2 International investment agreements and national investment law
2.3 IIAs and national law
The purpose of provisions on non-discrimination is to provide for equal treatment of domestic and foreign investors, that is, national treatment, and foreign investors among each other, that is, MFN treatment. Both
these provisions have the purpose of providing a level playing field for all companies in the host country. They also reduce policy space by minimising the government’s ability to legislate in favour of specific companies and investors. Granting national treatment to foreign investments and investors, for instance, will reduce a government’s ability to protect certain domestic infant industries and companies from international competition.
There are possibilities to grant national treatment in IIAs while maintaining some degree of policy space. National treatment can be subordinated to domestic laws, derogations from national treatment can be allowed or national treatment can be excluded from certain policy areas, companies (e.g. small and medium-sized enterprises – SMEs), measures or sectors (UNCTAD 2012a, 50; APEC / UNCTAD 2011, 29). Indications that the pursuit of legitimate public policy objectives might lead to certain forms of non-discrimination could be included in an IIA (Spears 2010, 1058–1095).
Another approach is to confine national treatment to “like” investors or
“like circumstances”. However, the ultimate discretion on what constitutes such “like” investors or circumstances remains with tribunals, which can also decide on the extent to which they wish to consider legitimate public policy concerns in the context of national treatment (Spears 2010, 1057). It is possible to further clarify non-discrimination by adding to an IIA specific and detailed language on the nature of non-discrimination, including what specifically constitutes “like” investors or circumstances. Policy space is highest if national treatment is excluded from an agreement, as it leaves the government full discretion in treating domestic investors more favourably than foreign investors, and the government can introduce all kinds of measures in any sector, even if they are favourable to domestic companies.
However, specifically for this reason, national treatment is of key importance for foreign investors and is considered particularly relevant for economic integration.
The MFN clause ensures that foreign investors obtain the best treatment that contracting parties grant to investors from third states. As mentioned above, the MFN provision leads to a levelling of the playing field for foreign investors and to enhanced coherence in international investment law-making. Due to the MFN clauses, which are a standard feature of most IIAs, it may be the case that IIAs are not discriminative vis-à-vis third parties. Schill (2009) argues that MFN clauses lead to a “multilateralization of international investment law” that is predominantly developed on the basis of bilateral treaties. Through the “multiplying effect” of the MFN
clause (Schill 2009), it is argued that foreign investors can import stronger treatment standards from other IIAs and can benefit from more-generous provisions that the contracting parties negotiated with third countries.
While a debate is ongoing about whether such “treaty shopping” reflects the original intention of states negotiating MFN clauses, this characteristic of IIAs, of course, makes it difficult to assess the specific impact of an IIA on the host country’s policy space, as the foreign investor, through the MFN clause, can rely on the more preferential treatment that the host country granted to other foreign investors in other IIAs.
Even though there is less interest for the state to discriminate among foreign investors, carve-outs are made in the MFN clause. Almost standard is the clause that more-favourable treatment is offered to investors from member states of regional economic integration agreements of which the host country is also a member. Matters of taxation are typically excluded from MFN treatment. In addition, ISDS and other policy areas, sectors and enterprises can be excluded from the MFN clause.
Both national treatment and MFN treatment can be granted in the post-establishment phase only, or in both the pre- and post-post-establishment phases.
As mentioned above, the former approach reserves full policy space for the pre-establishment phase, whereas the latter approach will maximise market access for potential investors, but reduce the government’s policy space to a significant degree by granting national and MFN treatment to investments even prior to entry and establishment.
National laws have to be in conformity with the principles of national treatment and MFN treatment. For national treatment, this means that a wide range of laws and regulations – especially laws reflecting a country’s industrial policy or protecting certain enterprises, sectors and industries – must be in accordance with the rules and exceptions provided in IIAs in the pre- and post-establishment phases. More specifically, schedules in IIAs granting national treatment in the pre-establishment phase have to be in accordance with relevant domestic laws and regulations. The process of making sure that such conformity is present and adapting the schedules in pre-establishment IIAs accordingly commonly involves substantial communication among a wide variety of domestic ministries and agencies.
The logistics involved in ensuring conformity with the MFN treatment are less complex, given that this standard only concerns equal treatment of foreign investors.