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How colonialism shaped free trade agreements: the imposition of Western legal regimes (part 2/3)

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25 May 2023

The return of the fleet of the Dutch East India Company by Frans II Pourbus (1609-1616). Louvre museum (Paris, France)

How colonialism shaped free trade agreements: the imposition of Western legal regimes (part 2/3)


This three-part series provides a historical perspective on free trade agreements and bilateral investment treaties. It argues that the free-market ideology and the laws that have governed international trade for the past 30 years are rooted in the history of colonialism. Power relations inherited from the colonial era have laid the foundations for modern international trade. A sound assessment of the nature of these trade and investment agreements is essential to addressing the problems they create. The first part explores the development of international trade at the dawn of colonialism. The second one shows how colonial companies and states shaped international trade and investment rules. Finally, the third part examines how current free trade practices reflect their colonial legacy.

Key points:

  • European political and commercial supremacy was established through the conquest of foreign territories
  • The influence of colonial companies grew as they were granted sovereign rights and privileges that intertwined trade, war and international law
  • Colonialism resulted in the imposition of a legal trade and investment regime favourable to Europeans
  • The international investment law that emerged after the Second World War is the legacy of doctrines developed in the colonial era

As shown in the first part, the development of international trade was by no means ‘natural’. It was deliberate state action, driven by capitalists, that led to its development at the end of the Middle Ages. The alliance between states and merchants allowed them to profit from the invasions of new lands, while at the same time asserting their domination.

The ‘new worlds’

From the 15th and 16th centuries, European conquests of foreign territories led to the assertion of European political and commercial supremacy. This was followed by the creation of an international body of law favourable to colonisers, granting them extensive powers and establishing new legal regimes for trade and investment in the territories they conquered. [1]

The emerging Spanish Empire was the first to embark on this venture, conquering what is now the Americas. From the beginning, trade was a central issue. The invaders were interested in gold, silver and other riches from the region. They landed with guns, disease and Christianity, but also with Western notions of ‘freedom of trade’. A Spanish jurist, Francisco de Vitoria, argued that the conquistadors had the right to travel and trade freely with the local population. Acts of resistance could ‘legally’ be interpreted as a violation of the invaders’ self-proclaimed legitimate right. In the eyes of the Spanish, war, plunder and dispossession were then fully justified, causing enormous brutality in the process. [2] Vitoria’s theory was influential in shaping international legal doctrines that favoured colonial companies. Many of his theories were adopted by later jurists when faced with similar situations in other colonies. [3]

In fact, the primary vehicles of colonialism were not really states but large corporations, such as the East India Company, the Dutch East India Company and the Hudson Bay Company. Imperial administrations were established more than a century after the arrival of the colonial companies, long enough to influence the emergence of international law. [4]

Hugo Grotius (1583-1645), considered the father of international law, worked as a lawyer for the Dutch East India Company. He advocated the “freedom of the seas”, which gave legal validity to the company’s actions in breaking the monopoly on maritime trade held by its foreign competitors. Following this principle, the Dutch company famously seized the Portuguese trading ship Santa Catarina and confiscated all the goods. In other words, legal doctrines favourable to the company’s needs, invented by its own lawyer, legitimised its aggressive behaviour.

States also granted sovereign powers and privileges to major colonial companies to carry out their activities in conquered territories. For instance, the Royal African Company of England had the exclusive right to trade in the African territories of the British Empire, which included the right to build forts, maintain troops and “make peace or war with any of the heathen natives.” [5] The English East India Company could also conquer and administer lands, quell rebellions of local populations, and extort taxes to conduct its slave and mineral trade without being held accountable for any of its actions. [6] Likewise, in the Americas, the Company of New France and, most notably, the Hudson Bay Company were instrumental in the conquest of what is now Canada. Further south, the Casa de Contratación regulated and oversaw all trade and shipping to Spain.

The activities of these companies reflected the imperial interests of their home states. Initially, the English East India Company focused primarily on commercial gain, but due to England’s growing rivalries with France and the Netherlands, the company took on a more offensive role of imperial acquisition and management in the late 18th century. [7] In the same vein, Louis XIV, King of France, dissolved the Company of New France in 1663 because he felt it was not doing enough to populate the colony with more French people and better control it. [8] The colonial companies pursued their commercial objectives, but also the ambitions of the state, blurring private and state interests, trade and war.

Construction of the railway linking the Ashanti Goldfields Corporation’s mining fields to the coast in the Gold Coast (now Ghana)

From gunboats to arbitration courts

States also ensured that their citizens’ foreign property, investments and ‘right’ to trade were protected through diplomatic action. In his 1758 treatise The Law of Nations, the Swiss jurist Emer de Vattel concluded that any mistreatment of a citizen abroad could be considered an offence against the state, encouraging the use of force to obtain full reparation or to punish the aggressor. Europeans also considered ‘hostile’ any non-European country’s refusal to trade with them or to allow foreigners to engage in commercial activity on their territory. This served as the basis for the doctrines of foreign investment protection from the late 18th century and for international investment law that emerged in the second half of the 20th century.

Colonial expansion justified the protection of foreign-owned property and trade, as control over resources and riches was crucial to Europe’s economic power and industrial growth. In the colonies, imperial law settled disputes in favour of the coloniser who had made the investment. Belgian, British or French judges often sat in local commercial courts to resolve trade and investment disputes. In other territories, the use of force was another means of protecting commercial interests and investments, a process known as gunboat diplomacy, which usually resulted in an unequal treaty being imposed on the non-European state.

Unequal treaties, or capitulation treaties, can be seen as the ancestors of free trade agreements, as they were key to achieving European commercial ambitions. They were unilateral legal instruments used by colonial powers to ensure that their ‘freedom to trade’ was an internationally recognised and legally binding right, and that the use of force was justified in the event of violation.

Disputes over trade and foreign-owned property in the colonial context were as much about the assertion of power as they were about the primacy of jurisdiction and the creation of legal regimes based on European conceptions of property, private wealth, economy and regulation. European understandings of colonised lands and their inhabitants were shaped by a context of military invasion and expansion. So was the international law that emerged from it. Local people could never invoke the rules of international law to address the damage and suffering caused, for example, by imperial resource extraction and the displacement of indigenous communities. These perceptions can still be felt today in the way foreign investment is regulated in the Global South, as the grievances of local communities are largely ignored. [9]

During the first Opium War, between 1839 and 1842, Britain sent a military expedition, supported by mercenaries from the East India Company, to challenge China’s ban on opium. The Chinese authorities were concerned about the health and social problems caused by the drug, much of which was traded by the British company. The Chinese defeat led to the cession of Hong Kong to the British Crown, the granting of benefits to British traders, the establishment of the principle of extraterritoriality, which gave British citizens the right to be tried in British rather than Chinese courts, and a huge fine to be paid as compensation for the opium destroyed. [10]

The US took a different approach. It was not a formal colonial power and preferred to protect its citizens’ commercial interests through treaties and diplomacy - with the threat of force always lurking in the background. [11] The US did send its navy on a few occasions, for example to Honduras in 1905 and during the banana wars in Central America and to the Caribbean in the early 20th century. But it also sought to externalise the protection of its citizens’ investments through external tribunals and the creation of an international minimum standard of treatment that would ensure fair and equitable treatment, full protection and security. Ad hoc tribunals were set up to resolve disputes, using standards favoured by the US and based on US legal principles. There was resistance to this view, particularly in Latin America, where the Calvo Doctrine argued that foreign citizens should be treated like domestic citizens and judged by national courts in the event of a dispute. But as the dominant regional power, the US imposed its view on other countries. [12]

In the late 19th and early 20th centuries, concession contracts were another means of imposing Western legal systems. They were widely used in colonies and protectorates to regulate investment. Under these contracts, colonial authorities would typically grant exclusive rights to private companies or individuals to extract resources, such as minerals and crops, or to carry out other economic activities in the colonies, such as building infrastructure and operating transport systems. In return, the colonial powers would receive a percentage of the profits made by the companies. They were usually protected by the laws of the investor’s host state – and by its military strength. In addition, as is the case with current international investment law, foreign investors were granted many rights but had no obligations. Over the years, local communities criticised such agreements for their negative impact on their environment and livelihoods, and because all the profits went to the colony and did not benefit them. These contracts were also usually signed for very long periods of time, guaranteeing the profitability of foreign investments. For example, the Ashanti Goldfields concession in the Gold Coast (now Ghana) was signed in 1895 for a hundred years.

As colonies gained independence, concession contracts paved the way for investment contracts. They contained provisions that are still commonly used today. For instance, stabilisation clauses required states to refrain from using their legislative or administrative prerogatives in a way that might adversely affect the investment. Investor-state arbitration could be used to resolve disputes. Such contract-based arbitration bypassed local legal systems and demonstrated that private individuals could create systems of rules within the international legal regime that suited their interests. In this sense, it is the forerunner of investment treaty arbitration that would emerge a few years later.

Permanent Court of Arbitration, The Hague, 1910 by Antonie Steinmetz / Wikimedia

Foreign investors in the post WW2 era

The end of colonialism was a turning point. Foreign investors could no longer rely on colonial law or military intervention to protect their interests. Safeguarding their assets in newly independent states became a new challenge, in a context where these states saw colonial hardship as both a factor in Europe’s prosperity and their underdevelopment. African and Asian states now wanted full control over their national resources and foreign investment, and followed the Latin American countries’ view that disputes should be settled by domestic courts.

Companies in the former colonial powers and their US ally disagreed, arguing that the rule of law was lacking in the overseas territories. In their view, their investments should be protected from expropriation - the taking of their private property by the government for a purpose deemed to be in the public interest - in a so-called neutral judicial forum applying international law.

But first, arbitration decisions had to be made enforceable. Arbitration tribunals had been settling foreign investment disputes arising out of contracts for several decades, but investors could not rely on a widely accepted international agreement on the recognition and enforcement of foreign arbitral awards in other countries. As a result, the application of these awards was a challenge in itself.

The International Chamber of Commerce, whose arbitration court was widely used, took up the cause. It drafted a convention and lobbied the United Nations to adopt it. With minor changes, the New York Convention, formally known as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, was signed in 1958. In practice, this meant that arbitral awards could cross borders and foreign investors could ask a court in any signatory country to enforce the award. [13] In 2012, for example, Achmea, a Dutch insurance company, sued Slovakia over the state’s decision to reverse the privatisation of the domestic healthcare system and was awarded 22 million euros by an arbitration tribunal. [14] After Slovakia refused to pay, Achmea was able to secure the seizure of 29.5 million euros in assets belonging to the Central European state in Luxembourg banks, after filing an action in a local court. [15]

The idea of a global investment protection instrument was gaining ground. Two prominent corporate figures drafted a convention on investment abroad, inspired by US-style treaties of friendship, navigation and commerce. [16] Born in 1902, when the sun never set on the British Empire, Hartley Shawcross was a lawyer who also had a career as a director of a broad range of corporations, including the Anglo-Dutch oil company Shell. He had been involved in several post-war oil arbitrations and was concerned about the protection of foreign private capital in the newly independent countries. His cohort, the German banker Hermann Abs, served as a senior executive at Deutsche Bank and IG Farben [17] under the Nazi regime, and as a senior official in the Reich’s Ministry of Finance. As such, he was responsible for overseeing the confiscation of Jewish property and its transfer to non-Jewish Germans. After the war, Abs lived through the massive expropriations of German property orchestrated by the Allies and rejoined Deutsche Bank in the late 1950s. The drafting of a joint text was timely, as the protection of foreign investment was back on the agenda in Germany and nationals were once again able to operate abroad. [18]

Their convention was ultimately rejected by most Western countries, but it would play a key role in shaping the future of foreign investment protection. Many controversial aspects, such as fair and equitable treatment and indirect expropriation, would find their way into modern free trade and investment treaties. Purely procedural rules in the convention would model the 1965 ICSID Convention.

The International Centre for Settlement of Investment Disputes (ICSID), part of the World Bank Group, is the most widely used arbitration tribunal for investor-state disputes under free trade and investment agreements. The Convention governing its arbitration was signed in 1965. [19] Four separate regional conferences had been set up during the discussions, but they could not interact with each other. Countries from Asia or Africa, for example, were unaware of similar reservations by others, suggesting that the World Bank had anticipated potential opposition. Although ICSID was originally created to settle contract-based disputes, its secretariat pushed many Western countries to include a reference to ICSID in their investment treaties. [20] Over the years, it has been the subject of much controversy from Southern countries and civil society movements globally. Criticisms have included the lack of transparency of arbitration panels, the lack of attention to health or environmental protection, and the bias of arbitrators in favour of the investor. [21] As a result, Bolivia and Venezuela withdrew in 2012.

However, until the late 1980s no investor-state disputes arose under investment treaties. Early BITs were short and did not contain strong provisions. Germany was the first to sign a few treaties after 1959, but they did not include an arbitration mechanism. The 1968 Indonesia-Netherlands BIT was the first to mention ICSID. But it was not until the turn of the 1990s that the situation changed. The demise of the Soviet empire, the triumph of neoliberalism and the Washington Consensus opened up a new world for Western corporations.

The third part examines how current free trade practices reflect their colonial legacy.


[1Miles, K., “International investment law: origins, imperialism and conceptualizing the environment”, Colorado Journal of International Environmental Law and Policy, vol. 21, no. 1, pp. 1-48, 2010

[2Gong, G., The standard of ’civilization’ in international society, Clarendon Press, 1984

[3Merrills, J. G. “Francisco de Vitoria and the Spanish conquest of the new world”, Irish Jurist , vol. 3, no. 1, pp. 187–194, 1968

[4Sornajah, M., Resistance and change in the international law on foreign investment, Cambridge University Press, 2015

[5“America and West Indies: September 1672”, in Sainsbury, N. (ed.), Calendar of state papers colonial, America and West Indies: Volume 7, 1669-1674, pp. 404-417, British History Online, 1889,

[6Sornajah, M., Resistance and change in the international law on foreign investment, Cambridge University Press, 2015

[7Miles, K., “International investment law: origins, imperialism and conceptualizing the environment”, Colorado Journal of International Environmental Law and Policy, vol. 21, no. 1, pp.1-48, 2010

[8Édits, ordonnances royaux, déclarations et arrêts du Conseil d’État du roi, concernant le Canada, P.E. Desbarats, 1803

[9Miles, K., “International investment law: origins, imperialism and conceptualizing the environment”, Colorado Journal of International Environmental Law and Policy, vol. 21, no. 1, pp.1-48, 2010

[10France used the same strategy. A common example is the Pastry War of 1838. The French fleet was sent to the Mexican coast and captured the major port of Veracruz after several complaints from French investors in Mexico. A few months later, a peace treaty was signed. It stipulated that Mexico would pay 600,000 pesos in compensation, a huge sum at the time, and that both countries would begin negotiations for a trade agreement.

[11Subedi, S., International investment law: reconciling policy and principle, Hart Publishing, 2008

[12Sornajah, M., Resistance and change in the international law on foreign investment, Cambridge University Press, 2015

[13The New York Convention had 24 original signatories and today has 168 parties.

[15“Slovak assets seized in dispute between state and Achmea”, The Slovak Spectator, 24 May 2013,

[16From its independence until the 1960s, the US signed many friendship, commerce and navigation treaties. These were comprehensive agreements covering trade, investment, intellectual property and even human rights, as well as international dispute settlement. They are often described as the forerunners of bilateral investment treaties.

[17IG Farben produced Zyklon B, the poison gas used in Nazi death camps. It was dismantled after the Second World War into AGFA, BASF and Bayer.

[18Alschner, W., “Americanization of the BIT universe: the influence of friendship, commerce and navigation (FCN) treaties on modern investment treaty law”, Goettingen Journal of International Law, vol. 5, no. 2, pp. 455-486, 2013; Bonnitcha, J., Poulsen, L., and Waibel, M., The political economy of the investment treaty regime, Oxford University Press, 2017; James, H., The Deutsche Bank and the Nazi economic war against the Jews: the expropriation of Jewish-owned property, Cambridge University Press, 2001

[19There were 20 original signatories to the Convention and 153 today.

[20Sornajah, M., Resistance and change in the international law on foreign investment, Cambridge University Press, 2015; St John, T., “The creation of investor–State arbitration”, in Schultz, T. and Ortino, F., (eds.), The Oxford handbook of international arbitration, Oxford University Press, 2020

[21Gómez, K., “Latin America and ICSID: David versus Goliath?”, Law And Business Review Of The Americas, vol. 17, no. 2, pp. 195-230, 2011