Waseda Institute for Advanced Study (WIAS)早稲田大学 高等研究所


Power asymmetry — How to promote fairness in international investment projects
XU Alison, Assistant Professor

XU Alison, Assistant Professor

Globalizing fairness

My research at WIAS deals with an exciting new direction in international law — addressing power asymmetry in international investment, and the legal protection of local stakeholders’ interests.

This issue is taking on greater urgency with growing globalization, as more capital is crossing borders and flowing into developing countries.

These cross-border capital flows are a key driver sustaining global growth. Foreign direct investment (which makes up the majority of international investment) reached $1.54 trillion in 2019, and it is growing, but so is competition among host countries trying to attract funds for economic development. This results in relationships that are inherently asymmetrical — investors are in the strongest bargaining position and states come second, while the local stakeholders are in the weakest position and usually have little bargaining power.

The current body of international investment law was designed to promote the flow of capital from wealthy developed nations to less developed ones, and most of it has only come into existence since the recent increase in globalization began.

The Investor State Dispute Resolution (ISDS) mechanism serves as the main framework for negotiations, but it mainly deals with the relationship between host states and investors, and offers little recourse for local stakeholders affected by investors’ actions.

Most of the pertinent cases have taken place within the last two decades, primarily in developing countries, which compete to attract investment capital from more developed nations to develop their infrastructure and so on. These are mostly long-term building projects, which is why the disputes are increasing now — it takes time for these issues to crop up, and projects may be halfway through when the problems start to become evident.  By then, changing directions or practices can be difficult and expensive. And given the inherent asymmetry in the investor-host country-local stakeholder relationship, local people tend to come up short, which can lead to social unrest, political disputes, and other problems.

Seeking solutions

So what can we do about this problem of power asymmetry?

In academia, scholars have been trying to explore how to reform mechanisms from within, finding ways to improve the existing system. But the existing system focuses on startups and investors, while ignoring the weakest parties whose rights are also affected by investors’ behavior, but usually are not heard.

The international investment system was originally designed to protect investors, not local people in host countries. Under current treaty schemes, investors have substantial advantages, and host states tend to commit to safeguarding the interests of investors even to their own detriment, in order to keep the investment funds flowing. But this means that often locals are structurally missing from the process.

Looking out for the little guy

Demand for change comes primarily from the host countries’ policymakers. Recently there have been cases where policymakers have imposed substantial fines on investors as damages for breaching treaty obligations, and that has made people pay attention to what’s going wrong with the established system, and how to fix it.

In my research I am exploring several possible directions to arrive at solutions to the problem of power asymmetry.

One could be to find ways to improve drafting techniques of investment treaties, incorporating a more balanced approach to investors’ obligations and increasing the local stakeholders’ presence. Another could be to find a softer approach, to resolve disputes before they arise. Another possibility is to create special national/domestic courts that have jurisdiction over international investment disputes, like the EU-advocated multilateral investment court.

Japan perspective

I was so happy to get this position at WIAS. I studied law for seven years at universities in China, where I’m from, and another five years in the U.K., for my PhD. This position is an excellent opportunity to dive deep into these issues, which are of particular interest to me.

It’s also a good opportunity to examine the situation in Japanese companies, which have a really good record of not being sued and not suing other countries. This I imagine is related to the corporate culture here — Japanese multinational corporations generally abide by laws and behave very well. It also relates to awareness of these issues by the Japanese public, who are conscious of environmental protection. This encourages caution in companies when engaging in foreign projects, to avoid issues arising.

Beyond this current work, and thinking more long term, I’d like to get involved in multidisciplinary research collaborations with environmentalists from other countries. These could bring together lawyers, environmentalists and corporate business people to come up with solid solutions to protect investors but also allow local people to be heard, which would make the host nations happy as well. I’d also like to participate in negotiations to support new dispute resolution mechanisms, but that’s far in the future.

Legal innovation

Another reason this field is exciting for me is that as lawyers we’re so used to thinking in terms of what we already know. There’s less innovation in the field of law. One of my teachers once said to me, “Even if you believe yourself to be liberal, if you are a lawyer, you are born to be conservative.” In other words, you have to stick to the established system, the established rules.

But that contradicts what I believe, at least right now. All around us we’re seeing these new technological innovations, new international relationships and constantly changing norms. So I think this is the time for lawyers to be more creative too, as we do our part in designing the future.

Interview and composition: Robert Cameron
In cooperation with: Waseda University Graduate School of Political Science J-School

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