Beyond ‘Once BITten, Twice Shy’: defending the legitimacy of investor-state dispute settlement in Peru and Australia

Abstract

Investment protection is a contentious issue in trade and investment negotiations due in large part to controversy surrounding investor-state dispute settlement (ISDS). Governments have taken a range of positions on ISDS—from opposing moderate reforms to the system to the outright rejection of it. Extant research suggests that countries which experience costly investor claims are more likely to be circumspect about it. Case studies of Australia and Peru demonstrate that other factors must be considered. Both countries experienced investor claims but governments continued to act as ‘pragmatic proponents’ of the system. We show how interest groups and experts shape government preferences by reinforcing the legitimacy of ISDS in the face of contestation. In both cases, domestic actors framed ISDS as low risk; promoting good governance through regulatory chill; and protecting public interests through the promotion of business, which outweighed the costs of participation. Despite the lack of empirical evidence supporting these claims, they were persuasive because interest groups played on embedded ideas about the merits of market-led development and the economic utility of the mechanism. However, we predict that the influence of pro-ISDS actors will vary over time depending on their access to bureaucratic and political decision-making centres.