A “California Effect” for Human Rights: South Africa and the Bilateral Investment Regime

The past two decades have witnessed growing concern about the challenges governments face in regulating multinational corporations whose operations fall outside any one state’s jurisdiction. Trade and investment agreements play a crucial role in setting the regulatory regime that governs these transnational activities. The effect of such agreements on the strength of regulation is a matter for debate: Scholars such as Vogel and Kagan (2002) and Prakash and Potoski (2006) have argued that states with strong regulation can leverage economic influence to tighten standards on trading partners. Others including Scott and Wilkins (2013) and De Ville and Siles-Brügge (2015) have found that states converge on the regulatory standards of the most lenient trading partner.
While much of this scholarship has focused on the capacity for wealthy countries in the Global North to raise standards on partners in the Global South, this paper reverses the script, considering efforts by developing countries to secure their own regulatory policy authority over global corporations. In South Africa, in particular, multinational corporations have leveraged the investor-state arbitration provisions in bilateral investment treaties to seek exemptions from regulations introduced since 1994 that redress the legacy of apartheid by requiring businesses to observe preferential treatment for historically disadvantaged groups (Schlemmer, 2015). The South African state has defended its policies by citing the South African constitution, where the eradication of historic discrimination in both the public and private sectors is defined as a human rights obligation, but this defence has been broadly unsuccessful (Peterson and Gray 2003).

Since 2012, South Africa has begun withdrawing from its investment treaties with European countries, and in 2015 South Africa introduced a new investment policy (Schlemmer, 2015), which explicitly sets out to enforce domestic human rights law on foreign investors, and to transfer authority over dispute resolution to newly created domestic South African arbitration tribunals. This new regime, which came into force in 2019, has particularly significant potential in the platinum sector, where South Africa holds a dominant share of world supply, as European mining companies represented the bulk of litigants in arbitration disputes about the post-apartheid regulations.

This paper draws on legal documents, and interviews with representatives from government and business in South Africa and Europe, to consider the impact of this new approach. First, it shows that despite initial concern that the new policy would lead to a withdrawal of international investment, this has not taken place, despite a deepening national recession and recent political scandal about regulatory corruption. Second, the paper demonstrates an emerging “California effect” for human rights, in which South Africa internationalises its post-apartheid regulations, and “hardens” human rights, a historically “soft” area of international law, by incorporating it into the investment regime and enforcing it successfully on foreign corporations. Third, the paper considers the reception of this approach by other developing countries and by multilateral economic governance organizations, and its potential as a new global model of regulation.