8 June 2005
Investment Regime Takes Shape
By: Rady Stoyanov
BEF Analytical Team
Investment rules are not on the agenda of the current Doha Round of global trade talks. Instead, bilateral, regional and other level agreements are building a de facto international regime for investment. Singapore, in particular, is concluding a string of agreements that point to a template for
East Asia and beyond.
There are no general multilateral rules on investment. Negotiations in the OECD on the Multilateral Agreement on Investment (MAI) broke down in 1989. The WTO’s 2003 Framework Agreement on the agenda for the Doha Round excluded investment along with other so-called Singapore issues.
Existing rules. Some rules are in place among small groups and in the WTO:
The OECD Codes on Liberalization of Capital Movements and Current Invisible Operations, dating from 1961, have been repeatedly updated. These are plurilateral in the sense that they include more than two countries (which would
be bilateral) but not a great many (which would be multilateral).
Multilateral. The GATS (the General Agreement on Trade in Services) provides for national treatment for investment both pre- and post-establishment. The agreement on Trade-Related Investment Measures prohibits trade-related
investment measures, such as local content requirements, that are inconsistent with basic provisions of the GATT.
These agreements remain modest, so the demand for stronger rules remains — and is being met at a bilateral and regional level. Bilateral investment treaties (BITs) and some free trade agreements (FTAs) are providing extensive investor
protections, dispute-settlement provisions, and market-opening measures.
The 2004 US-Singapore FTA offers a ’state of the art’ model
for investment provisions . Although existing restrictive measured are ’grandfathered’ (they are not covered by the agreement and can remain in place), it adopts and, in some respects, exceeds the NAFTA model for investment:
Investor protections include direct and indirect expropriation. The latter (also known as ’regulatory taking’) occurs when national regulatory policy has an effect equivalent to expropriation.
All forms of financial transfer, such as profits and interest payments, are free of controls. The agreement prohibits investment requirements such as export and local content
requirements, preferences for local procurement, trade balancing and technology transfer requirements. It also prohibits conditionality in benefits or advantages, such as tax breaks, on the investor meeting certain other
National rules cannot limit senior management posts to local nationals (but can require that a majority of the board of directors be of a specific nationality). Origin rules use the ’substantial business’ test. In other words, a
European-owned enterprise operating in the United States can benefit from the provisions of the agreement provided that it has ’substantial business presence’ in the US market.
Investor-state dispute settlement provisions set out extensive procedural rules for dealing with investment disputes.
NAFTA template. Through Singapore, the NAFTA model has found broader application in South and South-east Asia, though on a less ambitious basis than in the US-Singapore FTA. In 1998, Singapore signed the ASEAN Investment Agreement (AIA)
with other ASEAN countries with the aim of removing all barriers to investment within ASEAN by 2020. The AIA, even after its revision in 1999, was limited to progressive liberalisation of investment controls. There is no investment protection or investor-state dispute settlement. Singapore subsequently sought FTA negotiations with its major trading partners, offering some investment rules:
The 2000 FTA with New Zealand included NAFTA-type investment rules, but diverged from NAFTA in some important respects, namely in that the agreement did not include investor-state dispute settlement, nor any prohibitions on performance requirements; or provisions for the free movement of key personnel to provide services.
The Japan-Singapore New Age Economic Partnership Agreement of 2002 took NAFTA as its basic model, but fell short of NAFTA in terms of ambition.
The 2003 Singapore-Australia FTA, like the New Zealand agreement, contained no prohibition of performance requirements or provisions on key personnel. It did not provide most favoured nation (MFN) treatment for
investment, because of constraints on the Australian side (Australia would have been obliged to extend the same terms to other countries, notably Japan).
The 2003 Singapore FTA with the European Free Trade Association (EFTA) contained nothing on performance requirements and only general provisions on an investor-state dispute settlement. Without fully implementing provisions, it is
questionable that the investor-state dispute settlement system will be effective. The agreement with EFTA also provided for flexibility in commitments.
Washington in 2002 concluded the Enterprise for ASEAN agreement, which led to the conclusion of Trade and Investment Framework Agreements (TIFAs) with
Indonesia, the Philippines and Thailand. TIFAs provide for a comprehensive work programme including trade and investment liberalisation and can be seen as the prelude to bilateral FTAs between Washington and the ASEAN states. The
US-Singapore FTA will be a model for such FTAs.
EU left behind?
Although EU member states accounted for the majority of early
post-war bilateral investment treaties (beginning with the German-Pakistan BIT in 1959), the EU’s regional agreements did not include much in the way of investment agreements until the EU-Chile Association Agreement. This was partly
because the European Community does not have competence for investment, which lies with the member states, which have not been ready to cede it. The European approach to investment rules beyond its immediate neighbourhood, where the EU’s
liberal acquis is the model, has therefore been shaped by the existing BITs that were not particularly ambitious.
The EU turned down Singapore’s recent request for an FTA and has maintained a moratorium on new FTA negotiations. In the Asian context this has meant that EU-Asian investment talks have been limited to non-binding efforts at investment
cooperation and promotion within the Asia-Europe Meeting (ASEM) framework.
Though European corporates are now urging Brussels to become more active, the European Commission and the EU member states have yet to initiate FTA negotiations with Asian countries.
A global investment regime remains off the agenda of the Doha Round of global trade talks but is taking de-facto form in a growing number of bilateral and regional treaties with extensive investment provisions. These resemble, but rarely exceed, the provisions in NAFTA. The next stage of development appears to be South-east Asia, where the United States is concluding
’Trade and Investment Framework Agreements’ which are in essence the forerunners of deeper bilateral trade agreements.