David Gaukrodger, Senior Legal Advisor, OECD Investment Division
Public debate about investment treaties often focuses on whether treaties are being well-interpreted in investor-state arbitration cases in accordance with governments’ intent. Governments at the OECD have considered the role governments can play in the interpretation of investment treaties through joint government interpretations and other forms of government “voice”.
Shared government interpretations of investment treaties are increasingly recognised as a way to help improve treaty interpretation. The 2001 joint interpretation of the NAFTA agreement by the three NAFTA governments has had a decisive influence on the interpretation of key aspects of that treaty. Along with Canada, Chile, Mexico, the United States and other governments, the European Commission has included in its treaties express provisions allowing for binding joint government interpretations of the treaty. Major recent treaties such as the TPP, the ACIA treaty between ASEAN members, CETA or the Pacific Alliance contain such provisions.
Intergovernmental discussions at the OECD have focused in particular on how joint interpretations might be used for the many existing treaties that do not expressly contemplate them. Vague provisions in many older treaties leave broad scope for interpretation. The existing treaty text may thus frequently allow sufficient scope to achieve a jointly-desired interpretation. A growing range of governments now perceive those treaties to be outdated.
Joint interpretations can be issued at any time and can be a simpler and faster device than renegotiation to address some aspects of treaty policy. They may also allow governments to address unwanted interpretations that could otherwise lead governments to consider terminating treaties. Discussions and exchanges of views with treaty partners about proposed joint interpretations in advance of treaty renewal dates can also help inform future negotiations and decisions about treaties.
At the same time, joint interpretations may be less certain in their effects than formal treaty amendments. It may also be difficult to achieve common views on particular issues and some governments may prefer the flexibility of making submissions as a non-disputing party in particular disputes rather than agreeing to joint interpretations. The evolving views of many governments about treaty policy may, however, provide new opportunities for joint interpretive agreements.
Joint interpretations can help treaties to achieve a better balance between stability and flexibility in order to provide a solid policy framework for investment decisions while allowing for adaptation to changing circumstances. They may help governments to better balance foreign investor protection and the right to regulate because it can be difficult to fully build this balance into treaties in advance. Joint interpretive agreements are also likely to be an increasingly important tool for ensuring that treaties are interpreted in accordance with the treaty parties’ intent and achieve their purposes. Such agreements could allow a substantial range of older treaties to be at least harmonised if not made identical in the short term.
A new OECD paper considers key questions such as the binding nature of joint interpretations or the scope for joint agreements in light of existing treaty language. It identifies a number of empirical and policy questions of interest. An earlier paper addresses the range of options for government voice with regard to investment treaties.
As part of its broad range of work on investment treaties, the OECD offers evidence-based analytical materials and a forum to governments for sustained exchanges on these issues. G20, OECD and other jurisdictions gather bi-annually to discuss investment treaty policy at an OECD-hosted inter-governmental investment roundtable known as the Freedom of Investment (FOI) Roundtable. Non-OECD countries including Brazil, People’s Republic of China, India, Indonesia and South Africa are actively involved. Since 2011, the FOI Roundtable has addressed investor-state dispute settlement (ISDS) and investment treaties at its regular meetings. Summaries of these discussions are available on the OECD website. In October 2015, the OECD launched a broader government-led dialogue about investment treaties.
The FOI Roundtable is addressing issues at the centre of public debate over investment treaties such as the quest for balance between investor protection and governments’ right to regulate, which will be the focus of the OECD’s annual conference on investment treaties on 14 March 2016. These conferences provide opportunities for governments to discuss their policies and work, and to exchange views with stakeholders and experts.
Shaun Donnelly, retired U.S. diplomat and trade negotiator, now Vice President for Investment Policy at the US Council for International Business (USCIB). He is a regular participant in the Business and Industry Advisory Committee to the OECD (BIAC) and OECD Investment work.
I found some very interesting questions and even a few answers in the recent “OECD Insights” blog post on international investment agreements by Professor Jan Wouters from the University of Leuven. But it seems to me that Professor Wouters’ prescriptions may fit better in a university classroom or a theoretical computer model than in real world of government-to-government diplomatic investment negotiations or in a corporate headquarters making real-world cross-border investment decisions. As a former U.S. Government trade and investment negotiator and now in the private sector advising/assisting member companies of the U.S. Council for International Business (USCIB), as well as an active participant over the past three years in the investment policy work the OECD and its Business and Industry Advisory Committee (BIAC), I’d like to offer an alternative perspective on some of the international investment issues the professor addresses.
I’m tempted to challenge several of the assumptions that seem to underlie Dr. Wouters’ analysis and prescriptions. His assertion that multilateralism is an inherently superior venue for all investment issues seems a little naïve to me as a practitioner. Everyone accepts the theoretical point that in a textbook or the laboratory, multilateral can be the optimal approach – one set of comprehensive, high-standard rules applying to all countries and, by extension, to all investors – a WTO for investment if you will.
The reality is that diplomatic negotiations, investment projects, and job creation take place in the real world, driven by real people representing concrete, real-world interests. In that real world, governments have a wide range of views on what should or shouldn’t be in an investment agreement. How strong are the protections accorded to investors? Does the agreement include (as U.S. government investment agreements typically do) market opening or “pre-establishment” provisions? Do investors have access to a credible, neutral arbitration process to resolve disputes with host governments? These are key issues for any government or investor.
Unfortunately, not all players in the investment policy world would share all my views, or those of Dr. Wouters. Governments vary widely on their policy and political approaches to international investment and, more specifically, to international investment agreements. Many have views generally in line with those of the U.S. government, sharing a commitment to high-standard international investment agreements. But some other governments only seem willing to accept much lower standards of investment protection; still other governments are hostile to any international investment agreements.
Some OECD veterans like me recall that some 20 years ago, the then-25 OECD members made a serious attempt to negotiate a Multilateral Agreement on Investment or “MAI.” Unfortunately, after some early promise, the negotiations broke down over some of the key pillar issues I noted above. Neither the OECD nor any of its member governments have attempted to revive the search for the elusive multilateral investment agreement framework. Most OECD member nations seem, explicitly or implicitly, to have accepted the reality that, while multilateralism may be the optimal path, in the investment policy area, it is not, at least for now, a practical way forward.
The lesson I personally draw is clear, and it’s quite different from the approach advocated by Dr. Wouters. Those Governments around the world that think foreign direct investment is a positive force for economic growth, are trying to make practical progress, not simply engage in endless and frustrating political debates. They want to negotiate investment agreements that can attract real investment and, thereby, create real economic growth and jobs. While some of them may see intellectual debates about a theoretical multilateral investment regime at some point in the future as an interesting exercise, their priority is on finding ways to grow their economies today and tomorrow.
So my questions to Dr. Wouters and other advocates of a focus on multilateralism in international investment regimes would include:
- What kind of investment regime do you really envision? How strong an agreement would it be? Would it include the sorts of high-standard protections for investors currently found in recent investment agreements of OECD member countries?
- What causes you to think there is realistic chance for success in a multilateral investment negotiation? “Multilateral” now requires nearly 200 sovereign nations reaching a consensus. Countries ranging from Cuba and Argentina to Japan and Canada; from India and China to the U.S. and the EU; from Russia and Venezuela to Saudi Arabia and Singapore would have to be major players in any multilateral investment effort. What sort of consensus could emerge from that wide-ranging group?
- When the then 25 “like-minded” OECD member nations couldn’t negotiate an MAI, what causes you to think 200 diverse and widely diverging nations could come together now to negotiate a multilateral investment agreement or framework?
I’d love to be proven wrong, by Dr. Wouters or anyone else, if they can show me a credible path to that elusive high-standard multilateral agreement. But until someone can show me how to get that done, I believe strongly the better path in the real world is to keep doing what individual governments and groups of countries have been doing for some time, to find willing partners and negotiate strong bilateral or regional investment agreements that work in the real world. Here in the U.S., we in the business community are excited about the possibility of two “mega-regional” agreements, the recently-concluded Transpacific Partnership (TPP) and the on-going Transatlantic Trade and Investment Partnership (TTIP) as vehicles to update and strengthen investment protections with key partners.
When it comes to investment protection/promotion agreements, let’s focus all of our efforts on paths that we know can work – negotiating high-standard investment agreements. If/when someone can find that elusive path to a high-standard multilateral agreement, great! I’ll be at the front of the line applauding. But until that path really emerges, let’s stay focused on what works – the bilateral and regional path that has proven it can deliver real results, real investment, growth, and jobs and leave the multilateral investment framework to the theoreticians.
The OECD, specifically its Investment Committee, has long been a place for serious investment policy research, analysis and debate. I’ve been privileged recently to participate in some of those sessions as a business stakeholder as a BIAC representative. I encourage OECD to continue, indeed redouble, that policy work. There are important and challenging issues to address. We in the international business community, along with other stakeholders, can add much to that OECD work. I simply urge that the OECD investment work focus on concrete investment “deliverables” which can be implemented, rather than idealistic pursuits of some theoretical multilateral panacea.
OECD Conference on investment treaties: The quest for balance between investor protection and governments’ right to regulate OECD, Paris, 14 March, 2016. This second OECD Investment Treaty conference will explore: How governments are balancing investor protection and the right to regulate; the search for improved balance through new institutions or improved rules for dispute settlement including the new Investment Court System developed by the European Union; a case study on addressing the balance through substantive law in particular through approaches to the fair and equitable treatment (FET) provision; and how the OECD, working with other international organisations, can support constructive improvement of governments’ investment treaty policies in this regard.
Reconciling Regionalism and Multilateralism in a Post-Bali World, OECD Global Forum on TradeParis, 11 February 2014, Rapporteur’s report
Mounting fears of another slowdown in the global economy call for bolder policy responses. Trade and investment are a case in point.
The latest WTO forecasts suggest 2015 will be the fourth year running that global trade volumes grow less than 3%, barely at—or below—the rate of GDP growth. Before the crisis, trade was growing faster than GDP. In addition, global flows of foreign direct investment (FDI) remain 40% below pre-crisis levels. If we are to achieve the ambitious Sustainable Development Goals agreed in New York in late-September, and underpin broad-based improvements in living standards, we need to reignite these twin engines of growth and we need to do it for the ultimate goal of improving people’s prospects and wellbeing.
Trade and investment have always been intertwined in business, but they have never quite come together in policymaking. In a world of Global Value Chains (GVCs), characterised by the fragmentation of production processes across countries, the interdependencies between trade and FDI are sharper. Technological improvements, reductions in transport and communications costs, and regulatory developments allow firms to combine multiple channels–- imports, FDI, movement of business personnel, licenses — to optimize their international business strategies. Businesses do not think in terms of trade or investment, but in terms of maximizing expected profitability. On the contrary, policymakers have long addressed trade and investment on separate tracks. In the face of new economic realities, policymakers need to up their game.
The symbiosis between trade and investment is more complex than ever before. Multinational enterprises (MNEs) play a key role in this relationship, with their activities driving a large share of world trade. The decision of a firm to invest in a foreign country is influenced by the ease with which it can sell its products, but also by how easy it is to source inputs from its affiliates (intra-firm trade) or independent suppliers (extra-firm trade) abroad. Hence, trade barriers become indirect barriers to investment. In addition, “world factories” make emerging trade patterns more complex, as not only goods and services cross borders, but capital, people, technology, and data do too. Without a transparent framework, it is also difficult to upgrade and upscale responsible business conduct.
Services are an increasingly critical node in the relationship between trade and investment. The WTO’s General Agreement on Trade in Services (GATS) explicitly recognizes this by defining FDI in services as one of the four ways in which services can be traded (mode 3, or ‘commercial presence’). This reflects how trade and investment interact with one another. Clearly, services will be central in any further efforts to liberalize investment and to improve the business environment. The OECD FDI Regulatory Restrictiveness Index shows that investment barriers are overwhelmingly in the services economy. Reforms in backbone services, notably digital services, transport, and logistics are key to unclogging GVCs. Domestic reforms to allow for more competition in the service sectors is also a source of growth and equality. Moreover, there is untapped potential in services value chains that could be realized if services markets were opened further. The OECD Services Trade Restrictiveness Index (STRI) provides a tool for identifying these barriers and measuring their costs, in order to prioritize and sequence reforms.
There is still no global set of rules governing investment and trade, however. Apart from GATS, two other WTO agreements—TRIMS and SCM–cover aspects of FDI, but they are not comprehensive. The OECD Codes are also a reference on capital flows, but does not address the link with the trade dynamics. The void has been filled with a complex network of nearly 3,000 bilateral investment treaties (BITs) of different quality and with different coverage.. Investors and States need certainty. A uniform regime would help, providing a consistent interpretation of the rules that apply to investment flows, taking into account the interest of all stakeholders. We urgently need a clear, coherent and coordinated approach at multilateral level. Multiplying the number of BITs further muddies the water and moves us further away from the multilateral ideal. A better way forward may be to start consolidating and replacing BITs on the road to a comprehensive multilateral framework. We also need to take a hard look at investment dispute settlement mechanisms, transparently addressing stakeholders’ legitimate concerns.
Replace BITs with what? Regional Trade Agreements (RTAs) are already providing some closer policy linkages. Over 330 RTAs contain comprehensive investment chapters, reflecting more advanced thinking of how trade and FDI interact in the real economy. These agreements also cover ‘deep integration’ disciplines that are essential to investments, such as movement of capital, business persons, intellectual property rights, competition, state-owned enterprises, and anti-corruption. New generation RTAs are not perfect, but they are taking us several steps forward in addressing the services-trade-investment-technology nexus. Being regional, however, they are not applied uniformly at a global level, and create their own overlaps and incoherence. It would therefore be useful to create clearer rules for co-existence among RTAs and mega-regional blocs. Above all, it is important to foster information-sharing on emerging practices from these negotiations, so that good practices can be diffused more widely and uniformly, and provide a pathway for multilateral convergence. In this way, RTAs and mega-regionals can become the building blocks of an integrated and truly multilateral trade and investment regime.
We are at a critical juncture, both economically and politically. The global economy needs a helping hand for recovery from the global financial crisis and to give people the improvements they expect in their daily lives. At the same time, we have both an opportunity and obligation to upgrade the policy framework to meet the changing reality of how trade and investment are conducted across the world, to enhance policy coordination, and to ensure that both have a positive impact on people’s well-being. Mega-regional agreements like TTIP and TPP are on track to deliver new frameworks over the coming months. These can be stepping stones towards the future of global trade and investment rules. As these mega-regional deals approach the finish line, the 10th WTO Ministerial in Nairobi in December is an opportunity to break the current impasse in the Doha Round. Finally, all of this is taking place as we enter a new “Post-2015” era with the new SDGs, where trade and investment are expected to do more of the heavy-lifting in global development.
Against this backdrop, the G20-OECD Global Forum on International Investment (GFII), being held on 5 October 2015 in Istanbul, back-to-back with the meeting of G20 Trade Ministers, will bring together the trade and investment policy communities—along with the business community–to reflect on the main axes of a pragmatic strategy to enhance the international regime for investment, including through closer links with trade. The agenda cannot be delayed: trade and investment decisions must go hand-in-hand in policy, just as they do in global business.
Jan Wouters, Professor of International Law, Director of the Leuven Centre for Global Governance Studies, University of Leuven
We are living in interesting times for investment treaties, whether bilateral treaties or investment chapters in free trade agreements. Never before have they aroused such an interest from parliaments. People and politicians alike are concerned about their impact on international and domestic affairs. Their scope is expanding dramatically: just think of mega deals like the Trans-Pacific Partnership (TPP) or the Transatlantic Trade and Investment Partnership (TTIP), and the rise of intra-regional investment agreements. Debates on investment agreements have intensified recently within the EU because of the European Commission’s newly-acquired exclusive powers in this arena.
While competition for foreign investment is fierce, current levels of investment, both foreign and domestic, remain (too) low in many jurisdictions. The increased importance of global value chains (GVCs) and ever more integrated trade and investment flows call for (a renewed consideration of) more coherence between trade and investment policies. Today, governments adopting a regulatory measure (e.g. Australia’s plain-packaging legislation for cigarettes) can face both WTO and investment treaty claims, often raising similar issues, but with sharply different adjudication mechanisms – ad hoc arbitration, WTO Dispute Settlement with a permanent Appellate Body – and diametrically opposed remedies – damages vs. non-pecuniary; and very high costs, especially in Investor-State Dispute Settlement
The growing debate requires attention from governments, in particular at the multilateral level. Increased coherence in the system would be beneficial to all countries, including those that have so far navigated it successfully. Governments currently may feel exposed to multiple claims, unlimited damages, and to uncertain or excessively broad interpretations of treaty obligations. If they consider that the treaties they are party to restrain them, rather than help them in attracting investment, they may drop out of the system altogether, instead of seeking reform. This would be unfortunate, because properly-designed treaties can play a constructive role in fostering investment.
Many treaties focus only on investor protection. In addition to being increasingly controversial, those provisions are too narrow for today’s needs, including ensuring sufficient productive investment, providing the infrastructure to support the development of GVCs and removing barriers to cross-border investment that hinder technology spill-overs. Good policies to support the liberalisation of investment are ever more needed. One also needs to consider ISDS carefully in order to respond to public concerns in many jurisdictions. Governments need to modernise, simplify and strive for coherence in investment treaty policy.
For all these reasons, we must revitalise the multilateral debate on investment treaties. A key role should be played in this respect by the G20, the OECD and other international organisations. All G20 governments have been invited to participate in the regular meetings of an OECD-hosted Roundtable that has focused on investment treaties since 2011. At the latest OECD conference on investment treaties in March of this year, major countries, including OECD members, China and India, expressed support for treaties but also for significant reform.
Where to start? We first need to find broad agreement on some core principles and some clearly-defined options for governments with differing interests. That could lead to more ambitious goals like discussions of a multilateral framework or model provisions in key areas. The G20 could give the lead by giving impetus, showing broad government interest, and commissioning work. Turkey has put investment at the centre of its G20 presidency. That is why the G20 and the OECD will be co-hosting a Global Forum on International Investment in connection with the G20 Trade Ministers meeting in Istanbul on 5 October. The trade and investment nexus, and investment treaties, will be key issues there. It is likely that China, in presiding the G20 next year, will similarly place particular emphasis on investment. This should be applauded.
Multilateral attention to improve investment treaties is long overdue. At the adjudicative level, the recent proposal by the European Commission to establish a permanent ‘Investment Court System’ in the context of the TTIP negotiations is an interesting starting point for further discussion. The system, according to the proposal, should be based broadly on the WTO’s Appellate Body, with strict qualifications and ethical requirements and permanent remuneration for its members. It remains to be seen whether the US will go along with the proposal. In any event, it may serve as the starting point for reform of the heavily criticised current system of investor-state arbitration.