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. 2 Outline 1. International Law and Trends on Foreign Direct Investment Regulation 2. What is investment? 3. Objective of Investment Agreement 4. Standards of Treatment 5. Freedom of Establishment and Repatriation of Capital 6. Standards of Investment Protection –Non-Discrimination –Expropriation –Indirect Expropriation 7. Performance Requirements: TRIMS and the U.S. Bilateral Investment Agreements 8. Corporate Regulation and Measures for the Protection of Public Interest 9. Dispute Settlement 10. Dispute Settlement Facilities

3. 3 International Law and Trends on Foreign Direct Investment Regulation 1. Customary International Law –Basic laws protecting aliens and their property from discriminatory treatment; 2. Investment Treaties 4 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. 4 Free Trade Agreements with investment Chapters: U.S., Japan and Australia. 4 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. 4 International Law and Trends on Foreign Direct Investment Regulation 3. 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. 5 What is Investment? 4 Investment is defined under each agreement 4 Two broad categories: Foreign Direct Investment (FDI) and Portfolio Investment 4 The notable difference in FDI are: –Defining investment as by company –Defining investment by providing list of assets 4 See example, U.S. Uruguay BIT (2004) for definition based on investment asset and Energy Charter for definition based on enterprises; 4 Questions that may arise in relation to investment: 1.list of assets broader than available under domestic laws; 2.Assets that dependent on domestic legislation for their validity, e.g. geographic indications; 3.Assets difficult to determine their value, e.g., market shares, contacts.

6. 6 Objectives 4 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? 4 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? 4 Who gain the benefits? Multinational corporations!

7. 7 Standards of Treatment 4 Favourable treatment available for the domestic investor- non-discrimination 4 Favourable treatment available for the most- favoured nation –Exception: Regional Trade Agreements (Free Trade Agreements, Customs Union) –Sectors reserved for domestic investors 4 Fair and Equitable Treatment- international minimum standard

8. 8 Freedom of Establishment and Repatriation of Capital: U.S. BITs and GATS 4 National treatment is extended to freedom of establishment- typically under the U.S. BITs; 4 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; 4 International Commitment for liberalisation means countries do not have the option to change their investment policies- worse than IMF and World Bank; 4 Liberalisation of essential facilities, such as water, affects access and affordability of essential facilities. Regulation become essential. 4 BITs usually provide for guarantee of repatriation of profit and capital

9. 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. 10 Performance Requirements: TRIMS and the U.S. BITs 4 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 4 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. 11 Corporate Regulation and Measures for the Protection of Public Interest 4 Investment agreements generally provide that investors observes of the law of the land 4 Special formalities, Information requirements 4 Corporate Conduct: Investment agreements do not provide for rules on the conduct of investors 4 Corporate Social, and Environmental Responsibilities: No binding rules exist 4 Measures for the Protection of Public Interest –Competition –Public Health –Environment –Labour –National Security 4 Permitted provided that they are not discriminatory, confirm to fair and equitable treatment, do not amount to expropriation

12. 12 Dispute Settlement 4 State-to-State Dispute Settlement 4 Diplomatic Protection 4 Investor-to-State Dispute Settlement –No in the case of Australia and US BITs 4 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 4 State-to-Investor Dispute Settlement? None

13. 13 Dispute Settlement Facilities 4 ICSID 4 Designated arbitration centres 4 Other ad hoc facilities under UNCITRAL rules 4 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