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Investment Law

Unlike its trade-counterpart, the relationship between international investment law and labor standards has neither resulted in much treaty practice nor attracted extensive scholarly attention. The 2004 US Model bilateral investment treaty (BIT) was among the first to devote a full article to labor standards (Article 13). The revised US Model BIT,1 published in May 2012, updates and expands this provision.

The 2012 Model provides that each party “shall ensure” it does not derogate from, offer to derogate from, or fail effectively to enforce its labor laws to encourage investment (Article 13(2)). The effective enforcement requirement is new compared to the 2004 Model, reflecting that the weakening of labor standards often occurs due to lack of enforcement rather than formal derogations. These obligations align with firmer commitments in recent US free trade agreements (FTAs) and depart from the aspirational language of the 2004 Model and the BITs of other states, which merely require that parties “should not” derogate from existing labor legislation or “shall strive to ensure” not to do so. The obligations in question are not limited to investments from the other party, but equally apply to the weakening of labor standards in favor of investments of third states (Article 2(1)(c)).

The 2012 Model adds (the right to) non-discrimination in respect of employment and occupation to the list of non-derogable labor rights. Compared to the 2004 Model, the list now comprises all four “core labor rights” listed as such in the ILO’s 1998 Declaration, as well the right to acceptable conditions of work, which is otherwise not found in the Declaration. In other respects, the 2012 Model is less demanding than similar clauses found in other states’ BITs, as it effectively prohibits only derogations from domestic labor laws where such derogations are “inconsistent” with non-derogable rights, and not derogations in general. Derogations relating to social security arrangements, easing of termination of employment standards or reduction of labor inspections, for example, would thus not be actionable. Furthermore, a party that currently observes labor standards below the minimum of what is required by the ILO has no express obligation to bring its legislation in conformity with those norms.

As with the 2004 Model, the labor clause of the 2012 Model remains outside the treaty’s dispute settlement provisions. This differs from BITs of other states, which provide for that possibility. It also differs from recent US FTAs, which allow for state-state arbitration of disputes concerning labor provisions. Instead, the labor clause provides a consultations procedure (Article 13(4)) that has become more detailed and extensive than that applicable under the 2004 Model. But state-state arbitrations seldom occur under BITs. Investors, on the other hand, can often pursue claims relating to the (non-) enforcement of labor obligations by relying upon other standards of treatment guaranteed by a BIT, for which arbitration remains available.

At a time when concerns are being voiced about BITs unduly restraining states’ regulatory autonomy, it is surprising that the 2012 Model does not expressly recognize the right of each party to establish its own level of domestic labor standards. This differs from the labor provisions under US FTAs, and even from the 2012 Model’s provision on environment, which expressly recognizes regulatory discretion in environmental matters (Article 12(3)). Arguably, the parties’ policy space in relation to the improvement of labor standards is nonetheless safeguarded through the preambular paragraph expressing the desire to achieve the treaty objectives “in a manner consistent with … the promotion of internationally recognized labor rights,” as well as by the new provision affirming the parties’ respective obligations as ILO members and their commitments under the ILO Declaration on Fundamental Principles and Rights at Work (Article 13(1)).

Regrettably, the 2012 Model does not follow the trend of recent investment treaties that feature provisions providing that contracting parties “should encourage” foreign investors to adhere voluntarily to internationally recognized standards of corporate social responsibility, such as those found in the OECD Guidelines for Multinational Enterprises.

The amendments to the 2012 Model represent a small but welcome step in bridging the divide between investment law and public policy concerns. The scope of applicable labor standards and the level of commitment are more demanding than in its predecessor and most other (model) BITs. But it lacks a clear obligation to adopt and maintain ILO standards as a minimum, and does not allow disputes to be submitted to arbitration. We see no legal argument that explains why there should be a difference between BITs and FTAs on this issue.

The inclusion of labor provisions in model BITs is on the rise. We hope that this trend will receive more attention from scholars and practitioners, to further the interpretation and development of such provisions.

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This article was previously published in the FDI Perspectives series of the Vale Columbia Center on Sustainable International Investment (ISSN 2158-3579) as: “Vid Prislan and Ruben Zandvliet, ‘Labor provisions in bilateral investment treaties: Does the new US Model BIT provide a template for the future?,’ Columbia FDI Perspectives, No. 92, April 1, 2013.  

International Investment Agreements (IIA) play an important role in the protection and liberalization of global capital flows. Attracting foreign direct investment (FDI) is often seen as a prerequisite for the economic growth of developing countries. It strengthens a state’s balance of payments and is presumed to have positive spill-over effects on local economies. But the liberalization and protection of FDI may also carry risks. The best-known one is that IIAs could induce a ‘race to the bottom’ in domestic labour standards. Many empirical studies however conclude that such a race is non-existent. Therefore there would be no need to include minimum labour standards in IIAs. In my view, the race to the bottom paradigm should not be the main evaluative criterion for this normative debate. Instead, the debate should focus on two different problems.

First, even if there is no macro trend that points to a race to the bottom, there are concrete cases in which states lower domestic labour standards. Recorded instances range from the ‘Hobbit labour laws’ in New Zealand, where film industry workers were reclassified from employees to ‘independent contractors’ in order to deny them union contracts, to the prohibition of trade unions in Bangladeshi export processing zones, which was demanded by Japan and South Korea on behalf of their own investors. Such derogations artificially modify a state’s competitive advantage, and puts undue pressure on other states to also derogate in order to retain investments within their jurisdiction, or become more attractive to new investors. This may not escalate into a ‘race’ but still leads to a net deterioration of labour standards that could, from a normative perspective, be qualified as unfair and warrant the inclusion of minimum norms in IIAs below which states are not allowed to compete for FDI.

The second potential justification for the inclusion of labour standards in IIAs can be sought in concerns about the potentially restraining effects of IIAs on host states’ ‘policy space’. The threat of arbitration might make host states hesitant to implement measures in the pursuit of social policy objectives, such as the improvement of labour standards, out of fear that by doing so it might violate the standards of treatment prescribed by an investment agreement. From an empirical point of view, it is difficult to assess the validity of these claims, as they require counter-factual evidence. It may well be, as some have argued, that there is nothing in the nature of IIAs that would confirm the regulatory chill hypothesis. But the latter should not be dismissed too quickly, as threats are cheap and investors can make claims even when these may have little chance of success. Foreign investors have already demonstrated their readiness to use IIAs as a way to challenge undesirable legislative and administrative measures adopted by host states in pursuance of public policy objectives, such as those aimed at the promotion of public health or the protection of the environment. As long as IIAs are perceived as being one-sidedly focused on the rights of foreign investors without balancing these rights against the rights of host states to regulate social issues, the inclusion of labour standards in IIAs could shield domestic labour regulations from investor claims.

Each of these two concerns could thus legitimize international policy coordination in the form of including labour provisions in IIAs. Only when IIAs are designed in a way to not cause regulatory derogations or chill effects do they truly contribute to the development of their signature states. The race to the bottom paradigm is, from a normative point of view, nothing more than a distraction.

This blog post was previously published at http://www.leidenlawblog.nl, and is a summary of a longer paper that I co-authored with Vid Prislan, who is also a PhD Candidate at the Grotius Centre for International Legal Studies. It is freely available on SSRN.

I am currently working on a chapter that will be published in the Yearbook on International Investment Law & Policy, by Oxford University Press. The volume will examine how to bridge the divide between investment law and sustainable development issues. Sustainable development is understood to be composed of three interdependent and mutually reinforcing pillars: economic development, social development and environmental protection. The inclusion of references to labour and socio-economic rights in International Investment Agreements (IIAs) is said to be instrumental to the fulfillment of the social development component. The assumption is that the inclusion of labour standards will better balance the prospects of economic development traditionally expected to result from the increased inflow of foreign investment with the attainment of broader social policy objectives. The purpose of my article is to examine the substantive labour standards that are found in various IIAs, and assess their potential impact on investment law and investment arbitration in general.

There are not many IIAs that contain references to, or full provisions on labour standards. (Of course the US Model Investment Treaty is a prominent exception.) Investor-state arbitrations in which labour or socio-economic issues were at the heart of the matter are even rarer. With over 3000 investment treaties currently in force, and an even greater body of investor-state disputes (of which the arbitral awards are not always publicly available) I would be grateful if you could help me complete my database of relevant materials, and hear your thoughts on the relation between investment law and labour rights. Please get in touch via r.zandvliet@law.leidenuniv.nl or post your comments below.

Last month, the US State Department published its new model bilateral investment treaty (BIT). A BIT is treaty between two States which establishes protective rules when a national (person or corporation) of one State makes a private investment in the other State. It thus provides for improved (capital) market access, and protects inter alia against acts of discrimination or expropriation. In addition, BITs contain provisions regarding access to international arbitration in case the treaty is (allegedly) breached. Despite that they are retroactive, BITs usually protect multinational corporations from developed home-States when they make investments in developing host States. States use “model” investment agreements as a template to negotiate future BITs. As the number of US BITs is still relatively low compared to some European countries, and the US intends to begin negotiations with major recipients of US foreign direct investment such as China and Vietnam, the new model BIT may have a significant impact on the protection offered to US corporations operating abroad. (See map: dark green are BITs in force, light green are currently being negotiated.)

One of the main changes compared to the previous model BIT is the inclusion of a more expansive labour clause. This is perhaps unsurprising given the fact that the United States has been a major proponent of trade-labour linkages. The efforts to include a ‘social clause’ in the multilateral trade rounds have been unsuccessful, but they have featured in US free trade agreements (FTAs) since 1994. Labour clauses in BITs are scarce however. On a total of almost 3000 BITs, only a few Canadian, Belgian and Norwegian (model) BITs contain references to labour standards.

Under the new US BIT, State parties agree that “it is inappropriate to encourage investment by weakening or reducing the protections afforded in domestic labor laws”. The specific labour rights covered under this provision are: (1) freedom of association; (2) the effective recognition of the right to collective bargaining; (3) the elimination of all forms of forced or compulsory labor; (4) the effective abolition of child labor and a prohibition on the worst forms of child labor; (5) the elimination of discrimination in respect of employment and occupation; and (6) acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health. This list, which is notably broader than the list of “core” labour standards as defined by the ILO, has featured in all recent US FTAs and in the country’s GSP regulation. Also unsurprising is the fact that the reduction of labour standards is condemned only insofar as it relates to the encouragement of inward investments, despite problem that this link is sometimes difficult to establish.

The main difference with the American free trade agreements is, however,that in case of a dispute, States may not arbitrate under Article 37, but instead “shall consult and endeavor to reach a mutually satisfactory resolution.” This lack of enforceability has caused great disappointment with the AFL-CIO,America’s biggest labour federation. Yet on the other side of the spectrum, corporations and Republicans argue that the not enforceable provision already goes too far. In their view, the new BIT will deter developing countries from signing BITs with the US and it will force American corporations to restructure their investments via foreign subsidiaries. As the model BIT is not more than a template for future negotiations, and given the fact that each new treaty must secure 67 votes in the Senate for ratification, the battle on labour clauses in US BITs is perhaps only just begun.

The complete text of the new US model BIT can be found here. The labour clause reads as follows:

Article 13: Investment and Labor

1. The Parties reaffirm their respective obligations as members of the International Labor Organization (“ILO”) and their commitments under the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-Up.

2. The Parties recognize that it is inappropriate to encourage investment by weakening or reducing the protections afforded in domestic labor laws. Accordingly, each Party shall ensure that it does not waive or otherwise derogate from or offer to waive or otherwise derogate from its labor laws where the waiver or derogation would be inconsistent with the labor rights referred to in subparagraphs (a) through (e) of paragraph 3, or fail to effectively enforce its labor laws through a sustained or recurring course of action or inaction, as an encouragement for the establishment, acquisition, expansion, or retention of an investment in its territory.

3. For purposes of this Article, “labor laws” means each Party’s statutes or regulations, or provisions thereof, that are directly related to the following:

(a) freedom of association;

(b) the effective recognition of the right to collective bargaining;

(c) the elimination of all forms of forced or compulsory labor;

(d) the effective abolition of child labor and a prohibition on the worst forms of child labor;

(e) the elimination of discrimination in respect of employment and occupation; and

(f) acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.

 4. A Party may make a written request for consultations with the other Party regarding any matter arising under this Article. The other Party shall respond to a request for consultations within thirty days of receipt of such request. Thereafter, the Parties shall consult and endeavor to reach a mutually satisfactory resolution.

5. The Parties confirm that each Party may, as appropriate, provide opportunities for public participation regarding any matter arising under this Article.

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