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Comparing EU Free Trade Agreements : Investment

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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 inter- national (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- European Centre for Development Policy Management Centre européen de gestion des politiques de développement Page 2 Comparing EU free trade agreements July 2004 InBrief 6D 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 provi- sions 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
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