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International Investment Agreements:

Implications for Public Policy

ความตกลงดา้นการลงทนุระหว่างประเทศ: นยัต่อนโยบายสาธารณะ

Pariwat Kanithasen

kanithasen@gmail.com

Seminar at the Faculty of Economics, Thammasat University

22 May 2015

Disclaimer: Views expressed in this presentation are those of the speaker

Metalclad v Mexico (1997)

Metalclad, a US firm, built a

hazardous waste facility in

Mexico in 1993.

The local government stopped

the project due to

environmental reasons.

Metalclad sued Mexico under

NAFTA’s Investor-State Dispute

Settlement proceedings in

Canada

Mexico lost: had to pay

$ 16.7m compensation

2

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Questions for today

1. What are International Investment

Agreements?

2. How do they affect public policy?

3. Are there prospects for reforms?

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1. IIA: Foreign Investment for Policy Space

Foreign Investor

Country gives up some policy space…

Policy space through guarantees

Investments

…in exchange for Foreign Investments

4

Host Country

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1. IIA: Forms

International Investment Agreements (IIAs):

treaties giving foreign investors rights and

remedies protecting their investment in the host

country

Bilateral Investment Treaties (BITs):

investment protection

Investment Chapters of FTAs: investment

liberalization and protection

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1. IIAs in the context of FTAs

Goods: Lower tariffs,

non-tariff barriers

• Multilateral: GATT/WTO

• Plurilateral: AFTA, ASEAN+1, NAFTA, TPP

• Bilateral: Thai-X FTA

Services: Liberalize cross-border

services

• Multilateral: GATS/WTO

• Plurilateral: AFAS, ASEAN+1, NAFTA, TPP

• Bilateral: Thai-X FTA

Investment: Liberalize and protect

investments

• Multilateral: none

• Plurilateral: ACIA, ASEAN+1, NAFTA, TPP

• Bilateral: Thai-X FTA

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FTA

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1. Proliferation of IIAs

Global

3,000 BITs and around 300 FTAs

with Investment Chapters

Thailand

Bilateral Investment Treaties:

42 and counting

Bilateral FTAs: TAFTA (Aus), TNZCEP (NZ),

JTEPA (Japan), Thai-Chile, Thai-India*,

Thai-Peru*, Thai-EU*, Thai-EFTA*, Thai-

Canada*

Plurilateral FTAs: ACIA (ASEAN), ACFTA (A-China), AKFTA

(A-Korea), AJCEP (A-Japan), AANZFTA

(A-Aus-NZ), AIFTA (A-India), BIMSTEC*

(Bay of Bengal)

*under negotiation

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1. Do IIAs really attract FDI? 8

UNCTAD econometric studies (2009) and (2014):

Dataset: FDI from 27 advanced countries to 116 developing countries

1985-2012

Results:

No conclusive evidence that IIAs attract FDI

IIAs may be helpful for relatively risky countries

Other factors much more important, e.g. macro-fundamentals

Anecdotal evidence (Thai firms investing abroad):

No awareness of investment protection

Sources:

•UNCTAD (2009): The Role of International Investment Agreement in Attracting Foreign Investment to Developing Countries) • UNCTAD (2014): Do Bilateral Investment Treaties Attract FDI Flows to Developing Economies? • Baker, P. (2012): Who Enters into Bilateral Ivnestment Treaties and Do They Have an Impact on Foreign Direct Investment

• Interviews of Thai firms under the Bank of Thailand’s Business Liaison Program (2011-12)

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Questions for today

1. What are International Investment

Agreements?

2. How do they affect public policy?

3. Are there prospects for reforms?

9

Safety

Economic Stability

1. IIAs and Public Policy Space

Environ- ment

Public Health

International

Investment Agreements

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2. Basic Framework of IIAs

1. Scope defines what is in

the agreement

• National Treatment

• Most-Favored-Nation Treatment

• Transfers

• Expropriation

• ….

2. Obligations tells what the host

country needs to do

Exceptions

• General exceptions and safeguards:

Security, Public health, Economic

Stability, …

Scope

Obligations

Investor-State

Dispute Settlement

4. ISDS specifies recourse to remedies

if obligations are breached

3. Exceptions: carves out what is

excluded

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2.1 Scoping 12

Definitions: What’s an investment?

FDI, portfolio, IPR

Who’s an investor?

Nationality-based, residents, companies

Policy implications: Portfolio investment,

speculative flows, sovereign debt, intellectual property, mailbox companies…

Switzerland-Thailand BIT

Article 1: Definitions

The term “investments” means every kind of asset, including, in particular, but not exclusively:

(a) movable and immovable property …;

(b) shares, stocks, bonds …

(c) claims to money...

(d) intellectual property rights...

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2.2 Obligations: National/Most-Favored-Nation Treatments

NT: no discrimination

against domestic

investors

MFN: no discrimination

against any other foreign

investors

Policy implications:

NT: Differential treatment during

debt restructuring

MFN: Treaty shopping

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ASEAN Comprehensive Investment Agreement (ACIA)

Article 5: National Treatment

Each Member State shall accord to investors of any other Member State treatment no less favourable than that it accords, in like circumstances, to its own investors ….

Article 6: Most-Favoured-Nation Treatment

…to investors of any other Member State or non-Member State.

2.2 Obligations: Fair and Equitable Treatment

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Minimum standard of

treatment

Very ambigous: What is Fair?

Equitable?

Basis: Customary international

law (What is it?)

Policy implications:

Highly ambiguous and most contested obligation

ASEAN Korea FTA

Article 5: General Treatment of Investment

1. Each Party shall accord to covered investments of investors of any other Party fair and equitable treatment…

2. (c) The concepts of “fair and equitable treatment”…do not require treatment in addition to or beyond that which is provided under customary international law…

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2.2 Obligations: Expropriation 15

Expropriation (direct and

indirect) only for public

purpose and with

compensation

Policy implications:

Direct expropriation:

nationalization during crises

Indirect expropriation: very

broad: can cover taxation,

license revocation, sovereign

debt restructuring, changed

investment expectations…

ASEAN-Australia-New Zealand FTA

Article 9: Expropriation

1. A Party shall not expropriate or nationalise a covered investment either directly or through measures equivalent to expropriation or nationalisation, except: for a public purpose; in a non-discriminatory manner; on payment of prompt, adequate, and effective compensation; and in accordance with due process of law.

2.2 Obligations: Transfers 16

Free transfers of capital

into and out of the

country

Policy implications:

Capital flow policies

especially during balance-of-

payments crises or massive

capital inflows

ASEAN-Australia-New Zealand FTA

Article 8: Transfers

1. Each Party shall allow all

transfers relating to a covered

investment to be made freely and

without delay into and out of its

territory. Such transfers include:

(a) contributions to capital, including

the initial contribution;

(b) profits,…

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2.2 Transfers: Capital Flow Measures 17

Capital flows are

procyclical and may

destabilize the economy

But: Capital Flow

Measures likely to

violate free transfer

obligations

Chilean inflow tax

(1990),

Thai inflow URR (2006)

Malaysian outflow

limitations (1998)

Capital flows to Asia

Source: IMF

2.3 Safeguards: Balance of Payments Article

ASEAN Comprehensive Investment Agreement:

Article 16 Measures to Safeguard the

Balance of Payments

1. In the event of serious balance-of-payments

and external financial difficulties or threat thereof,

a Member State may adopt or maintain

restrictions on payments or transfers related to

investments…

2. The restrictions referred to in paragraph 1 shall:

....

(d) be temporary and be phased out progressively

as the situation....improves

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Originally from

GATT/GATS

Temporary

safeguards for

transfer measures

on capital

outflows

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2.3 Safeguards: Macro/exchange rate stability

Thai-NZ Closer Economic Partnership Art 15.6: Measures for Macro-Economic and Financial Stability

Notwithstanding any other provision of this Agreement, a Party shall not be prevented from taking measures for ...the stability of the macroeconomy. …

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ASEAN Aus-NZ FTA: Fin Services Annex

Art 3: Domestic Regulation

Notwithstanding any other provision of

this Agreement, a Party shall not be

prevented from taking measures for

prudential reasons...to ensure the

integrity and stability of the financial

system …

Safeguard covering

measures on

macroeconomic

stability

… and financial

system stability

through prudential

measures

2.3 Safeguards: Capital flows

ASEAN Comprehensive Investment Agreement (ACIA)

Art. 13: Transfers

4. Nothing in this Agreement shall affect the rights and

obligations ..... provided that a Member State shall not impose

restrictions on any capital transactions inconsistently with its

specific commitments under this Agreement regarding such

transactions, except:

…. (c) where, in exceptional circumstances, movements of

capital cause, or threaten to cause, serious economic or financial

disturbance in the Member State concerned.

5. The measures taken in accordance with paragraph 4(c):

(c) shall be temporary and shall be eliminated as soon as

conditions no longer justify their institution or maintenance; ....

(e) shall be applied such that any one of the other Member

States is treated no less favourably than any other Member State

or non-Member State;

(f) shall be applied on a national treatment basis; ....

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Current

safeguards on

capital in- and

outflows

ASEAN-wide

standard

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2.3 Safeguards: General Exceptions

ASEAN Comprehensive Investment Agreement (ACIA)

Art. 17: General Exceptions

1. Subject to the requirement that such measures are not applied

in a manner which would constiute a means of arbitray or

unjustifiable discrimination between Member States or their

investors....nothing in this Agreement shall be construed to

prevent the adoption or enforcement by any Memebrs tate of

emasures:

(b) Necessary to protect human, animal or plant life or health;

....

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General exceptions

for health,

environment,

safety

With conditions

against misuse

Only in recent FTAs

and BITs

NAFTA’s 1114

looks good but is

self-cancelling!

North American Free Trade Agreement (NAFTA)

Article 1114: Environmental Measures

1. Nothing in this Chapter shall be construed to prevent a Party

from adopting, maintaining or enforcing any measure

otherwise consistent with this Chapter …in a manner

sensitive to environmental concerns.

....

2.4 Investor-State Dispute Settlement 22

Investor-to-State Dispute

Settlement (ISDS)

Allows investor to

challenge violations of

investment treaties by the

State

Only present in investment

agreements: Others use

state-to-state dispute

settlement

Monetary compensation if

ruling is for investor

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2.4 ISDS Procedures 23

Investor

Chooses Forum

International Centre for

the Settlement of

Investment Disputes

(ICSID)

UN Commission on

International Trade Law

(UNCITRAL)

Tribunal:

1. Investor-appointed

2. State-appointed

3. Neutral

Investor wins:

Monetary

compensation

for investor

Choice of Arbitration Rules

Any other as specified

in the Agreement

Arbitration Finality of decision

State wins:

Case closed

Occidental v Ecuador (2006)

Occidental, a US oil company

invested in Ecuador.

Ecuador cancelled contract

as it violates domestic laws

Occidental sued Ecuador

under the US-Ecuador

“Bilateral Investment Treaty”

Ecuador lost and had to pay

$2.44 billion= ½ of

Ecuador’s health budget

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Phillip Morris v Australia (2012)

Hong Kong subsidiary of US

firm sueing Australia for

introducing plain packaging

Agreement: Hong Kong-

Australia BIT

Claim: Expropriation

(of intellectual property)

Compensation: pending

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Walter Bau v Thailand (2005)

German investor in Don

Muang Tollway Project sued

Thailand for changing

investment policies

Agreement: Thailand-

Germany BIT

Claim: Fair and Equitable

Treatment, Expropriation

Compensation:

29 million euro+legal fees

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Vattenfall v Germany (2011)

Swedish nuclear plant

operator suing Germany

for closing down plants

after Fukushima incident

Agreement: Energy Treaty

Claim: Expropriation

Compensation: pending

Ablacat v Argentina (2007)

Italian bondholders suing

Argentina after bond

restructuring following the

default in 2001

Agreement: Italy-

Argentina BIT

Claim: Expropriation

Compensation: pending

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2.4 ISDS: Criticisms 29

Unfair: Only states can be sued, not vice versa; no

appeals

Unethical: Arbitrators’ questionable independence

and impartiality

Uninformed: No information to stakeholders or

citizens

Unsustainable: “Regulatory chill” after decisions

Unimaginable: Huge costs for lawyers and

arbitrators (average case $8m -- $1000/hr) Sources:

Olivet: “How law firms, arbitrators and financiers are fuelling an investment arbitration boom” 2012

Eaton: “Australia’s Rejection of Investor-State” 2013

Questions for today

1. What are International Investment

Agreements?

2. How do they affect public policy?

3. Are there prospects for reforms?

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3. Prospects for Reform 31

Status quo Safeguards/ Limitations No ISDS No IIA

• Keep existiting treaties, keep negotiating

• Investment-friendly signal

• But: Maintains risks of ISDS • Examples: U.S. , to a lesser extent EU

1 2 3 4

3. Prospects for Reform 32

Status quo Safeguards/ Limitations No ISDS No IIA

1 2 3 4

• Selective adjustments : public policy safeguards,

limitations of scope , reform of ISDS (e.g.

screening, appeals)

• May pave way to more systemic reforms

• But: Maintains risks of ISDS

• Examples: Thailand, ASEAN+6

• ISDS Reforms urged by US academics and

senators, some members of the European Commission, Canada

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3. Prospects for Reform 33

Status quo Safeguards/ Limitations No ISDS No IIA

1 2 3 4

• Eliminating ISDS from IIAs

• Eliminates risk but also sends strong signal to

investment community

•Examples: Australia (Labor Government but now watered down), Ecuador

3. Prospects for Reform 34

Status quo Safeguards/ Limitations No ISDS No IIA

1 2 3 4

• Terminating existing treaties or let them expire

• Eliminates risk but also sends strong signal of

dissatisfaction with IIA regime

•Examples: Brazil (no IIA), Venezuela, Bolivia,

Indonesia (BITs but not FTAs),

• Alternatives for investors: Multilateral

Investment Guarantee Agency (MIGA) which offers insurance to FDI