The Ancestry of ‘Equitable Treatment’ in Trade

Lessons from the League of Nations during the Inter-War Period

In: The Journal of World Investment & Trade

How the League of Nations applied the concept of ‘equitable treatment’ in fostering international economic co-operation throughout the inter-war period had practical consequences for both modern multilateral trade law and international investment law. The ‘equitable treatment’ clause constructed by a sub-Commission of the League’s Economic Committee in 1933 was later encapsulated in the non-violation nullification and impairment procedural remedy in multilateral trade law. Moreover, a number of scholars have noted that the ‘fair and equitable treatment’ (FET) clause found in the majority of international investment treaties may be connected to Article 23(e) of the Covenant of the League of Nations, emphasizing ‘equitable treatment for the commerce of other Members of the League’. In light of these connections, a historical contribution that examines the League’s understanding of ‘equitable treatment’ should resonate with scholars and policy-makers.

This article analyses the meaning and scope of the concept of ‘equitable treatment’ as it was elaborated by the League during the inter-war period. It finds that the flexible concept of ‘equitable treatment’ was a necessary ingredient in an inter-war multilateral framework that could adapt to rapidly changing economic circumstances. In addition to a brief historical background, the first part of this article explores how the concept of ‘equitable treatment’ was underlying the League’s efforts to build an ‘international community’ to promote economic co-operation, broaden policy-making perspectives, and to achieve economic stability and growth, all without imposing rigid rules upon its Members. The second part of this article examines how a sub-Commission established during the 1933 World Financial and Economic Conference directly applied the concept of ‘equitable treatment’ as a flexible tool to protect the reciprocally guaranteed benefits arising from international commercial treaties, which reinforced its ambitions for a multilateral framework for international economic ‘equilibrium.’ The third part of this article studies how the drafting of the ‘equitable treatment’ clause by the sub-Commission helped to clarify its purpose and function as a flexible remedy at the time. The final part summarizes key lessons and identifies future work.

  • 8

    Schroppsupra note 5 p. 60.

  • 9

    Mavroidissupra note 6 p. 255; see Schropp supra note 5 pp. 70–2.

  • 11

    Schroppsupra note 5 p. 61 (“Thus all contracts known today are incomplete. They contain gaps that is they are insufficiently contingent and (in a strictly technical sense) inaccurately written.”); see van Aaken supra note 5 p. 519.

  • 13

    van Aakensupra note 5 pp. 515–517. Thus van Aaken concluded that “optimal contracting and the calculus of the joint costs and benefits for the parties reaching into the future can be taken into account by discounting the future payoffs.” She added “[a] balance needs to be found between commitment and flexibility with the following goals of the contract in mind: securing a high level of cooperation ex ante distinction between (desired) flexibility in relation to new circumstances on the one hand and cases of purely opportunistic breach of the contract ex post on the other and adequate compensation for the victim.” ibid. The terms ‘ex post’ and ‘ex ante’ refer to the conclusion of a treaty. Ex ante refers to time in advance of signing an agreement whereas ex post refers to events after the conclusion of the agreement.

  • 25

    McCluresupra note 15 p. 85.

  • 31

    Clavinsupra note 23 p. 5.

  • 32

    Clavin and Wesselssupra note 27 p. 467.

  • 33

    McCluresupra note 15 p. 102.

  • 34

    Clavin and Wesselssupra note 27 p. 471.

  • 37

    Clavin and Wesselssupra note 27 p. 472.

  • 41

    Irwinsupra note 4 p. 323; see League of Nations Economic Committee Equality of Treatment in the Present State of International Commercial Relations The Most-Favoured-Nation Clause League of Nations II Economic and Financial Doc. C.379.M.250.1936.II.B (12 September 1936) 6; see Americo Beviglia Zampetti Fairness in the World Economy (Edward Elgar 2006) 77.

  • 46

    Irwinsupra note 4 p. 323.

  • 49

    Pomfretsupra note 42 p. 20.

  • 51

    Clavinsupra note 23 p. 5.

  • 54

    League of Nationssupra note 4 p. 23; see Zampetti supra note 41 p. 73.

  • 60

    McCluresupra note 15 p. 85 citing Minutes (English) Preliminary Peace Conference Commission on the League of Nations p. 2.

  • 66

    McCluresupra note 15 pp. 91–92. McClure reported that President Wilson actually incorporated the “policy of the open door or equal economic opportunity for all” from General Smuts who had been discussing this policy in the context of not completely independent States when speaking out for former Russian Austrian and Turkish territories and their right of self-determination.

  • 67

    Rappardsupra note 55 p. 10.

  • 72

    Millersupra note 69 vol. 1 p. 21. Under Article 22 of the Covenant “equal opportunities for the trade and commerce of other Members of the League were also guaranteed.”

  • 75

    McCluresupra note 15 p. 97.

  • 76

    In 1922the Economic Committee was first asked to explore the definition and application of ‘equitable treatment’ and it reported that “in view of the wide divergencies of opinion between different States especially as to the conditions which would justify special treatment” it saw “no reasonable prospects in existing circumstances particularly in view of the disorder in the currencies and the disorganisation of the international exchanges of arriving at a general international convention covering the subject as a whole.” Martin Hill The Economic and Financial Organization of the League of Nations: A Survey of Twenty-five Years’ Experience (Carnegie Endowment for International Peace 1946) 37 citing League of Nations Official Journal June 1922 p. 625; see Clavin and Wessels supra note 27 p. 470 (explaining that the ‘vague reference’ made in Article 23 was “not so much an oversight” as it was “a reflection of continued international tensions”).

  • 77

    Millersupra note 69 vol. 1 p. 21. William Rappard noted that it was too difficult to square “the British imperial preference reciprocity treaties and the case of China.” Rappard supra note 55 p. 11.

  • 78

    Millersupra note 69 vol. 1 p. 21.

  • 80

    Rappardsupra note 55 p. 12.

  • 87

    Covenantsupra note 24 article 23; see supra note 4.

  • 88

    Pasvolskysupra note 50 p. 4.

  • 95

    Rappardsupra note 55 p. 66. See Economic Financial and Transit Department League of Nations supra note 1 p. 16 (“In the great majority of countries represented [at the Paris conference] there was no disposition at the time to limit national freedom of action in regard to trade policy.”)

  • 101

    ‘The Background’supra note 96 p. 3. By 1927 most countries had returned to the gold standard.

  • 102

    Clavinsupra note 23 p. 25.

  • 104

    Pasvolskysupra note 50 p. 4.

  • 109

    Rappardsupra note 55 pp. 50–61; See Hill supra note 76 p. 55.

  • 110

    Clavin and Wesselssupra note 27 p. 470; see Clavin supra note 23 p. 13; see Chase supra note 100 pp. 180–1.

  • 111

    Hillsupra note 76 p. 37; see League of Nations Economic Committee supra note 41 p. 5.

  • 113

    Hillsupra note 76 p. 40.

  • 115

    Clavinsupra note 23 p. 44. For example the USSR and Germany frustrated by their ‘pariah status’ at the Genoa conference in 1922 took steps to restore diplomatic and trade relations and signed the Rapallo Treaty on 16 April 1922. The bilateral action of these two ideologically opposed powers stood out from the “wider breakdown of multilateral negotiations” between States with shared aims and ambitions. Ibid. pp. 23–24.

  • 116

    Pasvolskysupra note 50 p. 4.

  • 117

    Clavinsupra note 23 p. 18. See Pasvolsky supra note 50 p. 4.

  • 118

    Pasvolskysupra note 50 p. 4.

  • 120

    Clavinsupra note 23 p. 12.

  • 122

    Stewartsupra note 96 p. 74.

  • 124

    Hillsupra note 76 p. 39.

  • 125

    Clavinsupra note 23 p. 21.

  • 126

    Clavin and Wesselssupra note 27 p. 472. Independent experts were seconded to the Sections following “informal behind-the-scenes negotiations” between the officials of sections and the primary governments of the League Member States. See Clavin supra note 23 p. 21.

  • 127

    Clavinsupra note 23 p. 42.

  • 130

    Stewartsupra note 96 p. 70.

  • 133

    Clavinsupra note 23 p. 43.

  • 135

    Clavinsupra note 23 p. 43.

  • 136

    Pasvolskysupra note 50 p. 6.

  • 137

    ‘The Background’supra note 96 p. 5.

  • 139

    Pasvolskysupra note 50 p. 70.

  • 142

    Clavinsupra note 23 pp. 101–102 citing Note by Pietro Stoppani ‘First Reflections on the Preparatory Commission’s Task in Regard to International Trade’ Doc. R.2671 10A/39755/38756 (26 October 1932) 18.

  • 145

    Clavinsupra note 23 p. 107.

  • 146

    Pasvolskysupra note 50 p. 10.

  • 147

    Clavinsupra note 23 pp. 119–121. See Patricia Clavin ‘The World Economic Conference 1933: The Failure of British Internationalism’ (1991) 20 J. Euro. Econ. Hist. 489 500–506.

  • 148

    Clavinsupra note 147 p. 495. Britain’s demands included: a settlement of war debts; “an agreement on monetary policy involving legislation to give central banks in France and the United States wider powers coupled with assurances that these powers would secure a rise in the price level; some form of settlement which would produce a redistribution of gold;” and modifications to other State’s protectionist policies especially those of the United States and France.

  • 152

    Stewartsupra note 131 p. 70.

  • 154

    Clavinsupra note 23 pp. 97–99.

  • 156

    Clavin and Wesselssupra note 27 p. 482 (describing the League Secretariat’s concern with international protectionism and their interest in “policy co-ordination between the world’s great democracies.”).

  • 157

    Clavinsupra note 23 pp. 97–99.

  • 159

    Clavinsupra note 147 p. 519. On 1 July President Roosevelt had issued his ‘bombshell’ message from his yacht Amberjack in “denouncing the ‘old fetishes of so-called international bankers’.”

  • 162

    Stewartsupra note 131 p. 200.

  • 164

    Clavinsupra note 147 p. 526.

  • 165

    Clavin and Wesselssupra note 27 pp. 482–483; see Stewart supra note 96 p. 80.

  • 166

    Hillsupra note 76 pp. 55–56.

  • 171

    Tascasupra note 168 p. 246 (noting also that “any governmental measure or regulation irrespective of its nature which impedes in any fashion the movement of commodities across national frontiers is protective to the extent that trade is discouraged.”).

  • 173

    Tascasupra note 168 p. 247.

  • 175

    Lester and Durlingsupra note 164 p. 219.

  • 176

    Tascasupra note 168 p. 247.

  • 177

    In May 1928the League’s Economic Consultative Committee was set up to monitor the progress in applying the resolutions of the World Economic Conference.

  • 203

    Eastmansupra note 187 p. 1.

  • 204

    Trendelenburgsupra note 194 p. 6.

  • 207

    McCluresupra note 15 p. 405.

  • 211

    Hillsupra note 76 p. 65.

  • 218

    League of Nations Secretariatsupra note 216 p. 2.

  • 226

    League of Nationssupra note 183 arts. 4–6. Article 4 provided that the Contracting States agree not to enforce any Customs regulations which have not previously been published. Article 5 required that all duties tariffs and other charges be promptly published “in a complete statement in an easily accessible form.” Article 6 required that all measures referred to in Articles 4 and 5 were communicated to the Secretariat and published with the International Office for the Publication of Customs Tariffs.

  • 227

    League of Nationssupra note 216 p. 1.

  • 240

    German Delegationsupra note 233.

  • 263

    Nielsensupra note 260. Within the letter Nielsen mentioned a memorandum of his oral remarks indicating the position of the US delegation regarding the ‘equitable treatment’ clause. Current research is being undertaken to find this memorandum.

  • 264

    Nielsensupra note 256 p. 263.

  • 266

    Nielsensupra note 256 p. 263.

  • 268

    Tascasupra note 168 p. 248.

  • 270

    Weilersupra note 18 p. xliv.

  • 273

    United States Delegationsupra note 257.

  • 275

    League Secretariatsupra note 216.

  • 282

    Langsupra note 98 p. 200-1.

  • 284

    Weilersupra note 18 pp. 184–9. Rather than rely on the practice where FET may be traced to ‘equitable treatment for the commerce’ in the League Covenant (see supra note 24) Todd Weiler has argued that the FET clause can be traced back to these ‘applicable law’ provisions that established hundreds of mixed claims commissions’ from the eighteenth to the twentieth centuries. Reflecting on this possible origin for the FET clause Paparinskis observed with respect to ‘applicable law’ clauses that a “reading of these authorities would find the unifying element in the looseness and flexibility of the criteria at its weakest introducing flexibility within the law and at its strongest providing for extra-legal discretion.” Paparinskis supra note 18 p. 88. As discussed in the concluding section this author tentatively theorizes connections between the FET clause and the trade-derived ‘equitable treatment’ clause. This theory will be the focus of future work.

  • 287

    Hudecsupra note 276 p. 20.

  • 296

    Nielsensupra note 260 pp. 3–4.

  • 299

    Hudecsupra note 276 p. 20.

  • 300

    Lauterpachtsupra note 278 p. 3.

  • 302

    Hudecsupra note 276 p. 26. Hudec observed that a delegate from the United Kingdom had argued that “[T]he law of the International Trade Organization should be dynamic and should be open to amendment and addition in the light of experience in this new field of international activity.… In almost every conceivable case arising under the Charter the issues will be of their nature involve the element of economic appraisal and assessment and will not be purely legal in character and it will be impossible to say where economic judgment ends and legal judgment begins.” See R.J. Shackle Article 86 - Summary of Points Made By Mr. Shackle Regarding Interpretation and Sattlement of DisputesU.N. Doc. E/PC/T/C6/W77 (14 February 1947) 2.

  • 303

    Hudec supra note 276 p. 21 citing League of Nations Procedures for the Friendly Settlement of Economic Disputes between States Doc. Conf. C.57.M.32.1932.II.B (1932) 4.

  • 307

    United States Delegationsupra note 257.

  • 308

    In 1948Schwarzenberger observed that the importance of the “standard of equitable treatment” “lies in spheres affected by an increase in State planning. It also provides the only solution in cases in which currency disequilibrium or changes in the structure of national economics force States to adopt measures of quantitative restriction of imports. … [T]his standard provides the only means … of achieving an at least proportionate equality between foreign States.” Schwarzenberger supra note 4 p. 411.

  • 309

    Irwinsupra note 4 p. 323–324. A majority of the Economic Committee’s work was driven by the desire to equalize international commerce and stop the “outbreak of even greater protectionism supplemented by discriminatory trade and currency blocs.” Ibid. p. 324; see supra note 4; see also Schwarzenberger supra note 4 p. 403 (observing that the ‘turning point’ was the “disequilibrium caused by the war the problems of reparations and inter-Allied debts the growth of economic nationalism and protection”).

  • 311

    Hudecsupra note 276 p. 20.

  • 317

    Lauterpachtsupra note 278 p. 66.

  • 318

    Lester and Durlingsupra note 174 p. 222.

  • 322

    Staiger and Sykessupra note 276 pp. 16–17.

  • 323

    Petersmannsupra note 276 p. 172. See Andrew D. Mitchell Legal Principles in WTO Disputes (CUP 2008) 90 (concurring with Petersmann’s argument). Article XXIII:1b provides “If any contracting party should consider that any benefit accruing to it directly or indirectly under this Agreement is being nullified or impaired or that the attainment of any objective of the Agreement is being impeded as the result of … the applicable by another contracting party of any measure whether or not it conflicts with the provisions of this Agreement ….” GATT 1947 supra note 276.

  • 324

    Nielsensupra note 260 p. 5.

  • 329

    Petersmannsupra note 276 p. 144. This was emphasized by the delegate from Australia Dr Coombs a supporter of the non-violation ‘nullification or impairment’ concept who explained that the word ‘benefits’ was understood “in a very wide sense.” He stated: “I should like to emphasise that by the word ‘benefits’ we conceive not merely benefits accorded for instance under the provisions of Article 24 [referring to tariff concessions] but the benefits which other countries derive from the acceptance of the wider obligations imposed by the Charter.” Verbatim Report of the Preparatory Committee of the International Conference on Trade and EmploymentU.N.ESCOR Twelfth meeting. U.N. Doc. E/PC/T/C.II/PV/12 (1946) 7.

  • 330

    Bermansupra note 2 p. 19.

  • 332

    Clavinsupra note 23 p. 122.

  • 334

    Hudecsupra note 276 p. 34. Professor Hudec explained that ‘an artistic use of ambiguity’ meant: “At times it seems to represent a deliberate policy to avoid stating even the simplest of ideas clearly and without qualification. On the other hand one also gets the impression that even the most subtle of these nuances are thought to have much more significance than the black-letter lawyer would ever dream of giving them.”

  • 338

    van Aakensupra note 5 p. 528 citing to Susan Franck’s empirically analysis of investor-State cases; Franck found that the win rate of investors is at about half. Susan D. Franck ‘Empirically Evaluating Claims about Investment Treaty Arbitration’ (2007–2008) 86 N. C. L. Rev. 1 48 et seq.

  • 339

    Staiger and Sykessupra note 276 p. 1.

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