International Studies Journal (ISJ)

International Studies Journal (ISJ)

Diplomacy and Arbitration Strategy in the Process of De-politicize Investment-Government Disputes in line with Investment Treaties

Document Type : Original Independent Original Article

Author
Mostafa Heidari Haratemeh
Assistant prof. at Department of Economics, Naragh Branch, Islamic Azad University, Naragh, Iran.
10.22034/isj.2024.319091.1696
Abstract
The new structure of investment treaties can act as an alternative dispute resolution system whereby investors can directly hold host countries accountable for property rights violations through international arbitration, And to manage and resolve disputes between investors and governments using technical legal methods instead of political disputes with diplomacy and arbitration strategies.  Therefore, the present research was considered with the aim of investigating the role of investment treaties in the de-politicization of investor-government disputes with the strategy of diplomacy and arbitration. Therefore, the research question implies the role of investment treaties in the de-politicization of investor-government disputes from the point of view of diplomacy and arbitration. The hypothesis of the research is that investment treaties have been effective in de-politicizing investor-government disputes from the point of view of diplomacy and arbitration.  In this regard, 110 cases of disputes were studied and analyzed between 2017 and 2022 in developing countries.  The results showed that the often hidden world of informal investment diplomacy raises broader questions about the effects of legalization, diplomacy, and corporate power as investors confront conflicts in the developing world.  Therefore, powerful governments rarely use threats or explicit sanctions in investment disputes. This indicates an important change in investment diplomacy from the period when the system of investment treaties was revealed. Governments also strategically choose when to intervene in conflicts, rather than when forced to do so by private pressure. Therefore, the non-interference of governments and the politicization of disputes and controversies in bilateral or multilateral investment treaties and a greater tendency towards active international arbitrations and diplomacy agreed upon by investors, which is specified in contracts and treaties, are recommended as a practical policy proposal.

Highlights

Introduction

Analytical review of the efficiency of the investment treaty system has paid more attention to how successful the treaties have been in attracting foreign capital, especially in developing countries.  Therefore, in empirical studies, the role and capacities of the components of treaties, including the potential of diplomacy and arbitration in the de-politicization of investment disputes, have received less attention, while if these potential capacities are turned into reality, it will be a powerful political incentive for countries to sign bilateral or multilateral treaties. It should be given special attention and adopted as an economic and political strategy in international relations and trade. Although some governments often intervene on behalf of their investors, such interventions can disrupt diplomatic relations between countries, and even in some cases lead to differences or tensions in relations between countries. The new structure of investment treaties can play a role as an alternative dispute resolution system whereby investors can directly hold host countries accountable for property rights violations through international arbitration and resolve disputes between investors and governments. Technical legal methods, instead of political disputes, should be managed and resolved with diplomacy and arbitration strategies. With the advent of international investment arbitration, foreign investors will be able to resolve property rights disputes with host governments dependent on diplomatic protection.

 

Methodology

The current research is based on the purpose of the applied type and in terms of the nature of the quantitative descriptive research.  Therefore, it has a practical purpose and a descriptive-survey nature, and based on the elements and structures in the literature, a conceptual framework including a set of propositions is considered. The methodology used in this research is post-event type and past information is used. Using the data of 110 disputes in a five-year period from 2017 to 2022, a logit model was explained and analyzed by estimating it. The de-politicization hypothesis suggests that governments should be less likely to intervene seriously in investment disputes if the host country has ratified an investment treaty. Therefore, in order to test the hypothesis, the research model was considered and estimated in two ways, the presence or absence of the investment treaty. In the model, due to the fact that the ability and effectiveness of diplomacy is related to the market size of the host country, the gross domestic product of the host country is considered.  GDP growth is also considered, as both investors and governments may be more inclined to a quick political solution in high-growth host countries. Also, diplomatic actions may depend on average or expected levels of investment risk in a host country. Therefore, the International Country Risk Guide Index (ICRG) is considered for the investment portfolio. This index captures the risks of contract survival, foreclosure, interest repayment, and payment delay. The estimation of the model answers whether the share of disputes with real diplomatic interactions is almost the same in countries with investment treaties and without investment treaties or not? The result of this study will indicate whether investment treaties are related to diplomacy and arbitration disputes or not?

 

Findings

The findings of the research showed that the share of disputes with serious diplomatic interactions is almost the same in countries with investment treaties and without investment treaties: 46% versus 44%. This suggests that investment treaties are unrelated to diplomatic disputes. The results of the model estimation in the first case show that while the characteristics of the host country do not seem to be an important predictor for interventions, the characteristics and the size of the difference level will be important.   Governments are also more likely to intervene in disputes that have already been brought to local domestic courts. Apart from following official guidelines, interventions in these cases may be designed to send a signal about the government's interest in a good justice system free from political interference. Treaty disputes are also more likely to require serious government intervention, perhaps because intervention is more easily justified when domestic investors are targeted compared to disputes over general government regulations. In the second model, the de-politicization hypothesis shows that the presence of a message such as an investment treaty should have a significant negative effect on the possibility of diplomatic intervention. But it is not confirmed and supported. For an "average" dispute not covered by an investment treaty, the predicted probability of serious diplomatic interventions is lower than when serious diplomatic interventions are for a similar "average" dispute but with an investment treaty. Of course, this difference is not only statistically small and insignificant, but also a sign of opposition to what is expected.  Finally, governments' official guidelines suggest that diplomats are more likely to intervene in disputes that address broader diplomatic priorities, such as rule of law, regulatory process, and treaty enforcement concerns.

 

Results and Discussion

The findings of the research showed that economic hostility towards a foreign country does not have a negative effect on the understanding of the overall image of the country and the beliefs related to the product, but only on the acceptance of the product. Furthermore, economic hostility towards a foreign country has a positive effect on consumer nationalism. On the other hand, nationalism has a negative relationship with belief in the product, but it has no relationship with a negative perception of the country's image. However, higher level of nationalism has a negative effect on product acceptance. A higher level of hostility towards a foreign country does not affect the level of perception of the overall image of the country and the quality of the products made in that country. However, there is a strong and negative relationship between consumer hostility and product acceptance. As a result, consumers with a higher level of economic hostility usually do not welcome more imports from countries that are considered enemies, show a lower level of affinity toward it, and spread little positive words about that country. Finally, economic hostility towards a foreign country can also increase nationalistic feelings and increase the preference for domestic products/services as an expression of their "patriotism".

 

Conclusion

Private access to international dispute resolution often leads to increased litigation against sovereign and government institutions.  The system of investment treaties is an important case in this field. The emergence of conflicting investor claims has led to significant costs for developing countries.  However, the benefits of the investment treaty system for developing countries are less clear.  Empirical literature has focused exclusively on one potential benefit called increased investment, while the other benefit, depoliticization, is neglected, although it is not more important, but it is important.  The current study has examined the hypothesis of de-politicization by providing an empirical test with a special look at the diplomatic interventions of governments and related institutions.  Contrary to the arguments put forward by capital-exporting countries and related scholars, there is no evidence that an investment treaty makes a significant difference in how governments exert pressure to resolve investment disputes.  On the other hand, this issue is particularly important for developing countries, because they are usually encouraged to arbitrate investment treaties and use active diplomacy strategies in exchange for less politicization of their investment disputes. The research results are only the first step to a deeper understanding of how investment treaties affect diplomatic relations between developed and developing countries. The study's look into the often hidden world of informal investment diplomacy also raises broader questions about the effects of legalization, diplomacy, and corporate power as investors confront conflicts in the developing world.   Finally, powerful governments rarely use threats or outright sanctions in investment disputes. This indicates an important change in investment diplomacy from the period when the system of investment treaties was revealed. Governments also strategically choose when to intervene in conflicts, rather than when forced to do so by private pressure.  This indicates that the involvement of the domestic government in investment disputes is more due to the issue of whether the politicization of disputes is consistent with the strategic interests of a country or not. Instead of considering the size and political influence of investors.  Therefore, the non-interference of governments and the politicization of disputes and controversies in bilateral or multilateral investment treaties and a greater tendency towards active international arbitrations and diplomacy agreed upon by investors, which is specified in contracts and treaties, are recommended as a practical policy proposal.

Keywords
Diplomacy
Investment Treaties
De-politicize Investment Disputes
Arbitration

Subjects

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