Event 1. Module 2. The Converging Strands Between …...Impact of investor-State arbitration •...
Transcript of Event 1. Module 2. The Converging Strands Between …...Impact of investor-State arbitration •...
Origins, policy rationale, and evolution of the different
types of IIAs
World Trade Organization (WTO), Preferential Trade
Agreements (PTAs), Bilateral Investment Treaties (BITs)
The new paradigms in investment rule-making: from
BITs to new generation IIAs
Interaction between trade and investment regulation
The impact of these agreements and domestic reform
Presenter: Roberto Echandi Resource person: Ivan Anton Nimac
Event 1. Module 2. The Converging Strands Between Trade and Investment Session One: Introduction to IIAs
Introduction to International
Investment Agreements (IIAs)
Vienna, 12 October 2015
INVESTMENT POLICY AND PROMOTION WEEK
Introduction to International Trade and Investment Agreements:
The evolution of investment rule-making. B
The ABC of International Trade & Investment Agreements:What should a government official know about these agreements?
A
What is the relevance of these negotiations for domestic investment policy?
C
The different levels of investment regulation
• National level– Specific laws applicable to investment or FDI– Non-investment specific domestic regulatory framework– Contracts
• International Investment Agreements (IIAs)
• Bilateral level– Bilateral Investment Treaties (BITs)
• Regional and/or Preferential Level– Regional Customs Unions (MERCOSUR, GCC, EAC) – Free Trade Areas/Preferential Trade Agreements (PTAs)
• Multilateral level– Applicable rules in the WTO Agreements– Other international investment conventions ( ECT, ICSID,
UNCITRAL)
IIAs
Source:UNCTAD
•More countries
undertaking more
regulatory changes…
•Despite prevailing promotion of FDI,
protectionism is in the
increase…
Investment Regulation: National Level
Investment Regulation: Bilateral LevelBilateral Investment Treaties (BITs)
Background:
• Customary International Law (XIX Century)– State Responsibility to Protection of Aliens and their Property
– Diplomatic protection
– Arbitration Comissions
• Friendship, Commerce and Navigation Treaties (Late 1700s)
• OECD Draft (1950s)
• First BIT: 1959 Germany & Pakistan
• Wave of agreements negotiated 30 years later during the 1990s
Original rationale and emphasis:
• Protection of assets of foreign investors overseas
• No interest in providing right of establishment to investors
BITs: Typical Elements
• Scope of Application– Definition of covered “investments” and “investors”
• Investment Entry and Establishment– Admission clause– Non-discrimination to investors regarding entry (subject to exceptions)
• Standards of Protection– Non-discrimination – Minimum Standard of Treatment– Protection against unlawful expropriation– Compensation in cases of strife– Transfers
• Other provisions– Performance requirements– Labor and environmental standards, culture, safety, regulatory coherence– Umbrella clauses
• Enforcement– Dispute Settlement
• State to State• Investor State
The surge of Preferential Trade Agreements: a consequence of competition for investment
Host Country
Export Country
A
Export Country
C
Export Country
D
Export country
B
Hub & Spoke Model
PTAs are key to attract
export-oriented FDI
The more PTAs, the
higher the number of secured
export markets the host country
can provide to export
oriented FDI
Investor
Source: UNCTAD
Proliferation of PTAs with investment provisions
0
50
100
150
200
250
300
350
1957 – 1967 1968 – 1978 1979 – 1989 1990 – 2000 2001 – 2010
By period Cumulative
Preferential Trade Agreements (PTAs) Typical Contents
• Trade in Goods– Tariff liberalization program– National Treatment in regulations– Rules of origin & customs procedures– Sanitary and Phytosanitary Standards (SPS)– Technical Barriers to Trade (TBT)– Subsidies (Incentives)– Trade defense mechanisms (safeguards & dumping)
• Trade in Services (sectors & temporary entry)• Investment• Government Procurement• Intellectual Property• Competition Policy• Labor• Environment• Institutional Aspects• Transparency• Dispute Settlement• Governance (Administration & Implementation)
Tariffs are no longer as
Important as in the past….
Now what matters are the
rules governing production and
access to markets….
The “Patchy” Legal Framework for International Investment: Multilateral Level
• There is no multilateral agreement on investment
• Failed attempts to bring investment into a multilateral setting• Havana Charter (ITO)• MAI• WTO
• Applicable rules on WTO Agreements– GATS, TRIMs, TRIPs, ASCM, DSU
• Other relevant investment-related institutions– International Centre for the Settlement of Investment Disputes (ICSID)– Multilateral Investment Guarantee Agency (MIGA/World Bank)– Arbitration Centres (ICC, Stockholm Chamber of Commerce)– Other World Bank agencies (IFC,FIAS)– Energy Charter Treaty– UN Global Compact– OECD Guidelines on Multinational Enterprises– OECD Convention on Bribery and Corruption– OECD Guidelines on Corporate Social responsibility– OECD Policy Framework for Investment– OAS Anti-bribery convention
Challenge: to foster more normative coherence
• De facto «overlap»• Agreements apply to the same matter
– GATS mode 3 & BITs applying to investmentin services
– TRIMS performance requirements– TRIPs– ASCMs, incentives
• Agreements contain analagousobligations which lead to similar results
– Art.VI. Domestic regulation & FET in BITs
• Explicit interaction in treatytext
– Reaffirmation of commitments (GATS)– Observe other agreements (TRIMs)– Incorporation of other Agreements
Effects:• Reinforcement• Expansion-complement• Contradiction
BITBI
BITSBITB
I
BITBI PTAs
WTO
BITS
Evolution of the Rationale in Investment Rule-making
1960s 1960s-1980s 1990s- present
Natural resource
seeking FDI
Natural
resource seeking FDI
Natural resource
seeking FDI
Market seeking
FDI
Market seeking
FDI
Efficiency-seeking
FDI
BITs/ ProtectionBITs & PTAs Protection &
Liberalization
Natural resource
seeking FDI
-1950s
GATT
De-colonization I.S.I. Model Market-oriented reformAgro-export model
FCN Treaties
C.I.L.
State responsibility
to aliens
IIAs really matter….• Context in which new global standards are generated
• Provide key certainty and predictability to investors involved in global value chains
• Cost of being left out for governments and domestic investors increases as PTAs with bigger markets proliferate
• Conformity of domestic legislation with international standards becomes more important
• Countries assume commitments that are monitored and enforceable, making these agreements instruments for domestic reform
• Governments, private sector and civil society pay increasing attention to these agreements… and to the reforms they generate
Empirical evidence: What is the impact of IIAs on FDI?
• Heterogeneous results due to data and methodological challenges (UNCTAD 2014)
• Key consideration to the debate is the function of IIAs with respect to countries’ overall development strategies. Attracting FDI is neither the prime --nor the only-- role of IIAs (UNCTAD 2014)
• IIAs and developing countries: multiple functions within two different dimensions:• International dimension: attract & retain FDI; participate in rule-making process of
GVCs; de-politicize investor-State conflicts, and increasingly protect outward FDI abroad
• Domestic dimension: lock-in effect on liberalization and promotion of greater discipline on internal regulatory transparency and effective investment protection guarantees (to be developed in next section)
20
Empirical evidence on impact of IIAs on attraction of FDI
• Impact on attraction tends to be different depending on the type of IIA and investment concerned
• While evidence on BITs is inconclusive, evidence on impact of PTAs in attracting FDI -- in particular export-oriented-- is much stronger. • Due to secure market access conditions in export destinations
• Key for efficiency-seeking FDI
21
Impacts of BITs and PTAs on FDI flows: some studiesCountry Study Investor protection measure studied EffectCross-country Berger and others
(2013)
Ratification of bilateral investment agreements and
preferential trade agreements with all source
countries (83 developing host countries and 28
source countries)
In the short term a host country could increase its share of FDI
flows from all source countries by 17% through bilateral
agreements and 23% through preferential trade agreements. The
long-term effect increases to 37% for bilateral agreements and
50% for preferential trade agreements. The long-term impact of
switching from preferential trade agreements without national
treatment provisions to agreements with them (with all source
countries) is about 29%
Cross-country Busse, Koniger, and
Nunnenkamp (2010)
Ratification of bilateral investment agreements (83
developing host countries and 28 source countries)
Nearly 25% increase in host country share of FDI flows from all
source countries. Long-term effect is about 31%
Cross-country Colen, Persyn, and
Guariso (2014)
Ratification of a bilateral investment agreements
(13 countries in the former Soviet Union and
Central and Eastern Europe)
Increases the stock of FDI by 1- 2%. Investments highest for
util ities and real estate and to a lesser extent banking and mining.
No effect found for manufacturing and services
Cross-country Egger and Merlo (2012) Ratification of a bilateral investment agreement
(Germany and 86 host countries)
12.6% increase in number of affil iates, 45% increase in FDI flows,
25% increase in employment, 49% increase in assets. FDI
generated by signing and ratifying a bilateral agreement averages
about 5 mill ion euros per firm and 130 mill ion euros per host
country
Cross-country Haftel (2008) Ratification of a bilateral investment agreement
relative to its signing (U.S. and 120 host countries)
FDI to host country increases from 0.07 to 0.24% of GDP. No
effects for signed bilateral agreements
Cross-country Yackee (2009) Signing of bilateral investment agreements
between the top 18 FDI source countries and the
rest of the world
No effect on FDI flows
Cross-country Lesher and Miroudot
(2006)
Ratification of a preferential trade agreement with
substantive investment provisions (177 countries)
Associates with a 57.1% increase in FDI flows and a 20.8% increase
in exports
Cross-country Buthe and Milner
(2008)
Ratification of a preferential trade agreement;
moving from a preferential trade agreement
without an investment clause to one with a strict
investment clause; moving from an agreement
without any dispute settlement mechanism to one
with such mechanism (122 developing and
transition economies)
Increases FDI by an equivalent of 0.274% of GDP. No effect for
signed preferential trade agreements; increases FDI by an
equivalent of 0.316% of GDP; increases FDI by an equivalent of
0.252% of GDP.
All results reported over five year-period22
Investment retention
• In developed countries, most of the FDI
inflows every year come from
expansion of investors already
established in the host country.
• Retention of existing investors should be a key priority for
developing countries.
• However, countries tend to focus efforts on attraction of new
investors.
• Investment retention is important not only to expand FDI, but
also key for generating investment confidence in new
investors
Binding constraints for investment retention: political risks generated by governments themselves
One out of four corporate investors either withdrew from an existing investment
or canceled planned investments due to political risk concerns…
Source: WIPR 2012
Political risks that investors are most concerned about relate to government actions
Impact of IIAs on investment retention
25
• There is a clear coincidence between government actions
affecting retention of investments, and the types of conduct
that IIAs purport to prevent.
• In most countries, there is a clear co-relation between
investment protection guarantees included in IIAs, with
those existing in domestic legal frameworks (Schill, 2011,
FTAA 1996)
• Thus, the key difference between IIAs and domestic laws
is that the former provide foreign investors with direct
international enforcement
Impact of investor-State arbitration
• Increased controversy due to increased investor-State
litigation… but for different reasons…• Some OECD countries: “discovery” of international investment regime
• Other OECD countries (EU): interaction with internal regional adjudication mechanisms
• Some Latin American countries: ideological issues (Venezuela, Ecuador and Bolivia)
• Other emerging economies (South Africa, Indonesia, Brasil), reaction against potential
effects of ISDS over their domestic policy making
• Majority of countries stick with rule-oriented regime
• Evolution in the features of IIAs• U.S. and Canada started by reforming NAFTA.
• Europe started discussion in the wake of the Lisbon Treaty and has negotiated a “new
generation” with Canada
• Negotiations of “mega regionals” will also reflect new trends
ISDS and its impact on investment rule-making
0
20
40
60
80
100
US Neth.
Annexes
Protocols
Exceptions
Disputes
Substantive
Definitions
Pages of Text:
Dutch v. US Investment Treaty with Uruguay
Source: Legum 2011
0
5
10
15
20
25
30
35
40
US Neth.
Protocols
Exceptions
Disputes
Substantive
Definitions
Source: Legum 2011
Pages of Text without Annexes:
Dutch v. US Investment Treaty with Uruguay
“New Generation IIAs”: Major Trends
1. Gradual movement from traditional approach focused on investment protection towards liberalization of investment
2. Greater precision in the definition of ‘investment’
3. Clarification of the content of certain key substantive provisions on investment protection
4. Promotion of transparency of regulations and rule-making
5. Clarification that investment protection and liberalization should not be pursued at the expense of other key public policy objectives
6. Innovations regarding Investor-State Dispute Settlement (ISDS) and alternative means to deal and prevent disputes.