* This paper was delivered as part of the evaluation in the LL.M. in a European and Global Context, da Catolica Global School of Law.
The modern landscape
of International investment law is embedded in the relations between domestic and
foreign investors. The idea of ensuring equal conditions of competition under “like”
circumstances is firmly rooted in such relations, which can also be translated
into the obligation of national treatment.
The obligation
of national treatment is imposed on the host country and entails the need to accord
to foreign investors treatment no less favorable than the treatment that the
same host country accords to national investors in “like” circumstances. This
obligation embodies a legal clause laid down in Articles III GATT and 1102 NAFTA
and is aimed at avoiding protectionism.
However,
when one is confronted with its wording it is possible to see that the legal
narrative is structured on a purpose-based approach which embraces the need to find
a prohibited state-purpose that necessarily leads to the breach of national treatment.
This paper offers
a critical perspective about the discipline of national treatment concerning the
proof of purposeful protectionism on the part of the regulator and the host
state.
Proof
of protectionist purpose: New and reliable indicia?
The analysis of this
question starts with a brief explanation of the discipline of national treatment
envisaged in the GATT.
In fact, the GATT
jurisprudence is viewed as a reliable indicator to frame the law of international
investment[1].
Taking into consideration
Article III GATT, one may perceive that the methodology behind the article is focused
on the effects of the regulation or taxation on trade as opposed to the aims-effects
approach[2].
The wording of the article clearly
states “as to afford
protection to domestic
production”. It departures from the assumption that in principle States enjoy a
considerable margin of discretion to employ their own policies and regulations based
on social-economical and political preferences. The regulatory regime can even be
neutral- basis and have considerable effects on the competitive relationship between
the domestic and the imported products (provided that they are in a competitive
relationship).
“So as to afford protection
to domestic production” seems not to be viewed as constituting an ex ante position
on the part of the regulating country. On the contrary, it solely contemplates the
effects which stem from the measure under an ex post analysis of its impact on
trade.
One may bring to memory
the formal approach that is usually taken to assess whether the measure was employed
in a protectionist way. Such evaluation places greater emphasis on the “design,
structure and impact of the measure[3]”
but does not welcome any evaluation of the State´s purpose under precise terms.
However, it is
true that the Appellate Body cannot isolate the examination of the design of the
measure, for instance, from its legislative purpose or other political considerations.
The purpose of the State ends up being indirectly called into analysis among
other factors. Although the proof of protectionism is not exclusively and individually required, it can inform the conclusion
of the breach of national treatment in conjunction with other elements.
Such evidence can be
inclusively perceived through mere circumstantial evidence if one considers the effect
of the measures or its legal
framework. In line with Petros
Mavroidis: “to the extent that they are given objective expression in the statute
itself[4]”.
In Chile – Taxes on
Alcoholic Beverages[5], the Appellate Body said once again that
the purpose of the measure could be manifestly found in its design, structure and
impact. At the same time it concluded that domestic regulatory purposes other than
protectionism would be enough to conclude that the measure was applied to afford
protection to domestic production[6]. Other purposes
would be considered
as well such as environmental purposes.
Also, it drew attention
to the fact that “the subjective intentions inhabiting the minds of individual legislators or regulators
do not bear
upon the inquiry if they
are not accessible to treaty interpreters[7]”.
While in GATT economical
preferences prevail, in investment law political forces are paramount.
Another difference is the fact that
Article 1102 NAFTA
does not lay down any
reference to the State intent as a necessary component of a breach of national treatment.
One cannot find any expression stating “so as to afford protection”. The focus seems
to be on the objective context in which the breach of national treatment occurs.
The article does not envisage any endeavor to plea for proving the purpose.
Or, in line with
paragraph 254 of S.D. Myers
case[8]:
“protectionist
intent is not necessarily
decisive on its own”.
It may be as well argued
that the above-mentioned reference emphasised in the GATT and not in the NAFTA may
reflect the kind of trade or political policy followed by different legal frameworks.
In trade, much attention is paid to the bias towards protectionism and the need
to provide equal conditions of competition. In the political and economic arena of
investment, for instance,
domestic interests are inevitably captured by the
host state, which may influence the conduct taken by the later[9].
The relationship between
the investor and the host state is not symmetrical from the beginning. The host
state, making
use of its sovereign
powers, may exercise
its discretion and modify the conditions
of competition[10].
In my opinion, the
fact that purposeful protectionism is specially targeted with respect to trade simply
offers a more contextual guidance and insights into the conclusion that restrictions
to trade may be intrinsically tied to impermissible political intents, apart from
economical considerations[11].
Still in my opinion,
the absence of interpretative guidance regarding protectionist purposes does not
determine that such purposes should be set aside. Indeed, one can make a prudential
reading of regarding Article 301(1) NAFTA. The article states that “Each Party shall
accord national treatment to the goods of another Party in accordance with Article
III GATT[12]”.
Regarding the question
we have to provide an answer, it explicitly states “proof of protectionist purpose”.
There is a strict approach underlying it since it disregards the effects of the
measure to the detrimental of the need to prove the intention.
The isolated search for
protectionist endeavors is not an easy one. On what grounds should it be based?
Who carries the burden of proof? At the end of the day, the aims are not insulated
from the effects but embedded in the later[13].
The disparate impact of a particular measure
or legislation can have enough probative force to unmask State´s purpose[14].
The analysis of the effects paves the way to the assessment of the aims.
Inquiry into governmental
purpose is not enough. There are policies conducted by the host state which are
not endowed with any protectionist purpose but still accord to a foreign investor
a treatment not as least as favorable as the treatment accorded to domestic investors[15].
The different treatment afforded to the foreign claimant may not be grounded on
nationality for example.
In light of Pope &
Talbot v. Canada[16], any
difference of treatment accorded between foreign and domestic
companies has to based on
proof showing a reasonable
relationship between the differential treatment and the policy, which has to be
rational and not motivated by preference of domestic investments over foreign
investments[17].
The discipline on protectionism
has to be filtered through a particular context. Considering that NAFTA Tribunals
have in part followed the WTO jurisprudence, there is no requirement to prove
the subjective intent to discriminate – “Proof is not a necessary and sufficient
condition for finding a breach of national treatment”[18].
On this point, the
requirement of a competitive relationship between foreign and domestic products
is crucial to understand national treatment[19].
State´s purpose is filtered through the combination of the impermissible regulatory purpose with the
adverse competitive impact[20].
In S.D. Myers case,
the Tribunal engaged in an aims-effect analysis assessing whether the company
operating in the same sector was receiving a less favorable treatment in “like circumstances”
in other Canadian companies. Protectionist intent was not so relevant in detrimental
of the actual impact and such combination would lead to the breach of Article 1102
NAFTA.
If competition is
part of the test, the breach of national treatment would be inferred from the following
sequence: provided that the foreign investor and the domestic one were in a competitive
relationship[21] (claiming
equal conditions of competition[22]),
the next question would be whether the host state treated the foreign investor less
favorably than the domestic one. Provided
that such differential
impact was found,
the presumption of a protectionist
purpose would arise. Such presumption could be rebutted if the State presented a
legitimate purpose capable of justifying the different treatment that was established.
A failure to rebut the presumption would demonstrate a clear indicator of the
purpose of the measure taken by the host state.
Undoubtedly, in line
with some scholars[23],
this approach seems to entail a slight resemblance of the proportionality test,
which can raise problems regarding legitimacy due to the lack of textual basis.
A possible solution to overcome this problem would be allowing the parties to specific
ab initio the regulatory purpose of the
host state in the BIT[24].
I share the same thought
and I advocate for proof of protectionist purpose in conjunction with other evidences.
But when evidence of protectionism is clearly found to be the dominant purpose of
the measure or the legislative act enacted by the State, it should suffice to constitute
a breach of the obligation of national treatment.
Proof of specific intent
is not expressly laid down in Article 1102 NAFTA. Does it mean that if the legal
narrative (Article 1102) was frustrated it could lead to the creation of a new condition,
without any legal basis or substance to come up with reason-based views? I don´t think that we are confronted with a legal
vacuum that does not allow us to look beyond. The legal provision makes a clear
reference to a particular effect: the finding of a less favorable treatment between
different actors.
In accordance with
S.D. Myers ““The existence of intent to favor
nationals...would not give rise to a breach of Chapter 1102 of the NAFTA if the
measure were to produce no adverse effect on the non-national complaint[25]”.
In Methanex[26],
the state of California had implemented a ban on the use of MTBE due to health and
environmental effects, which led the company Ethanol to argue for discrimination
and violation of national treatment[27].
Most rulings on NAFTA
provisions on non-discrimination and investment protection interpret the concept
of “like” circumstances as entailing a subjective element[28].
But what is innovative
about this case is the emphasis placed upon the legal chronology related to the
enactment of the California ban on the use of MTBE while continuing allowing
Ethanol to be used and sold in the Californian market. This approach sheds some
light on the purpose of the measure.
Also, the examination
of protectionist purpose has to be carried out in the light of the regulation itself
and whether it has a serious, objective and scientific basis instead of constituting
a deliberative political sham[29].
In fact, discrimination can be either in iure or de facto[30].
Due regard must be
paid to the historical background of a national regulatory standard linked to the
circumstantial and direct available evidence of intent, as highlighted by the case
Village of Arlington Heights v. Metropolitan[31]
.
Conclusion
Proof of protectionism
purpose should indeed be required and applied to justify breach of obligation
of national treatment.
However, if deference
to such subjective approach is singly taken, it will amount to a weak procedure,
threatened by other reliable indicators (such as proof of competitive relationship
and the kind of harm suffered) which may lead to different conclusion.
Proof of subjective
intent is not enough unless tested against the factual context in which it applies.
It requires the combination of the general policy goal with its effective implementation
as implicitly suggested in the GAMI case[32].
In order to find a breach of national treatment with regard
to purposeful protectionism the tribunal
has also to inquiry whether the exercise of a general public
goal is in itself discriminatory because it amounts to a deliberative
protectionist policy.
By Daniela Cardoso
February, 2014
[1] Fernando Gonzalez Rojas, “The Notion of Discrimination in Article 1102 of NAFTA”, Jean Monet Working Paper 05/05,
New York School
of Law – New York 10012.
[2] Howse and Tuerk,
"The WTO Impact on
Internal Regulations -
A Case Study of the Canada - EC Asbestos Dispute", in de Búrca and Scott (eds), The EU and
the WTO: Legal and Constitutional Aspects (Hart 2001),
pp. 283-328 (passim)
[3] Japan - Taxes on Alcoholic Beverages (Japan v.
U.S., Can., Eur. Communities) WT/DS8/AB/R, WT/DSI0/AB/R,
WT/DSI1I/AB/R (Oct.
4, 1996) (WTO Appellate
Body
[4] H. Horn and P.C. Mavroidis,
“Still Hazy After All These
Years: The Interpretation
of national treatment in the GATT/WTO Case Law on tax discrimination”,
15 EJIL (2004) 39, 41,
49.
[5] Appellate Body Report, Chile –
Taxes on Alcoholic
Beverages, WT/DS87/AB/R,
WT/DS110/AB/R, adopted 12 January 2000, DSR 2000:I, 281.
[6] Di Mascio and Pauwelyn, “Nondiscrimination in Trade and Investment Treaties: Words Apart or Two
Sides of the
Coin?” 102
AJIL (2008), 48.
[7] Ibid, paragraph
62
[8] SD Myers Inc. v. Canada,Partial Award (UNCITRAL, 13 Nov. 2000).
[9] See Kurtz, J. “The Use and Abuse of WTO Law in Investor-State Arbitration: Competition
and
its
Discontents”,
EJIL Vol. 20 (3),
pp.749-771.
[10] Bjorklund, A. “National Treatment”, in Standards of Investment Protection 29 (Reinisch, A.
Ed., 2008) p.
29.
[11] Op. cit.
9
[12] The Article
within the NAFTA framework can be found at http://www.sice.oas.org/trade/nafta/chap-031.asp-
[13] Ari Afilalo “Meaning, Ambiguity and Legitimacy: Judicial
(re) construction of NAFTA, Chapter 11, 25 NW Int´L & Bus 270, 304-305 (“005).
[14] OECD, National Treatment for Foreign-Controlled Enterprises
22 (1993).
[15] 29 UNCTAD Series National Treatment In On Issues of International
Investment (1999), Geneva. P.1
[16] Pope & Talbot Inc v. Canada, Award on the Merits of Phase 2 (UNCITRAL, 10 Apr. 2001).
[17] Ibid p. 72.
[18] Andrew New Combe, Lluis Paradell, “Law and Pratice of Investment Treaties: Standards of
Treatment”, Kluwer Law International,
Chapter 1,
Historical Development of Investment Treaty (2009)
[19] Kurtz, “National Treatment, Foreign Investment
and Regulatory Autonomy: The Search for Protectionism or Something more?”, in
P. Kahn and T. Walde (eds), New Aspects of
International Investment Law (2007) 311..
[20] Kurtz, “The Use and Abuse of WTO Law in Investor-State Arbitration: Competition and its
Discontents”,
EJIL (2009)
Vol. 20 No.3, 749 771
[21] The comparison between the treatment
accorded to foreign and domestic investors only takes place provided that both actors
are in “like circumstances”. Article 1102 (1) reflects the same idea “member states
shall accord to investors of another Party treatment no less favourable than that
it accords, in like circumstances, to its own investors”.
[22] See Bjorklund, A. “National Treatment”,
in Standards of Investment Protection 29 (Reinisch,
A. Ed.,
2008) p. 29. Equality of opportunities imply the removal of economic efficiency
caused by artificial distinctions in the treatment.
[23] Trujillo, E. “Mission
Possible: Reciprocal Deference between Domestic Regulatory
Structures
and the WTO Law”, Cornwell International Law Journal (2009), Vol. 40, p. 227.
[24] Ibid.
[25] Op. Cit., Myers case paragraph 254
[26] United Mexican States’ Submission Pursuant
to Article 1128 of NAFTA (Methanex Corp. v.
U.S.)
(Apr.30, 2001).
[27] Ibid paragraphs 14 and 15.
[28] J.H.H. Weiler “Prohibitions Against Discrimination
in NAFTA Chapter 19” in Weiler (ed) NAFTA Investment Law and Arbitration: Past Issues,
Current Practice and Future Prospects (2004),p. 27
[29] Jefferly Atik, “National Treatment in
the NAFTA Trucking Case”, Research Paper No. 2002-
7 (April
2002)
[30] Nicolas F. Diebald “Non Discriminatiom
and The Pillars of International Economic Law”
Energy
Schollars Paper 18 (2010)
[31] Village of Arlington Heights v Metropolitan,
429 U.S. 252, 266 (1977) (Powell J.).
[32] GAMI Investments, Inc. v Mexico, Final
Award (UNCITRAL, Nov. 15, 2004). In this case, Mexico chose to expropriate certain
sugar mills leaving others to private ownership. A US investor in Mexico claimed that such choice was
driven by nationality concerns amounting to a breach of national
treatment. Mexico argued
that such decision
was grounded on public
interests, an argument that was accepted by the tribunal without further inquiry
on whether the flexibility recognised to the state with
respect to general
public goals was
in itself discriminatory. This line
of reasoning is also
found in Stephan
W. Schill, “International Investment Law and Comparative
Public Law” (2000), Oxford University Press, Page 275
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