2 International investment agreements and national investment law

2.1 The global diffusion of IIAs

In light of the absence of a comprehensive multilateral investment agreement, FDI flows are governed by a dense network of more than 3,000 IIAs. According to recent data provided by the United Nations Conference on Trade and Development (UNCTAD 2013a, 101), this global network is made up of 2,857 BITs and 339 PTIAs, which are increasingly negotiated on a regional level. The global IIA network evolved along an S-shaped curve that is characteristic of policy diffusion processes (see Figure 2).9 In the early days of the IIA movement, some European countries started to adopt BITs to protect their national MNEs’ investments in politically unstable developing countries. The first BIT was concluded by Germany and Pakistan in 1959. Other Western European countries followed suit and started to negotiate BITs with developing countries (Newcombe / Paradell 2009, 42–43). In this initial phase of the diffusion, no more than 20 agreements were signed each year. At the end of the 1980s, the number of annually concluded BITs increased dramatically, mainly due to the adoption of BITs – being one element of liberal economic reforms in the Washington Consensus era – by Latin American and Central and Eastern European countries. In addition, during the 1990s more and more developing countries started to negotiate so-called South-South BITs among each other. With the turn of the new millennium, the number of newly negotiated BITs declined while investment rules are increasingly being incorporated in PTIAs (e.g.

Hofmann / Tams / Schill 2013).

9 On the policy diffusion concept in general, see Simmons, Dobbin and Garrett (2008).

Figure 2: Annual and cumulative signed BITs and other IIAs, 1959–2012

Source: ICSID Database of Bilateral Investment Treaties (online: https://icsid.worldbank.org/ICSID/

FrontServlet; accessed 30 July 2013), UNCTAD, World Investment Report, various years.

0

1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

BITs Other IIAs All IIAs cumulative

Source: ICSID Database of Bilateral Investment Treaties (online: https://icsid.

worldbank.org/ICSID/FrontServlet; accessed 30 July 2013), UNCTAD, World Investment Report, various years.

One of the main characteristics of the global IIA network is that these treaties are relatively uniform with regard to their overall structure and content.

Capital-exporting countries usually employ standardised IIA models in order to facilitate and simplify negotiations with host countries. In broad terms, the global IIA network can be distinguished into two types of agreements:

one offering only investment protection, and the other adding a specified degree of investment liberalisation to complement investment protection. In what follows, we refer to the former as the “protection approach” and the latter as the “liberalisation approach”.

The protection approach is the most widely used and combines strong substantive investment protection in the post-establishment phase with comprehensive ISDS clauses. This approach has been invented and applied first and foremost by European countries. It is also used in most South-South IIAs. IIAs that apply the protection approach establish international standards for the treatment and protection of foreign investors. Standard clauses in such IIAs oblige host states to treat foreign investors fairly and

equitably and to abstain from discriminative measures. Host countries, furthermore, commit themselves to provide compensation in the case of expropriation and to allow the free transfer of investment-related funds.

Often, these treaties include so-called umbrella clauses that incorporate all contractual obligations of the host state vis-à-vis investors of the other contracting party into the treaty and make them enforceable through the ISDS clauses.

IIAs that follow the protection approach are rather short, often comprising not more than 10 pages, and their provisions are drafted in an open-ended and often vague manner. Importantly, these characteristics imply that foreign investors are provided with far-reaching legal protection, whereas these treaties are usually silent on the “rights” of host countries to regulate FDI and the responsibilities of the foreign investors.

A minority of IIAs follow the liberalisation approach, which combines investment protection in the post-establishment phase with market-access provisions that grant national treatment and most-favoured nation (MFN) treatment in the pre-establishment phase. This particular approach has been developed by the United States, which started to negotiate BITs in the mid-1980s, and also served as a basis for Chapter 11 on investment of the North American Free Trade Agreement (NAFTA). Canada and a number of other countries such as Japan and Korea are applying the liberalisation approach in some of their BITs. Importantly, this approach is also used as a blueprint for the investment chapters of most PTIAs.

With regard to post-establishment investment protection, IIAs modelled on the liberalisation approach are more “balanced”, in the sense that they entail more elaborated and detailed legal language. These treaties provide more clarity with regard to the meaning of substantive provisions, and thus reduce the room for interpretation of arbitration tribunals. In addition, IIAs drafted according to the liberalisation approach increasingly include provisions that aim at raising the level of policy space for contracting parties to regulate FDI. Such provisions include, among other things, references to the international minimum standard and customary international law; exclusion of certain public policy fields (e.g. health, environment, social security); and possibilities to deviate from the free transfer of funds obligation in the case of financial crises. These attempts to enhance the clarity of IIA provisions and the exclusion of certain public policies from the coverage of the IIA were a reaction to the NAFTA countries’ experience with a number of

high-profile arbitration claims that were brought against them (e.g. Vandevelde 2009; McIlroy 2004).

Although the liberalisation approach, broadly speaking, provides more policy space for host countries to implement public policies than the protection approach in the post-establishment phase, this advantage has to be judged against the constraining effect of pre-establishment national and MFN treatment clauses. In contrast to IIAs following the protection approach, IIAs that follow the liberalisation approach include market-access provisions that limit the ability of the host country to screen investments before they are made and to reverse market access in sectors that have been opened up to foreign investors. Of course, the market-access provisions granted to foreign investors in the pre-establishment phase are not unconditional, and the contracting parties usually attach schedules with exceptions to their IIAs. The level of restrictiveness with regard to the host countries’ right to admit foreign investments thus depends on these market-access exceptions.

The discussion about the effects of IIAs on the policy space of host countries is so important because substantive protection standards included in these treaties are actually enforceable through third-party arbitral tribunals. In other words, foreign investors that would like to defend their rights against the host country can bypass national courts. What is more, in contrast to the World Trade Organization (WTO), where only governments can launch dispute settlement procedures, MNEs can sue host countries directly in case of alleged breaches of substantive IIA provisions without having to rely on the diplomatic support of their national governments. In short, the de-nationalisation and de-politicisation of the dispute settlement system is a defining feature of the global system of IIAs. Apart from a small number of investment treaty claims brought to international arbitration before 2000, the bulk of claims occurred afterwards (UNCTAD 2013b) and have triggered a debate about the legitimacy of the global IIA system (Franck 2005). By extension, this debate is also about the constraining effects of IIAs on host countries’ policy space and the ability of the host state to implement development-friendly policies.

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