Public Health and Investment Protection in the Context of the COVID-19 Pandemic—From the Sustainable Perspective of Exception Clauses

Abstract

In response to the COVID-19 pandemic, various preventive and controlling measures have been taken by host states but may damage the interests of foreign investors and consequently result in international investment disputes. Confronted with potential international investment arbitration, the exceptions clause in international investment law is one of the host state’s defences. However, the public health exception clause is a general exception clause with uncertainty when investment arbitration takes place and investment arbitral tribunals interpret it. In the international society, sustainable development has gradually been recognized as a key principle in contemporary international law. Against this background, in the context of international investment, it is appropriate for host states to optimize the exception clauses in BITs or FTAs, thereby reducing the risk of arbitration concerning the host state’s regulatory measures to protect the public from the pandemic.

1. Introduction

On 30 January 2020, the World Health Organization (WHO) declared that the outbreak of COVID-19 constitutes a Public Health Emergency of International Concern (PHEIC) [1]. On 11 March 2020, the WHO further declared that COVID-19 could be a global pandemic [2]. This PHEIC has negatively affected global investment. On the one hand, foreign direct investment (FDI) flows have declined significantly worldwide. According to the World Investment Report 2021 published by the United Nations Conference on Trade and Development (UNCTAD), FDI flows fell by 35 per cent in 2020. This was the lowest level since 2005 and almost 20 per cent lower than 2009, after the global financial crisis. On the other hand, in response to the devastating economic and social effects of the COVID-19 pandemic, numerous states around the globe have taken measures in support of foreign investment or critical domestic industries in the crisis [3]. Foreign investors may challenge some of these policy measures [4].

In the context of PHEIC, the question that host states and foreign investors will face is whether measures taken by host states in response to COVID-19 will lead to international investment arbitration under the current international investment legal framework. Host states’ various measures may violate substantive provisions such as indirect expropriation and fair and equitable treatment clauses and thus form the basis for foreign investors to seek remedies under the bilateral investment treaties (BITs) [5]. Some scholars are concerned about the potential for an avalanche of investor-state dispute settlement (ISDS) claims by “bad” foreign investors against “good” countries to challenge the regulatory or emergency measures designed to contain COVID-19 [6]. Institutions such as the Columbia Center on Sustainable Investment (CCSI) have called for an immediate moratorium on all arbitration claims by foreign investors against host states through international investment agreements to ensure that the ISDS does not plunge host states into the inevitable fiscal crisis [7]. Nevertheless, contrary arguments suggest that such concerns ignore the possibility of countries relying on other defences in treaties and international law to justify their regulatory responses to COVID-19-related regulatory measures under the current international investment legal framework [8] or even their violations [9].

In terms of the “weapons” available to host states, when a foreign investor challenges the COVID-19-related regulatory measures, the host state may have a justifiable reason under the BIT. If the measures are inconsistent with the obligations established by the relevant substantive provisions in the BITs, another issue arises: does the state have a valid defence? Under the current international investment legal framework, the host state may defend itself by relying on the exception clauses or customary international law [10].

Sustainability may be viewed as a process of sustainable development towards a new normative horizon [11]. The concept of health is regarded as the absence of disease of the public [12]. It is determined by a complicated backdrop of social and economic circumstances, the bio-physical environment and the person’s individual characteristics and behaviours [13]. Health was integrated with sustainability for the first time in 1998, and accordingly sustainability is defined as “the maintenance of health benefits over time” [14]. One of the most elaborate legal reflections is found in the ILA New Delhi Declaration of 2002 on ‘Principles of International Law Relating to Sustainable Development’, which lists seven principles, and the fourth principle is “the principle of the precautionary approach to human health, natural resources, and ecosystems [15].” With the increasing importance of sustainability, actors in the legal field, including stakeholders, legislators, and judges, become practitioners for sustainability and health [16]. It is a common way for them to solve public health and sustainability problems by implementing public-health-related interventions in the form of laws.

As the common sense of international society, sustainable development has been recognized by contemporary international law [17]. The Rio de Janeiro Earth Summit held in 1992 referred to the sustainability and investment in Article 2.23 of Agenda 21: “Investment is critical to the ability of developing countries to achieve needed economic growth to improve the welfare of their populations and to meet their basic needs in a sustainable manner, all without deteriorating or depleting the resource base that underpins development. Sustainable development requires increased investment, for which domestic and external financial resources are needed [18] … ” It is the first initiative in international law instruments to recognize the critical importance of investment to sustainability.

As a branch of the international legal framework, international investment law plays an important role in supporting the sustainability of long-term public health outcomes and global development as a whole. In the past decades, sustainability and the protection of FDI have been addressed in parallel discourses. Several model BITs have placed sustainability at their core and enshrined treaty provisions aimed at achieving sustainable development [19]. However, this trendy shift in treaty drafting is not the mainstream practice. Traditional BITs whose main function is to balance the interests between host states and foreign investors still provide for ambiguous sustainability rules especially regarding the public health. The so-called Cotonou Agreement adopted by the European Community and African, Caribbean, and Pacific States in 2000 mingled sustainable development with a variety of abstract norms such as human rights, rule of law, and good governance.

The COVID-19 pandemic imposes huge burdens on both host state governments and foreign investors. On the one hand, host state government may have to take some actions and measures with public health considerations to lower the risks. On the other hand, foreign investors may have encountered regulatory burdens while continuing to invest. The issue arises whether these burdens borne by foreign investors come at too high a price. Some claim that the current body of international investment law, in particular its application in the context of the COVID-19 pandemic, frustrates the sustainability of host states. The conflicts between them may lead to potential investor-state arbitration cases. The lack of response by the global community on international health obligations may also result in complex disputes [20]. So as better to achieve the overarching objective of sustainability and provide explicit sustainability rules for arbitrators, it is significant to identify and reformulate substantive provisions such as the public health exception clause in BITs. According to UNCTAD, provisions that protect the host country’s right to regulate in the public interest are more conducive to the achievement of sustainability objectives and avoidance of claims that the host country’s legitimate exercise of regulatory powers may interfere with the interests of the investor. In addition, the public health exception clause may safeguard certain sovereign actions that would otherwise be prohibited by the international agreement but which may be necessary to protect vital national security interests or the furtherance of the host state’s obligations under the UN Charter. A major difficulty in the use of a public interest exception provision modelled on Article XX of GATT is that it retains a significant degree of discretion for the adjudicator to determine whether a public policy measure is consistent with the exception [21].

BITs and free trade agreement (FTAs) constitute a suitable and effective approach to enhance the interpretative weight to be accorded to the promotion of sustainability in investor-state arbitration proceedings. Public health except clauses in BITs and FTAs are particularly relevant to achieve the sustainability of FDI and public health in the pandemic context [22].

Against this background, this article will examine the treaty-based defences available to host states against COVID-19-related regulatory measures under the current international investment legal framework and explore possible routes to apply and optimize public health exception clauses.

2. Public Health and Exception Clauses in IIAs

Recently, it is common that free trade agreements or regional trade agreements include provisions or chapters on investment protection. In this article, investment provisions or chapters in free trade agreements or regional trade agreements along with traditional bilateral investment provisions are collectively referred to as International Investment Agreements (IIAs).

2.1. Overview of IIAs

In order to understand the spread of public health exception clauses in IIAs, it is necessary to take a close look at the IIAs. Based on the specific data on all IIAs collected by the UNCTAD International Investment Agreements Navigator, we employed statistical analysis in the following parts to strengthen our arguments. Figure 1 indicates the annual number of IIAs, TIPs and BITs from 1957 to 2021 respectively.

The 1990s saw a dramatic increase in the number of BITs, compared to a relatively small increase in the number of TIPs, with BITs being the preferred choice for concluding IIAs between the countries during this period. In the early 21st century, the number of BITs declined slowly year by year. The number of TIPs in the same period was almost double that of the 1990s. After 2019, following the COVID-19 pandemic, all the IIAs are in the negotiation stage. It is clear that countries have become more interested in concluding multilateral and regional treaties with investment provisions in recent years.

2.2. Exception Clauses in IIAs

The issue behind the challenges of foreign investors against host states is the conflict between investor rights and the right to regulate of host states. Traditional international investment law has pursued investment liberalization and promotion, targeting the liberalization of FDI market entry, elimination of performance requirements, and enhancement of dispute settlement mechanisms, resulting in severe challenges to the right to regulate of host states. The balance of interests is too far in favour of foreign investors when investment disputes arise. The IIAs have changed from a “shield” protecting foreign investors into a “spear” challenging the right to regulate of host states [23].

Recently, an increasing number of IIAs have used the exception clauses as a more operational way of highlighting host states’ right to regulate. Three features characterize this trend. First, the scope of exception clauses has become increasingly broad, extending to public health, labour protection, environmental protection, energy issues, control of particular goods, intellectual property protection, and even human rights protection in a broader sense. Second, there has been a shift from general exception clauses under the WTO system to more specific and targeted exception clauses addressing security and public health per se, which explicitly provide a defence for non-discriminatory regulatory measures imposed by host states against foreign investors. Third, procedural exception clauses have appeared to safeguard substantive exceptions. For instance, Article 9.11 of the China-Australia Free Trade Agreement (ChAFTA) explicitly excludes such measures taken by a Contracting Party in the public interest from being the subject of a claim, and excludes the host state from being referred to in an arbitration [24]. It significantly reduces the likelihood that the host state is subject to investment arbitration.

In the light of recent IIAs, the application of exception clauses in the IIAs or FTAs can be divided into two categories: the first category is a combination with the general exception clauses of the GATT [25]. The possible primary defences to COVID-19 measures under the general exceptions clause are “necessary to protect human, animal or plant life or health” in Article XX of GATT (The main IIAs that have included this exception in recent years are: Armenia-Singapore Agreement on Trade in Services and Investment (2019), Article 3.26 (b); ASEAN-Hong Kong, China SAR Investment Agreement (2017), Article 9.1 (b); Australia-China FTA (2015), Article 5.1 (a)and Article 9.8 (a); Brazil-India BIT (2020), Article 23.1 (b); Burkina Faso-Turkey BIT (2019), Article 5.1 (a); Canada-EU CETA (2016), Article 28.3.1 and 28.3.2 (b); Egypt-Mauritius BIT (2014), Article 13; EU-Singapore Investment Protection Agreement (2018), Article 2.3.3 (b)a; EU-Vietnam Investment Protection Agreement (2019), Article 4.6 (b); PACER plus (2017), Chapter 11, Article 1.5 (b); United Arab Emirates-Uruguay BIT (2018), Article 18.1 (a)). The second category is special provisions for the protection of specific public interests. It differs from the general exceptions due to its specificity and direct relevance, strengthening the host states’ right to regulate. The second category may provide a defence with the public health exception clause.

2.3. Public Health and Exception Clause

In specific investment arbitration cases, the application of the exception clause depends on the specific provisions of the exception clause in the IIAs and the applicable scope of the clause. If there is only one single exception clause in the IIA, it is sufficient to apply it directly; if there are two or more exception clauses in the IIA, the sequence of the application is governed by the fundamental legal principle of lex specialis derogat legi generali. The principle requires the application of more specific and unique rules.

Table 1. Number and application of the exceptions clauses.

Number of Exceptions	Specifics	Application Rules
One single exception clause	Public health exception clause only	Application of the public health exception clause
	General exceptions clause only	Application of the general exceptions clause
	Security exception clause only	Application of security exception clause
Two exception clauses	Public health exception clause + general exceptions clause	Preferred application of public health exception clause
	Public health exceptions + security exception clause	Preferred application of public health exception clause
	General exceptions clause + security exception clause	Preferred application of the security exception clause
Three exception clauses	Public health exception clause + general exceptions clause + security exception clause	The sequence of application of the three: public health exception clause is the first priority, over general exceptions clause and security exception clause

below analyses the application sequence according to exception clauses in IIAs.

Host states attempt to defend measures tackling COVID-19 via the public health exception clause. It is directly linked to the general exceptions clause of the “necessary to protect human, animal or plant life or health” in Article XX of GATT, while the “security interest” in the security exception clause is a superior conception to “public health”. Furthermore, it remains debatable whether the former can cover the latter. Once all three provisions exist in an IIA, the first two, directly addressing public health, should be prioritized. The public health exception clause, which is more specific than the general exception clause, is often included as a paragraph under the clauses such as expropriation and fair and equitable treatment and should therefore take priority over the general exception clause. These three exceptions are interpreted below in the order of their application.

2.3.1. The Temporal Spread of Public Health Exception Clauses

The international society has yet to reach consensus on the public health exception as a standard provision in the field of international investment law, and the number of public health exception clauses is much smaller than that of IIAs.

A new generation of IIAs focuses on the public health exception clause, protecting host states’ relevant regulatory measures by adopting substantive or procedural exception clauses. For instance, the EU-Canada Comprehensive Economic and Trade Agreement (CETA) stipulates that non-discriminatory regulatory measures designed and applied to protect public interests, including public health, do not constitute indirect expropriation except under rare circumstances [26]. Article 9.10.3 (d) of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) stipulates that the contracting parties may achieve a given level or percentage of domestic content to protect human, animal, or plant life or health [27]. Article 12.8 of the Netherlands model BIT of 2019 specifies that non-discriminatory measures designed and applied in good faith to protect public health do not constitute indirect expropriations [28]. The United States-Mexico-Canada Agreement (USMCA) of 2020 contains a similar provision that non-discriminatory regulatory measures designed and implemented by a party to protect public health do not constitute indirect expropriation except in rare circumstances [29]. Apparently, the public health exception clause can directly defend host states to take pandemic-related measures against foreign investors.

According to the UNCTAD International Investment Agreements Navigator, the number of IIAs signed between different countries is 3219, the number of BITs is 2794, of which 2227 are in force, and the number of TIPs (Treaties with Investment Provisions) is 425, of which 333 are in force [30]. According to the UNCTAD International Investment Agreements Navigator’s Mapping of IIA Content, 240 of 2574 BITs and TIPs contain public health exception clauses [31].

Based on the statistics collected by the UNCTAD International Investment Agreements Navigator’s Mapping of IIA Content, Figure 2, Figure 3 and Figure 4 below summarize the changes from 1957 to 2021 in the number and percentage of public health exception clauses in IIAs.

The number of IIAs containing public health exception clauses did not fall along with the decline in the total number of IIAs after increasing in the 1990s. The percentage of IIAs containing public health exception clauses in new IIAs signed each year show a clear upward trend. In particular, after 2007, although the total number of BITs declined, the number of BITs with public health exception clauses increased significantly. It shows that public health exception clauses are included in more newly signed BITs. As the proportion of TIPs in IIAs rises, public health exception clauses in TIPs show an upward trend in both absolute number and percentage, indicating that public health exception clauses are increasingly favoured by parties in the process of negotiating regional trade agreements and free trade agreements.

2.3.2. General Exception Clauses

General exception clauses are exceptions to the protection of the comprehensive general interest of the host state, providing flexibility for host states to implement regulatory measures to protect the public interest and shield host states from legal liability in the event of an investment dispute. It is more often found in IIAs than special exception clauses. UNCTAD is also positive about the argument that these provisions promote consistency between IIAs and other public policy objectives and are more conducive to sustainable development [32]. According to UNCTAD’s statistics, of 29 IIAs concluded in 2018, one has a general clause with a single exception and 19 have general clauses with multiple exceptions [33].

The general exception clause in IIAs refers mainly to the values to be protected in the field of international trade law (Article XX of GATT), including public morals, human, animal, or plant life or health, and compliance with laws or regulations which are inconsistent with the BITs (e.g., Article 28.3.2 (b) of CETA, Article 17.12.1 of RCEP and Article 23.1(b) of Brazil-India BIT all have similar provisions).

2.3.3. Security Exception Clauses

In deglobalization, national security is another critical issue in the international investment arena. Along with the escalating international conflicts between national security and strategic interests, more host states are paying attention to the security exceptions clause in IIAs. The commitment made by the contracting party in the BIT does not prevent the contracting party from taking measures to protect its essential security interests. The content of the security exceptions clause is fundamentally identical. In the Regional Comprehensive Economic Partnership (RCEP), Article 10.15 stipulates that nothing shall be construed to require a contracting party to furnish or allow access to any information, the disclosure of which it determines to be contrary to its essential security interests or prevent a contracting party from taking such measures as they consider necessary to maintain or restore international peace and security, or protect their essential security interests [34].

In international investment disputes arising from regulatory measures taken in response to the COVID-19 pandemic, one of the defences for a host state to claim exemption from liability may be a state of emergency arising from a public health crisis in the state. One of the critical issues in successfully invoking the security exception clause is whether a public health emergency can be considered a vital security interest. Some scholars have explored the possibility of using national security to justify trade barriers during the COVID-19 pandemic in the context of international trade. The question then is whether the COVID-19 pandemic can be another emergency in international relations as expressed in Article XXI of GATT (Security Exceptions) [35]. A good exploration of the specific application of the security exception in international trade law may provide ideas for the application of the security exception in the field of international investment law.

3. Application of Exception Clauses

According to Article 38 of the Statute of the International Court of Justice [36], international conventions are one of the most important sources of international law. Due to the complexity of international conventions, their application depends on their interpretation. Current international investment arbitration has involved many crucial public health issues such as tobacco control and environmental protection. Most exception clauses in international investment law have borrowed from exception clauses under international trade law, which has developed relatively mature provisions on the application of public health exception clauses through typical cases. These cases are helpful references to understand the specific application of exception clauses by host states and arbitral tribunals when tackling disputes arising from COVID-19-related measures. This part will explore the application of three exception clauses in the sequence of their application, and analyse the dilemmas in applying exception clauses in the context of the COVID-19 pandemic.

3.1. Public Health-Related Awards in International Investment Arbitration

While public health has traditionally been concerned with medicine and disease prevention, the scope of public health has expanded in recent years. The WHO is considering covering more topics such as physical environment, communicable disease, emergencies, outbreaks, and pandemics [37]. With the rapid development of the tobacco, energy, chemical, and other industries, arbitral tribunals need to cope with disputes involving public health policy issues. The tension between investor protection and the implementation of public health policy by the host state is not a brand-new issue. However, the COVID-19 pandemic has brought this tension to an unprecedented level. Almost all countries have adopted regulatory measures to address the pandemic [9].

Public health cases in international investment arbitration are mainly based on disputes arising from tobacco control. Since 2010, countries have responded to the Framework Convention on Tobacco Control (FCTC) by implementing tobacco control policies such as packaging and labelling requirements and brand variety restrictions. It has led investors to investment arbitrations against Australia and Uruguay. For instance, in Philip Morris v. Australia, the claim was dismissed at the jurisdictional stage and did not proceed to the merits [38].

Philip Morris v. Uruguay proceeded to the merits. The tribunal had to face the conflict between the public health of the host state and the protection of foreign investors. Unfortunately, the Swiss-Uruguay BIT, the IIA at issue in Philip Morris v. Uruguay, did not contain any exception clauses for public health. The tribunal opted to apply Article 31.3 (c) of the Vienna Convention on the Law of Treaties, invoking customary international law to interpret and apply the fair and equitable treatment and indirect expropriation provisions. Ultimately, it found that Uruguay’s bona fide, reasonable and non-discriminatory measures to protect public health did not violate the Swiss-Uruguay BIT’s expropriation and fair and equitable treatment provisions [39]. The case is instructive in dealing with international investment disputes involving public health policy.

In this case, the WHO and the Pan American Health Organization (PAHO), as amicus curiae, provided critical support to the tribunal’s final award by submitting evidence explaining that Uruguay’s measures were effective and reasonable means of protecting public health. In weighing the evidence, the tribunal tended to respect the views of the WHO and transnational public health organizations to determine whether the measures implemented by the host state were reasonable. It can be inferred that WHO directives or guidelines will influence the tribunal in evaluating the reasonableness of host states’ public health and regulatory measures.

The WHO is the leading organization in response to the global pandemic. Since January 2020, the WHO has called for states to take immediate public health measures (including testing and quarantine) and has issued four warnings against international travel restrictions and trade bans worldwide [40]. The WHO and IMF said that in PHEIC, restrictions on travel and trade would not control the spread of the virus but rather would hinder the transportation of imperative resources and technical support [41]. However, the WHO’s warnings have not been responded to by the countries concerned. They have imposed bans on the export of protective equipment for COVID-19 and measures to restrict the international movement of people, which harm foreign investors and may even have a domino effect leading to further losses. If a foreign investor were to initiate an international investment arbitration as a result, how should the tribunal view the contradiction between the regulatory measures taken by the host state and the measures recommended by the WHO?

In fact, countries signed the International Health Regulations (IHR) with reservations to strike a balance between public health and the retention of ultimate political power. In the IHR, countries can take additional public health measures to obtain the same or more significant public health protection than recommended by the WHO, but the measures taken should not be more restrictive and traumatic than other alternatives that may reasonably exist. However, the IHR does not stipulate how the appropriateness of additional public health measures should be adjudicated, but only that states should base their adoption of additional public health measures on scientific principles and scientific evidence. When scientific evidence is insufficient, it should rely on available information. However, it is within the sovereign power of each state to judge the compatibility or reasonable relationship between additional health measures and scientific principles, scientific evidence, or available information. Under the rules, countries must report to the WHO within 48 h any measures taken outside their collective guidelines and report their reasons. However, during the outbreak of COVID-19, many countries failed to do so.

Furthermore, in response to COVID-19, the WHO has been criticized by various voices for incompetent leadership and even failure in the fight against the pandemic. The Independent Panel for Pandemic Preparedness and Response (IPPPR) in its latest investigation report states that the WHO was not strong enough to do what was expected of it and that its ability to validate reports of outbreaks, determine whether there was pandemic potential, and deploy support resources and contain the pandemic was severely limited [42]. In light of the WHO’s shortcomings in providing accurate and reliable information to its member states, to what extent will arbitral tribunals be able to rely on the WHO’s instructions or opinions in determining whether the host state has reasonably exercised its regulatory measures in the event of an international investment dispute? Especially in Philip Morris v. Uruguay, the tribunal cited the opinions of the WHO and PAHO to justify Uruguay’s tobacco control measures because the WHO Secretariat and PAHO are the official bodies responsible for implementing the FCTC, which means that they have authority in interpreting and applying the FCTC. The COVID-19 pandemic is different from the circumstances in the case of Philip Morris v. Uruguay, and it remains to be seen what role the amicus curiae’s “independent opinion” will play in the substantive deliberations of the arbitration and whether it will substantially influence the tribunal’s review of the host state’s public health regulatory measures.

3.2. Application of Article XX (b) of GATT in the WTO Dispute Settlement Mechanism

Based on the fact that general exception clauses in IIAs often use narration similar to that of Article XX of GATT, WTO Appellate Body involved in the dispute settlement process and international investment arbitration tribunals are all facing the common dilemma of a potential conflict between trade and investment liberalization and the protection of public interest of sovereign states. There are precedents in practice for international investment tribunals to draw on the WTO’s approach to interpreting general exception clauses. For example, in the ICSID case Continental Casualty v. Argentina, the tribunal considered that it would be better to rely on the WTO jurisprudence on Article XX of GATT rather than invoke customary international law to interpret the necessity requirement in Article XI of the US-Argentina BIT (the security exception clause) [43] since the concept and conditions for the application of the necessity requirement are adequately explained in the relevant WTO jurisprudence. In this case, neither the claimant nor the respondent raised any objection to the interpretation of the exception clause in IIAs by invoking the GATT exception clause in the award [44].

Since the 1980s, the Contracting Parties to the GATT have repeatedly invoked Article XX (b) of GATT to rely on the public health exception as a defence to trade restrictions by sovereign states. In a number of cases involving the public health exception, the WTO Panel and the Appellate Body have clarified the method by which this provision has been interpreted and applied, enhancing the operability of the provision. According to the text of Article XX (b) of the GATT and the relevant precedents, the WTO system applies a two-tiered review of the exceptions clauses: first, whether the measure meets the specific requirements of one or more of the exceptions clauses; second, whether the measure meets the requirements of the introductory paragraph (the chapeau of Article XX) [45]. Thus, the successful invocation of the public health exception clause requires that the measures meet both the requirements of the introductory paragraph and the requirement that it be “necessary for the protection of human, animal or plant life or health” as set out in Article XX (b) of GATT. The requirements of the specific exception clause are being human, animal, or plant life or health into “the protection of human, animal or plant life or health” and “necessary to”. As far as the sequence of the review of the introductory paragraph and the specific exceptions clauses are concerned, the Panels have followed a fixed order of review in many cases in accordance with the principle of effectiveness in international law. The exception clause invoking the party’s measures are examined first for the compliance with the requirements of the specific exceptions, and then for compliance with the requirements of the introductory paragraph of Article XX.

This section will focus on the criteria for reviewing specific exceptions by the WTO Panel and the Appellate Body through the four typical cases set out in

Table 2. Typical Cases of Article XX (b).

Case Name and Number	Disputing Parties	Case Process	Typicality	Outcome
Thailand-Restrictions on Importation of and Internal Taxes on Cigarettes DS10/R37S/200	United States v. Thailand	GATT Panel report was adopted on 7 November 1990.	Typical case of invocation of Article XX (b)	Thailand lost the case
United States-Standards for Reformulated and Conventional Gasoline WT/DS2/AB/R	Brazil, Venezuela v. the United States	WTO Appellate Body passed the report on 20 May 1996.	The first WTO case to invoke Article XX (b)	The United States lost the case
EC-Asbestos WT/DS135	Canada v. European Community	WTO Appellate Body passed the report on 11 April 2001.	The first successful case of invoking Article XX (b)	European Community won the case
Indonesia-Chicken WT/DS484/R	Brazil v. Indonesia	The panel report was adopted on 17 October 2017.	The latest WTO case invoking Article XX (b)	Indonesia lostthe case

below and will briefly analyse the “arbitrary or unjustifiable discrimination” requirement in the introductory paragraph of Article XX.

3.2.1. For the Protection of Human Life or Health

Article XX (b) of the GATT requires that the measures taken by the invoking party are for the protection of human life or health. In practice, this requirement is lightly scrutinized. On the one hand, it is within the sovereignty of states to take measures on the basis of different policy objectives. Generally, WTO panels and the Appellate Body do not examine the public policy objective claimed by the member state itself but rather focus on the measure’s necessity to achieve the objective. On the other hand, WTO panels and the Appellate Body tend to rely on the opinions of specialized agencies and intergovernmental organizations. For example, in the Thailand-Cigarettes case, the Panel credited the WHO’s standpoint that “smoking constituted a serious risk to human health” and therefore accepted that the Thai measures fell within the scope of Article XX (b)-“for the protection of human life or health” [46].

In the EC-Asbestos case, both the Panel and the Appellate Body adopted the conclusions of the International Agency for Research on Cancer (IARC) and the WHO that “chrysotile-cement products pose a risk to human life or health” and therefore accepted that the EC measures met the requirement of “for the protection of human life or health” [47].

During the COVID-19 pandemic, quarantine measures including traffic controls, border closures, restrictions on the movement of people and goods, city lockdowns, or the expropriation of private property for quarantine sites or medical treatment were commonly used by host states to reduce the transmission of the virus and adequately safeguard public health [48]. These measures are intended to protect human life or health. It is important to note, however, that as the impact of the pandemic continues, some of the measures implemented by host states may not be directed at public health. The impact of the pandemic on transportation, tourism, and trade has been extremely evident, and the increased demand for medical care has increased the economic burden on individuals, families, and even countries. Many host states have suspended payments for living expenses such as electricity, water, and gas through legislation and executive orders to alleviate economic pressures. For example, El Salvador suspended electricity, internet, and phone bills for three months, froze monthly rental payments, mortgages, and loan payments for three months, and expanded unemployment protections [49]. These are not medical or public health-related measures but measures taken in responses to domestic economic problems arising from the outbreak of the COVID-19 pandemic. If foreign investors contest such measures, it would be far-fetched for the host state to invoke the public health exception clause or paragraph two of the general exception clause, which would require sufficient scientific evidence to prove it or to prove that such measures fall within the scope of other exceptions clauses such as the security exception clause.

3.2.2. Necessity

It is the focus and difficulty of the Panel and Appellate Body to examine whether the relevant controversial measures are necessary to achieve the objective. The WTO dispute settlement body has gradually clarified the review criteria of this issue through several typical cases.

The Thailand-Cigarettes case is a classic example of invoking Article XX (b) in the GATT era. The Panel’s criterion of the “necessity” threshold set the base for subsequent dispute settlement bodies to determine the necessity of the regulatory measure. The Panel in Thailand-Cigarettes case held that if the invoking party could reasonably implement an alternative measure in compliance with or in violation of the GATT, and the alternative measure could also achieve the objective of “protecting human health or life”, then the relevant measures at issue taken by the invoking party could not meet the necessity requirement under Article XX (b) [46].

The EC-Asbestos case was the first case in the WTO era in which Article XX (b) was successfully invoked. The Panel in the case continued to examine the existence of alternative measures. Before this case, the WTO Panel and the Appellate Body had never defined the term “reasonableness” in determining whether a less restrictive measure to international trade was a reasonable alternative measure to achieve the objective. The EC-Asbestos case Panel filled this gap by defining the term “reasonableness” as “whether the alternative measure can be effectively implemented” and stating that it is necessary to take the economic and administrative realities faced by the invoking party into account and comprehensively assess whether the alternative measures can be effectively implemented [47]. In this case, the Appellate Body’s report is a significant development in the review of the necessity of the measure at issue. Drawing on the interpretation of Article XX (d) of the GATT in other cases, the Appellate Body elaborated on the meaning of “necessary” under Article XX (b) of the GATT. The determination of whether a measure is “necessary” requires weighing several factors: first, the importance of public value protected by the measure; second, the effect of the measure on the achievement of the policy objective in question; and third, the extent to which the measure restricts international trade [50]. Specifically, the Appellate Body found that the more critical the public value protected by the measure at issue is, the greater its role in achieving the policy objective in question and the less restrictive its effect on international trade, the more likely the measure would be deemed necessary [47]. This was a positive determination of the measure’s necessity, and the Appellate Body next reviewed whether there were alternative measures that would achieve the objectives equally well and be less trade-restrictive. The EC-Asbestos case Panel introduced “the principle of proportionality” to review the necessity and changed the criterion from “least restrictive” to “weighing relevant factors”, which results in a relatively mature and comprehensive set of criteria, providing a reference for the subsequent handling of related cases. In addition, it is worth mentioning that the Appellate Body, in this case, affirmed in its report that “the value of protecting human life or health is of the highest degree of materiality and importance,” which has led the WTO Dispute Settlement Body to focus on the “degree of contribution” and “degree of restriction” when reviewing the applicability of this provision.

After the EC-Asbestos case, the number of cases involving Article XX (b) of the GATT has gradually increased. The vast majority of them followed the Appellate Body’s criteria of reviewing necessity in the EC-Asbestos case. The latest WTO case invoking Article XX(b) is the Indonesia-Chicken case. The Panel firstly found the importance of the objective pursued by the measure; secondly, it assessed the extent to which the measure contributed to the policy objective, specifically whether it was “effective in reducing risk”, and then considered the extent to which the measure restricts international trade depending on the factual circumstances. The “substantive contribution” of the measure could still be more than trade-restrictive and finally compared the measure at issue with other alternative measures [51].

The invocation of Article XX (b) of the GATT under the WTO system focuses on reviewing the necessity of the measure. Once an international investment dispute arises and the host state invokes the exception clause, the focus and difficulty of the tribunal’s review will inevitably be on the necessity of the measure at issue. For example, the South African government has repeatedly banned the sale of wine nationwide to reduce injuries and illnesses caused by traffic accidents and violent crime and divert more medical resources to treat COVID 19 patients, which has left wine companies in a difficult situation. Several wine industry organizations have questioned the relevance of the ban on the sale of wine in the COVID-19 pandemic [52]. The necessity of the ban on the sale of alcoholic beverages for the “pooling of medical resources for the provision of public health services” has become a point of contention if challenged by foreign investors whose rights have been seriously infringed. In another example, Amazon’s operations in France were severely affected by a French court order to restrict its delivery activities of non-essential goods and to assess the risk of exposure to the COVID-19 virus in all warehouses and among its employees [53].

When examining the need for a measure in dispute, the tribunal needs to weigh relevant factors in the context of the current development of the pandemic to determine whether the measure in dispute is effective in reducing the risk of the spread of the pandemic, improving the efficiency of treatment for the pandemic, and whether there are alternative measures that could achieve the same objectives with a lower degree of impact on foreign investors.

3.2.3. The Introductory Paragraph of Article XX Requirement: “Non-Discrimination”

The general exception clause requires that the invoking party’s measures do not constitute “arbitrary, “unjustified” discrimination between countries under the same conditions, and do not constitute a “disguised restriction on international trade”, as provided in the introductory paragraph of Article XX of the GATT. From a textual point of view, the introductory paragraph of Article XX of the GATT is an expression of the principle of good faith, which prohibits the abuse of rights by member states. This requirement is also linked to national treatment and most-favoured-nation treatment provisions in BITs. Measures taken by host states in response to COVID-19 include many discriminatory policies, especially those aimed at protecting relevant domestic enterprises or industries, including the suspension of loan repayments and the provision of government bailouts, which may expose host states to claims by foreign investors.

The application of Article XX (b) of the GATT will provide a reference for international investment tribunals dealing with disputes arising from regulatory measures taken in response to PHEIC. Although the interpretation and review of the exception clause by arbitral tribunals in the context of COVID-19 is also subject to a high degree of uncertainty, arbitral tribunals have not only referred to WTO adjudication in previous cases, but also applied by analogy the relevant provisions of the Draft Articles on Responsibility of States for Internationally Wrongful Acts. The divergent interpretations by different arbitral tribunals have added uncertainty to this issue. Some scholars have also pointed out that it is too reckless to transplant the review of government measures under the WTO regime to international investment arbitration. International investment tribunals must take into account the fundamental differences between the trade regime and the investment regime when reviewing the necessity of measures. Compared to international trade, foreign investors enjoy a greater degree of liberalization and more flexible means of investment regarding the movement of goods, capital, or intangible assets. However, international investment arbitration is less law-based than the rules of review and interpretation developed by the WTO dispute settlement mechanism through the accumulation of cases over time. IIAs set broad standards rather than specific rules and therefore must be interpreted before they can be applied. Arbitral tribunals will play a key role in interpreting and developing international investment law [54].

Existing international investment arbitration awards seem to suggest tribunals’ positive attitudes towards the host state’s right to protect public health [25]. Confronted with the host state’s defence, the foreign investor may argue that the COVID-19-related measures adopted by the host state were discriminatory. The measures in question were not a bona fide policy to address public health issues. Public health was a pretext to hide protectionism, and the measures adopted by the host state did not mitigate the adverse effects of the pandemic and harmed the investors’ investment interests [5]. The essential requirement for the host state to invoke the clause is compliance with the principle of good faith.

3.3. Invocation of the Security Exception Clause

According to the Human Development Report issued by the United Nations in 1994, the security issues faced by humanity can be classified as economic security, food security, health security, environmental security, personal security, social group security, and political security. As a non-traditional security factor, health security arising from diseases also touches on the life and dignity of individuals (personal security) and undermines economic security, political security, environmental security, and the security of social groups. In September 2020, UN Secretary-General António Guterres warned that the COVID-19 threatens world peace and security [55].

One of the critical issues if a host state wishes to successfully invoke the security exception clause is whether a public health emergency can be a fundamental security interest of a state. The vast majority of scholars consider the security exception clause to be one of the means available to ensure national security, allowing states to retain sovereignty over national security. For example, as the US entered the 21^st century, it linked the economy, education, immigration, infrastructure, science and technology innovation, alternative energy, health care, and federal deficit reduction to US national security, all of which are defined as a set of potential risks to the nation [56].

While traditional national security is a delineation of sovereignty in the context of military conflict, humanity faces a wide range of unknown insecurities that require exceptional responses in broader global challenges such as economic security, cybersecurity, and climate change. It is putting increasing pressures on the application of the security exception clause. The question of “what constitutes an emergency” and “by what criteria should the good faith of states be judged when invoking the exception clause” remains essential [57]. Moreover, in the face of “new threats” and risks to society such as climate change and PHEIC, solutions rely more on a smooth and unhindered demand-supply chain to enable the necessary exchanges. For example, in the case of the COVID-19 pandemic, one of the critical supplies-masks-was sold worldwide [35]. It calls for a re-examination of national security: is the expansion of the security exception clause in the context of “new threats” including PHEIC beneficial, or does it simply extend the concept of “national security” so widely that the function of national security as a “self-judging” measure is diminished?

A most typical application of the security exception clause in international investment arbitration is the ICSID arbitral award in an investment dispute arising from the Argentine financial crisis, which recognized the possibility of invoking the security exception clause in response to non-military threats. It provides greater freedom for host states to take necessary measures to protect public health, particularly in the context of PHEIC [58]. In the Argentine series of cases, the economic interests in the context of the financial crisis were recognized as fundamental security interests by the arbitral tribunal. However, whether other interests of a state, such as political, environmental, and public health interests, are fundamental security interests has not been established in international investment law to date. As Roberto Ago pointed out, the interests that preclude a state from violating an international obligation in order to achieve a fundamental security interest should be the interests that concern the survival of the state, such as interests in the political and economic spheres and in maintaining the proper functioning of basic services, maintaining stability, and ensuring the protection of all or part of the territory of a state.

The response of the WTO Expert Group to the measures taken by Russia about transit in 2019 sent relevant signals to the international community on the application of the security clause. First, the Group’s observations indicate that the term “emergency” under the GATT framework refers to armed conflict or potential armed conflict, tensions, increased crisis, or general instability that envelops or surrounds a country. Second, the measures taken by the state invoking the security exception clause should meet minimum standards of credibility in relation to the interests safeguarded. Third, Member States should clarify the vital security interests arising from the so-called emergency in international relations. The further away from armed conflict the emergency is, the greater the need to clarify the specific circumstances [59]. In general, the Group’s interpretation and the application of the security exception clause is in a narrow sense and in line with the traditional view of the majority of scholars. After all, within the concept of national security, any act can be justifiably “securitized” if an actor successfully claims that extraordinary measures are necessary to deal with the existence of a threat [60]. The generalization of national security negatively affects the stability and normalization of international trade and economic rules and cross-border commercial activities.

While the COVID-19 pandemic has significantly impacted the world economy in recent years, the major economies are experiencing a steep decline in economic growth with a reduction of trade and cross-border investment. The view of the Group in the Russian Transit case is that in order to invoke the defence of the security exception clause successfully, the host state would need to bear the burden of specifying the underlying security interest at stake. The burden of proof is heavy, and the threshold for invocation is relatively high. Whether or not it can be invoked depends on how the arbitral tribunal in a particular case determines whether the pandemic reaches the level of a threat to the vital security interests of a state and the necessity of the measures taken by the host state.

3.4. The Dilemma of Invoking the Exception Clauses in IIAs

Although a significant number of IIAs or trade agreements currently contain exception clauses, the successful invocation of such clauses still faces two significant problems. First, in terms of the number of exception clauses, most IIAs are currently oriented towards economic development, with little attention paid to public health issues. For example, according to the statistics of the UNCTAD Investment Policy Hub, only 163 out of 2337 BITs in force provides for the public health exception clauses by 2020, with a relatively low ratio of about 7% [61]. The security exception or general exception clause is also found in the new generation of IIAs. The absence of exception clauses means that host states are much less likely to invoke the treaty exception clause defence in the event of ISDS arising from COVID-19. Second, in terms of the specific application of the exception clause, there is a high degree of uncertainty as to how an investment tribunal will apply the exception clause in an IIA in the context of the COVID-19 pandemic.

Moreover, the invocation of new generation IIAs or exception clauses in the practice of international investment arbitration is equally unpromising. According to the data from UNCTAD’s observation of international investment dispute cases in 2019, most of the awards rendered in 2019 were based on the older generation IIAs signed in the 1990s or earlier. In none of the cases in 2019 did the host state invoke the general exception clause or the security exception clause [62]. On the one hand, the host states have only a single defence “weapon” when faced with arbitration initiated by a foreign investor and can only claim that the measures they have taken do not violate the substantive provisions of the IIA in the absence of an exception clause in the IIA. On the other hand, the current generation of IIAs is well-developed, with a high degree of maturity of the provisions, giving host states guarantees of their right to regulate, which is the direct result of narrowing the space for foreign investors to challenge host states. However, it also limits the opportunities for tribunals to develop and improve the rules of interpretation of the new generation of IIA provisions in practice.

4. Conclusions

By and large, when combining FDI with sustainability, there is a consensus beyond international law that FDI is one of the key elements contributing to the sustainability of countries, their economies, and societies [63]. However, economic growth, largely premised on the capitalist logic of capital expansion and profit maximization, fails to take sustainability, inclusivity, and fairness into account and leads to an increase in poverty and other immiserations [64]. Nor does international law.

Although international law instruments such as UN reports have repeatedly emphasized on the importance of investment concerning sustainable development, as a fundamental regulatory framework, international investment law still needs to be improved to promote sustainability. The UN Conference on Trade and Development (UNCTAD) made efforts to enhance the sustainable development dimension of international investment policies by placing sustainable development squarely within the purview of the public purpose doctrine [65]. In 2012, all these efforts are framed into the instrument called ‘Investment Policy Framework for Sustainable Development’ which puts forward the view on perceived or real imperfections in the current system of international investment law. Hence, several proposals are found in UNCTAD’s Policy Framework on substantive standards in international investment agreements [66].

In the special context of the COVID-19 pandemic, it is an opportunity to take the public health exception clause as a tool for a possible breakthrough. Amid the continuous impact of the pandemic, the outlook for international investment is highly uncertain, depending on the duration of the global crisis and the effectiveness of policy interventions to mitigate negative economic impacts. With geopolitical and financial risks and ongoing trade tensions adding further uncertainty [67], the vast majority of countries and businesses remain affected by the harmful effects of COVID-19. Although the vaccine has become available and the pandemic more manageable, the possibility of international investment disputes of all kinds cannot be ruled out. Policy makers should reflect on an emerging new development paradigm that places inclusive and sustainable development goals on the same footing as economic growth and development objectives [65]. The host states, foreign investors, and international organizations promoting international investment need to be proactive to prevent the negative impact of the next public health crisis on international investment.

In the face of PHEIC, current investment law still suffers from multiple dilemmas and deficiencies such as insufficient coverage, unclear legal concepts, and difficulties in invoking them [68]. It has been argued that recent awards or decisions in the field of international trade and investment law demonstrate that the principles of treaty interpretation in international law can well be used to deal with disputes arising out of emergencies [69]. However, host states that wish to successfully invoke the exception clauses in IIAs, whether a particular exception clause or a general exception clause, face many difficulties such as the scarcity of exception clauses in the new generation of IIAs.

A host state should be cautious about the risks of introducing pandemic prevention measures, which should be adjusted promptly in response to developments of the pandemic so that regulatory measures are fair, reasonable, and prudent. When formulating COVID-19 policies, attention should be paid to scientific advice from reliable sources to demonstrate that measures are being taken to achieve public health goals. Priority should be given to such measures that have a more significant impact on achieving public health objectives and less impact on international trade or international investment. Given the importance of exception clauses in IIAs, there is a need to include special exception clauses for PHEIC as a means of avoiding being sued by foreign investors due to COVID-19-related regulatory oversight by the host state. Host states are well-advised to adopt appropriate public policies in COVID-19 pandemic scenarios, thereby advocating an eco-philosophy for community [70].