Authors: Uri Dadush, Sherry Stephenson
Originally published by the Global Agenda Council on Global Trade and FDI
Despite its importance, the disciplines governing FDI lie in the shadow of those governing global trade. There is no single, comprehensive multilateral treaty or institution to oversee investment activity. Various attempts to bring FDI under multilateral purview in the past have been unsuccessful. The result is a complex and confusing overlay of bilateral, regional and, in very limited areas, plurilateral disciplines. The negotiation of mega-regionals (e.g. TPP and TTIP), if successful, may improve this situation in some instances, or may result in just another layer of complexity.
Efforts at the multilateral level
There have been several attempts to govern investment at the multilateral level. In addition to the efforts to address the topic in the Havana Charter of 1948 – which ultimately failed for other reasons,48 a second attempt was made by the OECD through its four-year effort (1995–1998) to craft an MAI. The effort involved OECD Members and a few key developing countries. When made public in 1997, the draft agreement drew widespread criticism from civil society groups and developing countries, and the ensuing public pressure and opposition led to the withdrawal of first France and then other countries from the agreement. The effort was suspended at the end of December 1998.
A third attempt to bring investment under multilateral rules took place within the WTO itself, in the context of the Doha Development Agenda, when investment and three other “Singapore issues” (competition policy, government procurement and trade facilitation) were originally included within the Doha negotiating mandate. However, dissension within the WTO ranks made it impossible to reach a decision by consensus on the modalities for negotiating these issues, and therefore negotiations could not be launched as planned at the 2003 Cancun Ministerial Conference. While the EU, Japan and Korea were supportive of negotiating all four issues, most developing WTO Members were generally opposed, and the United States preferred to focus on market access rather than on generalized disciplines. In August 2004 three of the four “Singapore issues” (including investment) were dropped from the Doha Agenda, and negotiations were subsequently launched on only one subject: trade facilitation.
These repeated failures to consolidate a multilateral investment regime have left in place an irregular, overlapping and complex “patchwork quilt” of over 3,000 agreements in the IIA universe, consisting of 2,833 BITs and 331 “other IIAs, primarily FTAs with investment provisions, economic partnership agreements and regional agreements” (see the table in the Annex). This incoherent and often contradictory picture of FDI governance, with its associated costs and inefficiencies, undermines the tremendous value that investment brings as a source of world economic growth and employment, generator of world trade flows and driver of innovation and technological change.
Partial investment rules at the multilateral level
The Uruguay Round resulted in a patchwork of partial investment rules within the WTO. There are three agreements currently in effect that cover aspects of FDI, but they are not related in any way; nor are they comprehensive.
The first of these is the TRIMS Agreement covering trade in goods with a few disciplines but no investor protections. The second is the GATS, which covers FDI in services, defining FDI as one of the four ways of trading services (mode 3 or “commercial presence”). Certain generalized disciplines within the GATS on MFN, transparency and notification, and domestic regulation apply to FDI in services, but there are no comprehensive disciplines that address investment guarantees and protections. The third is the Agreement on SCM, which abolishes export subsidies for most products and regulates the response to them, as discussed by Dadush in the previous section. These three existing WTO agreements are insufficient to provide a coherent and effective regulatory framework for FDI at the multilateral level.
Agreements at the plurilateral, regional and bilateral levels have attempted to remedy inadequacies at the multilateral level in dealing with FDI, though in doing so, they have created their own network of overlapping – and sometimes contradictory and incoherent – disciplines, adding to the “patchwork quilt” on FDI. The table in the Annex summarizes the types of agreements that have been negotiated at various levels on FDI and their membership.
Plurilateral agreements on investment
At the plurilateral level, both the OECD and APEC have drawn up agreements on investment, to be followed by their Member economies, either as a contractual obligation or as a guideline for best practice.
The OECD Code of Liberalisation of Capital Movements (1961) and the Code of Liberalisation of Current Invisible Operations (1972) constitute a complementary set of legally binding rules that are obligatory for OECD Members. They stipulate the progressive, non-discriminatory liberalization of capital movements, the right of establishment and current invisible transactions (mostly services). The Codes provide a framework for countries to progressively remove barriers to the movement of capital through peer policy reviews and country examinations to encourage unilateral, rather than negotiated, liberalization. Under the Codes, an adhering country is entitled to benefit from the liberalization of other adhering countries, regardless of its own degree of openness. In July 2012 the OECD Council adopted a landmark decision on governance of the Code of Liberalisation: non-OECD Members willing and able to meet the standards of adherence are welcome to join and will benefit equally from all rights and obligations.
The OECD has also developed the 1976 Declaration and Decisions on International Investment and Multinational Enterprises (DIIME), which constitutes a policy commitment to improve the investment climate, encourage the positive contribution of multinational enterprises to economic and social progress, and minimize and resolve difficulties that may arise from their operations. The DIIME is obligatory for all OECD countries, but non-OECD Members can also adhere to it; at present nine other countries (Argentina, Brazil, Colombia, Egypt, Latvia, Lithuania, Morocco, Peru and Romania) have subscribed to the Declaration.
APEC Members developed a set of “Non-binding Investment Principles” in November 1994, which set out agreed guidelines for 12 different areas of investment, including national treatment, investment protections and dispute settlement. The principles are of a very general nature, however, and have not been further elaborated since then. APEC Members also worked on a series of model measures for commonly accepted RTA chapters from 2005 to 2008 to serve as guidelines for high quality and consistent provisions. The work was completed for model measures in 15 chapters, but investment was not one of the areas included, given the lack of agreement on how to address it in RTAs.
Regional agreements on investment
There has been a continuing trend in the world economy towards using RTAs as the preferred mode of negotiation for rules on investment. NAFTA broke new ground in 1994 with an innovative approach to investment rules and disciplines that are applied in a generic manner to goods and services in a separate chapter. Cross-border trade in services and investment are addressed in chapters devoted to each. Investment rules and disciplines cover both matters of investment protection (which are typically treated under bilateral investment treaties) and liberalization through market access (typically with respect to both pre- and post-establishment rights). These are combined with investor-state and state-to state dispute settlement provisions, all of which apply to both goods and services, in an attempt to reflect the integrated framework of modern production and trade decisions. Investment in this context is often defined broadly to cover FDI as well as portfolio investment and other capital movements.
NAFTA’s comprehensive approach to investment liberalization and disciplines has been adopted by several countries in RTAs around the world. Some countries have preferred to deal with investment in RTAs using a hybrid approach, by including provisions on “commercial presence” for FDI in services as well as a separate chapter on investment (goods and services). Still other countries have followed the GATS approach, dealing only with FDI in services and no other investment provisions. Although there is currently no commonly accepted way of dealing with investment in RTAs, investment chapters are becoming more numerous in regional agreements, as in the case of the Mexico–Central America Free Trade Agreement and the CARIFORUM–EU Economic Partnership Agreement. The lack of common treatment, however, makes it a challenge for investors to navigate the legal possibilities across different RTAs.
Regional investment agreements are also being concluded outside of RTAs, which may be incorporated into future formalized trade agreements, as is the case with the 2012 Trilateral Investment Agreement between China, Japan and the Republic of Korea. This shift towards regionalism can represent a step towards multilateralism by consolidating and harmonizing investment rules, but can also lead to the opposite outcome: duplicating treaty layers, giving rise to potential inconsistencies and generally making FDI governance even more complex.
Investment rules are a part of the “mega-regional” trade agreements now being negotiated among or envisaged by major world trading partners. The TPP negotiations have a draft investment chapter in place, while the Association of Southeast Asian Nations (ASEAN) Regional Comprehensive Economic Partnership negotiations, launched at the ASEAN Economic Summit in November 2012, also envisage the possibility of incorporating investment disciplines. Lastly, the US–EU FTA announced by the US administration in January 2013 will certainly contain significant provisions for both investment protections and investment access. To the extent that the content of these future “mega-regionals” is similar, they could be leading the world economy on a path towards a global investment regime.
Bilateral agreements on investment
Nearly every country in the world has signed a BIT (or several dozen of them). The United Nations Conference on Trade and Development (UNCTAD) puts the number of BITs at the end of 2011 at 2,833. Perhaps because of the larger existing number already negotiated, or because of the shift towards negotiations of regional FTAs or regional treaties, the number of new annual BITs signed has declined recently, with a total of 47 new IIAs signed in 2011 (33 BITs and 14 other IIAs), compared with 69 in 2010.
Both the United States and the EU have developed model BITs, with differing approaches in some key areas. The US-model BIT was elaborated in the 1980s, revised in 2004 and most recently revised again in 2012. In 2012, the United States revised its model BIT, introducing changes relating to transparency and public participation, sharpening the disciplines on SOEs, and strengthening protections relating to labour and the environment. The European-model BIT is based on the Abs-Shawcross Convention model endorsed by OECD ministers in 1962. In an important change, following the implementation of the Lisbon Treaty in 2009, the EU was given exclusive competence on FDI with the authority to negotiate BITs on behalf of EU Members. The previously existing 1,200 BITs concluded by the EU Member states are being respected, but over time may be replaced with EU-wide investment agreements.
These model BITs have been used by the United States and the EU, respectively, to make their agreements compatible between investment partners. However, this compatibility is elusive between the two main models. The fundamental difference lies in the extent of application of the treatment disciplines: while both “pre” and “post” establishment are covered in the US model BIT, only investment “post” establishment is covered in the European model. The US model also contains more disciplines on performance requirements and has more elaborate provisions in other areas, such as right of entry and sojourn of investors. Thus, although both models similarly cover a few major areas (admission and treatment, transfers, key personnel, expropriation and dispute settlement), they differ with respect to key aspects of investment and investor treatment, thus complicating the life of investors whose governments have signed BITs with both the United States and EU Members.
Where do developing countries fit in the investment picture?
Developing governments have been actively seeking partners for BITs as a way to promote trade and economic relations and to elicit interest in their economies as a destination for FDI. Only a few countries have refrained from the BITs race, most notably Brazil, which has signed BITs with 14 countries, none of which have entered into force. Brazilian authorizes have feared that strong protection clauses and comprehensive investor–state dispute resolution mechanisms in BITs may restrict their ability to pursue an independent national development strategy, expose the country to liabilities caused by legal claims by foreign investors and increase the complexity of policy-making. Although the size and dynamism of Brazil’s domestic market have allowed it to abstain from international agreements, most developing countries do not have such homegrown advantages. In fact, most developing countries have chosen the opposite path: to attract as much FDI as possible to boost their economic growth.
Both China and India have signed several BITs; as of mid-2012, China had BITs with 128 countries, of which 101 are in force. India had signed BITs with 83 countries as of the same date, of which 67 are in force. Neither India nor Brazil, however, has entered so far into any RTA with deeper disciplines on investment. And the quality of the BITs they have concluded is unequal, so the ability of these agreements to attract FDI will not be guaranteed.
Shifting patterns of global FDI in which South-South flows account for a larger share of global FDI will challenge developing countries’ typically cautious international investment policy approach. As capital importers, they may still have an interest in preserving safeguards in their BITs to support domestic development processes. As newly evolving capital exporters, however, these countries will have to (re)negotiate liberal BITs with developed and other developing countries to protect the foreign investments of their own national enterprises.
Costs arising from the “patchwork quilt” of investment agreements
The increasingly complex global setting for international investment that has resulted from the “patchwork quilt” of agreements discussed above requires investors and governments to try and ensure consistency between differing sets of obligations. While these agreements carry the legal force of international treaties, the legal implications of overlapping sets of various obligations are not always clear. Each agreement has its own architecture, objectives, and cultural and legal specificity, which makes it difficult to assess the global picture and the actual investor disciplines and protections for each potential investment location.
A large number of investment agreements, notably the BITs, contain similar concepts (national treatment, MFN treatment, fair and equitable treatment, full protection and security), but have legal and/or textual variations that can result in divergent interpretations of the same general obligation under different agreements. This can engender costs, in the form of time and inefficiencies in trying to sort through the implications of various provisions in different investment contexts, and potentially divert investment flows from more efficient to less efficient locations.
Another question raised by the overlapping set of investment agreements is the possibility of “forum shopping” in the case of dispute settlement, where an investor may initiate multiple procedures on the same issue to take advantage of the potentially more favorable dispute settlement provisions available in different agreements.
Chapter 6—The Current (Fragmented) Governance of FDI, is part of a broader report by the Global Agenda Council on Global Trade and FDI entitled, “Foreign Direct Investment as a Key Driver for Trade, Growth and Prosperity: The Case for a Multilateral Agreement on Investment.”
Leave a Reply