Comparing EU Free Trade Agreements : Investment

InInNo. 6DBriefBrief- July 2004

Comparing EU free trade agreements Investment Stefan Szepesi

The aim of this InBrief series is to provide a synthesis of various chapters of the ten free trade agreements (FTAs) recently concluded by the European Union with developing countries, as well as other relevant trade agreements when appropriate. Each InBrief offers a detailed and schematic overview of a specific set of trade and trade-related provisions in these agreements.

International investment flows are a vital pensation provisions that can be invoked vis-à-vis domestic counterparts (the part of the global economy. In developed and should an investment be expropriated by national treatment principle) lies at the developing countries alike, foreign direct the host state; and c) provisions on the heart of these provisions. investment (FDI) can be a key element for settlement of investment disputes. economic growth by stimulating employ- ment, wage levels and the transfer of knowl- (3) Market access for foreign investors and edge. There is a growing consensus that there the restrictions that are potentially The debate on investment is a close link between international trade encountered when entering a market and FDI. Though they can be substitutes for (known as ‘pre-admission provisions’). With the exception of investment promo- each other, trade and FDI are often comple- These provisions define foreign investors’ tion, all the above categories have gene- mentary means by which businesses can rights with respect to entry and estab- rated a great deal of controversy over the service foreign markets. It is therefore not lishment in certain economic sectors in question of whether a multilateral frame- surprising that investment issues are gaining the host country. work for investment should be negotiated in importance within international trade under the aegis of the World Trade negotiations. More broadly, private invest- (4) ‘Post-admission provisions’ on the regu- Organization (WTO). Whereas some deve- ment decisions are affected by a broad range latory treatment of foreign investors loped countries, led by the European Union of institutional factors, some of which may be once they are established in the host (EU), argue that international rules on addressed in investment agreements. country. The principle that foreign investment benefit all parties, most deve- investors are not discriminated against loping countries are either lukewarm or Broadly, provisions on investment in international (trade) agreements can be divided into four categories: Box 1 Investment in the WTO

(1) Investment promotion: the parties to an To date, WTO members have been unable to agree on the merits of covering international investment agreement try to stimulate investment by a single, all-encompassing multilateral agreement. So far, the issue has been par- reciprocal investment flows by means of tially dealt with (and in a fragmented manner) by GATT/WTO rules. The WTO General Agreement information exchange, regulatory coordi- on Trade in Services (GATS) includes the concept of a ‘commercial presence’ (through FDI) in its nation, investment promotion machiner- definition of trade in services. As regards trade in goods, the Agreement on Trade Related ies or technical assistance. Investment Measures (TRIMS) deals only with local performance requirements for investors.

(2) Investment protection. Such provisions At the Fifth WTO Ministerial Conference in Cancún (September 2003), members could not arrive include: a) the liberalisation of current at the ‘explicit consensus’ required by the Doha Declaration to start negotiations on investment. payments and capital movements, Hence, the investment issue was later dropped from the Doha agenda of negotiations. enabling foreign investors to liquidate and/or repatriate their assets from Members’ submissions on investment can be found at http://docsonline.wto.org/ abroad; b) guarantees of investors’ pro- under WT/WGTI/W. perty rights, for instance through com-

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Box 2 similar and relatively shallow provisions on Where to find articles on investment in EU FTAs and NAFTA’s Chapter 11 investment issues. Most of the agreements emphasise coordination and cooperation, MED agreements: e.g. Articles 33-35 and 50 (EU-Morocco) and Articles 48-52, 67 and Annex V and contain only loose wording on issues and VI (EU-Jordan), such as the objective of progressive capital http://europa.eu.int/comm/external_relations/euromed/med_ass_agreemnts.htm account liberalisation.

TDCA (South Africa): Articles 33-34 and 52, On investment promotion,means to stimu- http://europa.eu.int/eur-lex/en/archive/1999/l_31119991204en.html late reciprocal investment flows include harmonising and simplifying procedures, Global Agreement (Mexico): EC/Mexico Joint Council Decision no. 2/2001 of February 2001: examining the creation of joint ventures, Titles II-III, establishing co-investment machineries, and http://trade-info.cec.eu.int/doclib/docs/2003/april/tradoc_111829.pdf providing technical assistance (e.g. Art. 54 of EU-Algeria). A few agreements (i.e. those Association Agreement (Chile): Article 21, Title III, V, Annexes VII, VIII, X and XIV, with Algeria, Lebanon, and South Africa) http://europa.eu.int/comm/trade/issues/bilateral/countries/chile/euchlagr_en.htm specify particular industries (e.g. tourism and mining) which are to be targeted by such NAFTA’s Chapter 11, promotion measures, though no detailed www.sice.oas.org/trade/nafta/chap-111.asp commitments are made. Most of the MED agreements and the TDCA also mention For other agreements, see the Trade Agreements Database and Archive by the Dartmouth Tuck investment protection in the articles dealing School of Business: with investment promotion. However, this is http://mba.tuck.dartmouth.edu/cib/research/trade_agreements.html not covered in any substance, as they refer to the possibility of including protection provisions in BITs with EU Member States. opposed to committing themselves, fearing Investment in EU Free Trade as they do that such rules may undermine Agreements their sovereign right to pursue their own Current payments and capital flows domestic (development) policies. Experts The investment-related provisions of free also disagree on the potential merits of a trade agreements (FTAs) concluded by the The only MED and TDCA provisions that WTO agreement on investment. The debate European Union (EU) are generally not as effectively cover investment protection are is complicated by the fact that there is as comprehensive as those of traditional BITs. those dealing with current payments and yet no evidence linking the conclusion of One reason for this is that EU Member States FDI-related capital flows. All eight agree- (bilateral) investment agreements with have so far resisted to hand competency in ments state that current payments and increases in FDI inflows.1 negotiating some of the most substantial BIT transactions shall be free of restrictions (e.g. provisions entirely to the European Art. 32 of EU-Lebanon) or allowed in a freely The split between developed and developing Commission. Member States’ own BITs thus convertible currency (e.g. Art. 38 of EU- countries on investment issues was again remain important and some of their provi- Algeria). This basically reiterates the parties’ demonstrated during the failed Ministerial sions go beyond those of EU FTAs. In fact, the international (IMF) commitments. Meeting in Cancún in September 2003. It EU agreements refer directly to bilateral rela- Exceptions are made for serious balance-of- subsequently became clear that no consen- tions with Member States where certain payments difficulties (see the agreements sus could be reached to begin negotiations investment provisions are concerned. with Algeria, Lebanon, Morocco, the on investment, which was therefore dropped Palestinian Authority, South Africa and from the Doha Round agenda (see Box 1). Except for some loose provisions concerning Tunisia), in the case of serious problems capital market liberalisation, the agree- with the operation of monetary or exchange In the absence of such a multilateral frame- ments with the Mediterranean (MED) coun- rate policies (Israel), or both (Jordan). work, bilateral investment treaties (BITs) tries and South Africa merely emphasise the have mushroomed over the past decade: the parties’ commitments in international The provisions on the free movement of number of BITs rose from 385 in 1989 to agreements, as well as assistance and capital relating to direct investments contain 2,181 in 2002.2 Though BITs vary widely in cooperation in investment issues. And initially quite strong language. The agree- scope and content, the majority include though the more detailed agreements with ments with Algeria, Morocco, South Africa provisions on investment promotion, capital Mexico and Chile include restrictions on and Tunisia state that the parties ‘shall flows and direct payment liberalisation, as performance requirements, the principle ensure’ both the free movement of capital well as post-admission issues such as non- of national treatment, and even some relating to direct investment and the liqui- discrimination and bans on certain perfor- pre-admission provisions (i.e. market access dation/repatriation of investments (or the mance requirements. Some BITs go further, in services), they stop short of including any resulting profits) from the host country (e.g. including pre-admission issues (i.e. estab- clauses on expropriation and compensation, Art. 33.1 of the TDCA). However, the wording lishment and acquisition) across the board or a separate dispute settlement mecha- subsequently becomes looser: the TDCA of economic activities, and more explicit nism for investment issues. states that the parties ‘shall consult each protection provisions in the form of expro- other with a view to facilitating and priation and compensation clauses. The eventually achieving full liberalisation of the most renowned and controversial agree- movement of capital’ (i.e. including capital ment that has been concluded in this The Euro-Mediterranean not relating to FDI) between the parties (Art. respect is Chapter 11 of the North American Association Agreements and 33.2, emphasis added). The agreements with Free Trade Agreement (NAFTA). Because the TDCA Tunisia and Morocco mention full liberalisa- NAFTA’s investment provisions figure tion ‘when the time is right’ (Art. 34), and the prominently in the discussions on invest- The Trade, Development and Cooperation agreement with Jordan refers to the ment rules (either as an example to follow Agreement (TDCA) concluded with South prospect of full liberalisation ‘as soon as con- or a counter-example of what not to do), Africa in 1999, and the Association (or MED) ditions are met’ (Art. 49). None of the agree- Chapter 11 will be presented separately Agreements concluded with Israel (1995), ments, however, defines a time-frame or a towards the end of this InBrief. Tunisia (1995), Morocco (1996), Jordan (1997), specific set of conditions under which full the Palestinian Authority (1997), Algeria liberalisation is to be achieved. Hence, these (2001) and Lebanon (2002) contain mostly provisions are unlikely to carry much weight www.ecdpm.org InBrief 6D July 2004 Comparing EU free trade agreements Page 3

Table 1 Investment promotion in EU FTAs ment in real estate and the purchase and sale of any kind of securities, as defined in Technical Harmonisation Co-investment Reference to the OECD Codes of Liberalisation’ (Art. 28.1). assistance / & simplification machinery bilateral Article 29 states that restrictions on pay- investment investment ments shall be progressively eliminated and promotion treaties introduces a standstill on any new restric- instruments tions. Exemptions are still made for situa- tions where serious difficulties exist with MED 5 / TDCA exchange-rate or monetary policies (Art. 30) or with the balance of payments (Art. 31). In Palestinian Auth. - such cases, the party concerned is required to inform the other party forthwith, and the Israel ----measures taken should be equitable, in accordance with international obligations Mexico - and of a limited duration. Article 32 excludes direct investments by Mexican or EU resi- Chile - dents from Article 30 restrictions on liquidation or transfer abroad. Finally, the parties recall their international investment com- if one party fails to engage in any substan- tic companies or companies from ‘third mitments, in particular the OECD Codes of tive liberalisation, and are at best indicative countries’ (Art. 30), albeit with a long list of Liberalisation, in Article 34. This provision, of the parties’ intentions. The agreements sectoral exemptions (see Box 3). however, is among the few articles that are with Israel, Jordan and Lebanon are even less excluded from the agreement’s dispute set- forceful, as they merely boil down to a The MED agreements and the TDCA contain tlement mechanism (Art. 37.2). standstill in restrictions. Though it is stated relatively lightweight provisions on invest- that ‘there shall be no restrictions’ on the ment. The provision on the liberalisation of movement of capital (e.g. Art. 31 EU-Israel), capital movements is an expression of intent A GATS approach to… the parties are free to maintain any restric- rather than a genuine commitment. Three tion that existed before the agreement came agreements explicitly mention the possible The most substantive investment-related into force, involving direct investment, estab- maintenance of restrictions. Furthermore, provisions are found in the chapters on lishment, the provision of financial services only the agreement with Jordan contains a (financial) services, and are predominantly or access to capital markets (Art. 33 for Israel clause on national treatment. All agreements based on the parties’ commitments in GATS. and Lebanon, and Art. 50 for Jordan). mention investment promotion by means of Though a decision on a positive list for ser- harmonisation, information and assistance vices liberalisation was postponed (to be As for post-admission issues, the TDCA and as a means of creating a favourable invest- taken by the Joint Council ‘no later than most MED agreements do not include provi- ment climate. three years’ after the entry into force of the sions of this kind. Hence, the national Agreement; see Arts. 7.3 and 17.3),3 the treatment principle, under which foreign Global Agreement already makes provision businesses have to be afforded the same for three important general principles i.e. on treatment as domestic businesses, are not The EU-Mexico Global market access, most-favoured nation (MFN) included. Instead, the agreements only refer Agreement treatment and national treatment. to the parties’ obligations in the General Agreement on Trade in Services (GATS) The Economic Partnership, Political without binding themselves to any addi- Coordination and Cooperation Agreement, …market access… tional commitments. An exception is the also called the Global Agreement, between EU-Jordan Agreement, which entails a the EU and Mexico was signed in December On market access: investments by foreign commitment to national treatment in the 1997 and came into force in October 2000. service suppliers that seek market access in services sector. Title III (on Rights of The provisions on investment can be found the other party’s territory should not be Establishment and Services) states that the in the Joint Council Decision no. 2 of constrained by pre-admission requirements. EU and Jordan must treat each other’s com- February 2001. Articles 4 (on services) and 12 (on financial panies at least as favourably as their domes- services) state that no party may impose The investment promotion clause (Art. 33 of quantitative limits on the number of (for- Joint Council Decision no. 2/2001) in the eign) (financial) service suppliers in a coun- Box 3 Reservations to the Global Agreement reflects the generic provi- try. They are also not allowed to limit the national treatment principle sions in the TDCA and the MED agreements: number of transactions or operations per- information mechanisms on legislation and formed by these service suppliers, or the The EU-Jordan Association Agreement is the investment opportunities, progress towards size of their workforces. Similarly, measures only MED agreement that incorporates the uniform and simplified procedures, and that seek to cap the amount of foreign capi- principle of national treatment (in services), investment promotion targeting small and tal invested in domestic firms, or to limit albeit with the necessary reservations on medium-sized enterprises are cited as individual or aggregate foreign investment, both sides. instruments for stimulating reciprocal are forbidden. Moreover, (foreign) firms can- investment. Again, the option of concluding not be required to engage in specific legal On the Jordanian side, Annex V explicitly separate investment protection agreements entities such as joint ventures, except in the constrains EU ownership of public compa- is left to individual Member States and financial services sector. All these require- nies, construction, trade, trade services and Mexico (Art. 33(b)). ments reflect the parties’ specific commit- mining companies, and sets a minimum ments at the multilateral level, as agreed in amount for non-Jordanian investment in Like the MED agreements and the TDCA, the GATS Article XVI.2. any project. On the EU side, Annex VI Global Agreement seeks to liberalise invest- excludes agriculture, mining, fisheries, trans- ment-related payments and capital move- port, telecommunications, news agency ments. However, this agreement is the only …MFN… services and audiovisual services from the EU FTA reviewed here that explicitly defines principle of national treatment. these payments and capital movements as Once an investment is made and a foreign being related to ‘direct investment, invest- service supplier is established, the MFN

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Table 2 Current payments and capital movements in EU FTAs Standstill on new (Progressive) Exemptions for Repatriation/liquidation of restrictions to liberalisation of investments or the profits derived payments or current payments Serious balance- Serious thereof capital and capital of-payment exchange-rate or Guaranteed Exemption for movements movements difficulties monetary policy specific difficulties investment laws

MED 4/ TDCA - -

Israel - - -

Jordan - -

Lebanon - - -

Mexico -

Chile

principle (similar to GATS Article II) commits commitments. Both parties merely agree to The EU-Chile Association both parties to treating each other’s (finan- ‘recall their international commitments with Agreement cial) service suppliers in a manner that is ‘no regard to investment’, a reference to the less favourable than that accorded to like OECD Domestic Treatment Instrument To date, the most recent FTA concluded by service suppliers of any third country’ (Arts. (Article 34). Article 35 commits both parties the EU to date is the one with Chile, signed 5.1 for services and 15.1 for financial services). to review, within three years, the legal in November 2002 and provisionally in effect However, Article 5.2 (15.2) makes a reserva- framework for investment, the investment since 1 February 2003. Besides covering poli- tion for treatment to third parties with climate and the flows of investment tical dialogue and cooperation issues, it is the whom a separate agreement has been between them, so as to ensure that these trade chapter in the Association Agreement made (which is notified under GATS Article are consistent with their commitments that stands out as the most far-reaching in V). Hence, this provision for instance pre- under international investment agreements. EU regional agreements so far. The provi- vents EU service suppliers from compulsorily sions on investment are no exceptions in receiving a regulatory treatment in Mexico There is no special dispute settlement pro- this respect, even though, as in the Global that is identical to that granted to other cedure for investment-related disputes. Agreement, they are spread throughout the NAFTA members (i.e. Canada and the US). However, where disputes concern financial main agreement and the annexes. The Global Agreement does, however, con- services, Article 25 states that panel arbitra- tain an option for such an MFN treatment tors shall have the necessary expertise rele- Within the main agreement, investment- to be negotiated in the case of future agree- vant to the specific financial service that is related provisions can be found in the Titles ments with third parties (Arts. 5.3 and 15.3). in dispute.4 on Economic Cooperation (Part III, Title I), Services and Establishment (Part IV,Title III) The Global Agreement with Mexico goes and Current Payments and Capital …and national treatment somewhat further than the MED agreements Movements (Part IV,Title V). The part on and the TDCA in terms of investment provi- Economic Cooperation does not differ much Finally, the principle of national treatment for sions, as it explicitly incorporates the GATS from the other agreements. The parties services other than financial services is also principles of market access, MFN and agree (Art. 21) that investment will be pro- derived directly from GATS obligations (Art. national treatment in the chapters on ser- moted by: XVII). Hence, service suppliers from the other vices. There are, however, no investment provi- party shall, during their operations, receive sions ‘across the board’ of economic activity, (a) mechanisms that provide information on treatment ‘no less favourable’ than is and investment protection provisions other investment rules and opportunities; accorded to domestic services suppliers (Art. than those concerning payments and capital (b) a favourable legal framework - where 6.1). Treatment is considered to be less flows are left to bilateral agreements appropriate, to be pursued through bila- favourable if ‘it modifies the conditions of between Mexico and EU Member States. teral agreements with Member States competition in favour of services or service suppliers of the Party compared to like services or service suppliers of the other Box 4 Explicit language: Party.’ (Art. 6.3) The provisions on maritime a NAFTA-inspired national treatmentdefinition for financial services transport (Art. 10.3) and public procurement (Art. 26 of a different Council Decision – No. 2, Though the market access (Art. 12) and MFN clauses (Art. 15) in the Financial Services chapter of March 2000) reiterate this principle. For the EU-Mexico Global Agreement are worded almost identically to the Services chapter (both financial services, the national treatment reiterating obligations in GATS), national treatment is more explicitly defined in the former. provisions are more elaborate than those Article 14 describes it as: for other services as they include not only the operations of an investor once established ‘treatment no less favourable than that [is accorded] to [domestic] like financial serv- (post-admission), but also the entry of the ice suppliers with respect to the establishment, acquisition, expansion, management, investment itself (pre-admission) (see Box 4). conduct, operation and sale or other disposition of commercial operations of financial service suppliers in its territory.’ Apart from the specific chapters on services or financial services that are mainly based The wording of Article 14 is identical to that of NAFTA’s Chapter 11 (Art. 1102-1104), and stresses on GATS commitments, the Global that foreign investors in the financial services sector should be given national treatment from Agreement does not contain more general the start (establishment and acquisition) and throughout their further operations. pre-admission or post-admission investment www.ecdpm.org InBrief 6D July 2004 Comparing EU free trade agreements Page 5

concerning issues such as promotion, Box 5 Chilean reservations to capital market liberalisation protection and dual taxation; (c) technical assistance; and Annex XIV of the EU-Chile Agreement solely concerns Chile’s reservations to the liberalisation (d) developing uniform and simplified proce- of payments and free movement of capital to which both parties are committed under Articles dures. 164 and 165. Article 1 of this annex authorises Chile to forbid EU investors who have invested under voluntary investment programmes (see Box 6) to liquidate or repatriate (the proceeds It is clear from (b) that the Association of) an investment before a certain period has elapsed since the initial investment. Depending Agreement also stops short of covering all on the legal context, this period of restriction on capital flows can range from one to five years. sorts of investment protection provisions. Article 2 also confirms Chile’s right to adopt new voluntary investment programmes in the Here too, competency issues between the future (capping the restriction on repatriation or liquidation to five years, however). It should European Commission and the EU Member be noted that investors can choose the regulatory regime that best suits them: if they forego States seem to have precluded any substan- the (fiscal) benefits of investing under voluntary investment programmes, investors need not tial provisions in this area. Article 134 states comply with any of the capital constraints. that the legal framework (as well as the investment environment and the flow of However, Article 3 of Annex XIV also authorises Chile’s Central Bank to: investments) will be reviewed within three years, to ascertain whether they are consis- ‘…maintain or adopt measures […] in order to ensure currency stability and the normal tent with both parties’ commitments under operation of domestic and foreign payments. […] The Central Bank of Chile is empowered international agreements. Hence, as in the as well to issue regulations governing monetary, credit, financial, and foreign exchange Global Agreement, a further deepening of matters. Such measures include, inter alia, the establishment of restrictions or limitations investment provisions is made dependent on on current payments and transfers (capital movements) to or from Chile, as well as trans- either bilateral or multilateral developments. actions related to them, such as requiring that deposits, investments or credits from or to a foreign country, be subject to a reserve requirement ("encaje")’ (Annex XIV, Art. 3).

As for the Current Payments and Capital Since the functioning and independence of Chile’s Central Bank is grounded in the Chilean con- Movements Title, the provisions on the stitution, this reservation constituted a key condition for Chile. In return, Article 4 of this annex liberalisation of payments (Art. 164) and the states that, in applying any reserve requirements, Chile will not discriminate between the EU free movement of capital (Art. 165) are at and third countries. first sight broadly similar to those of the other agreements: provisions in Annex XIV. Here, Chile reserves virtually identical to those of the Global - capital (or profits derived from it) relating the right for its central bank to function Agreement, and thus reflect GATS commit- to direct investment can be freely liqui- independently, and for the government to ments. According to Articles 97.2 and 118.2, dated or repatriated; maintain or introduce investment legisla- no party may impose quantitative limits on - payments can be made in freely conver- tion that may restrict capital movements the number of foreign service suppliers, tible currency; (see Box 5). transactions, operations or employees. - exceptional circumstances under which Measures that seek to limit the amount of restrictions are allowed concern difficulties Most of the provisions on market access and foreign capital invested in domestic firms to in the operation of monetary or exchange- national treatment for investors can be a maximum percentage are also banned. A rate policy (Art. 166) and the existence or found in the chapters on Services and difference is that the Association threat of serious balance-of-payments and Financial Services. These apply directly to Agreement also bans all measures which external financial difficulties (Art. 195). the parties’ schedules for liberalisation in restrict or require a foreign financial service these sectors (Art. 97.1 and Annexes VII and supplier to engage in specific legal entities VIII). Unless otherwise specified, market or joint ventures. The Global Agreement Reservations to the movement of access commitments for a wide range of does not include such a provision for finan- capital (financial) services in both Chile and the EU cial services. However, in their respective are taken in these schedules.5 schedules for (financial) services liberalisa- What sets the EU-Chile Association tion, both Chile and the EU make substan- Agreement apart from the other EU FTAs in The provisions of the (financial) services tial derogations from these general this domain are the investment-related chapters on market access principles are principles (see Box 6).

Table 3 National Treatment for establishment in non-service sectors in EU-Chile FTA Main limitations on national treatment by party

Chile EU

Horizontal commitments - foreign investment laws various for individual member states - ownership of land near border or coast - assets in state-owned entities - rights granted to indigenous peoples

Sectoral commitments

Agriculture none various for individual member states

Fishing various various for individual member states

Mining and quarrying various various for individual member states

Manufacturing none none

Electricity, gas and water supply exception for nuclear energy various for individual member states

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control over fishing enterprises. Box 6 Reservations to market access principles in services

Though Articles 97 and 118 of the Chile-EU Association Agreement lay out the main principles As for investment-related dispute settle- for market access in the (financial) services sectors, both Chile and the EU stipulate various ment, the Association Agreement does not exemptions in their respective schedules (‘limitations to market access’ in Annexes VII and VIII). contain a separate procedure. It does require that the arbitrators involved are experts in In the EU, France Italy, Portugal and Spain retain their rights to reject Chilean participation in financial services law and that they should certain domestic firms, such as newly privatised companies, the utility sectors and the defence be appointed before a dispute can arise (i.e. industry, if this participation exceeds a certain percentage. France requires investors to be within six months after the agreement’s specifically authorised to establish certain commercial, industrial or artisanal activities, and entry into force). Italy retains the right to grant exclusive rights to newly privatised companies. Concerning investment, the Association Chile, on the other hand, has ensured that its two main laws on foreign investment, including Agreement with Chile is the most far-reach- its voluntary investment programmes, cannot be undermined by the agreement. Part B of ing of all EU FTAs. In addition to more Annex VII states that: detailed provisions on current payments, capital movement liberalisation and rights for for- ‘[t]he obligations and commitments contained in the services Chapter and in this Annex eign investors (including detailed reservations do not apply to Decree Law 600, Foreign Investment Statute, Law 18.657 Foreign Capital on the Chilean side), the agreement is the first Investment Fund Law, to the continuation or prompt renewal of such laws, to amend- EU FTA to extend the principle of national ments to those laws or to any special and/or voluntary investment regime that may be treatment to all non-service sectors. Besides adopted in the future by Chile’ (Annex VII, Part B, ii). its broad scope, the agreement allows for In practice, this means that the Foreign Investment Committee of Chile retains the right to reg- clear Chilean reservations in the pre-admis- ulate the investment laws and approve or reject applications from firms that wish to invest sion and investment protection provisions. under voluntary investment programmes.

As for the national treatment principle, the chapter on Establishment (Title III, NAFTA’s Chapter 11 wording of the EU-Chile agreement appears Chapter 3), this principle is adopted for all at first sight to be similar to that of the non-service sectors (Art. 130-132), ranging In the discussion on international invest- Global Agreement. The principle of national from agriculture to manufacturing and utili- ment rules, the provisions of NAFTA’s treatment and the conditions under which ties. The exceptions to the general national Chapter 11 are often referred to, either as a this principle is violated for the services and treatment commitment are subsequently model or as an anti-model for bilateral or financial services chapters (Art. 98 and 119) outlined in Annex X (see Table 3). multilateral frameworks on investment. are both formulated in accordance with GATS Certainly, Chapter 11 contains some of the Article XVII. However, as compared with the ‘Establishment’ is defined as ‘the constitution, most detailed and comprehensive rules on detailed definition of financial services in the acquisition or maintenance of a legal person’ foreign investment to date. In the past, it has Global Agreement (see Box 4), the EU-Chile or ‘the creation or maintenance of a branch or also served as a working model for OECD agreement is less explicit. Articles 108, 113 a representative office’ in the territory of one discussions on the controversial Multilateral and 139 reiterate the national treatment prin- of the parties. Without any reservations, Chile Agreement on Investment (MAI).6 ciple for the marine transport, telecommuni- grants full national treatment with respect to cation and government procurement sectors. establishment to EU investors in both the However, to date there remain wide differ- agricultural and manufacturing sectors. ences between the approach adopted and Similar commitments are also made in other the scope of the investment provisions in EU National treatment for non-service sectors, albeit with various reservations. A FTAs as compared with NAFTA. Broadly sectors separate protocol was added (Appendix 1) for speaking, NAFTA’s investment provisions go fisheries – a sector with clear strategic value beyond all EU FTAs in four respects: their Yet there is one unique feature of the EU- for some EU Member States – to provide for scope of application, the degree of liberali- Chile Agreement that far surpasses the clear reciprocal commitments between the sation, the extent of protection, and the Global Agreement in the scope of the parties on issues such as fishing permits, the mechanism for dispute settlement.7 national treatment principle. In a separate registration of vessels, and ownership and

Table 4 Post-admission provisions and protection in EU FTAs

National Treatment Performance requirements Horizontal Protection (non-discrimination) commitments not to maintain or introduce: Reservation against expropriation For services For other eco- Quantitative Legal entity Limits on the Specific nomic activities constraints on requirements proportion reservation to suppliers, trans- (e.g. for joint of foreign retain limits on actions, ventures) for ownership the proportion operations or inward invest- of foreign personnel ment ownership

MED6/ TDCA ------

Jordan --- -

Mexico - --

Chile -* -

*Limits may still be imposed on individual sectors.

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First, NAFTA’s investment provisions are not the words ‘tantamount to nationalisation’ scattered over the agreement such as in EU and the reference to indirect expropriation Acronyms FTAs (in particular in the services chapters), provide leeway for wide interpretation. A but are brought together in Chapter 11. Here, foreign investor who is adversely affected by ACP African, Caribbean and the terms ‘investment’ and ‘investor’ are seemingly normal host state actions (or reg- Pacific given very broad legal definitions that go ulations) could claim to be the victim of an BIT Bilateral Investment Treaty beyond mere FDI to include issues such as indirect expropriation. The serious legal con- EU European Union equity security, debt security, debt finance sequences of such a relatively open defini- FDI Foreign Direct Investment and real estate (Art. 1139). Hence, the poten- tion have been demonstrated by the rising FTA Free Trade Agreement tial regulatory impact of Chapter 11 is much number of arbitration procedures that have GATS General Agreement on Trade greater than that of most EU BITs or FTAs, been initiated under Article 1110, which have in Services which solely address investments, capital given rise to heated debates on the legiti- GATT General Agreement on Tariffs flows and payments in an FDI context. macy of Chapter 11.8 and Trade ICSID International Centre for the Second, Chapter 11 pursues liberalisation Fourth, and closely related to the issue of Settlement of Investment beyond the predominantly post-admission investment protection, an entire section in Disputes issues of EU FTAs. The national treatment Chapter 11 is devoted to very detailed proce- IMF International Monetary Fund and MFN principles clearly go beyond the dures for the settlement of investment- MAI Multilateral Agreement on definitions in GATS and concern the ‘estab- related disputes (Arts. 1115-1138). This is in Investment lishment, acquisition, expansion, manage- sharp contrast with EU FTAs, which include MED Mediterranean countries ment, conduct, operation, and sale or other only generic dispute settlement mecha- MFN Most Favoured Nation disposition of investments’ (Art. 1102) across nisms. The specificity of Chapter 11 allows NAFTA North American Free Trade the board of economic activity (services and investor-to-state dispute settlement, giving Agreement non-services) and for all investments. Hence, investors an opportunity to directly submit OECD Organisation for Economic as the terms ‘establishment’ and ‘acquisi- claims to arbitration, either under the Cooperation and Development tion’ underline, NAFTA parties are not only Convention of the International Centre for TDCA Trade, Development and obliged to treat foreign investors that are the Settlement of Investment Disputes Cooperation Agreement already established in the same way as (ICSID) or under the arbitration rules of the TRIMS Agreement on Trade Related domestic investors; they need to treat United Nations Commission on International Investment Measures potential foreign investors on an equal foot- Trade Law (UNCITRAL). Under EU FTAs, only UNCITRAL United Nations Commission ing as well. The Association Agreement with the contracting parties can have recourse to on International Trade Law Chile is the only EU FTA that comes close to the dispute settlement procedures. WTO World Trade Organization this wide coverage in its Services and Establishment chapters. However, the list of Unlike current EU FTAs, Chapter 11 places prohibited performance requirements in investment issues in a wider framework. It protection provisions such as expropriation Chapter 11 is both longer and much more contains a very broad definition of invest- and compensation clauses. These issues are widely applicable as compared with EU ment, as well as stronger provisions on liber- still left to bilateral agreements concluded FTAs, where the relevant provisions are alisation and protection in particular. Finally, by trading parties with individual Member modelled on GATS. Besides foreign invest- the dispute settlement mechanism, to which States. Another important difference is that ments, Article 1106, which regulates this investors themselves have access, stands in none of the agreements provide for a sepa- prohibition, also applies to all other invest- sharp contrast to the provisions in EU FTAs. rate investor-to-state dispute settlement ments in the territory of the parties (Art. procedure for conflicts about investment 1101.1(c)). Hence, in terms of the ban on per- issues. Hence, any dispute that might arise formance requirements, Chapter 11 has a under the FTAs discussed has to be resolved regulatory impact even when foreign Towards more by consultation or by applying the generic investors are not involved. substantial across-the-board dispute settlement provisions. commitments?

Measures ‘tantamount’ to Disagreement between EU Member States nationalisation and the European Commission over their Acknowledgements respective competences has so far Third, NAFTA includes very strong invest- prevented the latter from negotiating FTAs The author is grateful to Sanoussi Bilal, ment protection clauses, some of which are that cover all issues recurring in bilateral Francis Mangeni, Konrad von Molte, Dirk entirely absent from EU FTAs. Article 1110.1 agreements. There is, however, a clear differ- Willem te Velde and a Commission official states that: ence between the MED and the TDCA agree- from DG Trade for their comments. ments on the one hand and the agreements ‘No Party may directly or indirectly with Mexico and Chile on the other. nationalise or expropriate an invest- Whereas the former only contain loose ment of an investor of another Party in wording on international payments and Notes its territory or take a measure capital transfers, the latter include more tantamount to nationalisation or expro- substantial issues, such as market access to 1 See, for example, Hallward-Driemeier (2003). priation of such an investment ("expro- and national treatment for investors in for- 2 UNCTAD (2003). priation"), except: (a) for a public eign services sectors. The Association 3 See also the ECDPM FTA InBrief on services. purpose; (b) on a non-discriminatory Agreement with Chile goes even further by 4 For more information, see the ECDPM FTA basis; (c) in accordance with due process extending the national treatment principle InBrief on dispute settlement. of law and Article 1105(1); and (d) on to non-service sectors. 5 See the ECDPM FTA InBrief on services. payment of compensation in accor- 6 The MAI proposal never left the drawing dance with paragraphs 2 through 6’. In their scope and substance in terms of board because its first drafts stirred up huge investment liberalisation, however, none of controversy amongst Northern and Southern The compensation method mentioned in the EU agreements are as far-reaching as groups, after which some OECD members item (d) is subsequently defined as ‘immedi- NAFTA’s Chapter 11, an agreement often criti- openly distanced themselves from the idea. ate and equal to the market value at the cized for its excessive scope and implica- 7 See Kurtz (2002) for a detailed discussion. expropriation date’ (Art. 1110.2). In particular, tions. All EU FTAs stop short of including 8 See Kurtz (2002).

www.ecdpm.org InBrief 6D July 2004 Comparing EU free trade agreements Page 8

Selected publications and information sources on investment

Publications OECD (2004), Relationships between International Investment Agreements,working papers on international investment number 2004/1, CUTS (2002), Multilateral or Bilateral Investment Negotiations: where can develop- www.oecd.org/dataoecd/8/43/31784519.pdf ing countries make themselves heard?,CUTS Briefing Paper,No.9,2002, http://cuts.org/9-2002.pdf UNCTAD (2003), World Investment Report 2003, (especially Chapters 3 and 4), www.unctad.org/Templates/webflyer.asp?docid=3785&intItemID=2412&lang= Daniels, Ronald J. (2004), Defecting on Development: Bilateral Investment Treaties 1&mode=downloads and the Subversion of the Rule of Law in the Developing World,Draftdated March 23, 2004, www.unisi.it/lawandeconomics/stile2004/daniels.pdf Velde, Dirk-Willem, te (2002), Foreign Direct Investment: who gains?,ODI Briefing Paper, April 2002, www.odi.org.uk/publications/briefing/bp_may02.pdf Hallward-Driemeier, Mary (2003), Do Bilateral Investment Treaties Attract FDI? Only a bit…and they could bite,World Bank Working Paper Series 3121,DECRG,June Velde, Dirk Willem, te and Miatta Fahnbulleh (2003), Investment Related Provisions 2003, http://econ.worldbank.org/files/29143_wps3121.pdf in Regional Trade Agreements,October 2003, www.odi.org.uk/iedg/projects/Inv%20Prov%206.pdf IISD (2004), Investment and Sustainable Development: A Guide to the Use and Potential of International Investment Agreements, www.iisd.org/publications/publication.asp?pno=627 Information sources Kurtz, Jürgen (2002), A general Investment Agreement in the WTO: Lessons from Chapter 11 of NAFTA and the OECD Multilateral Agreement on Investment, www.acp-eu-trade.org University of Melbourne, Working Paper No. 6, 2002, www.jeanmonnetprogram.org/papers/02/020601.pdf Development Gateway Foreign Direct Investment: http://topics.developmentgateway.org/fdi OECD (2002), The Relationship Between Regional Trade Agreements and the Multilateral Trading System Investment,Working Party of the Trade Committee, OECD Investment Publications & Documents: TD/TC/WP(2002)18/FINAL, 13 June 2002, www.oecd.org/findDocument/0,2350,en_2649_37467_1_1_1_1_37467,00.html www.olis.oecd.org/olis/2002doc.nsf/LinkTo/td-tc-wp(2002)18-final UNCTAD International Investment Agreements portal: OECD (2003), The Investment Architecture of the WTO,Working Party of the Trade www.unctad.org/Templates/StartPage.asp?intItemID=2310&lang=1 Committee, TD/TC/WP(2002)41/FINAL, 14 April 2003, www.olis.oecd.org/olis/2002doc.nsf/LinkTo/td-tc-wp(2002)41-final SICE portal on investment: www.sice.oas.org/investment/main_e.asp

InBrief series on trade for 2004-2005

The InBrief series Comparing EU free trade agreements is aimed at The InBriefs are available online at www.acp-eu-trade.org trade negotiators, policy makers, officials and experts in gathering a www.ecdpm.org and www.ileapinitiative.com better technical insight into the evolution of EU trade agreements and the approaches adopted by the EU in negotiating these agreements. This InBrief series on trade is an initiative by the European Centre for This might be of particular interest to actors involved with or Development Policy Management (ECDPM), under the editorial interested in the current and forthcoming negotiations on trading supervision of Sanoussi Bilal ([email protected]) and Stefan Szepesi. agreements with the EU, such as the African, Caribbean and Pacific (ACP) countries with Economic Partnership Agreements (EPAs). A This InBrief on investment has been developed in cooperation with complementary and parallel series on EPAs, called Economic Partnership International Lawyers and Economists Against Poverty (iLEAP). Agreement InBriefs,provides insights into the main issues faced by the ACP,and discusses options for the negotiations with the EU. international lawyers and Topics included in the ECDPM InBrief series on trade for 2004-2005 are: • Agriculture economists against poverty • Anti-dumping and Safeguards iLEAP • Competition Policy and State Aid • Dispute Settlement • Fisheries • Government Procurement ILEAP • Investment 180 Bloor Street West • Rules of Origin Suite 904 • Sanitary and Phytosanitary Standards (SPS) Toronto,ON,Canada,M5S 2V6 • Services • Special and Differential Treatment Tel + 1 (0)416 946 3107 • Technical Barriers to Trade (TBT) E-mail [email protected] • Trade Facilitation • WTO Compatibility Website www.ileapinitiative.com

'InBrief' provides summarised background information on the main policy debates and European Centre for Development Policy Management activities in ACP-EC cooperation. These complementary summaries are drawn from consultative Onze Lieve Vrouweplein 21 processes in which the European Centre for Development Policy Management (ECDPM) engages with NL-6211 HE Maastricht numerous state and non-state actors in the ACP and EU countries. The Centre is a non-partisan organisation that seeks to facilitate international cooperation between the ACP and the EC. Information may The Netherlands be reproduced as long as the source is quoted. The ECDPM acknowledges the support it receives for the 'InBrief' from the Department for International Tel +31 (0)43 350 29 00 Fax +31 (0)43 350 29 02 Development in the United Kingdom, the Ministries of Foreign Affairs in Sweden, Finland and the [email protected] www.ecdpm.org Netherlands, the Directorate-General for Development Cooperation in Belgium, the Swiss Agency for Development and Cooperation and the Instituto Português de Apoio ao Desenvolvimento in Portugal. ISSN 1571-7542