Untangling the Knots: Why Disputes in Global Trade and Investment Follow Different RulesIn the intricate world of international commerce, businesses that operate across borders are typically shielded by a web of agreements designed to ensure fair play. If a company exports its products, its access to foreign markets is protected by international trade agreements, like those of the World Trade Organization (WTO). If it invests directly in a foreign country—building a factory, for instance—its assets are safeguarded by international investment agreements, such as Bilateral Investment Treaties (BITs).
The significance Differences Disputes in Global Trade & Investment
A fascinating and highly significant difference arises when things go wrong, even though both kinds of agreements seek to create a stable and predictable environment for international business. Trade agreements and investment agreements have very different dispute resolution procedures, and these distinctions go beyond simple legal technicalities. They have important real-world economic ramifications, are the focus of intense political debate, and touch on delicate matters of national sovereignty.
When things go wrong, there is an intriguing and highly significant difference between the two kinds of agreements, even though they both seek to create a stable and predictable environment for international business. There are significant differences between the dispute resolution procedures outlined in trade and investment agreements, and these differences go beyond simple legal technicalities. They have major practical economic effects, are the focus of intense political debate, and touch on delicate matters of national sovereignty. Why are the dispute resolution rules of these two parallel systems of international economic law so dissimilar? The National Bureau of Economic Research published an innovative working paper titled “
Literature Review on Disputes in Global Trade & Investment
Disputes in International Investment and Trade” by economists Ralph Ossa, Robert W. Staiger, and Alan O. Sykes, provides a compelling and unified explanation. The authors argue that these differences are not arbitrary but are instead carefully calibrated responses to the fundamentally different economic problems that trade and investment agreements are designed to solve.
The three core differences in their dispute settlement procedures
Let’s delve into the three core differences in their dispute settlement procedures—standing, the nature of the remedy, and the remedial period—and explore the economic logic that underpins them.
1. Who Has the Right to Sue? The Question of “Standing”
Perhaps the most significant and politically charged difference lies in who is allowed to initiate a dispute.
In the world of trade agreements, such as the WTO or the U.S.-Mexico-Canada Agreement (USMCA), the right to bring a formal complaint is reserved exclusively for national governments. This system is discussed as follows
State-to-State Dispute Settlement (SSDS). Disputes in Global Trade & Investment
If a company, say a French winemaker, believes that the United States is imposing an illegal tariff on its wine, the company cannot directly sue the U.S. government at the WTO. Instead, it must persuade the French government (or the EU) to take up its case and file a dispute on its behalf.
Investment agreements, on the other hand, feature a radically different approach. The vast majority—95% of treaties currently in force—allow private investors to directly sue their host governments in an international tribunal, a process known as
Investor-State Dispute Settlement (ISDS).
So, if an American energy company builds a power plant in another country and believes the host government has unfairly expropriated its asset or engaged in discriminatory practices, that company can initiate an arbitration case directly against the government without needing the U.S. government to formally lead the charge. This private right of action is a powerful tool and a primary source of the controversy surrounding modern investment treaties.
The Economic Rationale: Government-to-Government vs. Government-to-Investor Problems.
So why this divergence? The answer, according to Ossa, Staiger, and Sykes, lies in the core purpose of each type of agreement.
Trade agreements are fundamentally about solving a government-to-government problem.
When a country imposes a tariff, it might benefit its domestic producers and government revenue, but it does so by shifting costs onto foreign exporters and consumers, an effect known as a “terms-of-trade” externality. The importing country doesn’t fully account for the economic pain it inflicts on its trading partners.
Trade agreements are essentially contracts between governments to mutually rein in this selfish behavior and achieve more efficient market access for all.
Given this, the key relationship is between the governments. The exporting country as a whole is what matters, not just the profits of one industry. The home government is the best agent to weigh the benefits of winning a trade dispute against the potential diplomatic fallout or the costs imposed on other domestic industries or consumers. The authors argue that individual exporters would be “imperfect agents” for their government. They would be more aggressive, focused solely on their own commercial losses, and might ignore the broader diplomatic or economic implications for their home country. This could lead to an excessive number of disputes, challenging even legitimate regulations and imposing unnecessary costs. Therefore, the system optimally grants standing only to governments (SSDS), avoiding the introduction of overly litigious private actors
