Sunday 15. December 2019
#174 - September 2014

 

Protection of foreign investment: a legitimate concern?

 

The volume of investment abroad has risen sharply in recent decades. Encouraging and protecting international investments is part of international economic law and thus a subject of bilateral and regional agreements. The TTIP is supposed to also contain corresponding arrangements.


The negotiations between the EU and the USA on the Transatlantic Trade and Investment Partnership (TTIP) had already entered their 6th round last July. They are accompanied by considerable public concerns regarding, among other things, investment protection.

 

International investment law is part of international economic law. An investment abroad includes both foreign direct investments (FDI) and portfolio investments. FDI refers to investment abroad by a domestic investor (a natural or legal entity). Whereas a portfolio investment is usually just a short-term capital placement without a commitment to the company, with FDI the investor intends to be active abroad permanently, or at least for some time, and have a determining influence on or control over the stated economic activity. According to the latest World Investment Report of the UN Conference on Trade and Development (UNCTAD), in 2013 the volume of FDI was $1.45 trillion. Since the Lisbon Treaty, FDI has been part of the EU's common commercial policy.

 

Protection of foreign investment and the investor

This law focuses on treatment of the foreign investment and the investor in the country where the investment is made (the host country). The investor's interest lies in the investments being treated fairly and on an equal basis with domestic ones. This conflicts with the principle of the host country's national sovereignty which allows it to, say, nationalise or regulate private property. The host country usually allows the investment, hoping it will boost its economy such as in the form of technology transfers or job growth. The guarantee provided by international law in the form of investment protection provisions aims to create a stable environment for direct investment abroad in order to reconcile the differing interests.

 

The legal system is currently still a patchwork of international law sources. Bilateral and regional agreements play an important role alongside customary law. The content and scope of investment provisions are essentially determined by the stated agreement. The Commission counts 1,400 bilateral agreements of the EU Member States concluded since the 1960s. In principle, the term "investment" covers all types of assets, but the contracting parties may define by listing what is an investment in the sense of the agreement (positive list) and/or what is not (negative list).

 

Commission cites four key guarantees

The Commission identifies four key guarantees normally contained in investment protection agreements. These are: protection against discrimination (most-favoured nation treatment and national treatment); protection against unfair and inequitable treatment; protection for the possibility of transfering capital (e.g. the right to repatriate earnings to the investor's home country); and protection against expropriation which is not for a public policy purpose and not fairly compensated.

 

The last of these is a key point in international investment protection. A distinction is made between direct and indirect expropriations. The legal classification of indirect expropriation, in which ownership is taken away by means other than an act of government expropriation, can be difficult since according to the international law literature no uniform understanding of the term has yet evolved. The Commission says it wants to insert more detailed rules into future agreements as interpretation guidelines. It believes that when the state is protecting the public interest in a non-discriminatory way, the state's right to regulate should prevail over the economic impact of those measures on the investor.

 

A lawful expropriation includes providing compensation that must be prompt, correspond to the value, and be usable, i.e. freely transferable.

 

Including a right of market access from the very start

Some new agreements also protect market access (e.g. NAFTA). There is a general market access if countries have not reserved any exceptions. Market access clauses can sharply restrict a country's regulatory options, so great importance is attached to the catalogue of exceptions.

 

Forms of dispute settlement

Disputes between states usually stem from an investor's complaint against its home country or as a consequence of diplomatic protection (i.e. a state asserts an infringement of rights "in the name of" its nationals and if necessary demands compensation). For the investor, an interstate proceeding is lengthy, complicated, and in case of doubt not very productive.

 

The "investor state" procedure has evolved in this context. Most investment protection treaties give the investor the option – usually after unsuccessful attempts to reach an amicable settlement – to bring the dispute before an arbitration tribunal. The agreements normally cite the applicable procedural law, such as the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL), the International Chamber of Commerce, or the International Centre for Settlement of Investment Disputes (ICSID). The decisions of the arbitration tribunals are usually not subject to review.

 

Question marks

In international trade among private parties, arbitration is very important and the choice of jurisdiction seems to have been largely superseded. Supporters of the arbitration procedure cite its confidentiality, flexible design, and not least of all the high technical quality of the decisions as its advantages. But can the principles of these procedures be easily transferred to the investment arbitration?

 

One essential difference exists with regard to the actors involved. In contrast to arbitration procedures among private actors, in the case of investment arbritration we do not have equal actors facing each other.

 

Arbitration proceedings are often described as "parallel justice" or taking this legal path as a "means for fighting politics." Many commentators suggest a latent fear of the power of multinationals, fuelled especially by the international economic crisis of recent years. The concern is voiced that ultimately states are restricted in their leeway for making or changing regulatory decisions.

The question is, how - and if at all - arbitration procedures between investors and states could be justified in view of considerations linked with legal policy. They offer for instance the possibility of averting discriminatory or arbitrary government curbs on investment on an international law basis. In this way they can make a foreign investment more attractive, especially if there are gaps in the host state's possibilities for legal protection in this regard. However, would this really be the case with regard to the USA and the EU?

 

Moreover, additional concerns are brought forward in the current debate, as for instance in view of the compatibility with the legal procedures’ prevailing principle of public trial or in view of the creeping development of legitimacy standards independent of national public law.

 

Many questions are still open. However, if we listen carefully to the current debate and to public reporting, as expressed in a number of statements, it is a wonder, in particular considering the high number of investment protection agreements, how an entire area of law has been able to develop for decades "seemingly unnoticed." It might also be good if the current debate were somewhat less "agitated" and instead focused more on substantive arguments. As the current TTIP negotiations show, the crucial issue is creating transparency for citizens and engaging in a broad discussion with them.

 

Anna Echterhoff

COMECE

 

Translated from the original text in German

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