The Role of International Investment Agreements in Attracting ...
International Investment Agreements: Implications for ...E0%CD%A1... · 22/05/58 2 Questions for...
Transcript of International Investment Agreements: Implications for ...E0%CD%A1... · 22/05/58 2 Questions for...
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International Investment Agreements:
Implications for Public Policy
ความตกลงดา้นการลงทนุระหว่างประเทศ: นยัต่อนโยบายสาธารณะ
Pariwat Kanithasen
Seminar at the Faculty of Economics, Thammasat University
22 May 2015
Disclaimer: Views expressed in this presentation are those of the speaker
Metalclad v Mexico (1997)
Metalclad, a US firm, built a
hazardous waste facility in
Mexico in 1993.
The local government stopped
the project due to
environmental reasons.
Metalclad sued Mexico under
NAFTA’s Investor-State Dispute
Settlement proceedings in
Canada
Mexico lost: had to pay
$ 16.7m compensation
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Questions for today
1. What are International Investment
Agreements?
2. How do they affect public policy?
3. Are there prospects for reforms?
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1. IIA: Foreign Investment for Policy Space
Foreign Investor
Country gives up some policy space…
Policy space through guarantees
Investments
…in exchange for Foreign Investments
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Host Country
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1. IIA: Forms
International Investment Agreements (IIAs):
treaties giving foreign investors rights and
remedies protecting their investment in the host
country
Bilateral Investment Treaties (BITs):
investment protection
Investment Chapters of FTAs: investment
liberalization and protection
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1. IIAs in the context of FTAs
Goods: Lower tariffs,
non-tariff barriers
• Multilateral: GATT/WTO
• Plurilateral: AFTA, ASEAN+1, NAFTA, TPP
• Bilateral: Thai-X FTA
Services: Liberalize cross-border
services
• Multilateral: GATS/WTO
• Plurilateral: AFAS, ASEAN+1, NAFTA, TPP
• Bilateral: Thai-X FTA
Investment: Liberalize and protect
investments
• Multilateral: none
• Plurilateral: ACIA, ASEAN+1, NAFTA, TPP
• Bilateral: Thai-X FTA
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FTA
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1. Proliferation of IIAs
Global
3,000 BITs and around 300 FTAs
with Investment Chapters
Thailand
Bilateral Investment Treaties:
42 and counting
Bilateral FTAs: TAFTA (Aus), TNZCEP (NZ),
JTEPA (Japan), Thai-Chile, Thai-India*,
Thai-Peru*, Thai-EU*, Thai-EFTA*, Thai-
Canada*
Plurilateral FTAs: ACIA (ASEAN), ACFTA (A-China), AKFTA
(A-Korea), AJCEP (A-Japan), AANZFTA
(A-Aus-NZ), AIFTA (A-India), BIMSTEC*
(Bay of Bengal)
*under negotiation
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1. Do IIAs really attract FDI? 8
UNCTAD econometric studies (2009) and (2014):
Dataset: FDI from 27 advanced countries to 116 developing countries
1985-2012
Results:
No conclusive evidence that IIAs attract FDI
IIAs may be helpful for relatively risky countries
Other factors much more important, e.g. macro-fundamentals
Anecdotal evidence (Thai firms investing abroad):
No awareness of investment protection
Sources:
•UNCTAD (2009): The Role of International Investment Agreement in Attracting Foreign Investment to Developing Countries) • UNCTAD (2014): Do Bilateral Investment Treaties Attract FDI Flows to Developing Economies? • Baker, P. (2012): Who Enters into Bilateral Ivnestment Treaties and Do They Have an Impact on Foreign Direct Investment
• Interviews of Thai firms under the Bank of Thailand’s Business Liaison Program (2011-12)
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Questions for today
1. What are International Investment
Agreements?
2. How do they affect public policy?
3. Are there prospects for reforms?
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Safety
Economic Stability
1. IIAs and Public Policy Space
Environ- ment
Public Health
International
Investment Agreements
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2. Basic Framework of IIAs
1. Scope defines what is in
the agreement
• National Treatment
• Most-Favored-Nation Treatment
• Transfers
• Expropriation
• ….
2. Obligations tells what the host
country needs to do
Exceptions
• General exceptions and safeguards:
Security, Public health, Economic
Stability, …
Scope
Obligations
Investor-State
Dispute Settlement
4. ISDS specifies recourse to remedies
if obligations are breached
3. Exceptions: carves out what is
excluded
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2.1 Scoping 12
Definitions: What’s an investment?
FDI, portfolio, IPR
Who’s an investor?
Nationality-based, residents, companies
Policy implications: Portfolio investment,
speculative flows, sovereign debt, intellectual property, mailbox companies…
Switzerland-Thailand BIT
Article 1: Definitions
The term “investments” means every kind of asset, including, in particular, but not exclusively:
(a) movable and immovable property …;
(b) shares, stocks, bonds …
(c) claims to money...
(d) intellectual property rights...
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2.2 Obligations: National/Most-Favored-Nation Treatments
NT: no discrimination
against domestic
investors
MFN: no discrimination
against any other foreign
investors
Policy implications:
NT: Differential treatment during
debt restructuring
MFN: Treaty shopping
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ASEAN Comprehensive Investment Agreement (ACIA)
Article 5: National Treatment
Each Member State shall accord to investors of any other Member State treatment no less favourable than that it accords, in like circumstances, to its own investors ….
Article 6: Most-Favoured-Nation Treatment
…to investors of any other Member State or non-Member State.
2.2 Obligations: Fair and Equitable Treatment
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Minimum standard of
treatment
Very ambigous: What is Fair?
Equitable?
Basis: Customary international
law (What is it?)
Policy implications:
Highly ambiguous and most contested obligation
ASEAN Korea FTA
Article 5: General Treatment of Investment
1. Each Party shall accord to covered investments of investors of any other Party fair and equitable treatment…
2. (c) The concepts of “fair and equitable treatment”…do not require treatment in addition to or beyond that which is provided under customary international law…
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2.2 Obligations: Expropriation 15
Expropriation (direct and
indirect) only for public
purpose and with
compensation
Policy implications:
Direct expropriation:
nationalization during crises
Indirect expropriation: very
broad: can cover taxation,
license revocation, sovereign
debt restructuring, changed
investment expectations…
ASEAN-Australia-New Zealand FTA
Article 9: Expropriation
1. A Party shall not expropriate or nationalise a covered investment either directly or through measures equivalent to expropriation or nationalisation, except: for a public purpose; in a non-discriminatory manner; on payment of prompt, adequate, and effective compensation; and in accordance with due process of law.
2.2 Obligations: Transfers 16
Free transfers of capital
into and out of the
country
Policy implications:
Capital flow policies
especially during balance-of-
payments crises or massive
capital inflows
ASEAN-Australia-New Zealand FTA
Article 8: Transfers
1. Each Party shall allow all
transfers relating to a covered
investment to be made freely and
without delay into and out of its
territory. Such transfers include:
(a) contributions to capital, including
the initial contribution;
(b) profits,…
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2.2 Transfers: Capital Flow Measures 17
Capital flows are
procyclical and may
destabilize the economy
But: Capital Flow
Measures likely to
violate free transfer
obligations
Chilean inflow tax
(1990),
Thai inflow URR (2006)
Malaysian outflow
limitations (1998)
Capital flows to Asia
Source: IMF
2.3 Safeguards: Balance of Payments Article
ASEAN Comprehensive Investment Agreement:
Article 16 Measures to Safeguard the
Balance of Payments
1. In the event of serious balance-of-payments
and external financial difficulties or threat thereof,
a Member State may adopt or maintain
restrictions on payments or transfers related to
investments…
2. The restrictions referred to in paragraph 1 shall:
....
(d) be temporary and be phased out progressively
as the situation....improves
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Originally from
GATT/GATS
Temporary
safeguards for
transfer measures
on capital
outflows
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2.3 Safeguards: Macro/exchange rate stability
Thai-NZ Closer Economic Partnership Art 15.6: Measures for Macro-Economic and Financial Stability
Notwithstanding any other provision of this Agreement, a Party shall not be prevented from taking measures for ...the stability of the macroeconomy. …
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ASEAN Aus-NZ FTA: Fin Services Annex
Art 3: Domestic Regulation
Notwithstanding any other provision of
this Agreement, a Party shall not be
prevented from taking measures for
prudential reasons...to ensure the
integrity and stability of the financial
system …
Safeguard covering
measures on
macroeconomic
stability
… and financial
system stability
through prudential
measures
2.3 Safeguards: Capital flows
ASEAN Comprehensive Investment Agreement (ACIA)
Art. 13: Transfers
4. Nothing in this Agreement shall affect the rights and
obligations ..... provided that a Member State shall not impose
restrictions on any capital transactions inconsistently with its
specific commitments under this Agreement regarding such
transactions, except:
…. (c) where, in exceptional circumstances, movements of
capital cause, or threaten to cause, serious economic or financial
disturbance in the Member State concerned.
5. The measures taken in accordance with paragraph 4(c):
(c) shall be temporary and shall be eliminated as soon as
conditions no longer justify their institution or maintenance; ....
(e) shall be applied such that any one of the other Member
States is treated no less favourably than any other Member State
or non-Member State;
(f) shall be applied on a national treatment basis; ....
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Current
safeguards on
capital in- and
outflows
ASEAN-wide
standard
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2.3 Safeguards: General Exceptions
ASEAN Comprehensive Investment Agreement (ACIA)
Art. 17: General Exceptions
1. Subject to the requirement that such measures are not applied
in a manner which would constiute a means of arbitray or
unjustifiable discrimination between Member States or their
investors....nothing in this Agreement shall be construed to
prevent the adoption or enforcement by any Memebrs tate of
emasures:
(b) Necessary to protect human, animal or plant life or health;
....
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General exceptions
for health,
environment,
safety
With conditions
against misuse
Only in recent FTAs
and BITs
NAFTA’s 1114
looks good but is
self-cancelling!
North American Free Trade Agreement (NAFTA)
Article 1114: Environmental Measures
1. Nothing in this Chapter shall be construed to prevent a Party
from adopting, maintaining or enforcing any measure
otherwise consistent with this Chapter …in a manner
sensitive to environmental concerns.
....
2.4 Investor-State Dispute Settlement 22
Investor-to-State Dispute
Settlement (ISDS)
Allows investor to
challenge violations of
investment treaties by the
State
Only present in investment
agreements: Others use
state-to-state dispute
settlement
Monetary compensation if
ruling is for investor
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2.4 ISDS Procedures 23
Investor
Chooses Forum
International Centre for
the Settlement of
Investment Disputes
(ICSID)
UN Commission on
International Trade Law
(UNCITRAL)
Tribunal:
1. Investor-appointed
2. State-appointed
3. Neutral
Investor wins:
Monetary
compensation
for investor
Choice of Arbitration Rules
Any other as specified
in the Agreement
Arbitration Finality of decision
State wins:
Case closed
Occidental v Ecuador (2006)
Occidental, a US oil company
invested in Ecuador.
Ecuador cancelled contract
as it violates domestic laws
Occidental sued Ecuador
under the US-Ecuador
“Bilateral Investment Treaty”
Ecuador lost and had to pay
$2.44 billion= ½ of
Ecuador’s health budget
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Phillip Morris v Australia (2012)
Hong Kong subsidiary of US
firm sueing Australia for
introducing plain packaging
Agreement: Hong Kong-
Australia BIT
Claim: Expropriation
(of intellectual property)
Compensation: pending
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Walter Bau v Thailand (2005)
German investor in Don
Muang Tollway Project sued
Thailand for changing
investment policies
Agreement: Thailand-
Germany BIT
Claim: Fair and Equitable
Treatment, Expropriation
Compensation:
29 million euro+legal fees
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Vattenfall v Germany (2011)
Swedish nuclear plant
operator suing Germany
for closing down plants
after Fukushima incident
Agreement: Energy Treaty
Claim: Expropriation
Compensation: pending
Ablacat v Argentina (2007)
Italian bondholders suing
Argentina after bond
restructuring following the
default in 2001
Agreement: Italy-
Argentina BIT
Claim: Expropriation
Compensation: pending
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2.4 ISDS: Criticisms 29
Unfair: Only states can be sued, not vice versa; no
appeals
Unethical: Arbitrators’ questionable independence
and impartiality
Uninformed: No information to stakeholders or
citizens
Unsustainable: “Regulatory chill” after decisions
Unimaginable: Huge costs for lawyers and
arbitrators (average case $8m -- $1000/hr) Sources:
Olivet: “How law firms, arbitrators and financiers are fuelling an investment arbitration boom” 2012
Eaton: “Australia’s Rejection of Investor-State” 2013
Questions for today
1. What are International Investment
Agreements?
2. How do they affect public policy?
3. Are there prospects for reforms?
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3. Prospects for Reform 31
Status quo Safeguards/ Limitations No ISDS No IIA
• Keep existiting treaties, keep negotiating
• Investment-friendly signal
• But: Maintains risks of ISDS • Examples: U.S. , to a lesser extent EU
1 2 3 4
3. Prospects for Reform 32
Status quo Safeguards/ Limitations No ISDS No IIA
1 2 3 4
• Selective adjustments : public policy safeguards,
limitations of scope , reform of ISDS (e.g.
screening, appeals)
• May pave way to more systemic reforms
• But: Maintains risks of ISDS
• Examples: Thailand, ASEAN+6
• ISDS Reforms urged by US academics and
senators, some members of the European Commission, Canada
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3. Prospects for Reform 33
Status quo Safeguards/ Limitations No ISDS No IIA
1 2 3 4
• Eliminating ISDS from IIAs
• Eliminates risk but also sends strong signal to
investment community
•Examples: Australia (Labor Government but now watered down), Ecuador
3. Prospects for Reform 34
Status quo Safeguards/ Limitations No ISDS No IIA
1 2 3 4
• Terminating existing treaties or let them expire
• Eliminates risk but also sends strong signal of
dissatisfaction with IIA regime
•Examples: Brazil (no IIA), Venezuela, Bolivia,
Indonesia (BITs but not FTAs),
• Alternatives for investors: Multilateral
Investment Guarantee Agency (MIGA) which offers insurance to FDI