TRIMS and BITs

					    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   .
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

                                                                                    2
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
        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.

        Free Trade Agreements with investment Chapters: U.S., Japan and Australia.
        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.


                                                                                                                3
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

                                                                                          4
What is Investment?
 Investment is defined under each agreement
 Two broad categories: Foreign Direct Investment (FDI) and Portfolio
  Investment
 The notable difference in FDI are:
    –   Defining investment as by company
    –   Defining investment by providing list of assets
  See example, U.S. Uruguay BIT (2004) for definition based on
  investment asset and Energy Charter for definition based on
  enterprises;
 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.


                                                                                   5
Objectives
 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?
 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?
 Who gain the benefits? Multinational corporations!



                                                                                        6
Standards of Treatment

 Favourable treatment available for the domestic
  investor- non-discrimination
 Favourable treatment available for the most-
  favoured nation
   – Exception: Regional Trade Agreements (Free Trade
     Agreements, Customs Union)
   – Sectors reserved for domestic investors
 Fair and Equitable Treatment- international
  minimum standard
                                                        7
Freedom of Establishment and Repatriation of
Capital: U.S. BITs and GATS
 National treatment is extended to freedom of establishment- typically under the U.S.
  BITs;
 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;
 International Commitment for liberalisation means countries do not have the option to
  change their investment policies- worse than IMF and World Bank;
    Liberalisation of essential facilities, such as water, affects access and affordability of
    essential facilities. Regulation become essential.
 BITs usually provide for guarantee of repatriation of profit and capital


                                                                                                  8
Standards of Investment Protection

  –   Non-Discrimination
  –   Expropriation only for public purpose
  –   Indirect Expropriation: collision with
      environment, competition and other
      regulations
  –   Compensation: Prompt and adequate


                                               9
Performance Requirements: TRIMS
and the U.S. BITs
 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
 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;

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



                                                                       11
Dispute Settlement
 State-to-State Dispute Settlement
 Diplomatic Protection
 Investor-to-State Dispute Settlement
   – No in the case of Australia and US BITs
 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
 State-to-Investor Dispute Settlement? None

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Dispute Settlement Facilities
 ICSID
 Designated arbitration centres
 Other ad hoc facilities under UNCITRAL rules
 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

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