Ken Vandevelde is one of the preeminent scholars on investment treaties. He has a new short paper entitled "IIA provisions, properly interpreted, are fully consistent with a robust regulatory state" here. In the paper, he makes a couple points that I want to address.
First, he talks about the intellectual foundation of investment treaties:
Because the explosion in the number of bilateral investment treaties (BITs) began at the end of the 1980s, contemporaneously with the emergence of the “Washington Consensus,” identifying BITs with neoliberal market fundamentalism is tempting. And, because neoliberal market fundamentalism favors a minimalist state, the identification of the BIT network with that ideology often triggers concerns that BIT obligations intrude too much upon a host country’s regulatory discretion, concerns exacerbated by the fact that investor-state claims alleging BIT violations first appeared soon after the Washington Consensus.
Even Oprah is now being called a "neoliberal" so I'm kind of lost as to what it means, and "fundamentalism" is usually used with negative connotations, so "neoliberal market fundamentalism" seems like a loaded term to me. However, let's just take it to mean a strong supporter of free markets. As a strong supporter of free markets myself, I find the identification of BITs with free market supporters very odd. With a few exceptions, most of the people I know who favor BITS/ISDS/Investment protection are not extreme free market supporters, in the sense that while they believe in capitalism, they want it balanced out with a good amount of government assistance and regulation. And most of the strong free market supporters I hang out with are pretty unimpressed with BITS/ISDS/Investment protection as a way to push for free markets and property rights. So, while I recognize that the notion of BITs as a nefarious scheme by "neoliberals" is out there, I'm skeptical that this is the case.
Vandevelde himself has doubts, and has another explanation for the origin of these treaties:
The provisions of contemporary international investment agreements (IIAs), however, trace their origins not to the neoliberalism of Ronald Reagan and Margaret Thatcher, but to the New Deal liberalism of Franklin Roosevelt and Harry Truman. Nearly all of the provisions that commonly appear in IIAs have antecedents in the 22 US postwar treaties of friendship, commerce and navigation (FCNs), concluded by the US between 1946 and 1966. These treaties reveal the vision of international economic law that gave birth to the very concept of an investment treaty and the original understanding of the key provisions that appear in most IIAs today.
At the end of World War II, the Roosevelt-Truman administrations sought to promote outward US investment to provide other countries with the dollars needed for reconstruction and development and to purchase an anticipated US manufacturing surplus. One important means of promoting outward investment was to negotiate treaties for its protection.
US officials believed that Roosevelt’s New Deal provided a model for the right investment climate. The New Deal had promoted economic growth through a combination of free enterprise and state capitalism, while allowing the government to regulate the economy in the public interest, subject to basic rule-of-law norms found in the US constitution. Thus, in crafting the investment provisions of the post-war FCN treaties, the US sought to obtain for her investors abroad essentially the same protections that they and foreign investors already received in the US. These protections were entirely consistent with the New Deal regulatory state, while providing a legal framework within which investment could flourish and, in the US, had flourished.
While the people who pushed for FCN treaties may have been New Deal liberals, it seems to me there is another place to look for explanations of their support for these treaties: The legacy of colonialism. At this time, the world was perhaps winding down the colonial period, but was still firmly in it. I think it's fair to say that the establishment view in this period, on both the left and right, was that Europe and the United States had fair and effective institutions, and most of the rest of the world did not. As a result, using international law to impose Western ideas on the rest of the world seemed appropriate to those in power. While they may have been New Deal liberals on domestic policy, and they didn't intend for New Deal policies to be affected by BITs, I'm skeptical that New Deal regulatory policies played a big role in their push for investment treaties.
Finally, Vandevelde talks about the balance between investment protection and and regulatory autonomy in these treaties:
With the notable exception of the provision requiring parties to observe obligations relating to investment, virtually all the provisions in these first European BITs had antecedents in the US FCN treaties. Thus, it is in the FCN treaties that countries are seen, for the first time (in the context of an investment treaty), explicating the meaning of provisions such as the requirement of fair and equitable treatment, prohibiting unreasonable or discriminatory measures, protecting against direct and indirect expropriation, and including obligations of national and most-favored-nation treatment.
These and other IIA provisions were conceived in a framework where broad exceptions for regulatory discretion were unnecessary because the substantive provisions of the treaties, apart from special circumstances such as exchange controls, would not intrude upon legitimate, nondiscriminatory and non-expropriatory regulations in the public interest. For example, FCN treaty provisions presumed that host country assurances to investors included as an implied condition the state’s reserved power to regulate. When interpreted in accordance with their original understanding, the basic rule of law provisions that appear in IIAs are fully consistent with a robust regulatory state.
Those who created the first IIAs in the 1940s had a clear vision of the balance to be struck between investment protection and regulatory discretion when they drafted provisions such as the fair and equitable treatment standard. Arbitral tribunals seeking the object and purpose of IIA provisions can find their answer in that founding vision.
In my view, the balance that shows up in the language used by the original drafters is way off, and that's what reformers have been trying to fix for many years now. A prohibition on "unreasonable" measures, for example, is wildly intrusive into domestic regulation. You don't have to be as skeptical as I am about regulation to see how broad an obligation that is. So how did New Deal supporters who believed in extensive government regulation give us such intrusive language? I have never come across anything that explained how the drafters thought about these issues, but it may be that they simply did not anticipate the sort of litigation that goes on today. They may have expected a more diplomatic approach that took into account domestic regulatory interests outside the context of tribunal rulings, rather than a legalistic one that has international tribunals applying domestic administrative/constitutional law concepts. I can imagine how a more diplomatic system could get the balance right even with such broad language, but once a private right of action was established (not by the FCN drafters), that balance was forever disrupted.