed economies. Potential long-term foreign investment inflows could have been affected otherwise. The situation is different now. Several emerging markets have now become capital exporters. Indeed, emerging market MNCs are beginning to dominate the Fortune 500 club with more than 200 per cent increase in their numbers during 2005-2013. These economies would be keen on protecting the commercial and business interests of their MNCs from host government policies that might impact these interests adversely. While earlier they would have been uneasy over investor protection clauses, now they might be more welcoming towards these in the FTAs. This will create new dynamics in investment negotiations between OECD economies and emerging markets such as China.