Global Value Chains as a Constraint on Sovereignty: Evidence from ISDS

• In Event: Governance Implications of Multinational Firm Activity

Abstract

Inspired by Strange (1996), this article explores the conditions under which multinational corporations (MNCs) constrain host state sovereignty. We argue that MNCs with the potential to disrupt global value chains (GVC) have outsized leverage to shape domestic regulation in host states. To do so, we draw on a novel dataset of regulations disputed by MNCs: those regulations at the basis of MNC litigation against host states in Investor-State Dispute Settlement (ISDS). Should a host state lose an ISDS arbitration, it must provide compensation to the MNC, but it is under no obligation to cancel the disputed regulation. Nonetheless, our novel dataset comprising 809 arbitrations filed between 1987-2017 demonstrate that host states cancel some 24% of regulations disputed in ISDS. Using data on GVC trade as compiled by the OECD, we provide a variety of evidence to demonstrate that host states are more likely to cancel regulations when sued by MNCs with deep global value chain-integration in the host state. Consistent with Strange (1996), such powerful MNCs are associated with limits on host states' sovereignty over their own domestic policy choices.

Authors

• Carolina Moehlecke, Fundação Getulio Vargas

• Rachel Wellhausen, University of Texas at Austin

• Calvin Thrall