The Pre-Establishment National Treatment Obligation: How Common Is It?

Vrinda Vinayak*

Introduction

The national treatment obligation in international investment agreements (IIAs) is a double-edged sword – while it may attract foreign investment by guaranteeing equal access to and treatment in the domestic market, it has the potential to limit autonomy and sovereignty of nations in formulating domestic policy, and opens these measures up to challenge before arbitral tribunals. In this light, one of the most important aspects of the national treatment obligation is whether it applies only when investments have been admitted into the host country according to the latter’s rules and regulations (post-establishment obligation), or also before or during the admission stage (pre-establishment obligation).

Exclusively post-establishment obligations allow host states to retain autonomy over the kind and quantum of investment it wants to permit. An obligation to offer pre-establishment national treatment limits the ability of the host state to impose government approval requirements or sectoral caps for foreign direct investment (FDI). There is also a restriction on favourable treatment being granted to infant industries, imposition of performance requirements on foreign entities, requirements of mandatory partnership with local firms as a condition for establishment etc. Owing to these factors, pre-establishment obligations have traditionally been seen only in a small minority of agreements. However, this trend seems all set to change.

Pre-establishment obligations can be incorporated in IIAs in a variety of ways. They can either be embodied expressly in the national treatment clause, or gathered from the definitions of ‘investor’ and ‘investment’. IIAs containing broad, asset-based definitions of ‘investment’ (without reference to the asset having already been admitted in accordance with national law) and defining ‘investor’ as someone who “seeks to make, is making or has made an investment” or that “attempts to make, is making, or has made an investment” usually offer pre-establishment protections.

Treaty Practice – United States and Canada

The United States (US) and Canada have been at the forefront of the pre-establishment national treatment obligation. Early examples of some relevant bilateral investment treaties (BITs) include the US – Jordan BIT (1997)[1] and the Canada – Latvia BIT (1995)[2]. The model BITs of the US (2004 and 2012) and Canada (2004) were also the first models to feature such an obligation. The most prominent example of a provision embodying the pre-establishment national treatment obligation is Article 1102 of the North American Free Trade Agreement (NAFTA) (1992)[3], which reads: “1. Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments…” (clause 2 speaks of treatment accorded to ‘investments’ very similarly). ‘Investor’ is defined in terms of an entity that “seeks to make, is making or has made an investment”, and the agreement contains an asset-based definition of ‘investment’.[4] The NAFTA’s national treatment obligations have also been incorporated in the newly concluded Agreement between the US, Mexico and Canada (USMCA) (2018)[5], but ‘investor’ is now defined in terms of an entity that “attempts to make, is making, or has made an investment”, with a clarification as to the meaning of “attempts to make”.[6]

The IIAs concluded by the US and Canada with emerging economies display a varying practice – while the Canada – China BIT (2012)[7] does not include pre-establishment national treatment, the Rwanda – US BIT (2008)[8], the Canada – Senegal BIT (2014)[9] and the Canada – Mongolia BIT (2016)[10] contain such obligations worded similarly to the NAFTA. The practice of emerging economies will be examined in more detail below.

Treaty Practice – European Union

The European Union (EU) has recently become open to extending national treatment to the pre-establishment phase, as demonstrated by the EU – Montenegro Stabilisation and Association Agreement (2007), which provides for establishment of companies pursuant to the national treatment standard[11]. The EU’s agreements with Georgia[12], Moldova[13] and Ukraine[14] concluded in 2014 also admit pre-establishment national treatment. The most prominent manifestation of this trend is the newly concluded EU – Canada Comprehensive Economic and Trade Agreement (CETA) (2016)[15], Article 8.6 of which reads: “1. Each Party shall accord to an investor of the other Party and to a covered investment, treatment no less favourable than the treatment it accords, in like situations to its own investors and to their investments with respect to the establishment, acquisition, expansion, conduct, operation, management, maintenance, use, enjoyment and sale or disposal of their investments in its territory…

Similarly, Article 8.8(1) of the EU – Japan Economic Partnership Agreement (2018)[16] states particularly in the context of establishment that, “each Party shall accord to entrepreneurs of the other Party and to covered enterprises treatment no less favourable than that it accords, in like situations, to its own entrepreneurs and to their enterprises, with respect to establishment in its territory,” where “entrepreneur of a Party” means a “natural or juridical person of a Party that seeks to establish, is establishing or has established an enterprise…in the territory of the other Party.

Treaty Practice – Emerging Markets

It is interesting to examine the trend in emerging market states. Initially, most IIAs entered into by such states did not contain pre-establishment national treatment obligations. A typical formulation of such an exclusively post-establishment obligation is seen in the Indonesia – Turkey BIT (1997), which stated that “each party shall, in conformity with its laws and regulations, accord to these investments, once established, treatment no less favourable than that accorded in similar situations to investments of its investors or to investments of investors of any third country, whichever is most favourable.[17] Language facilitating only post-establishment obligations is also seen in the Korea – Qatar BIT (1999)[18], and the South Africa – Turkey BIT (2000)[19].

While the practice of emerging market states is still varied, pre-establishment obligations are becoming more frequent than before. One of the earlier examples of this trend is the BIT concluded by Korea with Japan in 2002[20] which defines investor broadly, provides a wide, asset-based definition of investment, and includes ‘establishment’ within the fold of the national treatment obligation. Around the same time, the ASEAN Comprehensive Investment Treaty (CIT) (2009)[21] also provided pre-establishment national treatment to its members, under the ‘mutual national treatment’ model.

In the next decade, regional agreements such as the Pacific Alliance Additional Protocol (PAAP) (2014) between Chile, Colombia, Mexico and Peru[22], and the ASEAN – India Investment Agreement (2014)[23] also provided such treatment. The Economic Partnership Agreement (EPA) concluded by Mongolia with Japan in 2015 states that:  “Each party shall in its area, accord to investors of the other party and to their investments treatment no less favourable than the treatment it accords in like circumstances to its own investors and to their investments with respect to investment activities,”[24] where ‘investment activities’ is defined as “establishment, acquisition, expansion, operation, management, maintenance, use, enjoyment and sale or disposal of an investment[25] – this formulation very clearly includes pre-establishment obligations. The terms ‘investor’ and ‘investment’ are also defined broadly.[26]

There are several recent examples of emerging market IIAs encompassing pre-establishment obligations. A case in point is the China – Hong Kong Closer Economic Partnership Arrangement (CEPA) Investment Agreement (2017), which defines ‘investor’ broadly as, “one side, or a natural person or an enterprise of one side, that seeks to make, is making or has made a covered investment,[27] and contains a national treatment obligation phrased very similarly to the NAFTA[28]. Another example is the Central America – Korea Free Trade Agreement (FTA) (2018) between Costa Rica, El Salvador, Nicaragua, Panama and Korea, which also extends national treatment to the pre-establishment phase[29] and incorporates an obligation phrased like the NAFTA.

On the other hand, some emerging economies still prefer to limit their national treatment obligation only to the post-establishment phase, exercising full investment control. Brazil is a prime example of this – for the longest time, it attracted investment without IIAs, and has only recently started entering into Cooperation and Facilitation Investment Agreements (CFIAs), which may explain its cautious and relatively more protectionist approach. The Brazil – Suriname CFIA (2018)[30] contains a national treatment obligation worded similarly to the NAFTA. However, an ‘investor’ must already have “made an investment”, and an ‘investment’ must be “established or acquired in accordance with the laws and regulations of the other Party”, thereby seemingly excluding pre-establishment national treatment obligations and allowing domestic law to discriminate. This is also clarified by Article 14(a) which clearly states that all investments must conform to domestic law in matters including establishment. Brazil’s CFIA with Ethiopia (2018) also contains an explicit admissions clause, stating that investments of investors of each party shall be admitted in accordance with domestic law,[31] and does not include ‘establishment’ in its national treatment clause[32]. Admissions clauses have been a common trend among countries wishing to retain autonomy over enacting domestic legislation stipulating specific criteria to admit foreign investment. Examples of older IIAs containing such clauses are the Ethiopia – Russia BIT (2000)[33] and the Bahrain – Thailand BIT (2002)[34]. More recently, the South Africa – Zimbabwe BIT (2009)[35] and the Rwanda – UAE BIT (2017)[36] have also adopted such clauses.

India’s 2016 Model BIT also clarifies through the definitions of ‘investor’, ‘investment’ and ‘enterprise’, coupled with non-inclusion of ‘establishment’ in its national treatment obligation, that such obligations are excluded at the pre-establishment stage. Uniquely, the model in Article 2.2 also states that: “…nothing in this Treaty shall extend to any Pre-investment activity related to establishment, acquisition or expansion of any Enterprise or Investment, or to any Law or Measure related to such Pre-investment activities, including terms and conditions under such Law or Measure which continue to apply post-investment to the management, conduct, operation, sale or other disposition of such Investments.

Restrictions on the Pre-Establishment Obligation

It is but natural that IIAs offering pre-establishment protections also contain restrictions on such a broad obligation, over and above general exceptions. Many IIAs of this kind contain ‘negative lists’ of sectors to which the obligation does not apply, such as those involving national interest or security, like telecommunication, transport, defence etc. The NAFTA, EU – Canada CETA, China – Hong Kong CEPA, Japan – Mongolia EPA, PAAP, ASEAN CIT, Central America – Korea FTA etc. are all found to contain such lists. There may also be a narrower approach, that of a ‘positive list’ enumerating sectors wherein national treatment will be granted, such as in the India – Singapore Comprehensive Economic Cooperation Agreement (CECA) (2005)[37]. Most IIAs analysed above also contain provisions making the national treatment obligation inapplicable to existing non-conforming measures and reasonable amendments thereto, while prohibiting the enactment of new discriminatory measures. Article 9 of the China – Hong Kong CEPA, Article 8.15(1) of the EU – Canada CETA and Article 9.13(1) of the Central America – Korea FTA are good examples of such provisions.

Another measure to restrict a broad interpretation of the pre-establishment obligation is to define the meaning of “seeks to make…an investment” or “attempts to make…an investment” in the definition of ‘investor’. Footnote 12 of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) (2018) clearly states that, “For greater certainty, the Parties understand that, for the purposes of the definitions of “investor of a non-Party” and “investor of a Party”, an investor “attempts to make” an investment when that investor has taken concrete action or actions to make an investment, such as channelling resources or capital in order to set up a business, or applying for a permit or licence.[38] Footnote 14 of the Central America – Korea FTA also contains such an understanding.

Explanations ‘for greater certainty’ have also been added in several agreements to explain ‘like circumstances’, so as not to allow arbitral tribunals too broad a discretion. For example, the USMCA in Article 14.4(4) states that, “For greater certainty, whether treatment is accorded in “like circumstances” under this Article depends on the totality of the circumstances, including whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives.” Article 3(4) of the ASEAN-India provides detailed guidance in this regard by clarifying that, “A determination of whether investments or investors are in “like circumstances” should be made, based upon an objective assessment of all circumstances on a case-by-case basis, including, inter alia: (a) the sector the investor is in; (b) the location of the investment; (c) the aim of the measure concerned; and (d) the regulatory process generally applied in relation to the measure concerned. The examination shall not be limited to or biased towards anyone factor.

Further, in response to jurisprudence that discriminatory intent is not a requirement for a finding of violation of national treatment, IIAs offering pre-establishment national treatment in the future may consider including such a requirement in the treaty itself. India’s 2016 Model BIT, despite not offering pre-establishment national treatment, clarifies the need for discriminatory intent in the following words: “A breach of Article 4.1 will only occur if the challenged Measure constitutes intentional and unlawful discrimination against the Investment on the basis of nationality,” and similar wording may be adopted in the future by countries offering a pre-establishment protection. Furthermore, for countries that have chosen not to afford pre-establishment national treatment, it may be beneficial to clarify that such treatment cannot be imported from other IIAs either. The Brazil – Colombia CFIA (2015) in Article 5(3) adopts this method.

Adopting a more extreme measure, some countries are also seeking to renegotiate treaties which had earlier offered pre-establishment guarantees, to retain autonomy over regulation of foreign investment. An example of a domestic measure which would ordinarily violate pre-establishment national treatment obligations is India’s foreign direct investment (FDI) policy, which mandates government approval for foreign entities seeking to invest in certain sectors in India. Moreover, the percentage of foreign investment allowed in these sectors is also limited. These restrictions placed on foreign entities in the pre-establishment phase accords them less favourable treatment than that afforded to domestic entities. India had previously adopted two distinct approaches while concluding IIAs – first, to undertake only post-establishment obligations, which was seen in a majority of agreements, and second, to undertake pre-establishment obligations but either only in certain agreed sectors (the ‘positive list’ approach was adopted in India’s IIAs with Singapore[39]) or by excluding certain sectors from the purview of pre-establishment national treatment (the ‘negative list’ approach was adopted in the IIA with Japan[40] and Korea[41]). Since the FDI policy is a pre-establishment regulatory procedure pertaining to sectors other than those agreed upon, or concerning those expressly excluded, India believed its FDI policy to be in compliance with its obligations under all international agreements. However, in its 2016 model BIT, India has specifically clarified its intent to undertake only post-establishment obligations henceforth, and is renegotiating its investment agreements according to this model.

Conclusion

It can be concluded safely that while countries continue to enter into treaties offering only post-establishment national treatment protection, the trend reflected in many recently concluded IIAs is towards inclusion of pre as well as post-establishment obligations. This trend could in part be attributed to intense liberalisation and globalisation. Countries and regions such as the US, Canada and the EU choosing to adopt pre-establishment protections is unsurprising, given that these developed economies do not fear competition from counterparties to their IIAs. Further, while emerging market economies were initially almost exclusively offering only post-establishment national treatment to protect their domestic economies, pre-establishment protections are now being offered among parties whose economic power is more equal.

There are political factors at play here as well. At the pre-establishment stage, there is strong impetus to the host state to strengthen the economy by attracting foreign investment. However, the same motivation to uphold national treatment may not remain in the post-establishment stage, when the investor has already invested large amounts of capital and other factors of production, and is unlikely to exit easily.[42] Political parties have more to gain from favouring domestic investors, which secures votes for them. In light of this, it will be interesting to see whether countries uphold the obligation with equal commitment in both phases.


*Vrinda Vinayak, Student, 5th Year, B.A. LL.B. (Hons.), National Law University, Delhi (India)


[1] Treaty Between the Government of the United States of America and the Government of the Hashemite Kingdom of Jordan Concerning the Encouragement and Reciprocal Protection of Investment, art. II.1, Jul. 2, 1997.

[2] Agreement Between the Government of Canada and the Government of the Republic of Latvia for the Promotion and Protection of Investments, art. II.3, Apr. 26, 1995.

[3] North American Free Trade Agreement between the United States, Canada and Mexico, Dec. 17, 1992.

[4] Id., art. 1139.

[5] Agreement between the United States of America, the United Mexican States, and Canada, art. 14.4, Nov. 30, 2018.

[6] Id., art. 14.1 read with footnote 3.

[7] Agreement Between the Government of Canada and the Government of the People’s Republic of China for the Promotion and Reciprocal Protection of Investments, art. 6, Sept. 09, 2012.

[8] Treaty between the Government of the United States of America and the Government of the Republic of Rwanda Concerning the Encouragement and Reciprocal Protection of Investment, art. 3, Feb. 19, 2008.

[9] Agreement Between Canada and the Federal Republic of Senegal for the Promotion and Protection of Investments, art. 4, Nov. 27, 2014.

[10] Agreement Between Canada and Mongolia for the Promotion and Protection of Investments, art. 4, Sept. 08, 2016.

[11] Council and Commission Decision on the conclusion of the Stabilisation and Association Agreement between the European Communities and their Member States, of the one part, and the Republic of Montenegro, of the other part, art. 53, March 29 2010.

[12] Association Agreement between the European Union and the European Atomic Energy Community and their Member States, of the one part, and Georgia, of the other part, art.79, June 27, 2014.

[13] Association Agreement between the European Union and the European Atomic Energy Community and their Member States, of the one part, and the Republic of Moldova, of the other part, art. 205, June 27, 2014.

[14] Association Agreement between the European Union and its Member States, of the one part, and Ukraine, of the other part, art. 88, June 27, 2014.

[15] Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union (and its member states) of the other part, Oct. 30, 2016.

[16] Agreement between the European Union and Japan for an Economic Partnership, July 17, 2018.

[17] Agreement Between the Government of the Republic of Turkey and the Government of the Republic of Indonesia Concerning the Promotion and Protection of Investments, art. II(2), Feb. 25, 1997.

[18] Agreement Between the Government of the Republic of Korea and the Government of the State of Qatar for the Promotion and Protection of Investments, art. 3(2), Apr. 16, 1999.

[19] Agreement Between the Republic of Turkey and the Republic of South Africa Concerning the Reciprocal Promotion and Protection of Investments, art. II(3), June 23, 2000.

[20] Agreement between the Government of the Republic of Korea and the Government of Japan for the Liberalisation, Promotion and Protection of Investment, art. 2(1), Mar. 22, 2002.

[21] ASEAN Comprehensive Investment Agreement, art. 5, Feb. 26, 2009.

[22] Additional Protocol to the Framework Agreement of the Pacific Alliance, art. 10.4, Feb. 10, 2014.

[23] Agreement on Investment Under the Framework Agreement on Comprehensive Economic Cooperation Between the Association of Southeast Asian Nations and the Republic of India, art. 3, Oct. 8, 2003.

[24] Article 10.3, Agreement Between Japan and Mongolia for an Economic Partnership, art. 10.3, Feb. 10, 2015.

[25] Id., art. 10.2(e).

[26] Id., arts. 1.2(k) & (l).

[27] Investment Agreement of the Mainland and Hong Kong Closer Economic Partnership Agreement, art. 2(2), June 26, 2017.

[28] Id., art. 5.

[29] Free Trade Agreement between the Republic of Korea and the Republics of Central America, art. 9.3, Feb. 21, 2018.

[30] Cooperation and Facilitation Investment Agreement between the Federative Republic of Brazil and the Republic of Suriname, art. 5 read with art. 3(1.3) and art.3(1.5), May 02, 2018.

[31] Agreement Between the Federativo Republic of Brazil and the Federal Democratic Republic of Ethiopia on Investment Cooperation and Facilitation, art. 3(4), art. 4(1), Apr. 11, 2018.

[32] Id., art. 5(1).

[33] Agreement between the Government of the Federal Democratic Republic of Ethiopia and the Government of the Russian Federation on the Promotion and Reciprocal Protection of Investments, art. 2(1), Feb. 10, 2000.

[34] Agreement between the Government of the Kingdom of Thailand and the Government of the Kingdom of Bahrain for the Promotion and Protection of Investments, art. 3(1), May 21, 2002.

[35] Agreement between the Government of the Republic of South Africa and the Government of the Republic of Zimbabwe for the Promotion and Reciprocal Protection of Investments, art. 2(1), Nov. 27, 2009.

[36] Agreement between the Republic of Rwanda and the United Arab Emirates on the Promotion and Reciprocal Protection of Investments, art. 3(1), Nov. 01, 2017.

[37] Comprehensive Economic Cooperation Agreement between India and Singapore, art. 6.3, Jun. 29, 2005.

[38] Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Mar. 08, 2018.

[39] Supra note 37.

[40] Economic Partnership Agreement between Japan and India, art. 90(2), Feb.16, 2011.

[41] Comprehensive Economic Partnership Agreement between India and the Republic of Korea, art. 10.8(2), Aug, 07, 2009.

[42] Jurgen Kurtz, The WTO and International Investment Law: Converging Systems 90 (2016).

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