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

Proliferation of IIAs

8

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….

Source:UNCTAD

PTAs: The Mega-Regionals

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

What is the relevance of these agreements for domestic

investment policy?

What is the relevance of these negotiations for

development?

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

To what extent do IIAs contribute to attract and

retain investment? Evidence-based analysis

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

Increase in investor-State litigation

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.

THANK YOU

rechandi@ifc.org

INVESTMENT POLICY AND PROMOTION WEEK