a More Balanced International Investment Law 2.0?
© Springer International Publishing Switzerland 2015Christoph Herrmann, Bruno Simma and Rudolf Streinz (eds.)Trade Policy between Law, Diplomacy and ScholarshipEuropean Yearbook of International Economic Law10.1007/978-3-319-15690-3_4
Towards a More Balanced International Investment Law 2.0?
Europa-Institut, Saarland University, 66041 Saarbrücken, Germany
With the entry into force of the Treaty of Lisbon,1 the European Union (EU) has gained new competences in the area of international investment law and politics.2 With a global economic weight equal to one quarter of global GDP and nearly half of global foreign direct investment (FDI) outflows,3 the EU’s potential in investment negotiations since the transfer of competence is readily evident. Together with the other two economic heavyweights, China and the US, it should be possible for the EU to give international investment law the necessary new face in reacting to partly reasoned critique; at the same time it is necessary to discuss the topic in a more objective way, at least in the case of publicly financed media as well as politicians.
The (new) EU competence laid down in Article 207 TFEU as part of the common commercial policy4 includes an external treaty-making power in the field of foreign investment. The EU has the exclusive competence to negotiate and conclude “stand alone investment agreements”—comparable to those international investment agreements that were concluded “before” (the entry into force of the Treaty of Lisbon on 1 December 2009) by the EU Member States—as well as Free Trade Agreements (FTAs) comprising chapters on investment law. The EU is currently5 negotiating stand-alone bilateral investment treaties (BITs) with China6 and Myanmar,7 as well as investment chapters as part of larger FTAs with India,8 Japan,9 the United States,10 Libya,11 Egypt, Jordan, Morocco and Tunisia,12 Malaysia,13 Vietnam14 and Thailand.15 Negotiations with Canada16 and Singapore17 have already been successfully concluded. After the current system of international investment law, as well as the recent inclusion of investment law in broader FTAs, have faced strong criticism from different sides, as will be summarized in the next section, the EU as a new actor in the area of shaping international investment policy and politics seems to take an innovative approach to international investment law with the clear intention of promoting a more balanced system in conformity with an international rule of law. This contribution will discuss these developments before concluding with a brief outlook on the future of international investment law and the role of the European Union in this development.
Criticisms in Regard to the Current System and Opportunity for a Restart
The current approach in regard to international investment law is “under fire”. Not only is the legal basis of international investment law fragmented with more than 3,200 International Investment Agreements (IIAs),18 out of which EU Member States have concluded some 1,500, but it is also seen as an unbalanced and overly investor-friendly system. Some of the criticisms are that multinational enterprises as investors can initiate claims against sovereign states in front of international investment tribunals. On these, biased arbitrators would generally proliferate: one day, they would act as counsel, and the next preside over a tribunal. It is argued that the tribunals, even though deciding over public interests and the conformity of national law as well as other public measures with international investment protection standards laid down in international investment agreements, do not have any democratic legitimisation. Furthermore, these protection standards would be too broad and would leave too much discretion to the arbitrators. Indeed, IIAs concluded by EU Member States in particular rarely foresee exception clauses or the right to regulate, and thus because of the aforementioned standards that are very favourable to investors, such IIAs would limit sovereign states in their (sovereign) right to regulate. Especially in investor-state dispute settlement (ISDS), a lack of transparency would exist, as well as no appellate system and no coherence in the jurisprudence of arbitral tribunals. Most of these points have been discussed throughout the past decade, but now with various negotiations under way receive new attention. From an economic point of view, it is discussed if international investment agreements do matter and attract foreign investments or are irrelevant and are thus questioned in their entirety.19
The aim of this contribution is not to discuss the above mentioned criticisms in detail, but to show that now is the time for a restart in international investment law and politics. It is not only to be noted that EU Member States are not allowed to negotiate or conclude new BITs any more, but with the EU as a new actor in this matière of investment protection, it is reacting both to existing deficits, and to partly or wholly unfounded criticism.
Possibility of a “Restart”: The EU as a New Actor in International Investment Politics
The criticisms in regard to the currently existing system of international investment law exist irrespective of the EU having stepped on the “scene” of international investment politics. Nevertheless, the “new” constitutional mandate of the external economic relations of the EU more or less force especially the European Commission to react to existing critique when shaping the EU approach in this field of international economic law. Not only has the Lisbon Treaty transferred the competences in the area of foreign direct investments from the EU Member States to the EU itself as an exclusive competence20 now being part of the Common Commercial Policy in Article 207 Treaty on the Functioning of the EU (TFEU),21 but at the same time the European Parliament has the power to “control” all measures taken and agreements negotiated and to be concluded in this area,22 as well as linking the exercise of all competences to the widely discussed Article 21 Treaty on the European Union (TEU).23 These modifications led to a change of paradigm in the European external relations in general as well as in EU investment law in specific.
The European Parliament today is an important actor in the field of EU external relations. The Lisbon Treaty significantly strengthened the role of the European Parliament24: it now has to give its parliamentary consent in de facto almost all cases of new agreements. The Commission is legally obliged to provide the European Parliament with information on the conduct of the negotiations, and to report regularly to the Parliament’s International Trade Committee (INTA). To exercise an influence on important trade negotiations, INTA has developed a practice of drafting reports on its own initiative, indicating its priorities during the negotiations.25 The Parliament regularly announces inter alia that it will give its consent only to agreements containing a human rights clause, and calls on the Commission to include far-reaching social and environmental clauses and standards in bilateral and regional trade agreements. Soon after the entry into force of the Lisbon Treaty, in February 2010, the European Parliament decided not to give its consent to the conclusion of the Agreement on the processing and transfer of financial messaging data from the EU to the United States for purposes of the Terrorist Finance Tracking Program.26 Another example for this is the EU–China BIT negotiations, in relation to which the European Parliament adopted a long “wish-list” with topics it wants to be covered by the agreement, ranging from the inclusion of the so-called Santiago Principles on sovereign wealth funds, and the insertion of more Corporate Social Responsibility and Labour Rights, to broader promotion of sustainable development and environmental protection.27 This wish list also stresses the explicit requirement that the CCP shall serve the principles and objectives of the EU’s external action: support for democracy and the rule of law as well as the promotion of sustainable development.
A new conjunction of the CCP with other political objectives of the EU, such as environmental protection and human rights, thus politicises EU investment and trade policy as this is brought under the same external action heading as other elements of EU external policy, and is therefore to be conducted within the context of the framework of the general principles and objectives of the EU’s external action.28 The broadly drafted principles and objectives of Article 21 TEU include support for democracy, the rule of law and human rights, along with more specific aims such as sustainable economic, environmental and social development, as well as good global governance and improvement of the sustainable management of global resources. Taken together, it is this increased role of the European Parliament connected with the politicisation of the entire common commercial policy which constitutes a great potential impact of the Lisbon Treaty on the new EU international investment policy.29 In its Resolution of 6 April 2011, the European Parliament has thus emphasised that as a result of the transfer of FDI competence, the future European investment policy must meet “the EU’s broader economic interests and external policy objectives.”30 It has further called on the Commission to protect the contracting parties’ right to regulate31 and to include social and environmental clauses32 as well as a reference to the OECD Guidelines for Multinational Enterprises33 and a provision on corporate social responsibility.34 Thus, it is the intention of the European Parliament to use international investment agreements as a tool to promote non-economic objectives, too.
Reaction I: A More Transparent Approach by Public Hearings?
One of the biggest issues of the past decade has been the stronger engagement of civil society in the globalisation discussion in general, as well as in the conclusion of international agreements specifically.35 In regard to the latter aspect, it at first seemed that only the multilateral negotiations of, for example, the WTO drew public attention, especially from NGOs such as Attac and others, whereas bilateral agreements (differently than the negotiation of the Multilateral Agreement on Investment (MAI) in the nineties) in the areas of trade or investment were rarely discussed at all outside the directly affected industries. The FTA with South-Korea did not get any attention during negotiations, and the Comprehensive Economic and Trade Agreement (CETA) with Canada was only discovered as a “hot issue” when negotiations were already more or less concluded.
Unlike earlier negotiation of FTAs, the Transatlantic Trade and Investment Partnership (TTIP) with the USA received maximum attention from the media and opposing civil society groups, which led to strange reactions of the German Minister for Economic Affairs and Energy and the German Bundesrat,36 even at already an early stage in negotiations. The Ministry for Economic Affairs and Energy not only set up a TTIP Advisory Council, which is lacking any know-how in regard to international investment law in particular, as well as international economics in general, but also openly opposed an ISDS mechanism in the TTIP, arguing that such a mechanism is not necessary between countries following the rule of law, such as the EU or the US. This might be seen as a violation of Article 4 paragraph 3 TEU, which stipulates the responsibility of the EU Member States to support the EU during the negotiation of international agreements37—even more so after having given a mandate to the Commission that also comprises negotiations of an ISDS mechanism.38 In Germany, the Bundesrat also discussed the TTIP negotiations, and adopted a resolution which opposed investment arbitration in the treaty and favoured legal recourse in the national state courts, stating that “[o]n this point, the Bundesrat views itself as being in line with the opinion of the Federal Government.”39
The European Commission itself reacted to the increasing public pressure—especially in regard to including ISDS in the TTIP—by suspending negotiations on this issue and initiating a public hearing40:
The European Commission is consulting the public in the EU on a possible approach to investment protection and ISDS in the TTIP. The proposed approach contains a series of innovative elements that the EU proposes using as the basis for the TTIP negotiations. The key issue on which we are consulting is whether the EU’s proposed approach for TTIP achieves the right balance between protecting investors and safeguarding the EU’s right and ability to regulate in the public interest.
Thus, even though the title of the public consultation seems to indicate that the focus is on ISDS, in reality almost the entire breadth of international investment law is opened up for discussion and statements by the Commission. Furthermore, it can be remarked that most questions are also addressed in the investment chapter of the CETA with Canada that is given as a reference in the consultation.
Reaction II: The New EU Approach
To evaluate the new EU approach, it is important to summarise briefly the current situation that some EU Member States are trying to preserve, irrespective of the criticisms mentioned above,41 before analysing the first publicly available text’s indication of the new EU investment policy approach.
Different IIA Approaches in the Past
In, for example, German and Dutch IIAs, so-called “Gold Standards” are used: clear standards of investor protection with short wording and no or only few exemptions.42 These rather short agreements—approximately 12 articles on 5–7 pages in total—in general mention neither sustainable development nor protection of human rights and the environment. Also they foresee only limited transparency of the entire ISDS system and contain no provisions on market access. Due to the former distribution of competences between the European Community and its Member States, FTAs concluded by the EC did not include chapters investment protection, but on market access of investments,43 the latter chapters being based on the so-called EU investment platform (“EU Minimum Platform on Investment”).44
Agreements concluded by the US or Canada (“North American approach”) differ from this European approach in various ways. North American agreements, or chapters of broader FTAs (US as well as Canadian FTAs include chapters on investment protection), foresee articles on pre-establishment as well as on post-establishment protection standards, and also cover the question of market access.45 Furthermore, these agreements contain very detailed provisions with explanations and limitations of the material scope of application of certain standards in the agreements, and are often more than 30 pages long. Just like the BITs concluded by Member States of the European Union, they also foresee ISDS.
Content and Crucial Issues of Future EU IIAs
As Karel de Gucht pointed out in the Parliamentary Hearings in January 2010 before being appointed Commissioner for Trade, “[i]nvestment is a completely new competence for DG Trade. It is a very important enlargement of its competences as it is, of course, part of the trade scenario.” Thus, the Commission has, since the entry into force of the Lisbon Treaty and together with the European Parliament, worked intensively on shaping this new EU policy. In July 2010, the Commission adopted a Policy Communication, entitled “Towards a Comprehensive European International Investment Policy”.46 Other important official documents are the Council Conclusions of 25 October 201047 and the European Parliament’s Resolution of 6 April 2011,48 as well as a “blueprint” adopted together with the US setting up standards of international investment law for the twenty-first century.49 The first examples of a possible wording of EU investments chapters can be found in the different leaked texts of the CETA between the EU and Canada.50 In the following section, examples for the positive and dynamic evolution of international investment law are given; it should be noted that this can only be a brief selection of crucial issues and is by no means exhaustive. The discussion here follows the general layout of international investment agreements (objectives, scope, standards and dispute settlement), but then also touches upon the newer topic of including “other issues”.
In the different published documents as well as in the leaked but not officially published mandates, the objectives for future EU international investment agreements were enumerated as inter alia: the maximisation of protection for European investors, the promotion of European standards of protection, the maximisation of Europe’s attractiveness as a destination for foreign investments, the establishment of a level playing field for different economic actors and the promotion of non-economic objectives.
Scope of Application and Market Access
The determination of the scope of application in future EU IIAs seems more or less to build upon the approach taken by different Member States of the EU, but at the same time include concrete answers to widely discussed problems.51 The definition of investment follows the asset-based approach, treaty shopping via shell companies will be broadly excluded, and in cases of double nationality of natural persons, the principle of effective nationality applies (“dominant and effective nationality”). Sovereign wealth funds as well as State Owned Enterprises (SOEs) will be given specific attention by most likely implementing transparency obligations for those investors, who show a specific connection to governmental actions. In particular, state-owned enterprises receive financial support from the state and are therefore placed in a position of competitive advantage compared to other investors, including local enterprises, and can create “disadvantageous economic conditions”.52 It is noteworthy that in the Statement of the European Union and the United States on Shared Principles for International Investment of April 2012, the EU has agreed that “the European Union and the United States support the work of the Organisation for Economic Co-operation and Development (OECD) in the area of ‘competitive neutrality’, which focuses on the importance of state-owned entities and private commercial enterprises being subject to the same external environment and competing on a level playing field in a given market”.53 It remains to be seen if these ideas, found especially in the CETA draft text, will provide sufficient answers to existing problems, as well as to problems arising out of most likely more involvement of state entities in international investments.
As has been spelled out in the TTIP negotiating directives, in regard to investment “…[t]he aim is to achieve the highest levels of liberalisation and investment protection that both sides have negotiated to date in other trade deals.” The opening up of domestic markets to foreign investors is one of the main purposes of trade and investment agreements, nevertheless this is not foreseen in the existing 1,500 EU Member States BITs, unlike in US or Canadian investment law approaches.54 This opening of markets can be a very general one by only excluding specific named sectors from general liberalisation (negative list approach), or open up domestic markets by indicating the types and volume of investment that should be permitted by the other contracting party/parties (positive list approach).55 This latter approach was also followed by the European Community in some of its later trade agreements based on the aforementioned investment platform in the pre-Lisbon era, when its common commercial policy powers did not include an express FDI competence and could arguably have been extended only to the trade-like aspects of access to foreign markets.56
The draft CETA text shows that it is primarily the Canadian approach that was pursued; the national treatment obligation also extends to “establishment, acquisition (and possibly expansion) of investments”,57 and furthermore, the draft CETA text contains a provision on market access in the form of prohibitions of specific limitations to foreign investors,58 coupled with a prohibition of performance requirements.59 Lately, even China has agreed to negotiate on market access with the United States on the basis of the US 2012 Model BIT; the EU will be asking for comparable treatment in the China-EU negotiations as a specific expression of regulatory competition.60 A built-in agenda comparable to the GATS with a positive-list approach on market access61 would be a solution for the negotiations with China on a stand-alone BIT, if agreement on a negative list is not possible between the negotiating parties.
Standards of Treatment
The negotiating mandates for the agreements with the US,62 Canada, India and Singapore63 specify that:
the negotiations shall aim to include in particular but not exclusively the following standards of treatment and rules: a) fair and equitable treatment, including a prohibition of unreasonable, arbitrary or discriminatory measures, b) unqualified national treatment c) unqualified most-favoured nation treatment, d) protection against direct and indirect expropriation, including the right to prompt, adequate and effective compensation e) full protection and security of investors and investments, f) other effective protection provisions, such as ‘umbrella clause’ g) free transfer of funds of capital and payments by investors as well as h) rules concerning subrogation.
The negotiating directives are a loose template and they are, at the same time, the outcome of a commonly agreed position, a compromise text, presented by the Council, which generally favours Member State positions.64 The general negotiation directives were concretised by the Commission, also influenced by the European Parliament.65 In a way, the Member States might never have expected this, at least not those who wanted to keep up their “gold standard approach”.
A further important negotiating directive is that the right to regulate and sustainable development should be recognised as “overarching objectives of future agreements”. A policy shift that first took shape in North America, namely with the adoption of the 2004 Model BITs of Canada and the United States, already leads to the adoption of more balanced investment treaties deferential to public policy considerations.66 In this light, EU Member State BITs are generally older generation BITs, one-sidedly focused on investment protection and largely silent where the public interest is concerned.67 However, the Commission has accepted this paradigm shift that can now be found in the formulation of especially the fair and equitable treatment standard, as well as the expropriation standard.
In particular with regard to the intention to preserve the host State’s right to regulate in order to meet legitimate public policy objectives, the Commission stated:
Future EU agreements will provide a detailed set of provisions giving guidance to arbitrators on how to decide whether or not a government measure constitutes indirect expropriation. In particular, when the state is protecting the public interest in a non-discriminatory way, the right of the state to regulate should prevail over the economic impact of those measures on the investor.68
This is done, for example, in the CETA text via an Annex pointing out that a high threshold of “substantial interference” with the right to use, enjoy and dispose of the investment has to be proven, and that arbitral tribunals do have to conduct a “balancing” exercise on a case by case basis.69 All in all, the new EU approach contains language inspired by the police powers doctrine, trying to ensure that bona fide regulation in the public interest should not be considered expropriation;70 the Commission followed the demand of the European Parliament71 to find a “clear and fair balance between public welfare objectives and private interests” in defining indirect expropriation.72
Also the fair and equitable treatment (FET) standard will be faced with significant changes. For a long time, this has been the most dynamic, almost “catch all” standard. In the CETA draft, the FET standard is given an explicit substantive content.73 The EU approach includes case law of arbitral tribunals and the legal traditions of the EU and its Member States.74 As is pointed out in literature, the new FET wording seems to underline the intention of the Commission to “reaffirm the right of the Parties to regulate to pursue legitimate public policy objectives” and to “set out precisely what elements are covered and thus prohibited” by FET in EU investment agreements.75
Also the most favoured nation principle now has received specific attention in the ongoing negotiations. It is most likely that it will expressly exclude ISDS76 as a direct response to the Maffezini case.77 This clarification is welcome from the perspective of predictability and certainty and will help avoid unnecessary litigation.78 An umbrella clause might not be included in the new EU agreements, at least not the one with Canada, as Canada has avoided including this standard in its IIAs. Thus, this might change with other negotiating partners,79 for example, China, Japan or South Korea, as those countries also included an umbrella clause in their trilateral agreement of 2012,80 and it may be different again with the US, which does not have such a far-reaching concept of including contract obligations as, for example, the EU Member States.81
Investor-State Dispute Settlement
All EU institutions that have so far expressed an opinion on the future EU international investment policy have clearly indicated that EU investment agreements need to provide an effective ISDS system.82 For example, the Commission has pointed out, that ISDS is “such an established feature of investment agreements that its absence would in fact discourage investors and make a host economy less attractive than others”.83 The Council has emphasised that EU investment policy should support the objective of the Union to remain “the world’s leading destination and source of investment”84 and increase legal security for EU investors abroad,85 further expressly stressing, as mentioned above in the analysis of the Council’s “Conclusions”, “the need for an effective investor-to-state dispute settlement mechanism”.86 The European Parliament has dedicated five paragraphs to investment dispute settlement in its Resolution of 6 April 2011.87 On the other hand, it has to be noted that some governments, such as the Australian government88 and now also the German Government, are turning away from ISDS, even though as already mentioned, the unanimously adopted Council mandates for negotiations with Canada, India, Singapore and the US clearly foresee this mechanism.
In regard to ISDS, it is important to highlight that the EU is for the time being precluded from offering ICSID arbitration in its future agreements, since the EU may not accede to the ICSID Convention, open only to States members of the World Bank or party to the Statute of the International Court of Justice.89 At this stage, UNCITRAL arbitration remains the most immediately available option. While the EU is not a member of UNCITRAL and currently it may only participate in UNCITRAL work as an observer,90 UNCITRAL rules do not limit their applicability to nationals of states which are UNCITRAL members,91 in other words “the EU is entitled to use the Rules of Arbitration in its investment agreements if it so wishes”.92 Other potential arbitration fora would be, inter alia, the Permanent Court of Justice (PCA), the International Court of Arbitration of the International Chamber of Commerce (ICC), or the Arbitration Institute of the Stockholm Chamber of Commerce (SCC). There is little doubt that an effective dispute resolution mechanism will be achieved.
In suggesting the design of the ISDS mechanism, the European Commission’s Communication “Towards a Comprehensive European International Investment Policy”, suggests that the EU should build on Member State practices and aim for a state-of-the-art dispute settlement system, and identifies a number of key challenges.93 One of the most topical issues in international economic law, transparency, has been the focus of recent debate in various fora,94 including famously in the context of UNCITRAL, whose Working Group II agreed to higher levels of transparency in disputes on the basis of future investment agreements.95 On transparency of ISDS in particular, the Commission Communication notes that:
[i]n line with the EU’s approach in the WTO, the EU should ensure that investor-state dispute settlement is conducted in a transparent manner (including requests for arbitration, submissions, open hearings, amicus curiae briefs and publication of awards).96
The issue has also been taken up by the European Parliament in its Resolution of 6 April 2011, which clearly states that changes to the present dispute settlement system are necessary in order to achieve greater transparency,97 and in the negotiating directive authorising the opening of investment negotiations on the EU–US TTIP.98
Transparency is mostly seen as a means of promoting the credibility and legitimacy of the international economic law system,99 although a conflict is possible between calls for a more open and transparent system and the need to protect confidential commercial and governmental information. In international investment law, transparency is understood inter alia as an obligation of host states to publish all legal rules affecting investors in general and, where the settlement of disputes is concerned, to conduct open proceedings and to publish arbitral awards.100 Although it is argued in some quarters that reforms with more transparency in the entire process of dispute settlement may be contrary to the interests of investors,101 the publication of arbitral awards is a precondition for the development of consistent case law and for inducing a modicum of legal certainty.
Furthermore in regard to more consistency102 and predictability in interpretations, the use of quasi-permanent arbitrators (as in the EU’s FTA practice) and/or appellate mechanisms, where there is a likelihood of many claims under a particular agreement, are currently considered.103 The TTIP negotiating directive likewise states that “[c]onsideration should be given to the possibility of creating an appellate mechanism applicable to investor-to-state dispute settlement under the Agreement.”104 A comparison with trade law is particularly revealing. In contrast with investment law, trade law provides a system for the settlement of international trade disputes between its members within the WTO. This system is governed by the Dispute Settlement Understanding (DSU) and applied by the WTO Dispute Settlement Body (DSB). The DSU offers a single dispute resolution system that is applicable to all WTO agreements. The creation of an appellate system in international investment law has been discussed at length,105 and some of the new US international investment agreements and the US Model BIT foresee the possibility of negotiating a bilateral appellate body.106
Inclusion of Human Rights, Sustainable Development and the Right to Regulate in EU IIAs
The European Parliament proceeds to include additional considerations on the insertion of social and environmental standards in the new treaties, for example, obligations relating to the promotion of social standards, sustainable development, human rights, good governance, etc.107 In particular, the Parliament reiterates that future EU investment policy must promote “investment which is sustainable, respects the environment” and “encourages good quality working conditions”108 and suggests the inclusion of a reference to the updated OECD Guidelines for Multinational Enterprises109 and a corporate social responsibility clause.110 The Parliament further:
[w]elcomes the fact that a number of BITs currently have a clause which prevents the watering-down of social and environmental legislation in order to attract investment and calls on the Commission to consider the inclusion of such a clause in its future agreements.111
Therefore, the protection the environment and the promotion of sustainable development must not encourage investment by lowering domestic environmental or social standards or “legislation aimed at protecting and promoting cultural diversity”.112 Also from the point of view of EU constitutional obligations, according to the general principles and objectives enumerated in Article 21 TEU, IIAs must also be seen as a means of promoting the objectives enumerated in that article “in the world”. As Commissioner Karel de Gucht has pointed out in his presentation and interview before the European Parliament in January 2010:
Free trade must be a tool to generate prosperity, stability and development. … When part of a wider set of measures, it is a potent lever promoting European values abroad, like sustainable development and human rights. …. The EU must lead by example.
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