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Citation: Qu, G.; Shen, W. Public

Health and Investment Protection in

the Context of the COVID-19

Pandemic—From the Sustainable

Perspective of Exception Clauses.

Sustainability 2022, 14, 6523. https://

doi.org/10.3390/su14116523

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Received: 30 April 2022

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sustainability

Article

Public Health and Investment Protection in the Context of theCOVID-19 Pandemic—From the Sustainable Perspective ofException ClausesGuangyi Qu 1 and Wei Shen 2,*

1 School of Law, Shandong University, Qingdao 266237, China; [email protected] School of Law, Shanghai Jiao Tong University, Shanghai 200030, China* Correspondence: [email protected]

Abstract: In response to the COVID-19 pandemic, various preventive and controlling measureshave been taken by host states but may damage the interests of foreign investors and consequentlyresult in international investment disputes. Confronted with potential international investmentarbitration, 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 wheninvestment arbitration takes place and investment arbitral tribunals interpret it. In the internationalsociety, sustainable development has gradually been recognized as a key principle in contemporaryinternational law. Against this background, in the context of international investment, it is appropriatefor host states to optimize the exception clauses in BITs or FTAs, thereby reducing the risk ofarbitration concerning the host state’s regulatory measures to protect the public from the pandemic.

Keywords: COVID-19 pandemic; sustainability; public health exception clauses; internationalinvestment agreements

1. Introduction

On 30 January 2020, the World Health Organization (WHO) declared that the outbreakof 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 directinvestment (FDI) flows have declined significantly worldwide. According to the WorldInvestment Report 2021 published by the United Nations Conference on Trade and De-velopment (UNCTAD), FDI flows fell by 35 per cent in 2020. This was the lowest levelsince 2005 and almost 20 per cent lower than 2009, after the global financial crisis. On theother hand, in response to the devastating economic and social effects of the COVID-19pandemic, numerous states around the globe have taken measures in support of foreigninvestment or critical domestic industries in the crisis [3]. Foreign investors may challengesome of these policy measures [4].

In the context of PHEIC, the question that host states and foreign investors will face iswhether measures taken by host states in response to COVID-19 will lead to internationalinvestment arbitration under the current international investment legal framework. Hoststates’ various measures may violate substantive provisions such as indirect expropriationand fair and equitable treatment clauses and thus form the basis for foreign investors toseek remedies under the bilateral investment treaties (BITs) [5]. Some scholars are con-cerned about the potential for an avalanche of investor-state dispute settlement (ISDS)claims by “bad” foreign investors against “good” countries to challenge the regulatory oremergency measures designed to contain COVID-19 [6]. Institutions such as the ColumbiaCenter on Sustainable Investment (CCSI) have called for an immediate moratorium on

Sustainability 2022, 14, 6523. https://doi.org/10.3390/su14116523 https://www.mdpi.com/journal/sustainability

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all arbitration claims by foreign investors against host states through international invest-ment agreements to ensure that the ISDS does not plunge host states into the inevitablefiscal crisis [7]. Nevertheless, contrary arguments suggest that such concerns ignore thepossibility of countries relying on other defences in treaties and international law to justifytheir regulatory responses to COVID-19-related regulatory measures under the currentinternational investment legal framework [8] or even their violations [9].

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

Sustainability may be viewed as a process of sustainable development towards anew normative horizon [11]. The concept of health is regarded as the absence of diseaseof the public [12]. It is determined by a complicated backdrop of social and economiccircumstances, the bio-physical environment and the person’s individual characteristicsand behaviours [13]. Health was integrated with sustainability for the first time in 1998, andaccordingly 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 of2002 on ‘Principles of International Law Relating to Sustainable Development’, which listsseven principles, and the fourth principle is “the principle of the precautionary approachto human health, natural resources, and ecosystems [15].” With the increasing importanceof 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 tosolve public health and sustainability problems by implementing public-health-relatedinterventions in the form of laws.

As the common sense of international society, sustainable development has beenrecognized by contemporary international law [17]. The Rio de Janeiro Earth Summitheld 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 economicgrowth to improve the welfare of their populations and to meet their basic needs in asustainable manner, all without deteriorating or depleting the resource base that underpinsdevelopment. Sustainable development requires increased investment, for which domesticand external financial resources are needed [18] . . . ” It is the first initiative in internationallaw instruments to recognize the critical importance of investment to sustainability.

As a branch of the international legal framework, international investment law playsan important role in supporting the sustainability of long-term public health outcomes andglobal development as a whole. In the past decades, sustainability and the protection of FDIhave been addressed in parallel discourses. Several model BITs have placed sustainability attheir core and enshrined treaty provisions aimed at achieving sustainable development [19].However, this trendy shift in treaty drafting is not the mainstream practice. Traditional BITswhose main function is to balance the interests between host states and foreign investorsstill 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 ofabstract norms such as human rights, rule of law, and good governance.

The COVID-19 pandemic imposes huge burdens on both host state governments andforeign investors. On the one hand, host state government may have to take some actionsand 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 aprice. Some claim that the current body of international investment law, in particular itsapplication in the context of the COVID-19 pandemic, frustrates the sustainability of hoststates. The conflicts between them may lead to potential investor-state arbitration cases.

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The lack of response by the global community on international health obligations mayalso result in complex disputes [20]. So as better to achieve the overarching objective ofsustainability and provide explicit sustainability rules for arbitrators, it is significant toidentify and reformulate substantive provisions such as the public health exception clausein BITs. According to UNCTAD, provisions that protect the host country’s right to regulatein the public interest are more conducive to the achievement of sustainability objectivesand avoidance of claims that the host country’s legitimate exercise of regulatory powersmay interfere with the interests of the investor. In addition, the public health exceptionclause may safeguard certain sovereign actions that would otherwise be prohibited bythe international agreement but which may be necessary to protect vital national securityinterests or the furtherance of the host state’s obligations under the UN Charter. A majordifficulty in the use of a public interest exception provision modelled on Article XX ofGATT is that it retains a significant degree of discretion for the adjudicator to determinewhether a public policy measure is consistent with the exception [21].

BITs and free trade agreement (FTAs) constitute a suitable and effective approachto enhance the interpretative weight to be accorded to the promotion of sustainability ininvestor-state arbitration proceedings. Public health except clauses in BITs and FTAs areparticularly relevant to achieve the sustainability of FDI and public health in the pandemiccontext [22].

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

2. Public Health and Exception Clauses in IIAs

Recently, it is common that free trade agreements or regional trade agreements includeprovisions or chapters on investment protection. In this article, investment provisionsor chapters in free trade agreements or regional trade agreements along with traditionalbilateral investment provisions are collectively referred to as International InvestmentAgreements (IIAs).

2.1. Overview of IIAs

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

Figure 1. The Number of IIAs from 1957 to 2021.

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The 1990s saw a dramatic increase in the number of BITs, compared to a relativelysmall increase in the number of TIPs, with BITs being the preferred choice for concludingIIAs between the countries during this period. In the early 21st century, the number ofBITs declined slowly year by year. The number of TIPs in the same period was almostdouble that of the 1990s. After 2019, following the COVID-19 pandemic, all the IIAs are inthe negotiation stage. It is clear that countries have become more interested in concludingmultilateral 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 conflictbetween investor rights and the right to regulate of host states. Traditional internationalinvestment law has pursued investment liberalization and promotion, targeting the liberal-ization of FDI market entry, elimination of performance requirements, and enhancement ofdispute settlement mechanisms, resulting in severe challenges to the right to regulate ofhost states. The balance of interests is too far in favour of foreign investors when investmentdisputes 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 moreoperational way of highlighting host states’ right to regulate. Three features characterizethis trend. First, the scope of exception clauses has become increasingly broad, extendingto public health, labour protection, environmental protection, energy issues, control ofparticular goods, intellectual property protection, and even human rights protection ina broader sense. Second, there has been a shift from general exception clauses underthe WTO system to more specific and targeted exception clauses addressing security andpublic health per se, which explicitly provide a defence for non-discriminatory regulatorymeasures imposed by host states against foreign investors. Third, procedural exceptionclauses have appeared to safeguard substantive exceptions. For instance, Article 9.11 ofthe China-Australia Free Trade Agreement (ChAFTA) explicitly excludes such measurestaken by a Contracting Party in the public interest from being the subject of a claim, andexcludes the host state from being referred to in an arbitration [24]. It significantly reducesthe 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 canbe divided into two categories: the first category is a combination with the general exceptionclauses of the GATT [25]. The possible primary defences to COVID-19 measures under thegeneral 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 28.3.1and 28.3.2 (b); Egypt-Mauritius BIT (2014), Article 13; EU-Singapore Investment ProtectionAgreement (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 theprotection of specific public interests. It differs from the general exceptions due to itsspecificity and direct relevance, strengthening the host states’ right to regulate. The secondcategory 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 dependson the specific provisions of the exception clause in the IIAs and the applicable scope ofthe clause. If there is only one single exception clause in the IIA, it is sufficient to applyit directly; if there are two or more exception clauses in the IIA, the sequence of theapplication is governed by the fundamental legal principle of lex specialis derogat legi generali.

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The principle requires the application of more specific and unique rules. Table 1 belowanalyses the application sequence according to exception clauses in IIAs.

Table 1. Number and application of the exceptions clauses.

Number ofExceptions Specifics Application Rules

One single exception clausePublic health exception clause only Application of the public health exception clause

General exceptions clause only Application of the general exceptions clauseSecurity exception clause only Application of security exception clause

Two exception clauses

Public health exception clause+ general exceptions clause

Preferred application ofpublic health exception clause

Public health exceptions+ security exception clause

Preferred application ofpublic health exception clause

General exceptions clause+ security exception clause

Preferred application ofthe security exception clause

Three exception clausesPublic health exception clause

+ general exceptions clause+ security exception clause

The sequence of application of the three: public healthexception clause is the first priority, over generalexceptions clause and security exception clause

Host states attempt to defend measures tackling COVID-19 via the public health excep-tion clause. It is directly linked to the general exceptions clause of the “necessary to protecthuman, 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, itremains debatable whether the former can cover the latter. Once all three provisions existin an IIA, the first two, directly addressing public health, should be prioritized. The publichealth exception clause, which is more specific than the general exception clause, is oftenincluded as a paragraph under the clauses such as expropriation and fair and equitabletreatment and should therefore take priority over the general exception clause. These threeexceptions 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 asa standard provision in the field of international investment law, and the number of publichealth exception clauses is much smaller than that of IIAs.

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

According to the UNCTAD International Investment Agreements Navigator, thenumber of IIAs signed between different countries is 3219, the number of BITs is 2794, ofwhich 2227 are in force, and the number of TIPs (Treaties with Investment Provisions) is425, of which 333 are in force [30]. According to the UNCTAD International Investment

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Agreements Navigator’s Mapping of IIA Content, 240 of 2574 BITs and TIPs contain publichealth exception clauses [31].

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

Figure 2. IIAs with Public Health Exception Clauses from 1957 to 2021.

Figure 3. BITs with Public Health Exception Clauses from 1957 to 2021.

The number of IIAs containing public health exception clauses did not fall along withthe decline in the total number of IIAs after increasing in the 1990s. The percentage ofIIAs containing public health exception clauses in new IIAs signed each year show a clearupward trend. In particular, after 2007, although the total number of BITs declined, thenumber of BITs with public health exception clauses increased significantly. It shows thatpublic health exception clauses are included in more newly signed BITs. As the proportionof TIPs in IIAs rises, public health exception clauses in TIPs show an upward trend inboth absolute number and percentage, indicating that public health exception clauses are

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increasingly favoured by parties in the process of negotiating regional trade agreementsand free trade agreements.

Figure 4. TIPs with Public Health Exception Clauses from 1957 to 2021.

2.3.2. General Exception Clauses

General exception clauses are exceptions to the protection of the comprehensivegeneral interest of the host state, providing flexibility for host states to implement regulatorymeasures to protect the public interest and shield host states from legal liability in the eventof 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 consistencybetween IIAs and other public policy objectives and are more conducive to sustainabledevelopment [32]. According to UNCTAD’s statistics, of 29 IIAs concluded in 2018, onehas a general clause with a single exception and 19 have general clauses with multipleexceptions [33].

The general exception clause in IIAs refers mainly to the values to be protectedin 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 whichare inconsistent with the BITs (e.g., Article 28.3.2 (b) of CETA, Article 17.12.1 of RCEP andArticle 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 in-vestment arena. Along with the escalating international conflicts between national securityand strategic interests, more host states are paying attention to the security exceptionsclause in IIAs. The commitment made by the contracting party in the BIT does not pre-vent the contracting party from taking measures to protect its essential security interests.The content of the security exceptions clause is fundamentally identical. In the RegionalComprehensive Economic Partnership (RCEP), Article 10.15 stipulates that nothing shall beconstrued to require a contracting party to furnish or allow access to any information, thedisclosure of which it determines to be contrary to its essential security interests or preventa contracting party from taking such measures as they consider necessary to maintain orrestore international peace and security, or protect their essential security interests [34].

In international investment disputes arising from regulatory measures taken in re-sponse to the COVID-19 pandemic, one of the defences for a host state to claim exemptionfrom liability may be a state of emergency arising from a public health crisis in the state.

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One of the critical issues in successfully invoking the security exception clause is whethera public health emergency can be considered a vital security interest. Some scholarshave explored the possibility of using national security to justify trade barriers during theCOVID-19 pandemic in the context of international trade. The question then is whetherthe COVID-19 pandemic can be another emergency in international relations as expressedin Article XXI of GATT (Security Exceptions) [35]. A good exploration of the specificapplication of the security exception in international trade law may provide ideas for theapplication 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], interna-tional conventions are one of the most important sources of international law. Due to thecomplexity of international conventions, their application depends on their interpretation.Current international investment arbitration has involved many crucial public health issuessuch as tobacco control and environmental protection. Most exception clauses in interna-tional investment law have borrowed from exception clauses under international tradelaw, which has developed relatively mature provisions on the application of public healthexception clauses through typical cases. These cases are helpful references to understandthe specific application of exception clauses by host states and arbitral tribunals whentackling disputes arising from COVID-19-related measures. This part will explore theapplication of three exception clauses in the sequence of their application, and analyse thedilemmas 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 pre-vention, the scope of public health has expanded in recent years. The WHO is consideringcovering more topics such as physical environment, communicable disease, emergencies,outbreaks, and pandemics [37]. With the rapid development of the tobacco, energy, chem-ical, and other industries, arbitral tribunals need to cope with disputes involving publichealth policy issues. The tension between investor protection and the implementation ofpublic health policy by the host state is not a brand-new issue. However, the COVID-19pandemic has brought this tension to an unprecedented level. Almost all countries haveadopted regulatory measures to address the pandemic [9].

Public health cases in international investment arbitration are mainly based on dis-putes arising from tobacco control. Since 2010, countries have responded to the FrameworkConvention on Tobacco Control (FCTC) by implementing tobacco control policies such aspackaging and labelling requirements and brand variety restrictions. It has led investors toinvestment 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 themerits [38].

Philip Morris v. Uruguay proceeded to the merits. The tribunal had to face theconflict 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 notcontain 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 tointerpret and apply the fair and equitable treatment and indirect expropriation provisions.Ultimately, it found that Uruguay’s bona fide, reasonable and non-discriminatory measuresto protect public health did not violate the Swiss-Uruguay BIT’s expropriation and fair andequitable treatment provisions [39]. The case is instructive in dealing with internationalinvestment disputes involving public health policy.

In this case, the WHO and the Pan American Health Organization (PAHO), as amicuscuriae, provided critical support to the tribunal’s final award by submitting evidenceexplaining that Uruguay’s measures were effective and reasonable means of protectingpublic health. In weighing the evidence, the tribunal tended to respect the views of the

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WHO and transnational public health organizations to determine whether the measuresimplemented by the host state were reasonable. It can be inferred that WHO directives orguidelines will influence the tribunal in evaluating the reasonableness of host states’ publichealth and regulatory measures.

The WHO is the leading organization in response to the global pandemic. SinceJanuary 2020, the WHO has called for states to take immediate public health measures(including testing and quarantine) and has issued four warnings against internationaltravel 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 wouldhinder the transportation of imperative resources and technical support [41]. However,the WHO’s warnings have not been responded to by the countries concerned. Theyhave imposed bans on the export of protective equipment for COVID-19 and measuresto restrict the international movement of people, which harm foreign investors and mayeven have a domino effect leading to further losses. If a foreign investor were to initiatean international investment arbitration as a result, how should the tribunal view thecontradiction between the regulatory measures taken by the host state and the measuresrecommended by the WHO?

In fact, countries signed the International Health Regulations (IHR) with reservationsto strike a balance between public health and the retention of ultimate political power. Inthe IHR, countries can take additional public health measures to obtain the same or moresignificant public health protection than recommended by the WHO, but the measurestaken should not be more restrictive and traumatic than other alternatives that may rea-sonably exist. However, the IHR does not stipulate how the appropriateness of additionalpublic health measures should be adjudicated, but only that states should base their adop-tion 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 rela-tionship between additional health measures and scientific principles, scientific evidence,or available information. Under the rules, countries must report to the WHO within 48 hany 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 voicesfor incompetent leadership and even failure in the fight against the pandemic. The Inde-pendent Panel for Pandemic Preparedness and Response (IPPPR) in its latest investigationreport states that the WHO was not strong enough to do what was expected of it and that itsability to validate reports of outbreaks, determine whether there was pandemic potential,and deploy support resources and contain the pandemic was severely limited [42]. In lightof the WHO’s shortcomings in providing accurate and reliable information to its memberstates, to what extent will arbitral tribunals be able to rely on the WHO’s instructions oropinions in determining whether the host state has reasonably exercised its regulatorymeasures in the event of an international investment dispute? Especially in Philip Morrisv. Uruguay, the tribunal cited the opinions of the WHO and PAHO to justify Uruguay’stobacco control measures because the WHO Secretariat and PAHO are the official bodiesresponsible for implementing the FCTC, which means that they have authority in interpret-ing and applying the FCTC. The COVID-19 pandemic is different from the circumstancesin the case of Philip Morris v. Uruguay, and it remains to be seen what role the amicuscuriae’s “independent opinion” will play in the substantive deliberations of the arbitrationand whether it will substantially influence the tribunal’s review of the host state’s publichealth 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 tothat of Article XX of GATT, WTO Appellate Body involved in the dispute settlement processand international investment arbitration tribunals are all facing the common dilemma of a

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potential conflict between trade and investment liberalization and the protection of publicinterest of sovereign states. There are precedents in practice for international investmenttribunals to draw on the WTO’s approach to interpreting general exception clauses. Forexample, in the ICSID case Continental Casualty v. Argentina, the tribunal consideredthat it would be better to rely on the WTO jurisprudence on Article XX of GATT ratherthan invoke customary international law to interpret the necessity requirement in ArticleXI of the US-Argentina BIT (the security exception clause) [43] since the concept andconditions for the application of the necessity requirement are adequately explained in therelevant WTO jurisprudence. In this case, neither the claimant nor the respondent raisedany objection to the interpretation of the exception clause in IIAs by invoking the GATTexception clause in the award [44].

Since the 1980s, the Contracting Parties to the GATT have repeatedly invoked ArticleXX (b) of GATT to rely on the public health exception as a defence to trade restrictionsby sovereign states. In a number of cases involving the public health exception, the WTOPanel and the Appellate Body have clarified the method by which this provision has beeninterpreted and applied, enhancing the operability of the provision. According to the textof Article XX (b) of the GATT and the relevant precedents, the WTO system applies atwo-tiered review of the exceptions clauses: first, whether the measure meets the specificrequirements of one or more of the exceptions clauses; second, whether the measure meetsthe requirements of the introductory paragraph (the chapeau of Article XX) [45]. Thus,the successful invocation of the public health exception clause requires that the measuresmeet 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 ArticleXX (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 thespecific exceptions clauses are concerned, the Panels have followed a fixed order of reviewin many cases in accordance with the principle of effectiveness in international law. Theexception clause invoking the party’s measures are examined first for the compliance withthe requirements of the specific exceptions, and then for compliance with the requirementsof the introductory paragraph of Article XX.

This section will focus on the criteria for reviewing specific exceptions by the WTOPanel and the Appellate Body through the four typical cases set out in Table 2 belowand will briefly analyse the “arbitrary or unjustifiable discrimination” requirement in theintroductory paragraph of Article XX.

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

Case Name and Number Disputing Parties Case Process Typicality Outcome

Thailand-Restrictions onImportation of and Internal

Taxes on CigarettesDS10/R37S/200

United States v. ThailandGATT Panel report was

adopted on7 November 1990.

Typical case of invocationof Article XX (b) Thailand lost the case

United States-Standards forReformulated

and Conventional GasolineWT/DS2/AB/R

Brazil, Venezuela v. theUnited States

WTO Appellate Bodypassed the report on

20 May 1996.

The first WTO case toinvoke Article XX (b)

The United States lostthe case

EC-Asbestos WT/DS135 Canada v. EuropeanCommunity

WTO Appellate Bodypassed the report on

11 April 2001.

The first successful case ofinvoking Article XX (b)

European Communitywon the case

Indonesia-ChickenWT/DS484/R Brazil v. Indonesia

The panel report wasadopted on

17 October 2017.

The latest WTO caseinvoking Article XX (b) Indonesia lostthe case

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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 partyare for the protection of human life or health. In practice, this requirement is lightlyscrutinized. On the one hand, it is within the sovereignty of states to take measureson the basis of different policy objectives. Generally, WTO panels and the AppellateBody do not examine the public policy objective claimed by the member state itself butrather focus on the measure’s necessity to achieve the objective. On the other hand, WTOpanels and the Appellate Body tend to rely on the opinions of specialized agencies andintergovernmental organizations. For example, in the Thailand-Cigarettes case, the Panelcredited 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)-“forthe protection of human life or health” [46].

In the EC-Asbestos case, both the Panel and the Appellate Body adopted the con-clusions 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 thatthe 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 theexpropriation of private property for quarantine sites or medical treatment were commonlyused by host states to reduce the transmission of the virus and adequately safeguard publichealth [48]. These measures are intended to protect human life or health. It is importantto note, however, that as the impact of the pandemic continues, some of the measuresimplemented by host states may not be directed at public health. The impact of the pan-demic on transportation, tourism, and trade has been extremely evident, and the increaseddemand for medical care has increased the economic burden on individuals, families, andeven countries. Many host states have suspended payments for living expenses such aselectricity, water, and gas through legislation and executive orders to alleviate economicpressures. For example, El Salvador suspended electricity, internet, and phone bills forthree months, froze monthly rental payments, mortgages, and loan payments for threemonths, and expanded unemployment protections [49]. These are not medical or publichealth-related measures but measures taken in responses to domestic economic problemsarising from the outbreak of the COVID-19 pandemic. If foreign investors contest suchmeasures, it would be far-fetched for the host state to invoke the public health exceptionclause or paragraph two of the general exception clause, which would require sufficientscientific evidence to prove it or to prove that such measures fall within the scope of otherexceptions 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 therelevant controversial measures are necessary to achieve the objective. The WTO disputesettlement body has gradually clarified the review criteria of this issue through severaltypical cases.

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

The EC-Asbestos case was the first case in the WTO era in which Article XX (b) was suc-cessfully invoked. The Panel in the case continued to examine the existence of alternativemeasures. Before this case, the WTO Panel and the Appellate Body had never defined theterm “reasonableness” in determining whether a less restrictive measure to international

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trade was a reasonable alternative measure to achieve the objective. The EC-Asbestos casePanel filled this gap by defining the term “reasonableness” as “whether the alternative mea-sure can be effectively implemented” and stating that it is necessary to take the economicand administrative realities faced by the invoking party into account and comprehensivelyassess 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 ofthe measure at issue. Drawing on the interpretation of Article XX (d) of the GATT in othercases, 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 weighingseveral factors: first, the importance of public value protected by the measure; second, theeffect of the measure on the achievement of the policy objective in question; and third, theextent to which the measure restricts international trade [50]. Specifically, the AppellateBody found that the more critical the public value protected by the measure at issue is, thegreater its role in achieving the policy objective in question and the less restrictive its effecton international trade, the more likely the measure would be deemed necessary [47]. Thiswas a positive determination of the measure’s necessity, and the Appellate Body next re-viewed whether there were alternative measures that would achieve the objectives equallywell and be less trade-restrictive. The EC-Asbestos case Panel introduced “the principle ofproportionality” to review the necessity and changed the criterion from “least restrictive” to“weighing relevant factors”, which results in a relatively mature and comprehensive set ofcriteria, providing a reference for the subsequent handling of related cases. In addition, it isworth mentioning that the Appellate Body, in this case, affirmed in its report that “the valueof 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 GATThas gradually increased. The vast majority of them followed the Appellate Body’s criteriaof 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 objectivepursued by the measure; secondly, it assessed the extent to which the measure contributedto the policy objective, specifically whether it was “effective in reducing risk”, and thenconsidered the extent to which the measure restricts international trade depending on thefactual circumstances. The “substantive contribution” of the measure could still be morethan trade-restrictive and finally compared the measure at issue with other alternativemeasures [51].

The invocation of Article XX (b) of the GATT under the WTO system focuses onreviewing the necessity of the measure. Once an international investment dispute arisesand the host state invokes the exception clause, the focus and difficulty of the tribunal’sreview will inevitably be on the necessity of the measure at issue. For example, theSouth African government has repeatedly banned the sale of wine nationwide to reduceinjuries and illnesses caused by traffic accidents and violent crime and divert more medicalresources 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 saleof wine in the COVID-19 pandemic [52]. The necessity of the ban on the sale of alcoholicbeverages 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 beenseriously infringed. In another example, Amazon’s operations in France were severelyaffected by a French court order to restrict its delivery activities of non-essential goodsand to assess the risk of exposure to the COVID-19 virus in all warehouses and among itsemployees [53].

When examining the need for a measure in dispute, the tribunal needs to weighrelevant factors in the context of the current development of the pandemic to determinewhether the measure in dispute is effective in reducing the risk of the spread of thepandemic, improving the efficiency of treatment for the pandemic, and whether there are

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alternative measures that could achieve the same objectives with a lower degree of impacton 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 consti-tute “arbitrary, “unjustified” discrimination between countries under the same conditions,and do not constitute a “disguised restriction on international trade”, as provided in theintroductory paragraph of Article XX of the GATT. From a textual point of view, the intro-ductory 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 tonational treatment and most-favoured-nation treatment provisions in BITs. Measures takenby host states in response to COVID-19 include many discriminatory policies, especiallythose aimed at protecting relevant domestic enterprises or industries, including the suspen-sion of loan repayments and the provision of government bailouts, which may expose hoststates to claims by foreign investors.

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

Existing international investment arbitration awards seem to suggest tribunals’ pos-itive attitudes towards the host state’s right to protect public health [25]. Confrontedwith the host state’s defence, the foreign investor may argue that the COVID-19-relatedmeasures adopted by the host state were discriminatory. The measures in question werenot a bona fide policy to address public health issues. Public health was a pretext to hideprotectionism, and the measures adopted by the host state did not mitigate the adverseeffects of the pandemic and harmed the investors’ investment interests [5]. The essentialrequirement for the host state to invoke the clause is compliance with the principle ofgood 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 politicalsecurity. As a non-traditional security factor, health security arising from diseases alsotouches on the life and dignity of individuals (personal security) and undermines economicsecurity, political security, environmental security, and the security of social groups. InSeptember 2020, UN Secretary-General António Guterres warned that the COVID-19threatens world peace and security [55].

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

While traditional national security is a delineation of sovereignty in the context ofmilitary conflict, humanity faces a wide range of unknown insecurities that require ex-ceptional responses in broader global challenges such as economic security, cybersecurity,and climate change. It is putting increasing pressures on the application of the securityexception clause. The question of “what constitutes an emergency” and “by what criteriashould the good faith of states be judged when invoking the exception clause” remainsessential [57]. Moreover, in the face of “new threats” and risks to society such as climatechange and PHEIC, solutions rely more on a smooth and unhindered demand-supply chainto 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-examinationof 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 “na-tional security” so widely that the function of national security as a “self-judging” measureis diminished?

A most typical application of the security exception clause in international investmentarbitration is the ICSID arbitral award in an investment dispute arising from the Argentinefinancial crisis, which recognized the possibility of invoking the security exception clausein response to non-military threats. It provides greater freedom for host states to takenecessary measures to protect public health, particularly in the context of PHEIC [58]. Inthe Argentine series of cases, the economic interests in the context of the financial crisis wererecognized as fundamental security interests by the arbitral tribunal. However, whetherother interests of a state, such as political, environmental, and public health interests, arefundamental security interests has not been established in international investment lawto date. As Roberto Ago pointed out, the interests that preclude a state from violatingan international obligation in order to achieve a fundamental security interest should bethe interests that concern the survival of the state, such as interests in the political andeconomic spheres and in maintaining the proper functioning of basic services, maintainingstability, 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 transitin 2019 sent relevant signals to the international community on the application of thesecurity clause. First, the Group’s observations indicate that the term “emergency” underthe GATT framework refers to armed conflict or potential armed conflict, tensions, increasedcrisis, or general instability that envelops or surrounds a country. Second, the measurestaken by the state invoking the security exception clause should meet minimum standardsof credibility in relation to the interests safeguarded. Third, Member States should clarifythe 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 thespecific circumstances [59]. In general, the Group’s interpretation and the application ofthe security exception clause is in a narrow sense and in line with the traditional view ofthe majority of scholars. After all, within the concept of national security, any act can bejustifiably “securitized” if an actor successfully claims that extraordinary measures arenecessary to deal with the existence of a threat [60]. The generalization of national securitynegatively affects the stability and normalization of international trade and economic rulesand cross-border commercial activities.

While the COVID-19 pandemic has significantly impacted the world economy inrecent years, the major economies are experiencing a steep decline in economic growth

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with a reduction of trade and cross-border investment. The view of the Group in theRussian Transit case is that in order to invoke the defence of the security exception clausesuccessfully, the host state would need to bear the burden of specifying the underlyingsecurity interest at stake. The burden of proof is heavy, and the threshold for invocation isrelatively high. Whether or not it can be invoked depends on how the arbitral tribunal in aparticular case determines whether the pandemic reaches the level of a threat to the vitalsecurity 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 excep-tion 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 to-wards economic development, with little attention paid to public health issues. For ex-ample, according to the statistics of the UNCTAD Investment Policy Hub, only 163 out of2337 BITs in force provides for the public health exception clauses by 2020, with a relativelylow ratio of about 7% [61]. The security exception or general exception clause is also foundin the new generation of IIAs. The absence of exception clauses means that host states aremuch less likely to invoke the treaty exception clause defence in the event of ISDS arisingfrom COVID-19. Second, in terms of the specific application of the exception clause, thereis a high degree of uncertainty as to how an investment tribunal will apply the exceptionclause in an IIA in the context of the COVID-19 pandemic.

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

4. Conclusions

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

Although international law instruments such as UN reports have repeatedly empha-sized on the importance of investment concerning sustainable development, as a funda-mental regulatory framework, international investment law still needs to be improved topromote sustainability. The UN Conference on Trade and Development (UNCTAD) madeefforts to enhance the sustainable development dimension of international investment poli-cies by placing sustainable development squarely within the purview of the public purposedoctrine [65]. In 2012, all these efforts are framed into the instrument called ‘InvestmentPolicy Framework for Sustainable Development’ which puts forward the view on per-ceived or real imperfections in the current system of international investment law. Hence,several proposals are found in UNCTAD’s Policy Framework on substantive standards ininternational investment agreements [66].

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

In the face of PHEIC, current investment law still suffers from multiple dilemmasand deficiencies such as insufficient coverage, unclear legal concepts, and difficulties ininvoking them [68]. It has been argued that recent awards or decisions in the field of inter-national trade and investment law demonstrate that the principles of treaty interpretationin 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, whethera particular exception clause or a general exception clause, face many difficulties such asthe scarcity of exception clauses in the new generation of IIAs.

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

Author Contributions: Formal analysis, G.Q.; Writing—original draft, G.Q.; Writing— design of keyidea and structure, revising & editing, W.S. All authors have read and agreed to the published versionof the manuscript.

Funding: This article is a research output of the major project sponsored by the China Social ScienceResearch Foundation (Project ID: 21&ZD208).

Institutional Review Board Statement: Not applicable.

Informed Consent Statement: Not applicable.

Data Availability Statement: Publicly available datasets were analyzed in this study. This datacan be found here: [https://investmentpolicy.unctad.org/international-investment-agreements,https://investmentpolicy.unctad.org/international-investment-agreements/iia-mapping].

Conflicts of Interest: The authors declare no conflict of interest.

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