Why the EU’s Foreign Direct Investment (FDI) Competence Should be Re-nationalized

by Nikos Lavranos, Secretary General of EFILA

At the last meeting of the Trade Policy Committee (TPC) at Full Members level, that is at Director General level, encompassing all MS and the European Commission, DG Demarty of the Commission is quoted as saying that the EU trade policy would have a “big credibility problem” if it could not ratify the CETA deal and added that it would be “close to death.”

He is definitely correct with this assessment, but he does not draw the necessary conclusions from this assessment, namely, that the Commission has spectacularly failed to provide the added value when the Member States rather unconsciously transferred the competence on foreign direct investment to the EU. This in turn leads to the conclusion that the trade and investment policy has been de facto re-nationalized.

In order to understand this conclusion, it is important to give a short historic overview of what has happened (or rather not) since the Lisbon Treaty entered into force in December 2009.

The unconscious transfer of the FDI competence

There seems to be no documented story on why, how and when exactly the FDI competence was transferred from the Member States to the EU. Anecdotal stories tell that in the very last minutes before the European Convention was concluded, which was tasked with drawing up a European Constitution, the European Commission rather secretly smuggled the three words “foreign direct investment” into the provision containing the exclusive trade competence of the EU.

At that time, since investment policy had been a purely national matter of the Member States, no investment policy or arbitration experts were present or involved in the drawing up of the European Constitution. Rather general EU law experts were doing the job, which were told since the EU’s internal capital market provisions already also apply to foreign investors, it makes sense as a sort of mirror provision to expand the EU’s competence to include foreign direct investment. In this context, it is interesting to note that nowhere was there any further definition or description of the scope of  FDI. As will be explained below, this lack of clarity is the root of the failure of the EU’s investment policy.

Whether or not the anecdotal stories are true, the fact is that after the European Constitution was re-labelled as Lisbon Treaty, FDI became part of Art.207 TFEU, which used to be the old Art.133 EC, covering the European Common Commercial Policy, in particular WTO law.

So, when the Lisbon Treaty entered into force in late 2009, neither the Member States nor the Commission really knew what this meant.

Mixity: the big elephant in the room

But from the very beginning, it was clear that there was one big elephant in the room, named “mixity”.

The mixity issue surfaced regularly at various levels and has created constant tensions between the Member States and the European Commission.

The first issue where mixity came up was regarding the scope of the FDI competence.

While most Member States understand FDI in a narrow sense, encompassing  only direct investments, the Commission naturally construed it broadly, covering also indirect investments.

These divergent views have been simmering in the background all the time with occasional burst outs. For example, when Member States or rather the Council issued negotiating mandates to the Commission for FTAs. The Member States always stressed that they assumed these FTAs should be mixed, whereas the Commission always claimed that they are in principle EU exclusive, and in any case this would depend on the final content of the FTAs.

In other words, this issue was never settled and it appeared that only the Court of Justice of the EU (CJEU) could settle this for good. Indeed, Karel de Gucht, the former Trade Commissioner, was so fed up about the mixity issue, that in his final day in office he brought the question to the CJEU. He asked the CJEU for an opinion as to whether the EU-Singapore FTA is mixed or EU exclusive. The Commission obviously being of the opinion that it is EU exclusive.

Mixity as a political appeasement instrument

 

While the general public has largely been unaware of the EU-Singapore FTA and the mixity issue before the CJEU, the widespread political hysteria against TTIP, and to lesser extent against CETA, has forced the Commission to adopt a selective U-turn on the mixity issue.

First, with regard to TTIP, Commissioner Malmstrom rather quickly understood that in order to save TTIP and obtain some minimum acceptance in several key Member States, such as Germany, France, Netherlands and Austria, a vote by the respective national parliaments is an absolute precondition for getting the TTIP deal done. Accordingly, Malmstrom has been touring most Member States assuring them that their parliaments will be voting on TTIP.

Second, and in contrast to the politically sensible U-turn regarding TTIP, which though is in clear conflict with the Commission’s longstanding view that it is exclusively competent for all investment issues, Malmstrom, and her adjutant Demarty, until very recently maintained their position that CETA should be ratified as an EU-exclusive agreement. After all, CETA and in particular the hated ISDS provisions have been drastically reformed, so all concerns have been addressed and a vote by the European Parliament on CETA should give sufficient comfort to the Member States and their citizens.

But the massive critique against any trade deal in the Member States has been gaining so much momentum that the Commission had to give in – also regarding CETA. Thus, CETA will be ratified as a mixed agreement, which may take several years before all parliaments (it appears that also several regional parliaments will vote on it as well) have ratified it.

This brings us to the third thorny issue, namely the so-called “provisional application” of CETA (or any other trade deal). It has become tradition in the past to apply trade deals provisionally as soon as the Council signs it off, while awaiting the conclusion of the whole ratification process. The obvious advantage of this is that the benefits of the trade deal can be reaped immediately, notwithstanding the non- fulfillment of the formal legal requirements. The question, which pops up in this context is, which parts of the trade deal can be immediately “applied provisionally”? That depends on which parts of the trade deal are considered to fall in the exclusive competence of the EU and which parts are still wholly or partly with the Member States’ competence.

Again, the Commission started off from its maximum position that the whole treaty should be provisionally applied. But the Member States – having realized how far the Commission is ready to go in order to save the CETA deal – came up with a whole list of policy areas (which most likely will be extended after the summer break), which are to be excluded from the provisional application of CETA. In addition to investment protection rules, Member States have flagged in particular transport, sustainability chapter in parts, culture subsidies, mediation and criminal sanctions to protect intellectual property, as areas to be excluded from provisional application.

The Commission already has accepted that investment rules should be excluded but continues to fight any further expansion of the list, arguing that this would undermine any meaningful provisional application.

This battle will go for some weeks ahead, but the intention is that CETA is finally signed at the EU-Canada summit on 27 October 2016. Accordingly, sometime in early October the Member States and the Commission must agree on the list of policy areas, which de facto are considered to be mixed.

The de facto re-nationalization of the trade and investment policy

Again, it can be expected that the Commission will be flexible in order to get the deal done, which only  enhances the position of the Member States.

That will be even more so in the case of TTIP, which is far more important (politically and economically speaking), but also far more contagious and politicized in the public debate. Member States have realized that they are in a much stronger position if they appear to be critical or outright against TTIP rather than in support of it. Consequently, citing domestic public outcry against TTIP, Member States can not only request that TTIP must be mixed, but can extract further demands from the Commission, such the exclusion of certain policy areas or further “improvements” of highly politicized areas such as regulatory cooperation, geographical indications, agricultural etc.

All this boils down to the conclusion that the Commission’s position that it has exclusive competence over all trade and investment aspects can simply not be maintained anymore by the Commission. Whereas the original idea might have been good to give the Commission a carte blanche because it presumably could negotiate better trade deals, it has become clear over the past 6 years that the Commission has failed to deliver. The main reason for that is that it “forgot” to take the Member States’ concerns serious and instead consistently opted to remind them that they have no say anymore on trade and investment issues. In other words, rather than working closely together with the Member States and carefully listen to them, the Commission did what it wanted. However, in the current political climate and with Brexit ahead of us, the support for the EU is rapidly dwindling. Instead, Member States are reasserting their powers again. Indeed, it is striking to see how easily and within months the Member States have been able to force the Commission to give up its almost sacred position of exclusive competence. The Commission has now seemingly adopted a more practical and realistic approach of accepting mixity for free trade deals. Although, it remains to be seen how it will handle the outcome of the Opinion of the CJEU regarding the EU-Singapore FTA.

In sum, it must be concluded that the transfer of the FDI competence to the EU has not yielded any results since the beginning. After 6 years no single trade deal has been fully signed, ratified and entered into force. In addition, the Commission is spreading doubts about the legal certainty of Member States’ BITs (both intra and extra) and is undermining the application of the ECT. Therefore, the Member States are only right in re-asserting control over trade and investment issues. Indeed, Brexit will offer an excellent opportunity to delete FDI from the exclusive EU competence, when the EU treaties have to be modified anyway.

BDA & AIA: Master Class on Investment Arbitration: Brussels, 19-22 September 2016

Dr. Nikos Lavranos, Secretary-General of EFILA, will give a Master Class on Investment Arbitration for the Brussels Diplomatic Academy and AIA on Monday, 19 September 2016 in Brussels. This Master Class is part of the closer cooperation agreed between EFILA and the AIA.

See here for the programme and registration: Master Class: Investment Arbitration


The Brussels Diplomatic Academy (BDA) and the Association for International Arbitration (AIA) kindly invite you to attend:

Master Class
on
Investment Arbitration

19-22 September, 2016

[Interesting to know: Several top diplomats already confirmed their participation]

BACKGROUND
The law on foreign investment protection is one of the fastest developing and intellectually challenging branches of international law with high practical relevance. Investment arbitration is predicted to be a major factor in the development of the global economic system. The number of investment disputes before international arbitral tribunals has increased significantly over the last decades and reflects the notable preferences of the international business community for resolving international investment disputes. Acquaintance with the legal regime for investment arbitration and case law has now become indispensable for those involved in investments, economic diplomacy and international dispute resolution. In the course of the Master Class, speakers will examine the fundamental notions relevant to investment arbitration and critically review a number of major cases.

AUDIENCE
This course is recommended to diplomats, government officials, investment arbitrators, lawyers involved in investment protection, private investors and executives involved in investment decision-making processes.

ADDED VALUE
The four days seminar is designed to provide its participants with a concentrated educational experience in the areas of law on foreign investment protection and investment arbitration. It is specifically aimed to provide practical help to those who wishes to grasp the fundamentals of investment arbitration. The course also offers an explanation of legal rules and relevant guidelines as well as checklists and practice examples.

The course’s unique feature is its international scope. Participants from a broad range of backgrounds will participate in a dynamic learning experience, where the multifaceted aspects of arbitration are considered from a range of comparative perspectives.

Diffusing the ‘Powder Keg’ through Regional Multilateralism: The Case for Investment Autarchy in the Balkans

 

by Horia Ciurtin LL.M., Managing Editor of the EFILA Blog*

Re-published by courtesy of Kluwer Arbitration Blog.

Just like a century ago – and throughout their entire history – the Balkans remain a zone of structural instability. In this respect, the ‘end of history’ has not come around to the fringes of Europe, as Francis Fukuyama once optimistically expected. Therefore, although the Balkan area is an essentially coherent cultural sub-space, while still being radically diverse, the relations of its constituent states have been marked by a confuse set of bilateral – and adversarial – interactions.

This resilient anarchy in Balkan coexistence has only proved to benefit external players. Consequently, each country – however fluid such notion may be there – sought to ‘balance’ the other by adhering to another global power’s grand strategy. Diverging loyalties only reflected – and continue to do so – the global rivalries at a sub-regional level, where no such oppositions appear natural or inevitable.

However, the nature of the risks involved in the area has changed, also paving the way for different types of confrontations, armistices and imperfect solutions. The keg might look differently, but it is nonetheless still filled with gunpowder.

More precisely, from a once strategically and militarily troubled area, the Balkans appear nowadays as touched by economic malaise. Within and outside the EU, within and outside NATO, this patchwork of states with competing and overlapping allegiances has proved a fertile (but troubled) ground for foreign investment and international trade. As a vital link between the Black Sea and the Mediterranean, between Asia Minor and mainland Europe, the Balkans are not just a transit route, but also a potential hub for the global flux of capital in search of a strategic haven at the crossroads.

The real problem of investing in this area largely reflects the shortcomings of the geostrategic zero-sum game. All the external players interested in ‘rooting’ themselves in the Balkans mainly tend to do so from geopolitical imperatives and when they do, their further intention is to build up momentum and exclude their global competitors from such markets. In essence, the ‘great game’ is repeated in this claustrophobic patchwork of polities, with no other intention but attaining the fine balance needed in realpolitik calculations. Thus, in such a paradigm, hegemony is the keyword. Economic hegemony.

The actual – and sustainable – development of the Balkan area is left on a secondary level. A rhetoric and academic endeavor at most. Nonetheless, even for major power brokers, it should appear evident that an economically consolidated Balkan space would lead beyond the mere zero-sum game for all competitors involved. Veritable development would translate into an outsourcing of economic security and into a reduction in costs for ‘keeping the others out’, making the Balkan states less receptive to mixed incentives (economic plus military/strategic packages) and to financial hijacking by global actors.

In other words, ensuring the autonomy – or, even better, the autarchy – of the Balkan space through investments would benefit the whole range of interests involved. A first step would be to determine Balkan polities to pool their resources on a multilateral level. By blocking the diffuse and adversarial nature of bilateral negotiations, often simply mirroring global allegiances, such a collective manner of interaction would lead to harsh discussions, but conclusive results.

Moreover, prioritizing such a negotiation and moving it higher on the list than the over-exalted comprehensive pacts with the EU ‘neighbor’, the US ‘guardian’, the Russian ‘protector’ or Chinese ‘partner’, would awaken a certain conscience of a shared Balkan economic destiny. Not one without asperities or divergences, but one that is enhanced by competition. The fact that some of these states are already EU members can only relieve the Commission of its increasingly burdensome mission and allow it to exercise its leverage by local proxies. And so could the other actors …

Instilling a multilateral trade and investment framework in the Balkans would allow this recalcitrant area to draft its own rules, while taking into consideration all the existing dynamics and not fall into the diplomatic trap of global balancing. Regional games can also be regionally played. A micro-space open for investment and commerce, at the fringes of Europe, might prove to be a better option than insisting to forcefully integrate it in a globalized flux for which it is not yet ready.

In addition, a different type of settling trade and investment disputes could be conceived in this limited geographic framework. Beyond the classical ISDS and surpassing the ‘revolutionary’ elements of the Commission’s ‘investment court system’, the apparatus for solving such cases should take into consideration the numerous ‘incidents’ in the Balkans. However, given the fact that such investors are aware of the complicated economic situation, a larger regulatory margin could be left in the states’ competence. Nonetheless, what might be truly innovative in this regard would be a compulsory enforcement mechanism which should function directly within all those states, in accordance with a simplified treaty-based procedure, circumventing any recourse to domestic rules.

Thus, in an area of lasting paradoxes, investment multilateralism might prove a key to development and to the diffusion of tensions. For the Balkans, more regional might prove more global. More autarchy might – over time – become more openness to the world. And the powder within the keg might turn into something less volatile …


 * Horia Ciurtin, Managing Editor of the online platform for the European Federation for Investment Law and Arbitration (Brussels), the EFILA Blog; Expert for New Strategy Center, a reputed strategy think-tank with offices in Bucharest, as well as Legal Adviser in the field of International Arbitration for Scandic Distilleries S.A [see SSRN author page].