Constraints on state regulation of economic activity

• Author: John H. Currie, Craig Forcese, Joanna Harrington, Valerie Oosterveld
• Pages: 688-714

688

CHAPTER 10

CONSTRAINTS ON STATE REGULATION

OF ECONOMIC ACTIVITY

An essential aspect of a state’s sovereignty is the power to determine its own economic

system and to regulate economic activity within its territory. Recall that the General As-

sembly’s inf‌luential Declaration on Principles of International Law concerning Friendly

Relations and Co- operation among States in accordance with the Charter of the United

Nations indicates that: “Every State has an inalienable right to choose its . . . economic

. . . system, without interference in any form by another State.”1 This is, however, only a

starting point. While in theory a state might attempt to insulate its economy from all out-

side inf‌luences by barring all foreign economic activity within its borders and, conversely,

forbidding all extraterritorial e conomic activity by its nationals, in practice, international

economic activity is the norm. The international legal issue that therefore arises is the

extent to which, and how, states may lawfully exercise jurisdiction over such economic

activity. We have already addressed some aspec ts of this issue in our examination of

the general rules of state jurisdiction over persons, property, and transactions (Chapter

7) and of state immunities (Chapter 8). In this chapter, we focus on specif‌ic, additional,

jurisdictional constraints that states have imposed upon themselves in two main areas

of international economic activity: foreign investment and the transborder movement of

goods and services.

A. TRE ATMENT OF FOREIGN INVESTORS

A controversial set of international legal constraints on state jurisdiction over e conomic

activity concerns state expropriation of property owned by foreigners. These limitations

form part of a broader body of international law relating to what historically was called the

“treatment of aliens,” other aspects of which we examine elsewhere.2

There is a political dimension to the controversy surrounding the international law

governing state expropriation of foreign-owned property: the property in question has

usually been located in developing states but owned by investors from developed states.

Such “propert y investments” were a common feature of the colonial period, and often

persisted following decolonization. This continuing foreign ownership, along with addi-

tional investments following decolonization, has frequently been perceived by newly in-

dependent and other developing s tates as a form of “neo-colonialism.” The response of

such states has therefore frequently taken the form of nationalization, referring to the

1 GA Res 2625 (XX V), UN Doc A/RES/2625/XXV, reprinted in UN GAOR, 25th Sess, Supp No 2 8 at

121–24, UN Doc A/8028 Corr 1 (1970); (1970) 9 ILM 1292 [Friendly Relations Declarati on].

2 See Chapter 9, “Respect for Interna tional Human Rights,” and Chapter 12, “State Responsibility.”

Chap ter 10 : Constraints on State Regulation of Economic Activit y 689

national expropriation of these investments in a bid by the expropriating state to regain

control over its natural resources and economic activity.

Given the developed-developing state dimension to the issue, it is no surprise that

the international legal rules governing state expropriation of foreign-owned property

have been a key point of contention between developed and developing states. Motivated

by a desire to create a “New International Economic Order” (NIEO),3 the UN General

Assembly — dominated at that time by newly independent states and confronted with

the consequences of the OPEC crisis — adopted a resolution embracing a new Charter of

Economic Rights and Duties of States in December 1974.4 Although a non-legally binding

declaratory tex t, and therefore not a source of international law, the new Charter did re -

f‌lect clearly the developing world’s view of economic sovereignty. Consider the key provi-

sions of Chapter II of the Charter:

Charter of Economic Rights and Duties of States, GA Res 3281 (XXIX ) (1974)

Article 1

Every State has the sovereign and inalienable right to choose its economic system as well

as its political, socia l and cultural systems in accordance with the wi ll of its people, with-

out outside inte rference, coercion or t hreat in any form what soever.

Article 2

1. Ever y State h as and shall freely exercise f ull perma nent sovereignty, i ncluding pos-

session, use and disposal, over all it s wealth, natural resources and economic activities.

2. Each State has the ri ght:

(a) To regulate and exercise authority over foreign investment within its national

jurisdiction in accordance wit h its laws and regulations a nd in conformity with its

national objec tives and priorities . No State shal l be compelled to grant preferential

treatment to foreign investment;

(b) To regul ate and superv ise the act ivities of tr ansnational corporations within its

national jurisdict ion and take measures to ensure that such activities comply with its

laws, rules and regulations and conform with its economic and socia l policies. Trans-

national corporations shal l not intervene in the internal af fairs of a host State. Every

State should, wit h full regard for its soverei gn rights, cooperate wit h other States in

the exercise of the rig ht set forth in this subparagraph;

(c) To n ationalize, expropriate or tra nsfer ownership of foreign property, in which

case appropriate compensation should be paid by the State adopting such measures,

taking into account its relevant laws and regulations and a ll circumstances t hat the

State considers pertinent. In any ca se where the question of compensation gives rise

3 Declaration on the E stablishment of a New Inte rnational Economic Orde r, GA Res 3201 (S-VI), UN Doc

A/RES/3201/S-VI, reprinted in UN GAOR, 6th Special Sess, Supp No 1 at 3– 5, UN Doc A/9559 (1974).

See further, Margot E Salomon, “ From NIEO to Now and the Unf‌inishable Story of Economic Justice”

(2013) 62:1 ICLQ 31.

4 GA Res 3281 (XXIX), UN Doc A/RES/3281/XXIX, repr inted in UN GAOR, 29th Sess, Supp No 31 at

50–55, UN Doc A/9631 (1974). See further, SK Chatterje e, “The Charter of Economic Rights and Dut ies

of States: An Evaluation After 15 Years” (1991) 40 ICLQ 669.