BACKGROUND
The resolution of disputes in international trade and investment has developed through various stages shaped by evolving political, economic, and legal contexts. Early international trade relations, dating back to the mercantilist era and subsequent centuries of global exploration and colonization, largely relied on informal and often inconsistent dispute resolution practices. Merchants and states often resorted to bilateral negotiations, political pressure, or even threats of force to settle conflicts arising from trade. This lack of a structured legal framework undermined predictability and created uncertainties that could impede long-term economic engagement between states and private actors.
In the early 20th century, the international community recognized the need for formal mechanisms to manage disputes peacefully, particularly after the devastation caused by two world wars. The League of Nations, established after World War I, was one of the first attempts to institutionalize dispute resolution among states, including economic disputes. The League’s Covenant encouraged member states to resolve disagreements through conciliation, arbitration, or judicial means, including referral to the Permanent Court of International Justice. However, the League’s approach suffered from significant limitations: it lacked universal membership, had no compulsory jurisdiction, and enforcement of rulings was voluntary. Consequently, its dispute resolution mechanisms were ineffective in preventing conflicts or resolving trade disputes satisfactorily.[1]
The conclusion of World War II prompted a renewed and intensified effort to build a robust system of international economic cooperation, grounded in rule-based dispute resolution. The establishment of the United Nations and the Bretton Woods institutionsthe International Monetary Fund (IMF) and the World Bank, reflected this vision. The General Agreement on Tariffs and Trade (GATT), created in 1947, was pivotal in facilitating multilateral trade liberalization by establishing principles of non-discrimination and tariff reduction. Although GATT had a dispute settlement process, it was largely diplomatic and lacked legally binding decisions. Disputes were generally resolved through consultations and negotiations, often leaving unresolved issues or allowing political considerations to influence outcomes.[2]
A significant breakthrough came with the creation of the World Trade Organization (WTO) in 1995, which succeeded GATT and introduced a comprehensive and binding dispute settlement system. The WTO Dispute Settlement Understanding (DSU) established a quasi-judicial process, which included panel adjudications and an appellate review mechanism. Unlike its predecessor, the DSU provided timelines for dispute resolution, the possibility of binding rulings enforceable through authorized trade sanctions, and enhanced transparency. This represented a fundamental shift towards a rule-based order that fostered stability and predictability in international trade relations. The WTO dispute settlement mechanism is widely regarded as one of the most effective international adjudicatory systems, resolving over 600 disputes since its inception.[3]
Alongside trade dispute resolution, investor-state dispute settlement (ISDS) mechanisms emerged as a vital component of the international economic architecture, particularly with the rise of foreign direct investment (FDI) after World War II. States began to negotiate bilateral investment treaties (BITs) to protect foreign investors from expropriation, discriminatory treatment, and unfair practices. The Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), adopted in 1965, became the cornerstone of ISDS. ICSID established a permanent international forum for arbitration and conciliation between investors and states, providing a neutral venue outside domestic courts. ICSID arbitration became instrumental in depoliticizing investment disputes and enhancing investor confidence in foreign markets.[4]
The ISDS system expanded rapidly with the proliferation of BITs and investment chapters in free trade agreements during the late 20th and early 21st centuries. By the 2010s, thousands of cases had been registered under ICSID and other arbitration rules. However, ISDS faced increasing criticism related to its lack of transparency, high costs, inconsistent rulings, and the potential to constrain states’ regulatory autonomy in areas such as environmental protection, public health, and human rights. These concerns have sparked global debates about reforming ISDS, leading to initiatives such as the UNCITRAL Working Group III on investor-state dispute settlement reform and proposals for multilateral investment courts.
In addition to WTO and ICSID, other dispute resolution frameworks have played important roles in international trade and investment. The United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, first adopted in 1976 and revised subsequently, have become the global standard for international commercial arbitration, offering flexible procedural rules adaptable to diverse disputes. The Permanent Court of Arbitration (PCA), established in 1899 and historically focused on inter-state disputes, has also evolved to administer investor-state arbitrations and complex multiparty disputes, demonstrating adaptability to contemporary challenges.[5]
Regional trade agreements (RTAs) and bilateral treaties increasingly incorporate their own dispute settlement provisions, often complementing or diverging from WTO and ICSID rules. These include entities such as the North American Free Trade Agreement (NAFTA)/United States-Mexico-Canada Agreement (USMCA), the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union, and various Asia-Pacific frameworks. The proliferation of such agreements has increased access to dispute resolution but also introduced questions about forum shopping, overlapping jurisdictions, and the coherence of international economic law.
Overall, the historical development of dispute resolution mechanisms in international trade and investment illustrates an ongoing quest for effective, fair, and enforceable processes that balance the interests of states, investors, and the broader international community. The journey from informal diplomacy to institutionalized, rule-based systems reflects broader trends toward legal globalization and the importance of safeguarding international economic cooperation amid political and economic complexities.
[1] John H. Jackson, The World Trading System: Law and Policy of International Economic Relations (MIT Press, 1997) 44–47.
[2] Ibid 57–60.
[3] World Trade Organization, Understanding the WTO: The Agreements (Geneva: WTO, 2015) 23–29; James Bacchus, ‘The WTO Dispute Settlement System: The First Ten Years’ (2005) 4 J World Investment & Trade 287.
[4] Christoph Schreuer, The ICSID Convention: A Commentary (2nd edn, Cambridge University Press, 2009) 10–18.
[5] Albert Jan van den Berg, ‘The History of the Permanent Court of Arbitration’ (2014) 30 Arbitration International 175, 178–180.