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).
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.
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
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) and the Canada – Latvia BIT (1995). 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), 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’. The NAFTA’s national treatment obligations have also been incorporated in the newly concluded Agreement between the US, Mexico and Canada (USMCA) (2018), 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”.
The IIAs concluded by the US and
Canada with emerging economies display a varying practice – while the Canada – China
BIT (2012) does not include
pre-establishment national treatment, the Rwanda – US BIT (2008), the Canada – Senegal BIT
(2014) and the Canada – Mongolia
contain such obligations worded similarly to the NAFTA. The practice of
emerging economies will be examined in more detail below.
Practice – European Union
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.
The EU’s agreements with Georgia,
Moldova and Ukraine
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),
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) 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
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.” Language facilitating
only post-establishment obligations is also seen in the Korea – Qatar BIT (1999), and the South Africa – Turkey
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
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,
Comprehensive Investment Treaty (CIT) (2009)
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, and
the ASEAN – India Investment Agreement (2014) 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,”
where ‘investment activities’ is defined as “establishment, acquisition, expansion, operation, management,
maintenance, use, enjoyment and sale or disposal of an investment”
– this formulation very clearly includes pre-establishment obligations. The
terms ‘investor’ and ‘investment’ are also defined broadly.
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,”
and contains a national treatment obligation phrased very similarly to the
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
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)
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
and does not include ‘establishment’ in its national treatment clause.
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)
and the Bahrain – Thailand BIT (2002).
More recently, the South Africa – Zimbabwe BIT (2009)
and the Rwanda – UAE BIT (2017)
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
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).
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.
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.”
Footnote 14 of the Central America – Korea FTA also contains such an
‘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) or by excluding certain
sectors from the purview of pre-establishment national treatment (the ‘negative
list’ approach was adopted in the IIA with Japan and Korea). 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.
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. 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)
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