If the previous discussion has demonstrated the importance of preserving state policy space in trade agreements such as ACAFTA, the next question is how such policy space is affected by dispute settlement mechanisms within the international investment regime. In practice, these mechanisms often become a direct point of conflict between public policy objectives and investor protection. This tension is particularly evident in investment disputes in the mining sector, where state decisions intended to protect the public interest instead lead to compensation claims brought by foreign investors through international investment arbitration forums, namely Investor-State Dispute Settlement (ISDS). The relevance of this issue is further heightened by the fact that Canada is among the home states of investors that have been active in ISDS disputes, particularly in the mining and extractive sectors.[1] In Blackfire Exploration v. Mexico, for example, the revocation of a mining permit amid social conflict and allegations of corruption resulted in an investor claim against the state.[2] Although the project faced strong opposition from local communities and was linked to violence against environmental activists, the state still had to confront allegations of breaching investment protection obligations.[3] This dispute illustrates how public policies aimed at addressing social and environmental impacts may be challenged through international investment arbitration. A similar case can be observed in Copper Mesa v. Ecuador, where the government revoked a mining project permit that had faced public opposition from the outset due to threats to land and biodiversity.[4] In its award, the arbitral tribunal acknowledged the company’s misconduct, yet still ordered the state to pay compensation on the basis of a breach of the applicable standard of treatment toward the investor. The award demonstrates that even when public interests are acknowledged, the framework of international investment law may still prioritize investor interests over state policy decisions.[5] These disputes are not exceptions, but rather reflect a structural pattern in the relationship between states and foreign investors.
These disputes indicate that the tension between public policy and investor interests is not merely coincidental, but is closely connected to the design of the international investment regime itself. Within this context, the ISDS mechanism becomes highly relevant to examine, as it enables foreign investors to bring claims directly against host states before international arbitral tribunals.[6] ISDS developed as part of international investment agreements that provide special legal protection for foreign investors. Historically, this mechanism was built upon the assumption that domestic courts in host states may not always be able to provide adequate protection for investors due to limited judicial independence, lengthy proceedings, or legal uncertainty.[7] Under such assumptions, ISDS was positioned as an instrument to enhance legal certainty and promote cross-border investment. However, to date, there is no strong empirical evidence demonstrating that the existence of investment treaties or ISDS mechanisms significantly increases foreign direct investment inflows.[8] Instead, in practice, ISDS has evolved far beyond its original function. Today, ISDS serves as an enforcement mechanism for more than 2,600 international investment agreements, both in the form of bilateral treaties and investment chapters within trade agreements.[9] It grants investors the right to sue states directly without requiring them to first exhaust domestic legal remedies. At the same time, states do not possess an equivalent mechanism to hold investors accountable for breaches of social or environmental obligations. This asymmetry positions ISDS not merely as a dispute settlement forum, but as an instrument of power that directly affects state policy space.[10] Criticism of ISDS has intensified as the number of disputes involving public policy measures has increased, particularly in the natural resources, energy, and environmental sectors. High litigation costs, limited transparency in arbitral proceedings, and the absence of a consistent appellate mechanism generate significant fiscal and policy risks for states.[11] In addition, compensation awarded by arbitral tribunals often includes not only actual losses but also potential future profits, meaning that damages may reach extremely large amounts.[12] Under such conditions, ISDS creates systemic pressure on public policymaking.
These systemic pressures are most evident in investment disputes in the natural resources and mining sectors. These sectors inherently involve broad public interests, ranging from environmental governance, the rights of local and Indigenous communities, to a country’s long-term development policies. At the same time, the mining sector is among those most frequently protected under international investment agreements.[13] Over the past decades, the increasing global demand for critical minerals has further intensified tensions between state public policies and the interests of foreign investors.[14] States are encouraged to open investment access and accelerate resource exploitation, while social and environmental risks are largely borne by communities living in mining areas. Data indicate that between 1987 and 2024 there were at least 139 ISDS cases, representing approximately 10 percent of all cases, linked to various categories of critical minerals, including 51 cases directly related to minerals required for the energy transition.[15] Investors have used ISDS mechanisms to challenge a wide range of state measures, including license revocations, mining moratoria, increased environmental standards, and changes in natural resource governance policies. The conflict between public policy and the international investment regime is also clearly visible in the context of strategic economic policies such as export controls and downstream industrialization policies. For many developing countries, including those in ASEAN, restrictions on raw commodity exports constitute development instruments aimed at promoting domestic processing, increasing value added, and strengthening national industrial structures.[16] However, within the ISDS framework, such measures are often interpreted by investors as violations of the fair and equitable treatment standard or as indirect expropriation. As a result, policies that are substantively legitimate and rational from a development perspective become a significant source of legal risk.
Such risks do not only arise through arbitral awards that disadvantage states, but also through the deterrent effect commonly referred to as regulatory chill. The threat of claims and the potential obligation to pay substantial compensation may cause states to refrain from formulating or implementing strategic policies. In practice, governments may be encouraged to dilute regulations, provide exceptions for certain investors, or extend transition periods in order to avoid disputes.[17] This situation is further aggravated by the presence of sunset clauses in many investment agreements, which extend investor protections for years even after the termination of the treaty.[18] Consequently, efforts to reclaim policy space through treaty termination do not immediately eliminate ISDS risks, but merely postpone them. Furthermore, although it is often argued that public policy exceptions, including environmental exceptions, can serve as safeguards for state regulatory space, arbitral practice indicates that such exceptions are frequently limited and ineffective.[19] Many exception provisions are drafted narrowly or do not apply to investment chapters, thereby providing little substantive protection to states during arbitration. Even when state measures are acknowledged as pursuing legitimate public interests, tribunals may still order the payment of compensation to investors. In this context, public policy exceptions often function as illusory safeguards that fail to address the structural imbalance embedded within the ISDS regime.
Nevertheless, regional and global developments demonstrate that ISDS is not an inevitable feature of international investment law. Several states and trade agreements have begun to reassess or limit the application of ISDS mechanisms on the basis of protecting national policy space. In the ASEAN region, the Regional Comprehensive Economic Partnership (RCEP) explicitly excludes ISDS mechanisms among its member states on the grounds of preserving national regulatory rights.[20] Although Article 10.18 of RCEP opens the possibility of future evaluation of ISDS, civil society actors have consistently urged that ISDS remain excluded from the agreement, arguing that it undermines public policy, burdens state finances, and has not been proven to increase foreign direct investment inflows. In the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which also involves several ASEAN member states, ISDS remains in place, yet its scope has been limited through side letters between certain parties.[21] Outside ASEAN, similar trends can also be observed globally. India has terminated more than 58 bilateral investment treaties, and Pakistan has chosen not to renew a number of expired BITs.[22] Meanwhile, Vietnam has actively supported structural reform of ISDS through the UNCITRAL Working Group III forum.[23] These developments reflect a growing awareness that the design of dispute settlement mechanisms has direct consequences for the ability of states to implement public policies.
In the context of negotiations for modern trade and investment agreements, including ACAFTA, the implications of ISDS for state policy space therefore cannot be treated as a purely technical issue. This becomes increasingly relevant given that ASEAN is Canada’s fourth largest trading partner, with economic interests encompassing access to natural resources, agriculture, manufacturing, and financial services.[24] Within this increasingly intensive economic relationship, investment protection provisions and dispute settlement mechanisms may play a decisive role in shaping the regulatory space of ASEAN states. Moreover, ISDS practice demonstrates that Canadian investors are among the most active users of this mechanism, particularly in disputes related to mining and extractive sectors. This fact confirms that ISDS risks in economic cooperation with Canada are not hypothetical, but rather reflect real precedents within international investment arbitration practice. However, criticism of ISDS should not be understood as an anti-investment stance or as a rejection of international economic cooperation. Instead, the core issue at stake concerns governance, particularly the legal design of investment agreements, the allocation of risks between states and investors, and the balance of power between public authorities and investors. Within the ISDS regime, the protection of investor interests is often institutionalized in a strong and directly enforceable manner, while the obligation of states to protect public interests does not receive an equivalent enforcement mechanism.[25] Investment agreements that include ISDS without adequate limitations tend to shift this balance in favor of investors, at the expense of state policy space and democratic decision-making processes. Therefore, in the context of ACAFTA, the option to exclude ISDS or to significantly restrict its scope may be viewed as part of a broader effort to recalibrate state-corporate relations in a more balanced, accountable, and sustainable development-oriented direction.
[1]Canadian Centre for Policy Alternatives, “Canadian investor-state lawsuits from mining companies threaten environmental policy and sustainable development: study,” CCPA, 19 Mei 2022, tersedia pada https://www.policyalternatives.ca/news-research/canadian-investor-state-lawsuits-from-mining-companies-threaten-environmental-policy-and-sustainable-development-study/, diakses pada 9 Januari 2026.
[2]Jennifer Moore dan Gillian Colgrove, “Corruption, Murder and Canadian Mining in Mexico: The Case of Blackfire Exploration and the Canadian Embassy,” United Steelworkers, Common Frontiers dan MiningWatch Canada (2013), hlm. 30.
[3]Ibid., hlm. 3.
[4]United Nations Conference on Trade and Development, Copper Mesa v. Ecuador (PCA Case No.2012-2).
[5]Gus Van Harten, Investment Treaty Arbitration and Public Law, (New York: Oxford University Press, 2007), hlm. 66
[6]Marta Latek dan Laura Puccio, “Investor-State Dispute Settlement (ISDS) State of play and prospects for reform,” European Parliamentary Research Service, PE 545.736, (2015), hlm. 2.
[7]Ibid.
[8]Sasidaran Gopalan, Cyn-Young Park, dan Ramkishen S. Rajan, “Do International Investment Agreements attract Foreign Direct Investment inflows? Revisiting the literature,” Economic Analysis and Policy, Volume 80, (2023), hlm. 471.
[9]United Nations Conference on Trade and Development, International Investment Agreements Issues Note No. 3: The reform of international investment agreements–state of play, (Geneva: UNCTAD, 2025), hlm. 2
[10]Marta Latek dan Laura Puccio, “Investor-State Dispute Settlement (ISDS) State of play and prospects for reform,” European Parliamentary Research Service, PE 545.736, (2015), hlm. 2.
[11]Ibid., hlm. 5
[12]Borzu Sabahi and Lukas Hoder, “Certainity in Recovery of Damages for Losses to New or Incomplete Businesses – Three Paradigms: Biloune v. Ghana, Gemplus v. Mexico, and Siag v. Egypt,” The Journal of Damages in International Arbitration, Vol. 3, No. 2 (2016), hlm. 106-107
[13]United Nations Conference on Trade and Development, International Investment Agreements Issues Note No. 3: TFacts and Figures on Investor–State Dispute Settlement Cases, (Geneva: UNCTAD, 2024), hlm. 1.
[14]Chaitanya Gupta, “Critical Minerals Explained: Why They Matter for Geopolitics, Clean Energy & Tech,” Harvard Kennedy School Belfer Center, 30 Oktober 2025, tersedia pada https://www.belfercenter.org/explainer-what-are-critical-minerals.
[15]United Nations Conference on Trade and Development (UNCTAD), Recent trends in investor-State arbitration cases, IIA Issues Note, No. 2 (UNCTAD, 2025), hlm. 1.
[16]Andrea Andrenelli, et al., “Trade and domestic effects of export restrictions: Insights from case studies of cobalt, lithium and nickel,” OECD Trade Policy Papers No. 300 (2025), hlm. 6.
[17]Kyla Tienhaara, “Regulatory Chill in a Warming World: The Threat to Climate Policy Posed by Invester-State Dispute Settlement,” Transnational Environmental Law Volume 7, No. 2 (2017), hlm.
[18]Antonios Kouroutakis, Sunset Clauses in International Law and their Consequences for EU Law, (Brussels: European Parliament, 2022), hlm. 7
[19]Julia Dehm, “OECD Public consultation on investment treaties and climate change,” Investment Treaties and Climate Change OECD Public Consultation (2022), hlm. 89
[20]Henry Gao, “The Investment Chapter in the Regional Comprehensive Economic Partnership: Enhanced Rules without Enforcement Mechanism,” dalam F. Kimura, et al., Dynamism of East Asia and RCEP: The Framework for Regional Integration (Jakarta: ERIA, 2022) hlm. 208
[21]Hon David Parker, “New Zealand signs side letters curbing investor-state dispute settlement,” The New Zealand Government, 9 Maret 2018, tersedia pada https://www.beehive.govt.nz/release/new-zealand-signs-side-letters-curbing-investor-state-dispute-settlement, diakses pada 9 Januari 2026
[22]International Institute for Sustainable Development, “Pakistan terminates 23 BITs ,” IISD, 7 Oktober 2021, tersedia pada https://www.iisd.org/itn/2021/10/07/pakistan-terminates-23-bits/, diakses pada 9 Januari 2026
[23]Vietnam Mission to the United Nations, “Viet Nam’s written comments on Draft provisions on procedural and cross-cutting issues,” UNCITRAL, tersedia pada https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/viet_nam_written_comment_on_procedual_isues.pdf, diakses pada 9 Januari 2026
[24]Government of Canada, “Canada and the Association of Southeast Asian Nations (ASEAN),” Government of Canada, 24 Oktober 2025, tersedia pada https://www.international.gc.ca/world-monde/international_relations-relations_internationales/asean/index.aspx?lang=eng, diakses pada 9 Januari 2026.
[25]Kyla Tienharaa, The Expropriation of Environmental Governance: Protecting Foreign Investors at the Expense of Public Policy, (Cambridge: Cambridge University Press, 2009), hlm. 14.