Remarkable economic and political forces are generating a wave of protectionism that looks set to sweep the world. These sentiments are evident in the rhetoric emanating from the US Presidential race through to the calls for Britain to exit the EU.
If the mistakes of history are repeated, resulting in the wheels of international commerce clogging with protectionist legislative structures, we expect a rapid deterioration in the fundamental supporting framework of trade and commerce: trust. Experience tells us when trust evaporates - disputes are sure to follow.
In a world that is more commercially cross-border connected than ever before, this lack of trust is likely to lead to a significant increase in cross-border and international arbitration disputes – not only between commercial parties but nation states as well.
Navigating this complex global world, whether in respect of an international supply chain contract or a major offshore investment, mandates participants to think proactively and strategically about protecting their commercial positions and establishing clear and considered dispute resolution strategies.
G20 MEETING LONDON - 2 APRIL 2009: "WE WILL NOT REPEAT THE HISTORIC MISTAKES OF PROTECTIONISM OF PREVIOUS ERAS".
The beggar-thy-neighbour protectionist policies of the thirties saw the advent of a series of systems and institutions (such as: Bretton Wood/IMF, GATT, WTO, EU) designed to facilitate free trade and reduce friction in global markets. Despite 70 years of concerted effort from these institutions and strong pronouncements from global leaders to avoid the mistakes of the past, the last several years have witnessed a protracted slowdown in world trade – the WTO predicts 2016 will be the 5th year of sub 3% trade growth and has noted the dollar value of world trade has fallen this last year 13% to $16.5 trillion. No doubt this is due to the significant range of international trade distortions deployed by Governments in recent years.
However, the last several years will hold little by way of comparison to the epoch we may soon enter, as a series of world events unfold over coming months which may irrevocably reshape the world – imagine for a moment: Trump as the US President, Britain exiting from the EU, several central banks engaging in competitive currency devaluation and a WTO decision that has given China market economy status.
If these events produce a rapid development of protectionist policies (which is at least probable) we will have repeated the mistakes of history. Only this time, we will do so in an entirely different world – where markets and trades are intimately linked, where corporations (and supply chains) operate across hundreds of jurisdictions and where the world is connected economically, financially, digitally and socially like never before. If so, beyond doubt, international trade and commerce will be dramatically impaired, including world trade, capital flows, tourism, migration and diplomatic relations. In this environment, the risks around international trade increase dramatically.
So, how likely is it that this scenario will come to pass? It would seem the world economy is on a trajectory that will be very difficult to reverse, in a political, social and economic sense. From a risk assessment perspective, we think the prospect of increased protectionism is at least a ‘possible’ risk (being a risk that may happen in some circumstances (31-49%)).
THE IMPACT ON ARBITRATION / CROSS BORDER DISPUTES
Argentina - A Recent Historic Parallel: Investor State Disputes
In 2001 the Republic of Argentina defaulted on its international debt obligations. Its Government then aggressively sought to restructure its financial position with its international counterparties. What resulted (from a disputes point of view) is perhaps apposite of what may occur should nations seeks to aggressively ‘manage’ their international engagements without due regard to normal processes and obligations.
A 2015 study in respect of disputes involving sovereign states determined that between 1976 and 2010, Argentina was involved in almost one third of all disputes. A very significant number of these disputes post-dated Argentina’s 2001 default. By 2005, 37 cases had been filed with ICSID, the most ever against a single member.
The distinguished Economist in Residence and Director, International Economic Relations Program Arturo C. Porzecanski states: “The mass filing of arbitration claims, in turn, was prompted by Argentina’s radical and seemingly irreversible changes to the ‘rules of the game’ affecting foreign strategic investors, which clashed with commitments prior governments had made in multiple bilateral investment treaties.” Porzecanski went on to lament the ‘veritable sagas’ that resulted from the sheer number of cases filed and appealed, the substantial sums at stake and the complexities involved. These factors were only exacerbated by Argentina’s unwillingness to settle out of court or to honour judgments and awards rendered against it.
Argentina’s position has parallels to a world where nation states act inimically with their international obligations in a protectionist manner. As was the case with Argentina, it appears that this conduct is directly related to significantly increased international dispute processes being engaged.
Private Party Arbitration Impact
Because of the confidential nature of private party arbitrations, evidence of the impact on international arbitration is difficult to aggregate. What the data does appear to tell us is that the propensity to engage arbitration to resolve international disputes is increasing.
Separately, it would seem trite to say that protectionist forces may negatively impact private contacting parties operating across multiple jurisdictions, at a range of levels (and thus increase international commercial arbitration). The issues most likely to be impacted by protectionism that will intersect private party arrangements include: employment, intellectual property, taxation and financial structures.
From a private party point of view, in a protectionist world some local court systems may be even less likely to enforce overseas judgments. This is likely to see the New York Convention taking on even more significance - resulting in arbitration increasing in attractiveness as the dispute mechanism deployed to resolve international disputes.
Overall, we consider that it is a ‘likely’ risk profile (being a risk that it will probably happen in most circumstances – (50-89%)) that a rapid rise in protectionist positions will lead to a significant increase in international arbitration and cross border disputes.
RISK ANALYSIS AND MITIGATION
Undertaking a risk / impact weighted assessment produces a ‘medium-high’ overall risk assessment around protectionism, international trade and associated disputes.
Within our risk mitigation framework, a ‘medium-high’ risk profile mandates that: “mitigation steps are required to the possible event / consequence. If in dispute, seek resolution where practicable. Resolve or mitigate unless the resolution / mitigation cost is greatly disproportionate to improvement gained, or risk reduction is impracticable”.
Mitigation strategies are best engaged early. Parties contemplating one-off international commercial arrangements should actively consider a range of issues, including at least: the arbitral institution and seat that will give best advantage, whether a bilateral investment treaty may offer protection and the ability to enforce awards, rights and obligations off shore – and potentially in multiple jurisdictions. For those that engage in numerous international engagements, an in-house position on the appropriate strategy to be engaged in various jurisdictions is essential.
As world events unfold, leading to a global commercial world moving (potentially rapidly) away from free and open trade, strategic and informed management will not just be important but essential to understanding and controlling a new range of international commercial risks. Certainly, from a mitigation point of view, risk reduction is not impracticable and it’s difficult to see how the time and cost of preparing well developed strategies to protect a parties’ international position could be disproportionate to the significant risks of not instituting safeguards.