RUSSIAN INVESTORS IN AFRICA:HE WHO DOES NOT RISK WILL NEVER DRINK CHAMPAGNE

(Russian Proverb)

Izabella Prusskaya, Associate, CAREY OLSEN (BVI) L.P.

Africa needs more Russian foreign direct investments to enhance the current Africa-Russian trade ties

Albert M. Muchanga, Commissioner for Trade and Industry of the African Union, during the St. Petersburg International Economic Forum 2018, “Business Dialogue: Russia-Africa”

A changing landscape: industry focus and the nature of investors

Trade between Russia and African countries has strengthened in recent years. For example, the total turnover in trade in 2016 amounted to US$14.5 billion, which is US$3.4 billion more than in 2015,[1] and 2017 again saw record levels of investment.[2] According to the Eurasian Economic Commission, Africa is the only region with which Russia increased its trade in 2016.[3] To dig deeper: in the face of sanctions and unstable political relationships with the United States and Western Europe, Russia is looking for new economic partners.

Russian business interests in sub-Saharan Africa today still mainly lie in the commodities industry. Alrosa, Rosneft, Rostec and Rosatom are already involved in mining projects in Angola, Namibia and Zimbabwe among others. KamAZ and Sukhoi Civil Aircraft are also developing trade projects in the region. VTB has recently opened an office in Angola. Congo, Sudan and Senegal are also cooperating with Russia in the field of oil and gas exploration.

However, these are far from the only areas attracting investment. Agriculture also plays an important role in Russian-African economic relations, with Africa becoming a promising market for Russian grain and agricultural equipment.[4] In turn, many African countries[5] have recently increased the numbers of fruits and vegetables exported to Russia, taking advantage of the favorable market conditions arising after Russia imposed “counter-sanctions” on produce imported from the EU.[6]

Although large companies are still most engaged in the energy and mining sectors, manufacturing, transportation and infrastructure are also growing areas of focus. And this is not the end of a long list of investment opportunities Russian businesses are pursuing in Africa. One interesting example is Lisma, a company from Mordovia, which established a joint venture in Burundi for the production of lamps supplied to the entire East African market. African investors substantially finance the project, and Lisma in turn supplies equipment and technology.

There are some common features associated with the structure of Russian investment into Africa. As a general rule, it is relatively large Russian companies that are operating on the continent. Led by companies such as Gazprom, Lukoil, Rostec and Rosatom, which have investments or interests in Algeria, Egypt, South Africa, Uganda and Angola, Russians are mainly investing in oil, gas and African infrastructure. Most large Russian corporations investing in Africa are at least partially state-owned. Thus, most Russian economic interest in Africa effectively takes the form of public-private partnerships, with the majority of investment projects originating in Moscow, Russia’s financial and industrial center.

New frontiers for Russian investment: two innovative case studies

It is clear that there are an increasing number of Russian investment projects in African nations – and the following examples from Angola highlight that Russia’s presence on the continent is constantly forging new frontiers, in terms of both reach and scale.

Roskosmos has long been a partner of Angola in the space industry and Roskosmos currently plans to produce and launch the second satellite in Angola, Angosat-2.

The first satellite, Angosat-1, was launched into orbit at the end of 2017. The export contract for Angosat-1 amounted to US$327.6 million and was signed on 26 June 2009 between the Angolan Ministry of Telecommunications and Information Technology and Rosoboronexport. The Russian corporation Energy was appointed as the main contractor. In 2011, Vnesheconombank, Roseximbank, VTB and Gazprombank entered into a loan agreement with the Angolan Ministry of Finance, under which the African country got a credit line for US$278.46 million for a period of 13 years. In 2015, the construction of a satellite flight control center began in Luanda, the capital and largest city in Angola. Angola financed the construction of ground infrastructure at a cost of US$54.3 million.

In some cases, Russian investors play a dominant role in key industries – and they are using this position to deepen cooperation with host states. Another large Russian investor in Angola is Alrosa, a Russian group of diamond mining companies accounting for 95% of country’s diamond production and 27% of the global diamond extraction.[7]

According to those documents, Alrosa will participate in the project through the subsidiary company Katoka (Alrosa owns 32.8%), which will receive a 50.5% share in the new structure. Taking into consideration the results of a preliminary feasibility study, the development of Luashe is of a considerable economic interest to the project participants. The Luele kimberlite pipe found in the Luashe exploration field is the largest discovered in the world in the last 60 years.[8]

Substantive protections for investors under bilateral investment treaties

Currently, Russia is a party to eleven BITs with African countries,[9] of which six are currently in force – namely with Angola (2011), Egypt (2000), Equatorial Guinea (2011), Libya (2010), South Africa (2000) and Zimbabwe (2014).[10] Interestingly, while South Africa has terminated its BITs with a significant number of Western nations, its BIT with Russia remains in force.

The BITs in force between Russia and African nations have several features in common as regards the dispute resolution mechanisms. Each of them contains an article providing for investor-state dispute settlement (“ISDS”) and generally reflects a so-called “traditional” approach to dispute resolution, providing for arbitration as one of the available options. All of the dispute resolution clauses in those BITs are multi-tier and provide for negotiations as a preliminary step in resolving investor-state disputes (the “cooling-off period”). If the parties are not able to resolve their disputes in the course of negotiations, then the investor may apply to the competent court of the country where the investment was made or resort to arbitration.

Other features of the BITs’ provisions on arbitration do, however, vary – in particular, as regards the applicable arbitral rules, which govern proceedings between parties and can impact on a wide range of issues including timing of the arbitration, composition of the tribunal, confidentiality and emergency relief. For example, Article 10 of the South Africa-Russia BIT provides for either arbitration under the Arbitration Institute of the Stockholm Chamber of Commerce Rules (“SCC Rules)” or through an ad hoc arbitration in accordance with UNCITRAL Arbitration Rules (“UNCITRAL Rules”) – but not ICSID Rules. The older BITs, which entered into force in 2000, provide a more limited choice of arbitration options for the investors. The Egypt-Russia BIT provides only for UNCITRAL ad hoc arbitration, in its Article 10.

In contrast to the older BITs, the more modern Russian BITs with Angola, Libya and Zimbabwe represent a new generation of texts, which explains why they provide for an ICSID arbitration option. This is in line with Article 11 of the Angola-Russia BIT, Article 12 of the Zimbabwe-Russia BIT and Article 8 of the Libya-Russia BIT, all of which provide for investors to bring a claim via either ad hoc arbitration in accordance with UNCITRAL Arbitration Rules, or arbitration under the ICSID Convention. In practice, the arbitral rules most frequently used by Russian investors in claims against states are UNCITRAL Rules (12 cases) and SCC Rules (6 cases), with three filed under the ICSID Additional Facility Rules, two of which in 2018.[11]

The Russian-African BITs in force provide various types of protection for investors. Compensation shall correspond to the actual value of the expropriated investment and shall be paid without an unjustified delay.

Another substantive protection available for Russian investors under BITs with African countries is an obligation of host states to provide fair and equitable treatment of the investment (“FET” standard). The standard has been developed through case law, protection from discriminatory treatment or damage to investments (that amount to less than expropriation). FET is contained in the vast majority of international investment agreements as one of the main standards for the protection of foreign investors,[12] including in those six Russian-African BITs currently in force.

A third frequently used standard of investment protection, which is closely connected with FET standard, is the Most-Favoured Nation Treatment (“MFN” standard). It requires the host state not to treat an investor differently than other foreign or domestic investors based on the fact that it comes from a particular country. Based on MFN clauses contained in all Russian-African BITs in force, Russian investors shall receive equal trade advantages as the “most favoured nation”, for example, trade or tax advantages.

Where BITs are in force, therefore Russian investors in Africa are covered by the main substantive protections. Enforcing such protections is a matter of dispute settlement, subject to the clauses in the treaty covering the investor’s recourse.

Investor-state dispute settlement under bilateral investment treaties.

Russia is no stranger to investment arbitration – and even though Russia has more famously participated in such proceedings on the side of the host state, there have also been 22 cases where Russian investors filed claims against states under investment treaties.[13] The first such case was brought in 2004,[14] with several investment arbitration proceedings initiated by Russian investors in previous years still pending[15]. There has been a recent surge in claims by Russian investors, with six such cases brought in 2018[16] following just two in 2017[17] and three in 2016.[18] However, only one of these cases to date has involved an African host state – Egypt.

The PCA case of MetroJet (Kogalymavia) Limited v. Arab Republic of Egypt relates to a plane crash that took place in the Egyptian desert region of the Sinai in 2015. This crash killed all 224 passengers, the majority of which were Russian citizens. The Russian airline, Metrojet, together with the Turkish tour operator, Prince Group, are claiming at least US$200 million in an investment treaty claim against over the suspected terrorist attack.[19]

The Claimants brought their claim in 2017, seeking compensation for both direct damages caused by the crash and the loss of their investment in the Egyptian economy. The airline, which stopped flying shortly after the crash and filed for bankruptcy shortly after, is seeking US$90 million in damages. The Turkish tour operator is seeking US$111 million.

Optimizing BIT protections: structuring investment through a third country

In the case that Russian investors are unable to access adequate protections under the applicable BIT between Russia and the African host nation, investment structuring is an important means of optimizing the protections available to the investor. This is generally achieved by choosing a state with a favorable BIT between it and the target nation, in which to incorporate an investment vehicle to act as a conduit for funds. The purpose is to allow the Russian investor, by virtue of the domicile of the investment vehicle, to achieve superior investment protection pursuant to the terms of the preferred BIT.

The United Kingdom is a popular choice for such investment structuring, with 21 BITs with African countries currently in force.[20] However, it remains to further see whether Brexit will make it more attractive to structure investments in certain EU member states through the UK in order to take advantage of BIT protection.

It is to be noted that in March 2018 the Court of Justice of the European Union held, in the famous Achmea case that BITs between EU member states are invalid as their investor-state dispute settlement provisions are incompatible with the EU single market. Based on this, a treaty of 29 August 2020, the so-called “Termination Agreement” will terminate all intra-EU BITs between ratifying states. The UK has declined to join it, so investments under those BITs may continue to be structured via the UK so as to attract relevant BIT protection. This would have the added advantage to Russian investors of potential treaty protection in EU States that would not be provided by structuring through States – such as those mentioned below – which have signed the Termination Agreement. However, this may be in danger due to the infringement procedure which the EC has commenced against the UK for refusing to sign the Termination Agreement.

Another popular choice for investment structuring is France, with 23 BITs in force with African states.[21] Other jurisdictions such as the Netherlands may also be favorable, particularly in circumstances where they offer additional taxation benefits to an investor. These considerations should ideally be considered at the outset of an investment, or at least well before it could be said that any potential treaty dispute has arisen or could likely arise. If a switch comes only after the start of a dispute it is unlikely to benefit from protection.[22] The latter approach may lead an arbitral tribunal to reject a claim on the grounds that the claimant engaged in an abuse of process by switching the investment vehicle after knowing that a dispute had arisen or was likely to arise, as happened for example in Mobil Corporation v Venezuela and Banro American Resources Inc. v. Congo.[23]

There are already two examples of Russian investors taking advantage of third-country investment vehicles in bringing a claim under an alternative BIT, although not yet in Africa. In Naumchenko and others v. India (2012) the claim was brought under the Cyprus-India and Russia-India BITs; and in Nadel & Ithaca Holdings Inc v. Kyrgyzstan (2012), the claim (now discontinued) was brought under the Kyrgyzstan-United States of America BIT. Insofar as alternative BITs provide greater protection, Russian investors considering a new venture should seek advice on the most appropriate jurisdiction for incorporating an investment vehicle, taking into account substantive protections, the ISDS mechanism and any enforceability benefits.

Enforcement of awards: the availability of ICSID arbitration and the New York Convention

Famously, the ICSID Convention provides the most widespread and effective means of enforcing investment arbitral awards among its member states, with mandatory recognition and enforcement of arbitral awards by local courts. According to the survey conducted by ICSID in 2017, Member States reported 85% compliance with ICSID awards of costs and/or damages in favor of the claiming party and post-award decisions issued from 14 October 1966 until 1 April 2017.[24] The ICSID Convention applies only to disputes between state members of the Convention, and nationals and companies of member states. To be a member, a state must both sign and ratify the Convention.

As Russia has signed but not yet ratified the ICSID Convention,[25] Russian investors will need to use third country investment structuring, in order to participate in conventional ICSID arbitrations and benefit from the associated enforcement mechanism. Availability of the ICSID enforcement mechanism will, of course, also depend on the ratification status of the host state. To date, 38 African nations have ratified the ICSID Convention,[26] so the mechanism is in principle quite widely available on the continent.

The ICSID Additional Facility Rules provide one alternative for Russian investors, where investment structuring is not an option. These Rules are available for the arbitration of investment disputes where only one side is a party or national of a party to the ICSID Convention.[27] As such, Russian investors can in principle bring arbitration against an African host state under the ICSID Additional Facility Rules where the host state has ratified the ICSID Convention, and the applicable BIT permits ICSID arbitration. Although awards under the Additional Facility Rules are not enforceable pursuant to the ICSID Convention, such awards still have the advantage of credibility and are generally favorable for enforcement. Further, one of the proposals in ICSID’s current Rules Amendment Project is to extend the Additional Facility Rules to cases where both the claimant and the respondent are not ICSID Contracting States or nationals thereof. If this proposal is ultimately approved, Russian investors would (subject to the terms of the BIT) have access to arbitration under ICSID Additional Facility Rules regardless of the counterparty state.

The New York Convention provides an alternative enforcement mechanism to the ICSID Convention, where the arbitration has been carried out pursuant to other arbitration rules such as UNCITRAL. It is subject to local laws (where assets are based) regarding sovereign assets. However, it is applicable simply if the award is rendered and enforced in New York Convention contracting states – which represent a significant majority of African states.[28] As such, this enforcement mechanism will be more widely accessible to Russian investors in cases where investment structuring is not employed.

Contractual protections and contract-based arbitration

Beyond general investor-state protections, investors may also seek to incorporate an arbitration clause into a written and binding investment agreement with the state – although of course, this is likely to be a heavily negotiated point. Where successful, this approach will enable investors to bring claims against the host state in circumstances where there is no applicable BIT, the applicable BIT offers inadequate substantive protections, or the BIT does not provide for resolution of disputes via international arbitration. In all cases, investors will need to ensure that the investment agreement is drafted to incorporate the requisite substantive protections directly, and that the arbitration clause is appropriately drafted. This mechanism is a powerful but underutilized option: the statistics show that around 16% of all the arbitration cases filed under different ICSID Rules are based on contractual agreements between the parties in the dispute (112 out of 704), with the majority of Respondents from either Latin American or African countries.

ICSID permits arbitration on a contractual basis as well as pursuant to a BIT[29] and suggests a well-developed set of model clauses for this purpose.[30] As for treaty claims, Russian investors will need to structure their investment through a third party vehicle in order to allow investors to take advantage of the ICSID enforcement mechanism, although the arbitration clause could of course specify alternative rules, for example UNCITRAL, and seek to rely on alternative enforcement mechanisms. Contract-based arbitration is also permissible under the ICSID Additional Facility Rules, which as noted above may apply where either the host State or the State of origin of the investor is a Party to the ICSID Convention. ICSID also provides suggested drafting for this scenario in its model clauses.

A role for BRICS organizations in investment disputes?

Since South Africa joined the BRICS in 2010, the dispute resolution mechanisms of this informal grouping of nations have rapidly evolved, leading to new means of settling disputes between Russia and South Africa. The Shanghai International Economic and Trade Arbitration Commission established the BRICS Dispute Resolution Center Shanghai (“BRICS DR Center Shanghai”) in October 2015. This center accepts cases involving parties from BRICS countries and provides arbitration and alternative dispute resolution services. A similar center is now operational in New Delhi.

Moreover, the Moscow Declaration signed on 1 December 2017 proposed the “establishment of a Panel of Arbitrators and common institutional rules to coordinate and merge the functioning of the BRICS Dispute Resolution Centers already established […] and the proposed Centers in Brazil, Russia and South Africa“. Though such a panel has not yet been established, the representatives of the BRICS member states are actively discussing the future structure and functioning of such a panel. The proposed centers in Brazil, Russia and South Africa will, most likely, use BRICS DR Center Shanghai as an analogue.

The BRICS seem to be a good example of regionalizing dispute resolution mechanisms by setting up various centers for settling disputes between the member states. Together with the ever-increasing integration of African economies, recently heralded by the newly implemented African Continental Free Trade Area (“AfCFTA”), and its forthcoming Investment Protocol, this ongoing trend towards regionalization may yet see a specialized dispute resolution center for investment claims between CIS and the African Union.

Conclusion

Africa is a promising investment target with rapidly developing use of arbitration due to the continent’s progressive integration into the global economy and its evolving experience in resolving international disputes. The investment protection measures included in investment treaties allow investors to adapt the structure of their investment to benefit from those protections.

A variety of instruments provide for investment protection for Russian investors in Africa. The scope and level of protection will vary from country to country and depend on the local legislation and treaties in force. Importantly, the scope and level of protection must be evaluated before investing into Africa, since potential investors might be better served by structuring their investment through a third country in order to benefit from stronger protections. While the significant majority of African states have now ratified the New York Convention,[31] which provides a good means of award enforcement, innovation by Russian investors via third-country structuring may allow access to the ICSID Convention, under the egide of the World Bank.

As of today, African countries are parties to more than 900 BITs, generally with non-African countries;[32] and the majority of African states are also Member States of ICSID Convention. Although there has only been one known investment claim by a Russian investor in Africa, cases are likely to develop alongside the growth of Russian investments on the continent. It may be too early to determine whether any of the investors would face particular problems in Africa in connection with the initiation of investment arbitration. However, “forewarned is forearmed” and Russian investors are well advised to analyse investment protections applicable to them, in order to invest and risk with confidence before they drink champagne.

  1. FDI Intelligence. The Africa Investment Report 2016. Available at: Analyseafrica.com.
  2. Trends Report by FDIMarkets.com, 2017: as at the date of this publication, 2017 was the year “in which the highest numbers of projects were recorded”.
  3. Id.
  4. For example, Russia supplies wheat to Morocco, South Africa, Libya, Kenya, Sudan, Nigeria and Egypt.
  5. Egypt, Côte d’Ivoire, Benin, Nigeria, Guinea-Bissau, Central African Republic, Guinea, Burkina Faso, and Mali.
  6. More about Russia’s counter-measures at: https://www.politico.eu/article/putin-extends-counter-sanctions-against-eu/
  7. 2017 global natural diamond production forecasted at 142M carats worth US $15.6B”. Available at: MINING.com
  8. See at: http://www.alrosa.ru/алроса-примет-участие-в-освоении-круп/
  9. BITs not in force with: Morocco, Namibia, Nigeria, Algeria, Ethiopia.
  10. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/international-investment-agreements/countries/175/russian-federation
  11. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/investment-dispute-settlement/country/175/russian-federation/investor
  12. FAIR AND EQUITABLE TREATMENT. UNCTAD Series on Issues in International Investment Agreements II. P. 7. Available at: https://unctad.org/en/Docs/unctaddiaeia2011d5_en.pdf
  13. UNCTAD Investment Policy Hub, accessed at: https://investmentpolicy.unctad.org/investment-dispute-settlement/country/175/russian-federation/investor
  14. Bogdanov v. Moldova (I), which was initiated in 2004 under SCC Rules (Stockholm Chamber of Commerce). Mr. Bogdanov initiated three more claims against Moldova in 2005, 2009 and 2012, with two awards in favour of the investor and two in favour of the state.
  15. See for example Paushok v. Mongolia (2007), Naumchenko and others v. India (2012), Tatarstan v. Ukraine, Deripaska v. Montenegro (2016) and Boyko v. Ukraine (2017).
  16. Gazprom v Ukraine (2018), GRAND EXPRESS v. Belarus (2018), Lazareva v. Kuwait (2018), Manolium Processing v. Belarus (2018), MTS v Turkmenistan (II) (2018), RusHydro v Kyrgystan (2018).
  17. Boyko v. Ukraine (2017); MetroJet (Kogalymavia) Limited v. Arab Republic of Egypt (2017).
  18. Deripaska v. Montenegro (2016), Tatarstan v. Ukraine (2016), Evrobalt and Kompozit v. Moldova (2016).
  19. Garrigues. PCA to decide claim against Egypt over plane crash. Available at: https://www.garrigues.com/en_GB/new/international-arbitration-newsletter-march-2020-regional-overview-middle-east-and-africa
  20. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/international-investment-agreements/countries/221/united-kingdom
  21. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/international-investment-agreements/countries/72/france
  22. See, for example: Philip Morris Asia Limited v. The Commonwealth of Australia, (PCA Case No. 2012-12)
  23. Banro American Resources, Inc. and Société Aurifère du Kivu et du Maniema S.A.R.L. v. Democratic Republic of the Congo, ICSID Case No. ARB/98/7
  24. Including both Convention and Additional Facility awards
  25. Database of ICSID Member States, accessed at https://icsid.worldbank.org/en/Pages/about/Database-of-Member-States.aspx
  26. Database of ICSID Member States, accessed at https://icsid.worldbank.org/en/Pages/about/Database-of-Member-States.aspx
  27. Article 2 of the ICSID Additional Facility Rules
  28. Database of ICSID Member States, accessed at https://icsid.worldbank.org/en/Pages/about/Database-of-Member-States.aspx
  29. Article 25(1) of the ICSID Convention
  30. See at: https://icsid.worldbank.org/en/Pages/resources/ICSID-Model-Clauses.aspx
  31. New York Convention Contracting States, accessed at http://www.newyorkconvention.org/countries
  32. See at: http://aefjn.org/en/bilateral-investment-treaties-a-continuing-threat-to-africa/

The Need for the Implementation of a Multilateral Agreement on Investment vis-à-vis Dispute Settlement in WTO

Aayushi Singh*

Introduction – Cogs of the same wheel – Trade and FDI

Grazia Ietto-Gillies’ theories were based on the classical theory of trade in which the motive behind trade was a result of the difference in the costs of production of goods between two countries, focusing on the low cost of production as a motive for a firm’s foreign activity. The relation between trade and FDI flows from this. Analytical work has recently been developed by OECD in order to explore the nature of these links in quantitative terms.

Globally speaking, the impact of FDI on trade has been much debated and studied in the literature since it provides an  indication  of  how  the  international  specialization  of  countries  is  affected  by  globalization  and, hence, holds a clue to understanding the welfare effects. If  trade  and  FDI  complement  each  other  then  it might  lead  to  greater competitiveness of the foreign market and this is beneficial to exports from host country and therefore to its industries. Reinterpreting  models  of  the  multinational  firms  in  terms  of  the  choice  between FDI  and  cross-border  services  takes  into  account  the  fact  that  services  account  for  an important and stable fraction of global trade. Hence, theories explaining international trade (in services) should, in principle, also be applicable to international trade in financial services.

At this juncture it is integral to understand that FDI may enter through regional, bilateral and multilateral investment treaties. The write-up draws two theses regarding the viability and opportunities offered by bilateral and multilateral investments and attempts to build a case for the latter through an analysis of empirical data and research gathered from financial institutions, trade organizations and research papers.

Thesis 1A) limitations of bilateral FDI arrangements (Achilles Heel) as opposed to multiilateral framework in the interest of member nations

UNCTAD puts the number of BITs globally at the end of 2011 at 2,833. Perhaps because of the larger existing number already negotiated, or because of the shift towards negotiations of regional FTAs or regional treaties, the number of new annual BITs signed has declined recently, with a total of 47 new IIAs signed in 2011 (33 BITs and 14 other IIAs), compared with 69 in 2010. Developing governments have been actively seeking partners for BITs as a way to promote trade and economic relations and to elicit interest in their economies as a destination for FDI.  Only a few countries have refrained from the BITs race, most notably Brazil, which has signed BITs with 14 countries, none of which have entered into force. Brazilian authorizes have feared that strong protection clauses and comprehensive investor–state dispute resolution mechanisms in BITs may restrict their ability to pursue an independent national development strategy, expose the country to liabilities caused by legal claims by foreign investors and increase the complexity of policy-making.

The increasingly complex global setting for international investment that has resulted from the “patchwork quilt” of agreements discussed above requires investors and  governments to try and ensure consistency between differing sets of obligation.

A large number of investment agreements, notably the BITs, contain similar concepts (national treatment, MFN treatment, fair and equitable treatment, full protection and security), but have legal and/or textual variations that can result in divergent interpretations of the same general obligation under different agreements. This can engender costs, in the form of time and inefficiencies in trying to sort through the implications of various provisions in different investment contexts, and potentially divert investment flows from more efficient to less efficient locations. Another question raised by the overlapping set of investment agreements is the possibility of “forum shopping” in the case of dispute settlement, where an investor may initiate multiple procedures on the same issue to take advantage of the potentially more favorable dispute settlement provisions available in different agreements.

Thesis 1B) Current fragmented governance of FDI contributes to the confusing landscape faced by investors and governments and multilateral agreement on investment is a viable solution

Despite its importance, the disciplines governing FDI lie in the shadow of those governing global trade. There is no single, comprehensive multilateral treaty or institution to oversee investment activity. In addition to the efforts to address the topic in the Havana Charter of 1948 – which ultimately failed for other reasons, a second attempt was made by the OECD through its four-year effort (1995–1998) to craft a multilateral agreement on investment (hereinafter “MAI”). The effort involved OECD Members and a few key developing countries. When made public in 1997, the draft agreement drew widespread criticism from civil society groups and developing countries. The effort was suspended at the end of December 1998. A third attempt to bring investment under multilateral rules took place within the WTO itself, in the context of the Doha Development Agenda, when investment and three other “Singapore issues” (competition policy, government procurement and trade facilitation) were originally included within the Doha negotiating mandate. However, dissension within the WTO ranks made it impossible to reach a decision. In August 2004 three of the four “Singapore issues” were dropped from the Doha Agenda, and negotiations were subsequently launched on only one subject: trade facilitation.

Need for mandating a MAI through WTO

If an International Investment Agreement is to emerge at some future point, then for several reasons the WTO is the logical home for it. WTO provides effective regulation of trade, but only piecemeal regulation of FDI. An MAI will be effective in countering various drawbacks with the fragmented structure of FDI that presently exists and will be beneficial in the following manner:

  • There is a growing unhappiness with various provisions in BITs and investment provisions in RTAs, particularly with their dispute settlement aspects. Multilateral negotiations could yield more equitable outcomes and ensure non-discrimination.
  • WTO’s dispute settlement regime has worked well, especially in its most trying period during the current global financial crisis. It has a strong record with regards to member participation, different levels of development and achieving compliance.
  • Current proliferation of investment regimes offers arbitrage opportunities for investors who are well placed to exploit it, yet confuses many others who are not. At the same time, regulating states’ hands are increasingly tied in a confusing array of obligations.

A unified system would help overcome these problems. Reflecting this groundswell of interest in multilateral investment regulation, there have been several recent attempts to reflect on what the content of such regulation should be.

UNCTAD, OECD, ICC and APEC have all recently issued principles, recommendations and policies that could be used to effectively promote and regulate FDI. Overall, these guidelines and recommendations focus on a new development paradigm in which inclusive and sustainable development is at the centre of international investment policy-making. An MAI could perhaps diminish litigation costs and cater to a better understanding of direct and indirect investment globally. Further, some states oppose agreements that contain investor–state dispute settlement obligations and often FDI is looked at with a similar perspective. Since the WTO’s dispute settlement mechanism is a state–state system, it at least has the important advantage that it is widely accepted. WTO dispute settlement could also limit the scope of state obligations and responsibilities and increase the pressure to comply. The downside is that companies would be reliant on their governments to bring such cases, which introduces factors other than corporate interests into the equation, thereby making the process unpredictable. From the investor’s standpoint, this is an argument in favour of investor–state dispute settlement, but it would require amending the Dispute Settlement Understanding, which is deliberated on in the next section.

Overhauling the Dispute Settlement Understanding Scheme of WTO

In the early years of the GATT, most of the progress in reducing trade barriers focused on trade in goods and in reducing or eliminating the tariff levels on those goods. More recently, tariffs have been all but eliminated in a wide variety of sectors. This has meant that non-tariff trade barriers have become more important since, in the absence of tariffs, only such barriers significantly distort the overall pattern of trade-liberalization. The presence of multiple datasets on WTO dispute settlement and FDI arbitration may bias researchers towards further research on patterns within these issue areas.  Members often use dispute settlement as a mechanism to gain further clarification of the provisions of the covered agreements and as a means to try to expand the scope of existing obligations to encompass matters on which no negotiating process has been made.

– Cross-border trade in services and investment are addressed in chapters devoted to each. Investment rules and disciplines cover both matters of investment protection and liberalization through market access and even these are met with much chaos.

– Forum shopping in the case of dispute settlement, where an investor may initiate multiple procedures on the same issue to take advantage of the potentially more favorable dispute settlement provisions available in different agreements, is one of the most rampant issues created by the dispute settlement provisions.  The tabulation states:

Complaints by developed country members

Respondents – Developed – 127

Respondents – Developing – 77

Complaints by developing country members

Respondents – Developed – 72

Respondents – Developing – 53

Complaints by both developed and developing country members

Respondents – Developed – 6

Respondents – Developing – 0

Given  that  the  largest  members  of  WTO  could  not  deploy  these  ultimate  enforcement  measures  of suspension and concessions in the  DSU  effectively,  the  prospects  for  developing  countries  or  small  economies are even bleaker.  Over three-fourths of the WTO’s members are developing countries, and thus this question assumes great importance for a large majority of the member states. If instances of non-compliance go unchecked and cannot be remedied, it may not be very long before the euphoria   about the WTO’s “giant leap” withers away and serious questions are raised about the efficacy of the dispute settlement procedures.

Need for unified MTA – Impending a developing nations clause – Conclusion and the Way Ahead.

Each year on July 1, the World Bank revises analytical classification of the world’s economies based on estimates of gross national income (GNI) per capita for the previous year. The updated GNI per capita estimates are also used as input to the World Bank’s operational classification of economies that determines lending eligibility. As of 1 July 2015, low-income economies are defined as those with a GNI per capita, calculated using the World Bank Atlas method, of $1,045 or less in 2014; middle-income economies are those with a GNI per capita of more than $1,045 but less than $12,736; high-income economies are those with a GNI per capita of $12,736 or more. Lower-middle-income and upper-middle-income economies are separated at a GNI per capita of $4,125.

In the academic literature there is much discussion and analysis of two main types of constraints faced by developing nations in the DSU, which have been thought to hold back participation of developing members in the system. As expressed by Guzman and Simmons, these are “capacity constraints”, a term which includes the limits imposed by shortage of skilled human resources or lack of finance for use of outside legal assistance, and “power constraints”, a term which covers the impact of possible retaliatory action by major players if their policies or measures were challenged in the WTO. These restraints can be addressed and incorporated in the system of multilateral trade agreement policies and a clause to address the needs of developing nations must be encapsulated.


* Aayushi Singh, V Year, Symbiosis Law School, Pune

Profit vs. Sustainability: How to pursue a sustainable investment

 

Benedetta Cappiello*

 

It seems that nowadays the debate on fragmentation of international law is not yet ready to reach a prompt solution. On the contrary, every and each occasion, even at the jurisprudential level, seems a good one to offer some new reflections, in brief or at length, on the reason why international law results fragmented within itself and, in parallel, on the instruments suitable to solve that phenomenon.

True the above, we deem, on the contrary, that reference to fragmentation should be avoided, given that the so labeled phenomenon should instead be referred with other concepts such as that of expansion of international law. Today we are indeed witnessing the raise of many different sub-systems of law, almost one for each subject, which “ask” for it. This mean that next or below international law of general character there is a multitude of sub-systems, formed by norms of special character. As such, they reflect the blooming of new needs, deserving a normative qualification, in term of rights and obligations. From this, it derives the raise of conflicts among norms (and values empowered by them), of general and special character, or of norms coming from different sub-systems.

In this respect, our assumption is that sub-systems of law are not completely autonomous. Neither from each other, nor from that of general international law (in which, in case of failure, all fall back to). This interconnection seems to make useless any search for the prevalence of a norm over the other; contrarily, it renders strong the need to find a way to integrate and balance among provisions which, while pursuing opposite aim, result contemporarily binding and applicable to a given situation.

This scenario seems to be well mirrored by the on-going struggle involving norms coming from two sub-systems of law apparently pursuing conflicting interest.

Namely, reference is made to international (and European) investment law and the group of norms empowering the principle of sustainable development (that concept appeared for the very first time in 1967, to later becoming a principle of international law endorsed in binding, or non-binding, normative provisions).

At first sight, the two groups of norms protect opposite interests: investment law has, indeed, been framed in order to guarantee investors’ (economic) rights, thus allowing them to pursue their activity in the most profitable way. The second group of norms aim, instead, to drive economic activity in a sustainable way, thus in respect of all fundamental and social rights involved (such as environment, labor rights, public health).

According to the praxis, host State – especially when developing country – has accepted foreign investment at almost any condition, so to increase investment flow within itself and boost its economy. Accordingly, host State has never asked foreign investor for any special behavior nor it has imposed upon him obligations to contribute to its development. By and large, this has meant investment only with long lasting protection and economic guarantee. Consequently, host State has for long time refused to higher its standard of protection of fundamental right, so to align them to the international ones.

Such an imbalanced relation has been for decades legitimized at the normative level (multilateral and bilateral agreements) and well mirrored by arbitral decision, which have always avoided any chance to reason on (alleged) violation perpetrated by investors against host State’s development. It is enough to remember that, the attempt made in Salini (¶57) case law was not pursued by further jurisprudential praxis.

Despite this, it seems that, in the last decade, a wide spread consensus has evolved on the need to guarantee sustainable development.

The question of this contribution is therefore, whether and how it is possible to pursue a sustainable investment.

A first attempt to remodeled the relation investment law-sustainable development, date back to 2008 when Prof. J. Ruggie, by that time UN SG Special Representative on the issue of Human Rights and Transnational Corporations and other business enterprises, law made a public statement related to the introduction of sustainable development within investment law as a binding concept (§ 12 Protect, Respect, Remedy).

Since then, States have started various tools to integrate SD concerns within FDI sources of law. The relative new born principle on sustainable development has thus started to be empowered also by international investment law, so to render it a binding obligation.

This change seems to have been driven at both political and normative level, where obligations have started to be imposed also on foreign investors, namely if juridical persons (small, medium or multinational enterprises).

To prove this, an excursus through the most recent normative and arbitral praxis is required.

As regard the normative level, it seems on-going a deep reshape of investment treaties (BITs and IIAs) which, for themselves, are not necessarily treacherous legal products. In fact, as any other treaties, they are simply instruments at the disposal of contracting parties to legally protect their respective interests. What really matters is their content, which obviously depends on agendas, choices and concessions of the parties. Consequently, investment agreements have started to change nature, including several innovative provisions able to recalibrate the legal protection of all stakeholders’ interests (host State along foreign investors). This step forward can be expected to enhance the chances for economically, socially and environmentally sustainable investments.

A clear, and virtuous example, comes from the Morocco and Nigeria BIT, which has increased host State’s right to regulate and it has imposed obligation of conduct upon foreign investors. Namely, host State provisions, enacted to pursue a S.D. goal, are legitimate; conversely, foreign investors have to pursue their activity contributing to host State’ sustainable development.

Sustainable Development’ goals are thus not anymore declaration of principle embedded in preambles (thus serving as mere interpretative tools), but they are becoming legally binding provision included right in the text, along with all other clauses on rights and obligations. Parties to the above-mentioned BIT have shown confidence that such an instrument can offer investors solid protection, without compromising on host State’s rights or on social values.

In parallel, also the European Union seems to have endorsed a more sustainable oriented approach, at both the internal and external level (after all, art. 2.5 and art. 21 TFEU oblige the EU to pursue its foreign relation respecting also sustainable development).

As regard the internal level, the European Court of justice, in its Opinion 2/15, found that that the EU has exclusive competence to enter any international agreement including commitments on all aspects of intellectual property and also those concerning sustainable development and environmental protection: all are indeed sufficiently linked to the objective of freeing trade.

At the international level, EU is assuming a leading role in “the sustainability cause”: for instance, it was instrumental in shaping Agenda 2030 and, along with member States, it is fully committed to implementing it and its Sustainable Development Goals into EU policies. This has certainly induced EU negotiator to include provision on SD’ goals in the most recent treaties.

As regard jurisprudential level, it seems that arbitrators have started to allow Respondent-host State’ counterclaims raised versus Claimant-foreign investor for its alleged violation of fundamental rights (Blusun v. Argentina). Besides, it seems spreading the practice to start proceeding against corporations which have allegedly acted, infringing fundamental rights.

Given the above, two last doubt raises.

The first regards the allocation of responsibility: who respond for infringement of a SD obligation? Our tenet is that the same fact could potentially raise joint and several responsibilities of both host State and foreign investor.

Investor responds where international agreement, or contracts, binding the parties involved, include specific obligations on SD. Host State is responsible where it has bound it-self with international treaties (Basel Convention, 1989, Kyoto protocol, 1997; Paris Agreement, 2016) or other instruments (Protocol of finance and investment binding States parties to South African Development Community and requiring them to pursue their investment relations according to SD principle) providing for obligations on SD.

The second doubt is strictly related to the first one: if host State can be held responsible for infringement of a SD provision, any action pursued to align itself to that latter (or other international standard), should not engage State responsibility (in Gabcikovo-Nagymaros, Respondent State casted doubt upon whether “ecological necessity” or “ecological risk” could […] constitute a circumstance precluding the wrongfulness of an act). Some have qualified that circumstance as State of necessity, but this seems of limited practical application. It should, instead, be viewed as exercise of sovereign power in the public interest. Given this, and provided that the measure adopted is necessary to the aim pursued, the act is legitimate and the compensation due should be defined according to proportionality test, as endorsed by the ECtHR.

To conclude, it seems that at both normative and jurisprudential level there is a widespread consensus aimed at legitimizing a more balanced investment relation, leading to a sustainable investment.

The better avenue for a State seeking to further its SD’ goal, is to harmonize them with its investment obligations, rather than to seek outright relief from investment obligations.


Benedetta Cappiello, Post-Doctoral Researcher, Università degli Studi di Milano, Italy.

 

The EU’s foreign investment screening proposal: Towards more protectionism in the EU

by Prof. Nikos Lavranos, Secretary General of EFILA

Last September, European Commission President Juncker presented a proposal for a European foreign investment screening regulation – apparently following a request by Germany, France and Italy.

The proposal fits the protectionist mood that has taken hold in Brussels and in many EU Member States. The backlash against TTIP, CETA and ISDS – suddenly supported by once free trade minded countries such as Germany and the Netherlands – has prepared the ground for this proposal.

Indeed, the EU has failed to deliver so far anything on its competence on Foreign Direct Investment (FDI). TTIP has been put in the freezer; the CETA investment chapter is on hold because it is awaiting adjudication by the Court of Justice of the EU (CJEU) and in the new envisaged trade agreements with Japan, New Zealand and Australia the investment chapter is left out altogether.

So, instead of promoting and protecting foreign direct investments – especially European foreign direct investments abroad – the EU has followed suit on populist calls for protecting Europe from perceived dangerous Chinese and other foreign investors, which aim at supposedly buying up strategic European companies.

As often is the case, the main argument for this European screening mechanism for foreign investments is “harmonization”, since several EU Member States already have a national screening mechanism while other Member States don’t.

Accordingly, the proposal first and foremost claims to provide legal certainty for Member States that maintain a screening mechanism or wish to adopt one. In other words, this Regulation would empower Member States to maintain their mechanisms or to create new ones in line with this Regulation.

Second, the Regulation aims at creating a “cooperation mechanism” between the Member States and the European Commission to inform each other of foreign direct investments that may threaten the “security” or “public order”. This cooperation mechanism enables other Member States and the Commission to raise concerns against envisaged investments and requires the Member State concerned to take these concerns duly into account. In other words, this “cooperation mechanism” is an “intervention mechanism” in disguise by given the Member States and the Commission a tool to review and intervene against planned foreign investments in other Member States.

Third, the proposal also enables the Commission itself to screen foreign investments on grounds of security and public order in case they “may affect projects or programmes of Union interest”.

In short, Member States and the Commission will effectively be enabled to review any screening of any foreign investments and to intervene if they think that their interests may be affected.

If one looks at the description of the screening grounds (“security” or “public order”), it immediately becomes clear that this proposal essentially can cover any investment.

Article 4 Factors that may be taken into consideration in the screening of the proposal states:

In screening a foreign direct investment on the grounds of security or public order, Member States and the Commission may consider the potential effects on, inter alia:

  • critical infrastructure, including energy, transport, communications, data storage, space or financial infrastructure, as well as sensitive facilities;
  • critical technologies, including artificial intelligence, robotics, semiconductors, technologies with potential dual use applications, cybersecurity, space or nuclear technology;
  • the security of supply of critical inputs; or
  • access to sensitive information or the ability to control sensitive information.

In determining whether a foreign direct investment is likely to affect security or public order, Member States and the Commission may take into account whether the foreign investor is controlled by the government of a third country, including through significant funding.

Moreover, in order to be effective, this Regulation essentially will require all Member States – in particular those which have not yet a screening mechanism in place – to create one, otherwise these Member States and the Commission will not be able to share the required information about planned new foreign investments and the review them.

As a result, if this proposal is approved, the screening of foreign investments will become a standard procedure in all Member States.

The question arises to what extent this proposal may be damaging for the economies of the Member States. In this context, it is telling that this proposal is not accompanied by an impact assessment study. This proposal contains the following justification for the lack of the impact assessment:

“In view of the rapidly changing economic reality, growing concerns of citizens and Member States, the proposal is exceptionally presented without an accompanying impact assessment. The proposal targets specifically the main issues identified at this stage in a proportionate manner. Other elements will be further assessed in the study announced in the Communication accompanying this Regulation. In the meantime the Commission proposal for Regulation is accompanied by a Staff working document providing a factual description of foreign takeovers in the EU on the basis of the available data, as well as a brief analysis of the issue at stake.”

This “justification” reveals that the need to satisfy populism quickly is considered more important than performing a proper impact assessment.

Apart from this, there are significant reasons to reject this proposal.

Firstly, the question arises whether such a screening mechanism would be compatible with the 1,500 extra-EU BITs which the EU Member States currently have in place with third states. The proposal does not discuss the potential incompatibility with BITs and neither does it discuss the potential claims based on the BITs by foreign investors against such screening decisions. This is very surprising since one of the main aims of BITs is to promote foreign investments and to protect them against unfair or discriminatory treatment. Prima facie, it seems that such a screening mechanism could lead to breaches of these BITs and thus to subsequent claims.

Secondly, there are many countries within the EU, in particular in Central, Eastern and Southern Europe which actually are in dire need of foreign investments – including also Chinese investments. Creating more obstacles against such investments is not going to help these countries economically.

Thirdly, one may wonder whether it is in the interest of the EU to send out such a protectionist signal to the world – in particular in light of the current US Administration’s protectionist attitude. Indeed, the experience with the American CFIUS mechanism shows that the screening of foreign investments is mainly used for domestic political gains rather than for economic benefits.

Finally, one wonders who will be financially responsible if foreign investments fail to materialize due to the market distorting interventions by other Member States and/or the Commission.

So, for all these reasons, the EU Member States should resist riding on the populist protectionism wave that may be helpful to satisfy short-term political gains, but which will be damaging for the EU as an attractive FDI dentition. The EU Member States are in dire need for more foreign investments, for example in renewable energy but also for large infrastructure projects such as connecting to the One Belt one Road (OBOR) project, which is currently pushed by China.

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.

ICC: Policy Statement Foreign Direct Investment

The ICC Commission on Trade and Investment Policy has just issued a Policy Statement on Foreign Direct Investment arguing the necessity of FDI and of ISDS mechanisms for ensuring economic growth in our global society.

Investment, including foreign direct investment (FDI), plays an important role in determining a country’s economic prospects. ICC strongly supports FDI as an effective tool to foster economic growth and sustainable development, and calls on governments to both maintain and strengthen investment protection and promotion agreements.

In the short and medium term, this can be don through high-standard bilateral and regional investment agreements, and in the longer term through an equally high-standard multilateral framework on investment. Investment agreements should continue to include strong dispute resolution provisions, through investor-state dispute settlement (ISDS) with independent proceedings to settle investment disputes.

The full document can be consulted here.