Exploratory Research: Given the evolving nature of the topic, an exploratory
research design will be employed to gather a comprehensive understanding of the
relationship between sovereign investors and national security exceptions in the
WTO and investment law.
- Data Collection:
- Documentary Analysis: Extensive analysis of legal texts, treaties, agreements, and case law related to the WTO and investment law.
- Case Studies: In-depth examination of specific cases where national security exceptions were invoked in the context of sovereign investments.
- Primary Data: Interviews, official legal texts, and case records.
- Secondary Data: Academic articles, reports, and analysis by reputable institutions.
- Interdisciplinary Approach: Employ an interdisciplinary approach, combining legal, economic, and political science perspectives to provide a holistic analysis.
- Peer Review: Seek peer review and feedback from experts in international law, trade, and investment to enhance the research's credibility.
This research methodology aims to provide a rigorous and comprehensive analysis
of the relationship between sovereign investors and national security exceptions
in WTO and investment law, contributing to a better understanding of this
complex and evolving issue.
BACKGROUND AND SCOPE OF THE PAPER
The idea of national security has changed to include a variety of dangers, such
as non-State actors, non-military, and non-human threats, like economic crises,
cybersecurity threats, terrorism, and climate change. Particularly, some States
are actively extending the definition of national security to cover economic
security, protection of vital infrastructure, communications assets,
cutting-edge technology, and data security.
National security, however, cannot
be viewed in a purely theoretical sense. Instead, the well-established
justification for security exclusions to protect nations' autonomy in matters of
national security and defence must be understood within the constraints imposed
by substantive responsibilities in international economic agreements. It entails
striking a balance between competing demands for predictability, transparency,
due process, and non-discrimination.
This chapter makes the case for a
consistent approach to the examination of security exclusions under
international trade and investment law in light of the general desire of the
international community to handle global issues on a multilateral basis. It
begins by outlining the shape and organisation of security exceptions under both
The choice of the standard of review and the most significant concerns
arising from the resolution of national security conflicts are covered second.
Thirdly, it examines the developments in security exception interpretation in WTO and investment law, as well as the consequences for sovereign investors.
The consistent application by international adjudicators under both regimes
could assist in taming the released opportunistic impulses by catalysing
domestic legal and policy reforms that would provide some degree of constraint
and scrutiny in the implementation of protectionist measures. In particular, it
might encourage trade and investment liberalisation while guarding against the
emergence of sovereign investments as instruments of political sabotage and
Political or judicial trade and investment forums are rife with talk about
An abrupt change from a protracted period of restraint regarding the use of
security exclusions before international trade and investment courts can be seen
in this pattern. In that sense, we see the passing of youth: after a period of
fairly stable global trade relations that produced mutually beneficial, if
unbalanced, outcomes, comes a period in which trade regulation takes on its
unpleasant face, reminding us of how closely tied trade is to foreign policy and
power politics. The evolving geoeconomic environment has raised the stakes of
international competition and newforms of economic warfare.
Trade flows are
being instrumentalized, as States look to turn the
increasing dependence of businesses on global markets and supply chains into
leverage and choose to use tariffs and blockades aimed to protect their national
security interests as instruments of choice in pressure campaigns. This is the
result of a gradual reversal of a centuries-long reality of virtual exclusivity
of foreign direct investment (FDI) flows from the developed world to the
developing world, coupled with an important rise of FDIs from emerging
economies, such as:
An agenda of economic nationalism driven by politics and centred on issues of
national security and autonomy, geopolitical positioning, and national
competitiveness is arguably strengthened by the resurgence of the trend towards
the creation of national industry champions and the Chinese government's
acquisition of resources from abroad.
Particularly, the FDIs of State-Owned Enterprises (SOEs), Sovereign Wealth Funds
(SWFs), and other State-influenced enterprises (together defined as "sovereign
investments") are the subject of the issues addressed. These worries are a
result of the worry that such investments would no longer operate under a strict
market-based logic but rather under geopolitical pressure. As a result, host
States are starting to rethink their strategy with regard to the creation of
investment agreements in particular so that they move away from protecting
investments and towards giving the State a suitable regulatory margin of
States also implement investment screening tools in addition to greater latitude
in the interpretation and execution of investment agreements. Such forces that
view every economic transaction as possibly having an influence on national
security interests have been unleashed by protectionist language and a new
variety of contemporary mercantilism. This does not imply that security was
never the topic of contentious debates within the framework of the international
economic order. On the contrary, political forums were rife with these events
over a large portion of the Cold War era. Such conversations were, however,
exempt from court review. However, security issues have recently resurfaced,
necessitating a review of the definition, boundaries, and extent of national
In addition to non-State actors, non-military, and non-human threats like
economic crises, cybersecurity, terrorism, infectious disease, and climate
change, the notion of national security has developed to address a variety of
threats. Particularly, some States are actively extending the definition of
national security to cover economic security, protection of vital
infrastructure, communications assets, cutting-edge technology, and data
It might be argued that the idea of national security cannot be understood in
isolation. Instead, the well-established justification for security exclusions
to protect nations' autonomy in matters of national security and defence must be
considered within the constraints imposed by substantive responsibilities in
international economic agreements. It entails striking a balance between
competing demands for predictability, openness, due process, and the absence of
Modern free trade agreements (FTAs) sometimes include investment-related rules
in addition to those governing trade. The natural connections between commerce
and investment have been strengthened by global value chains as well. Both
regimes set limits on governmental actions that are taken in the public interest
but also have an impact on business enterprises. In this way, they serve similar
purposes.Furthermore, regardless of the particular treaty's content, exception
clauses under all international economic agreements must be interpreted in
accordance with the customary principles of treaty interpretation outlined in
the Vienna Convention on the Law of Treaties (VCLT).
This chapter makes an argument for a consistent approach to the examination of
security exclusions under international trade and investment law in light of the
general desire of the international community to handle global challenges on a
multilateral basis. It begins by outlining the shape and organisation of
security exceptions under both regimes. The choice of the standard of review and
the most significant concerns arising from the resolution of national security
conflicts are covered second.
Thirdly, it examines the developments in security exception interpretation in
WTO and investment law, as well as the consequences for sovereign investors.
This chapter comes to the conclusion that by ensuring a certain degree of
restraint and scrutiny in the implementation of protectionist measures, the
clarification of the scope of the security exceptions clauses and their coherent
application by international adjudicators under both regimes could help tame the
unleashed opportunistic forces. In particular, it might encourage trade and
investment liberalisation while guarding against the emergence of sovereign
investments as instruments of political sabotage and diplomatic evasion.
National Security Exceptions in WTO and Investment Law
Much of the discussion to this point has been filtered via a set of legal
principles that may describe the connections between international economic law
and security. For instance, the General Agreement on Tariffs and Trade (1994)
(GATT), Art. XIVbis General Agreement on Trade in Services (GATS), and Art. 73
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS
Agreement) all govern how trade and national security are related within the
framework of international trade. They provide potential escape routes for
States looking to defend legitimate non-trade policy interests, together with
general exceptions under individual accords (such Art. XX GATT).
A wide carve-out is implied by GATT's Art. XXI, which stipulates that "nothing
in this Agreement" shall be interpreted as prohibiting WTO Members from taking
actions "which it considers necessary" as specified by this clause. Despite
fundamental differences in their subject matter and application to products,
services, and intellectual property rights, respectively, all WTO law rules
relevant to national security generally use the same wording. A number of FTAs
similarly replicate the language and organisation of GATT Article XXI.
Security is a concept that can also be found in bilateral investment treaties (BITs)
and the investment chapters of free trade agreements (collectively known as IIAs).
It is frequently used to refer to the obligation of the host State to safeguard
the investor and its investment against negative outcomes. To safeguard
physically against violations by government agencies or private parties, such
clauses are generally grouped under the general heading "full protection and
Currently, the GATT's Art. XXI section on security exclusions that can be used
to stifle commerce in products has some of the most complex language ever
written. General or security exceptions of the type outlined in GATT Articles XX
and XXI. However, as a matter of more recent treaty practise, security
exceptions in the IIAs have been promulgated in a binary fashion: either IIAs
(notably those concluded by the United States (US)) include a broad, undefined
carve-out vis-�-vis any treaty obligations if a State's essential security
interest is at stake, or IIAs incorporate a more elaborated exceptions clause,
frequently by way of cross-references to WTO law or by including However, in
other agreements, we also see Parties' willingness to provide the arbitrator
with as much assistance as possible by combining language from WTO law and other
Having said that, even though the drafters in both situations wanted to be more
specific and limit the parties' ability to act unilaterally, they lacked the
knowledge necessary to create a comprehensive contract that would have addressed
all conceivable future emergencies. Giving host countries the necessary-and
occasionally excessive-discretion to respond to internal or external economic or
political shocks and crises without compensating foreign investors increases
risk for the investor but may be necessary to maintain the agreement's long-term
effectiveness and implementation.
This leads to the identification of three categories of security exceptions
under international economic agreements: exceptions allowing a State to take
security measures as "it considers necessary" subject to good faith scrutiny (WTO-style
exceptions); exceptions subject to the full scrutiny of the adjudicator; and
exceptions that expressly exclude any security measures from judicial review
(self-judging). Because the wording of the various trade and investment
agreement clauses falls into the first two categories, adjudicators can infer a
consistent threshold of scrutiny for the two categories of exceptions under
international trade and investment law.
A number of BITs use the third category
of security exceptions, which appears to totally exclude any security measure
from being subject to arbitral review, regardless of whether it was adopted in
good faith.The explicit, self-evaluative language of security exceptions hasn't
yet prevented any panel from reviewing a dispute. This can imply that the
parties are hesitant to use security exceptions during the proceedings if they
are clear about their aim to preclude adjudication of security measures.
Adjudication of National Security Disputes
The International Court of Justice (ICJ), WTO panels, and investment tribunals
have all accepted jurisdiction in cases involving economic agreements when
confronted with the issue in order to determine whether or not national security
issues were involved and whether or not the adoption of the in question
measures, which deviated from the State's international legal obligations, was
The case of Djibouti v. France
is noteworthy because it is the first
time the International Court of Justice (ICJ) has been asked to review a
self-judging provision of the Mutual Assistance Convention's Article 2(c), which
states that a state may refuse to provide assistance in criminal proceedings "if
it considers that the execution of the request is likely to prejudice its
sovereignty, its security, its ordre public, or other of its essential
In a few cases, the ICJ was required to make decisions regarding the application
of security exceptions that lacked self-judging language. The ICJ rejected the
US-Nicaragua security treaty's absolute self-judging nature of exception in
Nicaragua v. United States, saying that it "does not restrict [the Court's]
jurisdiction in the present case, but is confined to affording the Parties a
possible defence on the merits to be used should the occasion arise." The ICJ
commented on a similar clause included in the US-Iran treaty that allowed for
the measures "necessary to protect [State's] essential security interests" in
Oil Platform and Iran v. United States.
The Panel argued that it should assess security policies that have an impact on
international trade and put forth a nimble and politically sensible framework
for deciding security-related disputes. Because of its "adjudicative function,"
it emphasised that it had "inherent jurisdiction" over the matter, especially
since the matter Settlement Understanding (DSU) doesn't contain any additional
or unique rules for disputes involving the provisions of Article XXI.
language of security exceptions does not expressly call for a WTO panel to be
disqualified from hearing instances concerning the application of exceptions.
Due to this, a panel that has been constituted has the authority to hear a
complaint and to handle all legal matters associated with that disagreement,
even if only one party is involved.
Choice of Standard of Review
In an international setting, the standard of review establishes the scope of the
latitude that national authorities have in making particular choices and has an
impact on how much authority is divided between the national and international
levels. While the common law gives rise to the legal doctrine governing
standards of review, the idea of a margin of appreciation has its roots in
European legal heritage.
The margin of appreciation notion, which is typically
linked with international human rights legislation, can be defined as the amount
of deference an adjudicator is ready to provide to national decision-makers in
the international environment. The terms "standard of review" and "margin of
appreciation" could be seen as referring to the same thing, albeit in the
opposite sense (i.e., a large margin).
When a panel or the Appellate Body examines the degree of a WTO Member's
compliance with WTO commitments in accordance with Article 11 DSU, the standard
of review for WTO disputes comes into question. The thoroughness and rigour of
the WTO judicial organ's evaluation of the WTO Member's national measure is
based on the standard of review.
As a result, this establishes the WTO Members'
vertical power allocation and margin of discretion. However, Article 11 does not
explicitly state when adjudicators should conduct a de novo assessment of a case
or when a more deferential approach is required.The pendulum of security
exceptions appears to be tilting towards deference, at least according to WTO
practise up to this point. The Panel's decisions in Saudi Arabia, Russia, and
Traffic in Transit.
In comparison to other fields of public international law, international
investment law has perhaps a far less developed and consistent understanding of
the standard of review. Because of the concept of state sovereignty, states have
the power to control economic and business operations that take place on their
soil.Investment tribunals are frequently asked to weigh the regulatory authority
of host States against the protections granted to foreign investors by IIAs,
particularly during economic downturns.
Due to the hybrid (public/private)
structure of investment arbitration, where the concept of equality of the
parties will be mitigated by the presence of a sovereign entity, tribunals are
expected to accord due weight to the sovereign functions of a State in any such
Trends in the Interpretation of Security Exceptions in WTO and Investment Law
The Evolving Concept of National Security
The WTO Agreements' security exceptions can only be interpreted in light of the
idea of "essential security interests." The phrases "essential," "security," and
"interest," regardless of how WTO Members interpret the scope of their own
national security, have common meanings. While "security" refers to the state of
being shielded from or not exposed to risk, "interest" refers to the
relationship of being involved or concerned with prospective harm or
'Essential' is defined as '[t]hat is such in the utmost
or highest meaning' and '[a]ffecting the essence of anything; significant,
important'. As a result, not all security interests are related to national
security and not all security interests are "essential."In the absence of, the
security exemption requires a qualified interest.
According to the Panel in Russia - Traffic in Transit, "essential security
interests" refer to "those interests relating to the quintessential functions of
the State, namely the protection of its territory and its population from
external threats, and the maintenance of law and public order internally."
Since "[t]he specific interests that are considered directly relevant to the
protection of a State from such external or internal threats will depend on the
particular situation and perceptions of the State in question, and can be
expected to vary with changing circumstances," the designation of essential
security interests is generally left to the WTO Member. Therefore, non-military
security can be viewed as vital due to new risks and circumstances just as
non-military security, for example, can be generally judged essential.
Good Faith Review
The function of good faith does not seem to be to establish a precise code of
conduct, but rather to serve as an interpretive principle that would be crucial
in the interpretation and application of the relevant rules, both procedural and
substantive, as it emerged from the galleries of cases of international courts
and tribunals. Given the numerous inconsistencies in the law caused by various
methods of interpreting security exceptions, good faith as a doctrine that
exists above the law may have a corrective and harmonising role to play that is
crucial when dealing with security measures.
WTO adjudicators have inferred the assumption that WTO Members have behaved in
good faith in upholding their WTO obligations from the rule of pacta sunt
servanda stated in Art. 26 VCLT. The Appellate Body explained in US - Continued
Suspension that "the presumption of good faith attaches to the actor, but not to
the action itself." As a result, even while the presumption of good faith
focuses on the motivations behind a Member's actions, it does not address the
issue of whether the implementing Member's action actually resulted in
Necessity of Security Measures:
In many legal systems, the concept of necessity is utilised to draw the line
between allowed and banned actions when those actions are inimical to the values
of the system. As previously mentioned, exceptions under many economic
agreements specify a "necessity" nexus between the government action and the
permissible objective, such as that "it considers necessary to protect" certain
interests, or that:
"it considers necessary for the fulfilment" of certain
obligations, to protect its security interests.The necessity requirement of the
treaty exception examines the degree to which the chosen measures are acceptable
for the State in question's claimed regulatory objective. In many regimes, the
necessity criteria restricts only means and calls for an adjudicating body to
inquire whether the purpose could have been achieved without moderate
Many security exceptions include ratione materiae limitations, meaning that they
only apply to particular items or circumstances.148 As an example, a WTO Member
can defend trade restrictions that serve to safeguard its crucial national
security interests by citing GATT Article XXI(b):
nuclear fission and fusion; (ii) referring to the services supporting a military
establishment; (iii) implemented in times of war or other crises in
international affairs. Since national security can be understood to cover a wide
range of domestic businesses or areas, Art. XXI makes an effort to define it
more specifically. Problems primarily arise in accordance with Art. XXI(b)
(iii). and the scope of the terms 'other emergency in international relations'.
Indeed, the case law reveals that it was under this catch-all provision that
most cases were brought before the contracting parties during the GATT years and
then before the WTO.
Sovereign Investors and Security Exceptions:
State capitalism is a global phenomena, especially if we also consider
State-driven institutions that seek to regulate capital allocation based on
security interests, in addition to direct State ownership. There are
approximately 1'600 worldwide operating SOEs in 2020, up 7% from 2019. The
pandemic has forced several governments to postpone their privatisation plans or
take ownership stakes in businesses as part of a corporate rescue plan. Overall,
it is possible to see a longer-term trend of SOEs engaging in less cross-border
activities. Originally, sovereign investments were meant to be truly made for
It is intended to increase assurance about the regulatory role of States and
provide additional direction regarding their comprehension and execution of
public policy and national security in international economic relations by
including specific exceptions in international economic accords. The purpose of
this chapter was to show that, given the similarity of the treaty language
employed, such assurance and clarity can be achieved provided security
exceptions are, to some extent, interpreted consistently across different treaty
The purpose of the drafters to confine judicial review to their use in good
faith is indicated by the specific phrase of "it considers necessary for the
protection of [State's] essential security interests." Therefore, adjudicators
should only consider whether the State sufficiently proved its important
security interests to prove their validity and established the plausibility that
the measures were put in place to protect those interests. Adjudicators must
examine objective aspects of the exception clause, if any, in addition to a good
faith examination that focuses on the measures to prevent abuse, such as whether
the measure was implemented during a "other emergency in international
relations" as defined by GATT Article XXI(b)(iii).
In the Nicaragua and Oil Platforms decisions, as well as in investment tribunal
proceedings, the ICJ underlined that a stronger standard of review is required
for the evaluation of security exceptions without the phrase "it considers
On the one hand, substantive review raises the possibility that
international courts and tribunals may ignore the changing national security
interests of States and will reimpose security concepts based on traditional
military doctrine. However, as the current practise demonstrates, international
courts and tribunals can and do afford some deference to a state's decision
through customary legal procedures.
For instance, when interpreting the
constantly evolving term "essential security interests" or the concept of
"necessity," which inherently varies depending on the specific facts and its
- Giacomo Rojas, Elgueta, Benedetta Mauro - The Paradoxical Relationship between 'Foreign Direct Investment Screening' and International Investment Law: What Role for Investor-State Arbitration? Posted: 2018-10
- See M Sornarajah - The International Law of Foreign Investment, volume 4 Posted: 2018
- J, Benton Heath - The New National Security Challenge to the Economic Order
- European See, Commission and the Interim National Security Strategic Guidance published by the Biden administration in March
- Foreign Investment in Critical National Infrastructure (CNI) by State-Controlled Entities (SCEs) and Investment Screening Mechanisms (ISMs) Posted: 2016-10-06� PublicAffairs 2013) 385. Harlan Grant Cohen, 'Nations and Markets' (2020) 23(4) Journal of International Economic Law 793, 797.
- � Maya Steinitz, 'Foreign Direct Investment by State-Controlled Entities at a Crossroad of Economic History: Conference Report of the Rapporteur' in Karl P Sauvant et al., Sovereign Investment: Concerns and Policy Reactions (OUP 2012) 539
- � Andrew D Mitchell and Caroline Henckels, 'Variations on a Theme: Comparing the Concept of 'Necessity' in International Investment Law and WTO Law' (2013) 14(1) Chicago Journal of International Law 93, 95.
- � Dominik Eisenhut, 'Sovereignty, National Security and International Treaty Law The Standard of Review of International Courts and Tribunals with Regard to 'Security Exceptions'' (2010) 48(4) Archiv des V 431, 458