Written submission from Dr Robert Basedow (UIP0020)

 

 

What is the impact of Brexit on international investment policy?

 

  1. The UK will continue to benefit from its extensive BIT network after Brexit: Until the entry into force of the Treaty of Lisbon (2009), the member states were competent to conclude Bilateral Investment Treaties (BITs). BITs contain post-establishment treatment and protection standards as well as provisions on investor-to-state dispute settlement (ISDS). The United Kingdom concluded 105 Bilateral Investment Treaties (BITs) with third countries according to UNCTAD. The British BIT network is the second biggest in the world behind Germany (132). British BITs remained in force after 2009 and will remain in force after 29 March 2019 providing protection to British investors abroad and foreign investors in the United Kingdom.

 

  1. The UK will lose access to most investment liberalisation agreements after Brexit: Investment liberalisation always came under shared competence of the EU and the member states. Hence, the EU and the member states had to jointly act and negotiate in this domain. As a EU member state, the UK is party to several international agreements – such as the EU’s Free Trade Agreements (FTAs) with Chile, Mexico, South Korea, Singapore or Japan – with binding investment liberalisation provisions. The UK will lose access to these agreements when it exits the EU and will have to start building its own network of investment liberalisation agreements. Two notable exceptions exist: 1) The UK will remain party to the General Agreement on Trade in Services (GATS) of the World Trade Organisation (WTO). The GATS contains binding – yet typically humble – market access commitments for FDI in service sectors (‘GATS mode III’). 2) The UK will remain party to the OECD Codes on the Liberalisation of Capital Movements and Current Invisible Operations. The OECD Codes in principle provide for non- discriminatory and broad liberalisation of capital movements, services and foreign direct investments among OECD economies.

 

What can UK policy-makers learn from the EU’s approach to investment protection?

 

  1. Should the UK emulate EU reforms strengthening states’ right to regulate? The Treaty of Lisbon (2009) empowered the EU to regulate foreign direct investments (FDI) and to conclude international investment agreements (Basedow, 2017).1 Following the competence transfer, the EU developed a new approach to investment protection. The EU approach differs from UK BITs in that it strengthens states’ ‘right to regulate’ vis-à-vis investor rights. The EU inter alia limited the scope of protection, refined the definition of the important ‘fair and equitable treatment’ standard and added language on the right to regulate. EU reforms follow a global trend and similar US and Canadian reform efforts. UK policy-makers may want to reflect about the costs and benefits of emulating EU reforms.

 

  1. Should the UK join the EU’s Investment Court System replacing controversial ISDS? Member state BITs – including British BITs – grant foreign investors access to standard investor-to-state dispute settlement (ISDS) in case of expropriation. Standard ISDS has manifold shortcomings (e.g. lacking transparency, questionable pay and incentive structure for arbitrators, accountability issues, limited options for review). To address these shortcomings, the EU has developed the so-called Investment Court System (ICS) to replace ISDS in its agreements. It constitutes a standing court-like adjudication platform with tenured and vetted adjudicators and mechanisms to review contested decisions. In the long run, the EU intends to replace this


1 The Court of Justice of the European found in 2017 that the EU is exclusively competent under Art. 206-207 TFEU to regulate FDI but that 1) portfolio investments typically covered under BITs and 2) standard ISDS provisions continue coming under shared competence of the EU and the member states. Standard BITs are thus subject to mixed ratification by the EU and member states.


system through a multilateral investment court to be established under the umbrella of the United Nations. UK policy-makers may want to assess the costs and benefits of re-joining the EU’s Investment Court System and supporting its call for a multilateral investment court.

 

What can UK policy-makers learn from the EU’s approach to investment liberalisation?

 

  1. The EU’s approach to investment liberalisation in a nutshell: The EU has been including investment liberalisation chapters into its FTAs since the early 2000s (Basedow, 2017). One can summarise the EU’s standard approach to investment liberalisation under five points: 1) The approach prohibits general restrictions on market access (e.g. foreign ownership limitations, number of companies active, joint venture requirements); 2) It requires national and most favoured nation treatment at the pre-establishment stage; 3) It prohibits performance requirements (e.g. technology transfer, export performance); 4) It contains rules on the movement of natural persons necessary for the operation of investments (e.g. managers, trainees); 5) The EU includes sustainable development commitments into its investment chapters and agreements prohibiting the lowering of labour, social and environmental protection regulations and standards in order to attract FDI. To schedule the sectorial scope of these commitments, the EU at first used ‘positive lists’ (lists of sectors subject to liberalisation commitments). In recent years, the EU has frequently used ‘negative lists’ (lists of sectors exempted from horizontal liberalisation commitments). While both approaches can generate similar levels of liberalisation, negative lists make comprehensive liberalisation easier.

 

  1. Should the UK emulate the EU’s Market Access Partnership? The EU successfully operates a Market Access Partnership and Database as an institutionalised dialogue between the European Commission, European business and Member State governments to exchange information about market access conditions for goods, services and investment in third countries. The Partnership and Database gather information about the implementation of investment liberalisation agreements in partner countries as well as the evolution of market access conditions in third countries. They enable the Commission and Member State governments to grow aware of barriers and to use technical dialogues, diplomatic and legal channels to address them. UK policy-makers should assess the costs and benefits of creating similar procedures to complement investment agreements and to support UK investors and traders.

 

What forces may shape the UK’s future investment liberalisation negotiations?

 

  1. While the UK loses access to most investment liberalisation agreements, it is unlikely to result in worse market access for UK investors in the short and medium term: Many countries are more open to foreign investors than they have committed under investment liberalisation agreements. Investment liberalisation agreements create legally binding minimum levels of openness for foreign investors but in most cases do not determine the actual level of openness. They are best understood as insurance policies against protectionism. What is more, countries rarely discriminate among foreign investors of different nationalities. Many countries only distinguish between national and foreign investors in their legislation and regulation. These observations imply that even if the UK loses access to EU agreements with binding investment liberalisation commitments, British investors may still benefit from similar market access in third countries.

 

  1. Multilateral talks may appear efficient but bilateral talks are more likely to succeed: In the coming years, the UK may nonetheless want to rebuild a network of international agreements dealing with investment liberalisation. Bilateral negotiations with key partner countries are most likely to succeed. Bilateral negotiations are easier to launch, shorter and less complex. Multilateral and plurilateral negotiations, on the other hand, may appear as more efficient option. One multilateral or plurilateral agreement can theoretically substitute thousands of bilateral deals. Multilateral and plurilateral initiatives on investment liberalisation have, however, regularly run into gridlock and collapsed (see Supplementary Protocol of the Energy Charter Treaty, Multilateral Agreement on Investment or most recently the Trade in Services Agreement).

 

  1. As an open economy, the UK has little leverage to further enhance investor market access: The White Paper ‘Our Future UK Trade Policy’ (2017) suggests that the UK government will seek to  negotiate enhanced market access to third countries following Brexit. It is important to note that the UK has always been very open to foreign capital and investment, which implies that the UK can offer little to third countries in exchange for enhanced access.

 

  1. MFN may help the UK to level the playing field, but may prevent it from securing enhanced market access: Many trade and investment agreements contain ‘most-favoured nation’ (MFN) clauses covering investment liberalisation commitments. MFN clauses prohibit the discrimination between different partner countries and across trade and investment agreements. The MFN clause may help but also hinder the UK: First, MFN clauses in UK agreements can ensure a level playing field for British investors abroad vis-à-vis third country investors. Second, MFN clauses are likely to prevent the UK from achieving enhanced investor market access in third countries. Countries negotiating with the UK will be cautious not to go beyond existing commitments, as they may have to extend any additional commitments to other FTA partners. This finding holds true with regard to the UK’s future negotiations with the EU as well as any partner countries identified in the government’s White Paper such as the USA, Australia, New Zealand, Japan, China or the Gulf Cooperation Council. The EU is unlikely to offer the UK significantly better market access for investors under a EU-UK FTA, because it will have to extend these preferences to countries such as Japan, Canada or Vietnam. Other potential partner countries of the UK – such as Australia or New Zealand – are unlikely to offer the UK enhanced investor market access, because these countries may come under the legal obligation to grant the same preferences to the EU, USA and alike.

 

Does FDI promote or hinder development?

 

  1. FDI mostly promotes but can also undermine sustainable development: The United Nations consider FDI as an important building block of the Sustainable Development agenda. FDI can provide access to capital, technology and know-how, promote productivity growth and integration into the world economy and improve infrastructure in developing economies. On the other hand, FDI can also endanger sustainable development. Developing countries might for instance lower labour or environmental protection regulations and disregard minority rights to attract FDI. Research finds that FDI overall promotes sustainable development but finds also some contradicting evidence (Alfaro et al., 2009; Dardati and Meryem, 2012; Dean et al., 2009; Demir, 2016; Demir and Duan, 2018; Eskeland and Harrison, 2002; Garsous and Kozluk, 2017; Herzer, 2012). The findings suggest that the relationship between FDI and sustainable development is complex, context-specific and depends on FDI governance by home and host countries.

 

How effective are international investment agreements in promoting FDI?

 

  1. Investment agreements have an ambivalent impact on investment activities: Research on the impact of investment protection as well as investment liberalisation agreements on FDI flows and stocks has generated mixed findings. It is unclear that investment protection and/or liberalisation agreements can channel FDI into developing countries. Some studies suggest that traditional BITs dealing with investment protection have a positive effect on FDI flows (Eric Neumayer and Spess, 2005; Salacuse and Sullivan, 2005). Other studies come to the conclusion that BITs have little to no impact on FDI activities (Peinhardt and Allee, 2012; Rose-Ackerman and Tobin, 2005). Yet a third group of studies suggests that BITs may promote investment activities in some sectors but not in others (Colen et al., 2014). Only few studies have assessed the impact of investment liberalisation agreements on FDI activity (Berger et al., 2013; Dixon and Haslam, 2016; Lesher and Mirodout, 2006). They draw a similarly mixed picture. The inconclusiveness of existing research is rooted in methodological and empirical challenges. It is difficult to assess whether countries conclude investment agreements to boost investment activity; or to accommodate a surge in investment activity. What is more data on FDI and portfolio investments is notoriously unreliable.

 

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Eskeland, G.A., Harrison, A.E., 2002. Moving to Greener Pastures? Multinationals and the Pollution Haven Hypothesis (Working Paper No. 8888). National Bureau of Economic Research.

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