Investment: TRIMS and Bilateral Investment Provisions

1
Investment TRIMS and Bilateral Investment
Provisions--------------------

• 31 October- 1 November 2007, International
  Training Centre of the ILO, Turin (Italy)
• ------------------------
• Ermias T. Biadgleng, South Centre.
• All statements are personal to the presenter and
  do not necessarily reflect the official position
  of the South Centre or its Member States.

2
Outline

• International Law and Trends on Foreign Direct
  Investment Regulation
• What is investment?
• Objective of Investment Agreement
• Standards of Treatment
• Freedom of Establishment and Repatriation of
  Capital
• Standards of Investment Protection
• Non-Discrimination
• Expropriation
• Indirect Expropriation
• Performance Requirements TRIMS and the U.S.
  Bilateral Investment Agreements
• Corporate Regulation and Measures for the
  Protection of Public Interest
• Dispute Settlement
• Dispute Settlement Facilities

3
International Law and Trends on Foreign Direct
Investment Regulation

• Customary International Law
• Basic laws protecting aliens and their property
  from discriminatory treatment
• Investment Treaties
• Bilateral Investment Treaties
• Started as agreement between European and
  Developing Countries
• Germany and Pakistan- first BIT signed in 1959
• First BIT of the United States was signed in 1982
  with Panama
• BITs are very rare among developed countries
• Currently there are more than 2500 BITs
• The leading countries in terms of the number of
  BITs are
• Germany, China, Switzerland, United Kingdom,
  Egypt, Italy, France, Netherlands, Belgium and
  Luxemburg, and Korea.
• Free Trade Agreements with investment Chapters
  U.S., Japan and Australia.
• Regional Investment Agreements
• Ex., North American Free Trade Agreement (NAFTA).
• The Energy Charter Treaty- started as regional.
  It is largely accepted by European countries and
  transition economies, with notable exception of
  Russia and Norway.

4
International Law and Trends on Foreign Direct
Investment Regulation

• Multilateral Treaties (Substantive and
  Procedural)
• Effort to establish multilateral treaties on
  investment have repeatedly failed
• UNCTAD- Code of conduct on multinational
  corporation and transfer of technology
• OECD- Multilateral Agreement on Investment- 1998.
• WTO Singapore issues- Investment, competition
  and government procurement
• The WTO General Agreement on Trade in Services
  (GATS) remain the main source of multilateral
  commitment
• GATS provide mechanism for countries to committee
  the liberalisation of services sectors through
  negotiation
• The International Centre for the Settlement of
  Investment Dispute (ICTSD) remain the main
  institution providing facility for investment
  disputes
• The World Bank and International Monetary Fund
  promote investment liberalisation, including as
  condition to loan or grant
• OECD and the UN promote soft laws, by adopting
  frameworks and resolutions

5
What is Investment?

• Investment is defined under each agreement
• Two broad categories Foreign Direct Investment
  (FDI) and Portfolio Investment
• The notable difference in FDI are
• Defining investment as by company
• Defining investment by providing list of assets
• See example, U.S. Uruguay BIT (2004) for
  definition based on investment asset and Energy
  Charter for definition based on enterprises
• Questions that may arise in relation to
  investment
• list of assets broader than available under
  domestic laws
• Assets that dependent on domestic legislation for
  their validity, e.g. geographic indications
• Assets difficult to determine their value, e.g.,
  market shares, contacts.

6
Objectives

• Why States develop binding international norms on
  Foreign Direct Investment ?
• Developed Countries- capital exporters
• Developing Countries- capital importing-
  Promotion of investment.
• Mutual Benefit?
• Fairness and Equity
• Substitute for Domestic laws and institutions?
• Who bears the risk? Developing countries!
• Development process- that need active government
  role
• Public interest in relation to operation of
  multinationals vis-à-vis investment disputes?
• Who gain the benefits? Multinational
  corporations!

7
Standards of Treatment

• Favourable treatment available for the domestic
  investor- non-discrimination
• Favourable treatment available for the
  most-favoured nation
• Exception Regional Trade Agreements (Free Trade
  Agreements, Customs Union)
• Sectors reserved for domestic investors
• Fair and Equitable Treatment- international
  minimum standard

8
Freedom of Establishment and Repatriation of
Capital U.S. BITs and GATS

• National treatment is extended to freedom of
  establishment- typically under the U.S. BITs
• GATS provide for commercial presence or
  otherwise called mode 3 for the supply of
  services
• The GATS apply, in principle, to all services
  hotels, water, sanitation, electricity,
  telecommunication, finance, health,
  transportation, recreation (including gambling)
• Liberalisation takes place when countries enter
  into commitment upon bilateral negotiation
• Note the case of United States on internet
  gambling
• The Doha Round of negotiation is expected to
  result in opening services sector significantly
• International Commitment for liberalisation means
  countries do not have the option to change their
  investment policies- worse than IMF and World
  Bank
• Liberalisation of essential facilities, such as
  water, affects access and affordability of
  essential facilities. Regulation become
  essential.
• BITs usually provide for guarantee of
  repatriation of profit and capital

9
Standards of Investment Protection

• Non-Discrimination
• Expropriation only for public purpose
• Indirect Expropriation collision with
  environment, competition and other regulations
• Compensation Prompt and adequate

10
Performance Requirements TRIMS and the U.S.
BITs

• Countries want to
• maximise the benefit from the presence of
  foreign company
• reduce the consequence of investment activities
  by big companies on local industry
• to safeguard their economy and external financial
  standing
• Performance Requirements have been one of the
  mechanism widely used by developed countries in
  integrating foreign companies to local economy
• Trade related investment measures (TRIMS) covered
  by the WTO
• Balancing requirements with respect to trade
• Balancing requirement with respect to foreign
  currency
• Supply of domestic market
• Local content Indonesia measures affecting
  automotive sector
• Technology, skill and development related
  measures (BITS) Requirement to
• transfer technology to local partners
• undertake Research and development in relation to
  the investment activity
• train and upgrade skills
• Hire and involve human resource available within
  the country

11
Corporate Regulation and Measures for the
Protection of Public Interest

• Investment agreements generally provide that
  investors observes of the law of the land
• Special formalities, Information requirements
• Corporate Conduct Investment agreements do not
  provide for rules on the conduct of investors
• Corporate Social, and Environmental
  Responsibilities No binding rules exist

• Measures for the Protection of Public Interest
• Competition
• Public Health
• Environment
• Labour
• National Security
• Permitted provided that they are not
  discriminatory, confirm to fair and equitable
  treatment, do not amount to expropriation

12
Dispute Settlement

• State-to-State Dispute Settlement
• Diplomatic Protection
• Investor-to-State Dispute Settlement
• No in the case of Australia and US BITs
• Investor-to-State contract Dispute Settlement
  Most controversial According to some BITs, state
  are required to observe their undertakings,
  contracts, obligations and other commitments with
  foreign investors as a treaty obligations.
• Contracts, promises are elevated to international
  obligation
• State-to-Investor Dispute Settlement? None

13
Dispute Settlement Facilities

• ICSID
• Designated arbitration centres
• Other ad hoc facilities under UNCITRAL rules
• Controversies
• Arbitration proceedings are confidential
• Public law disputes private commercial disputes
• Arbitration awards are final
• Arbitration awards may not always be disclosed
  for the public
• Usually result in awards favourable to investors