Investor-state dispute settlements (ISDS) such as the case of the Cypriot bank bailout have recently attracted immense attention by policy makers and the general public alike. The claim brought by the Greek investor against Cyprus fanned widespread fears of a wave of investor-claims against European countries that were involved in crisis-combating measures. This concern is a relatively new phenomenon among European countries. The treaties to which these claims refer were originally designed to protect foreign investment in countries without a reliable legal system. Why have Western countries recently become the subject of investor claims?

To answer this questions, I have looked at OECD countries’ experience in my bachelor thesis. The analysis reveals that there are broadly two scenarios that foster the risk of investment arbitration. The first emphasizes the importance of a state’s ability to plan, enforce and review regulatory policy in due process and without improper influence. Most markedly, this can be observed among countries of Central and Eastern Europe. There, counteractive pressures of economic liberalization, institutional restructuration and electoral expectations led to partly inconsistent public policies. Where these characteristics concur, conflicts with foreign investors are likely to arise.

The other scenario identifies power dynamics in regional economic blocks as a principal factor contributing to the risk of investment disputes. Specifically, in North America and the European Union, disputes seem to take place primarily between the economic hegemon and its major trade partners. However, this is not a pure question of exposure. It rather reveals important pressures of policy alignment. The arbitration proceedings recently initiated by German investors against Spain following the government’s withdrawal of photovoltaic subsidies are a prime example for this scenario.

What can be drawn from these results ? ISDS is not solely an instrument of justice. Like every judicial system, it has strong ideological ties. ISDS strikes a balance between investor rights and national sovereignty that is shaped by the historical experience of the capital-exporting world. Recent moves by South Africa and India to withdraw from treaties involving an ISDS mechanism are reflecting this divide. Besides this old conflict, ISDS has recently become a tool for hegemonic countries to push for policy alignment. This trend can be observed most markedly in NAFTA (the North American Free Trade Agreement) and the Energy Charter Treaty. By subjecting investment disputes to international tribunals, conflicts that are highly political in nature are in fact de-politicized. While this may be advantageous for minor conflicts, it is problematic for major questions concerning health or environmental policies.

In that context, ISDS must be reorganized. Its jurisdiction should be narrowed and committed to standards of independence, transparency and subsidiarity. For the rest, international law should not be used to obscure political processes. Ultimately, it is the free contest of ideas that will determine dispute outcome.

This article is part of CISS’s cooperation with the Diplomatic Magazine and was published there first in the edition 9/2015.