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The intertwining mechanisms of resolving
disputes in international economic law (A close analysis of IMF, WTO, and ICSID)
Elena Katherine Toscano III° anno Giurisprudenza
Università Europea di Roma
Settembre 2013 Corso di International Economic Law
Word Count: ≈ 3,600
Elena Katherine Toscano International Economic Law
The intertwining mechanisms of resolving disputes in
international economic law
Living in a global era, where nowadays the idea of nationality is hard to comprehend due to the massive connections that a single nation has, both virtual and actual, implicates a non-ending relationship with international subjects. The word relationship is key for the international community. International law strives for a pacific and transparent relationship between subjects of the international community in order to maintain a mutual and durable cooperation. Not surprisingly, this translates in the so called verification of law which is, by the way, one of the three functions of International Law (next to the general rules of international law1 and effectiveness2).
This paper will analyze the verification of law, or better, the controls and dispute mechanisms that occur in specific subjects of international economic law. International economic law is the study of international economic relations between both organizations and nations, and so, falls into the domain of public international law. The institutions that I will take into account will be: IMF (International Monetary Fund), WTO (once GATT, now World Trade Organization), and finally ICSID (branch of the World Bank, International Center for Settlement of Investment Disputes). International law isn’t any other system that we may assimilate to such as common or civil law, since there isn’t a written global constitution nor the principle of stare decisis3 is always foreseeable in international settlements. Therefore, the close study of these different yet somewhat connected procedures are, on one hand very interesting and on the other very complicated, in that when dealing with many areas that encompass international economic relations we discover many legal gaps. There is a very fine line between what is considered economically incorrect (so, illegal) for instance, contrary to fair competition, and what is instead legal but needs to be continuously controlled because it may or may not negatively affect global economics. Considering this last scenario proves how hard it is for such organizations like WTO or IMF or ICSID to decide
1 According to the Statute of the International Court of Justice, Art. 38
2 Effectiveness must be intended as the third and last function of International law, as the means of obligating an international subject to undertake the decisions or rules of International law.
3 Pillar principle found in common law systems where the final decision by judge, on specific matter, will be the same decision in future cases in the same court or lower courts in that jurisdiction. Sparingly, the creation and regeneration of law is enacted by the judicial authorities.
whether an action or omission conducted by a subject may potentially interfere foreign jurisdiction and/or economics.
Before analyzing the single dispute settlements, it is ideal to address the standardized pacific solution of international controversial. The UN charter indicates4 the different means and procedures available for both organizations and nations to follow as members of the international community. There are two separate types of procedures: 1) arbitration, or judicial procedure, where both subjects participate to the case and there is a third party, known as the arbitrator, which will give a judgement or binding verdict limited to the single case; or 2) diplomatic procedure, which include sub-types like negotiation (between counterparts autonomously), good office5, mediation (with third party) and conciliation (with third party that gives an opinion on negotiation), all with the purpose to find a diplomatic non-binding measure in order to have a shorter and less expensive settlement without the need of a proper trial.6
Both arbitration and diplomatic means are based on the will of both counterparts to find a proper and fair solution. The old international law, being very conservative in protecting the states, was based on principles and rules of static nature. The new international law is based on the principle of solidarity which is, on the contrary, dynamic, with the objective of moving economics and cooperating.7 In the international community, finding a pacific solution to a controversial represents one of the fundamental obligations sanctioned in the UN Charter. This obligation of course implicates the non-use of violent means as a mechanism to solve a disagreement. Lastly, another minor yet important aspect must be mentioned, the term controversy. In 1924, the International Court of Justice (then, the Permanent International Court of Justice) cleared any sort of uncertainty when it came to requesting a trial on a legal disagreement. It was affirmed that controversy must be intended a disagreement on a legal of factual point where there is a conflict on a legal aspect or interest. This means that in order to achieve an accepted controversy for trial, there must be both elements: a) the presence of a conflict on an interest or legal aspect, and b) a disagreement on the pretension of one of the counterparts with the reaction that the other counterpart is unwilling to satisfy such demand.8
Historical premises: The beginning of international institutional relations
In an era where globalization and economic relations sky-rocked throughout the second half of the twentieth century, it only makes sense that the international institutions needed to change with the social, economical, and political trends. This enlargement of relations had of
4 Article 33, UN Charter. See UN Charter
5 not contemplated within the UN charter but is contemplated in international law.
6 CICIRIELLO, M. C., Lezioni di diritto internazionale, II edizione, 2009. p. 205.
7 personal notes from a lecture of Prof. Alessandro Costa
8 CICIRIELLO, M. C., p. 202-203.
course its benefits but on the other spectrum, created an overlapping of jurisdictions and regulations that couldn’t simply be taken lightly by the international institutions. Before WWII, any economical transaction such as exchange restrictions, trade, competitive exchange rates, financial agreements etc, were very common and usually based on the grounds of a bilateral agreements. Bilateral agreements did not mesh well with the developing trend that was making economics global, for the sole reason that it created discrimination towards surrounding or related businesses. In synthesis, it only worsened the fragmentation of the international monetary and trading system. With the disastrous economic outcome of WWII, the international community took advantage of the widespread will to cooperate and create amicable relations to both avoid further wars and secondly, to pick up the economies around the world. The UN conference in 1944 in Bretton Woods, approved a new economic and financial order that held its basis upon two intergovernmental pillars: the International Bank (IBDR, later became World Bank) and the International Monetary Fund (IMF). Since then, money was no longer under exclusive domain of a nation. When the results of the conference became law in 1947, there was officially an international rule of law on monetary matters. It was clear that to return to economical postwar stability, there must have been a collaboration between international institutions that dealt with trade and foreign investments which meant: WTO and IBRD (that then became World Bank9). Trade and foreign investments represent in a way the main areas in international economic law. With time other areas such as integration law, private international law, financial law, tax law, and recently intellectual property law followed up into the enormous umbrella of international economic law.10 However, since trade and investment, in a way mark the birth and then the increasing development between international economic institutions, it is excusable to consider only such bodies-IMF, WTO, ICSID-that marked such innovation.
Money becomes of global domain
The profound impact of the international monetary fund is proven by the fact that is still exists. Even if it was created in 1945 by 29 member countries with the objective to reconstruct the worlds international payment system postwar11, it then managed to survive both because it continued to foster international monetary cooperation with organizations and nations, and cooperated with other international economic bodies, such as WTO, to standardize international regulation. The power to impose such limitations and regulation on exchange payments and capitals was once only the States’ sovereignty. This power is now shared with international regulations, such as IMF, or in other words by international treaties.
9 The World Bank is composed by the IBRD and IDA. However, the World Bank Group includes other legally and financially independent agencies IFC, ICSID, MIGA.
10 Class material: “Fundamental principles of international economic law”, chapter 3. p. 21-22
The IMF goes by its own charter known as the “Articles of Agreement” which encompass the main goals of the organization and rules by which it controls and may have limitation towards national economic policies. For example, it is forbidden, without prior consent by the IMF, to impose restrictions on current payments12 or on discriminatory currency practices13. Initially, the organization simply dealt with floating exchange rates. The new challenge it faces is promoting and implementing policies that reduce the frequency of crises among the emerging market countries, especially the middle-income countries that are open to massive capital outflows. Rather than maintaining a position of oversight of only exchange rates, their function became one of surveillance of the overall macroeconomic performance of its member countries. Their role became a lot more active because the IMF now manages economic policy instead of just exchange rates.14
An important clarification that arises through the articles of the IMF, is the distinction between restriction and control. Restrictions impose a direct limitation on the availability of foreign currencies, whereas, controls have a more limited impact and could consist of specific procedures to be followed or might obligate to provide information.15 This distinction serves to place the IMF as an organization which manipulates and limits national jurisdiction. But how does it do so? Through the regime of borrowing techniques16 along with the WTO regulation which implicitly gives a degree of participation in WTO dispute settlements whenever disputes concern: monetary reserves, balances of payments or foreign exchange arrangements17. Not only substantive monetary norms referred to in the GATT will be applied within WTO system, but the competence on their interpretation will remain within IMF organs.18 Basically the procedural link between IMF-WTO obligates WTO, in limited areas, firstly to consult the IMF as it may only assist as an expert, and secondly, the interpretation made by the Fund must be accepted by the counterparts. Though, efficiency in the IMF controversies may not be enforced. However, there are consequences to inconsistency with the IMF articles and are the usual effects present in any organization where a nation signs to be part of. So, the possible
12 article VIII.2 of the Articles of Agreement. See: http://www.imf.org/external/pubs/ft/aa/
13 article VIII.3 of the Articles of Agreement. See footnote 12 for website.
15 www.sielnet.org online proceedings -working paper No. 34/08
16 The binding nature of preexisting monetary treaty rules id confirmed through the insertion of a substantial link to the IMF regime. In this way, preexisting rules will not be subject to the operation of the lex posterior and lex specialitis principles. This results in the incorporation of the IMF rules in trade treaties: the IMF provisions allowing (in specific circumstances) the adoption of exchange restrictions will exert their effects also within the international trade system; they will exchange restrictions is hence “borrowed” by the trade system. See footnote n° 15 for source.
17 Art. XV.2, GATT. It must be addressed that the relationship between IMF-GATT remained unaltered by the Marrakesh Agreement which established the WTO. Therefore it explains the validation of an article from the GATT regulation.
18 See footnote n° 15.
consequence is the suspension or loss of the vote, or ineligible to use the Fund’s general resources, and finally the possibility to be asked to withdraw from IMF membership.
Money and Trade go hand-in-hand
Going back to 1946, after the successful conference at Bretton Woods, the UN decided to convene another conference this time on trade and employment. Initially, it was meant to elaborate a Charter of International Trade Organization, also known as ITO, but the project failed. The common vision that the protagonists19 of the time had, persisted and led to the General Agreement on Tariffs and Trade (GATT). This collaboration between international organizations led onto a further step which provided a tight relationship with IMF jurisdiction that was elaborated in the previous section. Though, GATT was provisional and was substituted during the Marrakesh Agreement in 1994 with the WTO. Needless to say that the intertwining legal aspects between IMF-GATT remained with some slight modifications from the WTO system. The main change was that GATT had mainly dealt with the trade in goods, whereas the WTO and its agreements now cover trade in services, and in traded invention, creation and designs -intellectual property. The World Trade Organization deals with the rules of trade between nations at a global or near-global level. The main objective of the organization is liberalizing trade. It’s a forum for governments to negotiate trade agreements. It’s a place for them to settle trade disputes. It operates a system of trade rules.20 Therefore, its safe to say that whatever the WTO achieves is a result from negotiation. Again, we have the presence of the will of organizations and/or nations. The WTO’s dispute settlement is formally known as the “Understanding of the Rules and Procedures Governing the Settlement of Disputes” (DSU). Though, it is unclear whether this mechanism operates under a common or civil law model.21 However it is safe to say that it operates as a blend of both models: from the common law it extracts the possibility that panelists take into consideration previous similar cases, and the civil law model is incorporated by having a series of written rules by which the organization goes by when settling disputes. The procedure of the DSU aims for a non-tariff barrier that can be represented by any government policy or regulation that has the effect of making it more difficult or costly for foreign competitors to do business in a country. Therefore, the possibilities are infinite. As for the IMF with the specification of what restrictions and controls each mean, in the DSU its essential to analyze what ‘barrier’ stands for.22 Barriers may be allowed due to environmental, safety or other public policy goals but other than in these cases, it may represent an obstacle for foreign businesses. Once a barrier is considered to have crossed the line of ‘economically correct’, it may be brought to a dispute settlement upon the WTO. Again, the will represents a
19 meaning, IMF, IBRD and ITO
21 www.commercialdiplomacy.org/manuals/wto_dispute.htm ; Part Two: WTO Dispute Settlement Jurisprudence
22 (insert - find website)
requirement for the request of a negotiation. It happens to be an obligation of the counterpart that before requesting a panel for the formation of a settlement, it must consult up to 60 days with the apparently abusing country as a preliminary diplomatic negotiation before enduring such DSU process.23
Once a negotiation attempt does not bring to a common agreement, also known as the consultation, the following steps indicated by the DSU are: the panels, final panel report to parties, final report to WTO members, DSU adoption of the final report, then a possible appeal, followed by the DSU appeal report and the final DSU report appeal adoption. The approximate timing that occurs during this process is a year for the first report, and a 15 months if the appeal is requested. Because of the long process the DSU undertakes, there are other non-DSU WTO mechanisms that are available that are easier and quicker.24 Even if these mechanisms are quicker, they do require careful analysis of information, preparation, verification of facts. However, only the DSU is efficient in that there are significant measures of sanctioning. Lastly, the most significant transition that the WTO brought to the dispute settlement is that the losing country may not unilaterally block the adoption of the ruling -a possibility that occurred under the GATT procedure. This might seem minimal, but it is fundamental in guaranteeing the efficiency under the DSU mechanism.
Money makes the world go around
As the title of this section indicates, another fundamental aspect of economics is of course, the investments. International investments fall into the domain of the World Bank. When dealing with international controversies, there are three financially and legally independent agencies from the World Bank, where one deals specifically with the solution of international investment disputes: ICSID. The Investor-State dispute settlement (ISDS) is the form of resolution of disputes that encompass several procedural rules that may be chosen by the counterparts for the resolution such as: ICSID Convention and Rules, the ICSID Additional Facility Rules, the rules of the United Nations Commission on International Trade Law (UNICTRAL), or other arbitration rules.25 ICSID’s jurisdiction, however, does require: mutual consensus to abide to the ICSID rules, the desire to find a solution must be voluntary, the consensus must be in written form. ICSID is a fairly stable organization considering the United Nations was born in 1945 and ICSID in 1966. 156 States nowadays have signed and adopted to this institutional and procedural framework. This translates to the consensus of the counterparts to comply with
23 See footnote n° 21
24 These mechanisms include informal consultations, raising the matter in the meetings of the relevant WTO committee meetings such as the Sanitary and Phytosanitary Measures (SPS), Technical Barriers to Trade (TBT) or Agriculture Committees and using some of the dispute settlement tools in the specific agreements, such as the Subsides Agreement.
25 https://icsid.worldbank.org/ICSID/FrontServlet? requestType=ICSIDDocRH&actionVal=ShowDocument&icsidOverview=true&language=English ; 4. How does ICSID Facilitate the Settlement of Investment Disputes?
ICSID procedure and final report. Being an independent branch of the World Bank, implicates that ICSID proceedings are separate and independent from the work of the World Bank. The Center is not an arbitrary tribunal, but provides solutions to controversies through two procedures: conciliation and arbitration; by means of conciliatory commissions or arbitrary commissions, depending from case to case.26
In the first case, any party may make a request to start the process. Upon such request the conciliation is considered by the commission, and has to be composed by only one conciliator or uneven number of conciliators. Function of the Commission is to clarify the issues and assist in bringing forth a mutual settlement. However, such process is non-binding. In the second case, there are the same rules in the numbering of arbitrators like in the process of the conciliation, though, the final settlement is binding. In both cases, the panelists may be chosen from a list that the ICSID owns. The procedure in the Center is similar to the steps seen in WTO. So once the arbitration or conciliation is requested there must be the registration and constitution of the tribunal. Within 60 days from the constitution, occurs the first session which makes the preliminary questions, followed by a written and oral procedure. The panel will then deliberate the dispute settlement and present its award. The award is the non-appealable binding solution presented to the counterparts. It is only possible to change if there are errors of interpretation, revision or request of annulment on the grounds of an invalid procedure.27
The brief analysis of the possible different mechanisms available from the international institutions reflect the vast field of international economic law and prove how intertwined they are. The collaboration that the international community has is symbol of a mechanism that works and wants to work collectively. However, the overlapping areas of competence among the main organizations can lead to disruptive conflict of norms, as well as to excessive fragmentation.28 This occurred for example in litigations over monetary issues that were not brought forth to the IMF, because the IMF does not provide an actual mechanism to settle disputes. Another problem presented in selected circumstances are where WTO rules weave with the IMF regulations in the so called ‘regime of borrowing techniques’, resulting in the difficulty to predict the solution that will be suggested. Certainty and predictability are two vital components in order to keep alive a jurisdiction. Similarly, the lack of a legal model in the WTO mechanism presents an unstable and unpredictable ground for the counterparts to foresee the procedural outcome. More specifically,
26 LEANZA, U., CARACCIOLO, I. “Il Diritto Internazionale: Diritto per gli Stati e Diritto per gli Individui” Parti Speciali. 2010, Giappichelli Editore. p. 444
27 See footnote n° 25.
28 See footnote n° 15
will the DSU choose to operate by the principle of stare decisis?, or will the DSU operate on civil law grounds? Which of the two will prevail on the other? These questions create instability, analogous to the example presented before in the IMF. A possible solution may be in both cases to insert in each regulation rules such as a legal source hierarchy, or discipline the cases when one interpretation prevails on the other. However, given that the same issue exists in international law and was brought forth in the International Court of Justice, its a strategical maneuver for such international disputes operators to play with solutions as the prefer.
CICIRIELLO, M. C., Lezioni di diritto internazionale, II edizione, 2009.
LEANZA, U., CARACCIOLO, I. “Il Diritto Internazionale: Diritto per gli Stati e Diritto per gli Individui” Parti Speciali. 2010, Giappichelli Editore.
Articles of Agreement. (IMF regulation). See: http://www.imf.org/external/pubs/ft/aa/
“Fundamental principles of international economic law”, chapter 3. (Class material) maybe found at the present website: https://icsid.worldbank.org/ICSID/FrontServlet? requestType=ICSIDDocRH&actionVal=ShowDocument&icsidOverview=true&language=Engl ish
Statute of the International Court of Justice. maybe visualized at the present website: http://www.icj-cij.org/documents/?p1=4&p2=2&p3=0
Official website of the World Trade Organization. www.wto.org
UN Charter. http://www.un.org/en/documents/charter/index.shtml
VITERBO, A. Dispute settlement over exchange measures affecting trade and investments: the overlapping jurisdictions of the IMF, WTO, and the ICSID, Working Paper no. 34/08, 2008, Society of International Economic law. www.sielnet.org