WTO Disciplines on Foreign Investment Wasn t the GATS about trade in services?

Transcription

1 Alma Mater Studiorum Universidad de Bolonia Representación Buenos Aires WTO Disciplines on Foreign Investment Wasn t the GATS about trade in services? Tesis de M aster en R elaciones Internacionales E uropa A m érica L atina A ño A cadém ico: Presentada por: M artín M olinuevo Tutor: Prof. R am on Torrent B uenos A ires, 2006

2 Table of contents WTO DISCIPLINES ON FOREIGN INVESTMENT INTRODUCTION BILATERAL AND REGIONAL DISCIPLINES ON INVESTMENT BITS GENERAL OBJECTIVES SCOPE OF THE AGREEMENT: DEFINITION OF INVESTMENT TREATMENT OBLIGATIONS Comparative standards of treatment: MFN and NT Absolute standards of treatment: F&ET INVESTMENT PROTECTION Expropriation Transfer of funds DISPUTE SETTLEMENT GATS MAIN DISCIPLINES MODES OF SUPPLY AND FOREIGN INVESTMENT Commercial Presence DEFINITION OF INVESTMENT IN GATS Definition of Investor GATS Nationality Approach MOST FAVOURED NATION PRINCIPLE IN THE GATS MFN Coverage: measures affecting trade in services MFN Treatment: No Less Favourable MFN and One-Off Deals Exceptions to MFN MARKET ACCESS MA provisions on foreign investment NATIONAL TREATMENT A GATS KEY ISSUE: LIKE SERVICES Likeness and Services Classification Services Competitiveness and Substitutability Like Service Suppliers National Regulatory Power and the Matter of Likeness Cross-Mode of Supply Likeness GATS KEY DISCIPLINES ON FDI STRUCTURE OF THE AGREEMENT AND COMMITMENTS PRE-ESTABLISHMENT RIGHTS

3 4.2.1 Art. XVI ban on quantitative measures Art. XVI ban on zero quotas MA implications for the establishment of foreign investors NT implications for the establishment of foreign investors MA + NT implications on pre-establishment rights INVESTMENT PROTECTION Expropriation Transfer of Funds INVESTMENT INCENTIVES Incentives and the Matter of Likeness GOVERNMENT PROCUREMENT MOVEMENT OF KEY PERSONNEL COMPETITION POLICY TRANSPARENCY DISPUTE SETTLEMENT Investment Agreements approach GATS discipline Investment-Related Problems of GATS Nationality Approach GATS AND INVESTMENT AGREEMENTS BITs and MFN treatment MFN Exemptions Lists Positions Possible Solutions CONCLUSION BIBLIOGRAPHY

4 Abstract (Castellano) El contexto regulatorio internacional de las inversiones extranjeras se compone, en la actualidad, de dos diversos niveles de acuerdos. Por un lado, los tratados bilaterales sobre inversiones (BITs, en inglés) y los acuerdos de zona de libre comercio, que incluyen capítulos específicos sobre inversiones. Por el otro, los acuerdos multilaterales firmados bajo la órbita de la Organización Mundial del Comercio (OMC). Mientras que los primeros son instrumentos directamente destinados a la regulación de las inversiones, no existe en el ámbito multilateral un acuerdo específico sobre inversiones extranjeras. El Acuerdo General sobre el Comercio de Servicios (GATS, por sus siglas en inglés) de la OMC regula el comercio internacional de servicios, contando a la inversión extranjera como uno de los posibles medios de provisión. El presente trabajo examina, por medio de un análisis de las normas de acuerdos bilaterales y el GATS, si este último puede ser considerado un acuerdo sobre las inversiones extranjeras en lugar de, o además, del comercio de servicios. El estudio analiza en detalle el marco jurídicos de ambos tipos de acuerdos para los principales derechos y obligaciones sobre la inversión extranjera: obligaciones de trato, acceso a mercados, protección de las inversiones, subsidios, solución de controversias, entre otros. El trabajo concluye que, si bien el GATS no alcanza el nivel de detalle y liberalización propio de los acuerdos sobre inversiones, contiene una amplia regulación de la materia. Estas normas exceden el mero ámbito del comercio de servicios para sentar las bases de un verdadero acuerdo sobre la inversión extranjera en el ámbito de la OMC

5 WTO Disciplines on Foreign Investment WASN T THE GATS ABOUT TRADE IN SERVICES? 1. Introduction A key issue at the last World Trade Organization (WTO) Ministerial Conference, held in Cancun in September 2003, and to some degree what certainly contributed to its failure, was the decision to take on whether multilateral negotiations on foreign investment matters were to be initiated. Equally, the drop of that issue in the later negotiations paved the way to the conclusion of the July Package of 2004, and the successful continuation of the Doha Round. The content of the Doha Ministerial Declaration adopted in November 2001 provided for the launch of negotiations with the scope of setting a multilateral framework for investment, particularly towards foreign direct investment (FDI), with the consensus of all WTO Members after Cancun s Conference. The WTO Working Group on the Relation Between Trade and Investment (WGTI), created by the Singapore Ministerial Conference, was directed to focus on the clarification of certain topics, including relevant WTO provisions on the issues. Since then, a number of countries have addressed the matter in different ways. Some WTO countries, led by the European Union and Korea, resolutely promoted the signature of an investment agreement at a multilateral level. Other Members, like India, firmly opposed any talks on investment issues under the umbrella of the WTO. While many other countries, mostly developing countries, were willing to accept negotiations towards a multilateral agreement on investment in exchange for discussion of other issues they consider more relevant. These different positions may have suggested that foreign investment regulation would have been a novelty in WTO agreements, and that the launch of negotiations according to Doha Declaration would have broken new ground in multilateral disciplines

6 Such a conclusion would, however, be inaccurate. Foreign investment disciplines in WTO trade agreements date back to the birth of the WTO itself in The outcome of the Uruguay Round did not create a distinct agreement addressing foreign investment in a specific and complete manner, but disciplines on the issue are found in a number of other agreements. These arrangements, although their scope is to regulate other trade-related matters than foreign investment, contain several provisions that apply directly or indirectly to it. Agreements such as the General Agreement on Trade in Services (GATS), the agreement on Trade-Related Investment Measures (TRIMS), the Trade- Related Aspects of Intellectual Property Rights (TRIPS), the Agreement on Subsidies and Countervailing Measures (ASCM), the plurilateral agreement on Government Procurement (GPA) and the Dispute Settlement Understanding, all provide, at least in an indirect and partial manner, provisions applicable to foreign investment. Of these instruments, the GATS is undoubtedly the one containing the most comprehensive and profound discipline towards foreign investment. The precise scope of the GATS on investment regulation is an issue of current relevance at the multilateral level, and of growing significance at the bilateral and regional levels. Indeed, while the drop of investment regulation at the WTO during the Doha Round has made lose momentum to the issue in the scholars interests and the agendas of the main international organizations, it has not made it lose its inherent importance in the context of the WTO. On the contrary, the outcome of the Cancun Ministerial and the July Package of 2004 has sealed that, at least until next Round, all disciplines on investment at the multilateral level will be those currently existent in the WTO Agreements, of which the GATS presents the strongest rules and wider in scope. A comprehensive knowledge of GATS rules and their implications for foreign investment is therefore key in the present status of the multilateral negotiations. The scope of this study is to assess GATS discipline on trade in services from a foreign investment standpoint, in order to determinate how and to what degree its regulation covers investment issues. To what extent can the GATS be considered a multilateral investment agreement? would be the question this study - 6 -

7 tries to answer. To that end, the study proposes to perform a comparison between the GATS and bilateral investment treaties (BITs) and regional and free trade agreements with disciplines on foreign investment. The first part of the study sets the ground for a comparison by focusing on investment agreements, describing their rationale, scope and general disciplines. It also highlights, where relevant, the major differences that exist among the several models of BITs signed by different countries. A second part draws the attention to GATS main discipline towards trade in services. It considers the main features of the agreement, paying particular attention to those key topics that may have an special influence on the regulation of foreign investment. Thirdly, the study addresses the most prominent issues on foreign investment regulation in the GATS. In this task, the paper attempts to assess how these matters are regulated by the GATS, vis-à-vis investment agreements. A final fourth part presents the main conclusions of the study

8 2. Bilateral and regional disciplines on investment 2.1 BITS GENERAL OBJECTIVES BITs are spin-offs from general treaties dealing with economic relations between countries, such as Friendship, Commerce and Navigation treaties. The first modern bilateral investment treaty was signed by Germany and Pakistan in While a number of developing and even least developed countries are increasingly entering into investment agreements with countries of similar level of development 1, BITs have been traditionally developed on a North-South basis. Investment agreements serve different purposes depending on the country concerned. Capital exporting countries (typically, OECD Members) promoted these instruments with the scope of securing additional and higher standards of legal protection and guarantees for the investments of its firms in the host countries, particularly, in developing countries. Later on, especially since the beginning of the 1980s, BITs additionally became an instrument to open new investment opportunities for developed countries enterprises abroad. On the other hand, developing countries enter into BITs with the expectation of attracting foreign investment into their economies, by using these instruments as a signal for foreign investors of a solid and stable investment climate. Whether these agreements have actually achieved its objectives of protecting and promoting foreign investments, is a matter subject to endless debate. On the protection side, it would appear at first sight that BITs have played a role, if not in forcing national regulatory changes, at least in consolidating unilateral liberalization reforms and preventing host countries from reversing the non-discriminatory regulations applied. The recognition of MFN and national treatment in international investment agreements seems therefore to be for the most part a useful tool to ensure non-discriminatory policies lock-in and a guarantee to 1 UNCTAD, A Wave of South-South Cooperation in the Area of International Investment Policies, forthcoming (a), - 8 -

9 foreign investors that their assets will not be subject to worse conditions because of their origin by the host country. Nonetheless, it is by now clear that these core disciplines are not followed strictly not even by their promoters. A number of deviations to MFN and NT provision have been recorded to be applied, for instance, by the European Union and their Members States 2. The Understanding Concerning Certain U.S. Bilateral Investment Treaties signed on September 22 nd, 2003, by the US, the European Commission (!), and eight Eastern European countries at the time of their accession to the EU, recognized with no ambiguities that current EU regulation violates national treatment obligations, despite the fact that all EU Members have BITs with third countries containing such a provision. From a different angle, the dispute settlement mechanisms foreseen in international investment agreements have proved effective to grant foreign investors monetary compensation where host countries applied prohibited discriminatory and expropriatory measures. However, criticism and concerns have arisen against international arbitral tribunal not only from the side of developing countries and the NGO community, but also within the governments of some OECD Members, in particular the US and Canada. The discussion is far from settled also in what concerns the ability of BITs to attract FDI flows towards developing countries, although the balance seems to tilt on the side of concluding that BITs play, at their best, only a marginal role in influencing global flows of FDI. An aggregate statistical analysis conducted by UNCTAD did not reveal a significant independent impact of BITs in determining foreign investment allocation 3. Another similar examination performed by the World Bank concluded that there was little independent role for BITs in accounting for the increase in FDI by the end of the 1990s, and that countries that had concluded a BIT were no 2 Torrent, Ramon, Derecho y práctica de las relaciones económicas internacionales en la Unión Europea, Barcelona, Ed. CEDECS, UNCTAD, World Investment Report 1998: Trends and Determinants, New York and Geneva, United Nations,

10 more likely to receive additional FDI than were countries without such a pact 4. Hallward-Dreimeier stated that analyzing twenty years of bilateral FDI flows from the OECD to developing countries finds little evidence that BITs have stimulated additional investment 5. Yet one study of determinants of FDI in Central and Easter Europe found that bilateral investment agreements, along with the degree of enterprise reform and repatriation rules tended to stimulate FDI 6. The basic features of BITs, including their objectives, structure and broad principles underlying the agreements, have changed little over the years. Their main provisions typically deal with the scope and definition of foreign investment (which in most cases includes tangible and intangible assets, direct as well as portfolio investments, and existing as well as new investments); admission of investments; national and most favoured nation treatment; fair and equitable treatment; guarantees and compensation in respect of expropriation; guarantees of free transfer of funds and repatriation of capital and profits; and dispute-settlement provisions, both State-to-State and investor-to-state. In addition, some BITs include provisions regarding transparency of national laws; performance requirements; entry and stay of foreign personnel; and general exceptions. Within these broad lines, the exact content of BIT provisions varies considerably, even between BITs signed by the same country, reflecting different approaches as well as diverse bargaining positions. 2.2 SCOPE OF THE AGREEMENT: DEFINITION OF INVESTMENT The scope of the investment agreement in regard to its material coverage is determined by the definition of the term investment provided by the 4 World Bank, Global Economic Prospects and the Developing Countries Washington D.C., World Bank, Hallward-Driemeier, Mary, Do Bilateral Investment Treaties Attract FDI? Only a bit and they could bite, World Bank Policy Research working paper series, Grosse and Trevino, Institutional theory, transaction cost economics and foreign direct investment in the transitional economies of Central and Eastern Europe, 2002, cited by UNCTAD, World Investment Report FDI Policies for Development: National and International Perspectives, op. cit

11 agreement. The concept of investment is then an internal legal definition and is to be interpreted according to the specific terms that each BIT provide. The great majority of the BITs signed to date include similar concepts under the definition of investment, although the particular terms may differ in each case. Typically, BITs adopt a broad definition that refers to every kind of asset, suggesting that any economic value is covered by the agreement. This sort of broad asset-based definition is usually followed by an illustrative list of assets covered, which includes: movable and immovable property and other property rights. This category includes property rights on merchandise or any other goods, as well as ownership of land or any sort of real-state interest, such as mortgages, liens and pledges; interests in the property of companies, such as shares, stock and debentures. There is no minimum equity participation required to be covered by the agreement, nor the foreign investor is required to be in a position of control over the enterprise. Moreover, other forms of participation as bonds and, loans and debt instrument are also included in this category; claims to money and claims to a performance under a contract having financial value. This category suggests that the agreement applies not only to property rights, but contractual rights as well. Many agreements expressly refer to rights acquired under concession contracts, including those for the exploitation of natural resources. UNCTAD points out that the general inclusion of contractual rights under the definition of investment raises a number of questions as to contractual relations for cross-border trade in goods and services can be considered investment for the purposes of the agreement 7. Moreover, the general wording adopted in this category does not seem to restrict the scope of the agreement to long term contracts. Under this category, any kind of portfolio investment is also included; 7 UNCTAD, Scope and Definition, UNCTAD Series on issues in international investment agreements, New York and Geneva, United Nations,

12 intellectual property rights. This grouping comprises trademarks, trade secrets, patents and copyrights. Some BITs expressly include technical processes, know how, geographical indications and goodwill, indicating that the agreement also covers newer forms of intellectual property rights, which are traditionally not legally protected under this category. There is no requirement that these rights were registered or acquired under the laws of the host country, suggesting that the intellectual property of the investor in the host country is protected also when such rights were developed in the home country or any third one. These categories are covered by the vast majority of the investment agreements signed to date. The ASEAN Agreement for the Promotion and Protection of Investments, for instance, in its Art.1:3 provides an example of an asset-based definition covering those elements: The term investment shall mean every kind of asset and in particular shall include though not exclusively: a) movable and immovable property and any other property rights such as mortgages, liens and pledges; b) shares, stocks and debentures of companies or interests in the property of such companies; c) claims to money or any other performance under contract having a financial value; d) intellectual property rights and goodwill; e) business concessions conferred by law or under contract, including concessions to search for, cultivate, extract or exploit natural resources. Differences exist, however, among particular agreements in terms of the precise drafting of the relevant provisions, but regardless the wording almost all of them expressly apply to this wide range of rights. In any case, independently of such categories being listed or not, they are covered by the agreement to the extent that the BITs apply to any kind of asset. Therefore, the broad terms typically used by BITs and other investment agreements seem to suggest that virtually anything lawful- that has an economic value is encompassed under the definition of

13 investment, and therefore protected by the agreement. The specific scope of each agreement, however, is to be found in the wording adopted its particular definition of investment. A few more recent BITs, notably those promoted by Canada, include also a description of what is not considered an investment. The Canadian Model FIPA of expressly indicates that a) a loan and debt securities to one of the Parties or to an state enterprise, b) a loan granted by or debt security owned by a cross-border financial service provider, c) claims to money arising from commercial contracts for the cross-border sale of good and services, are not investment and therefore fall outside the reach of the agreements. 9 8 Available online at documents/2004-fipa-model-en.pdf. 9 Canadian Model Foreign Investment Promotion and Protection Agreement (FIPA) of 2004, states in its Article 1, that (emphasis added): investment means: (I) an enterprise; (II) an equity security of an enterprise; (III) a debt security of an enterprise (i) where the enterprise is an affiliate of the investor, or (ii) where the original maturity of the debt security is at least three years, but does not include a debt security, regardless of original maturity, of a state enterprise; (IV) a loan to an enterprise (i) where the enterprise is an affiliate of the investor, or (ii) where the original maturity of the loan is at least three years, but does not include a loan, regardless of original maturity, to a state enterprise; (V) (i) notwithstanding subparagraph (III) and (IV) above, a loan to or debt security issued by a financial institution is an investment only where the loan or debt security is treated as regulatory capital by the Party in whose territory the financial institution is located, and (ii) a loan granted by or debt security owned by a financial institution, other than a loan to or debt security of a financial institution referred to in (i), is not an investment; for greater certainty: (iii) a loan to, or debt security issued by, a Party or a state enterprise thereof is not an investment; and (iv) a loan granted by or debt security owned by a cross-border financial service provider, other than a loan to or debt security issued by a financial institution, is an investment if such loan or debt security meets the criteria for investments set out elsewhere in this Article; (VI) an interest in an enterprise that entitles the owner to share in income or profits of the enterprise; (VII) an interest in an enterprise that entitles the owner to share in the assets of that enterprise on dissolution, other than a debt security or a loan excluded from subparagraphs (III) (IV) or (V); (VIII) real estate or other property, tangible or intangible, acquired in the expectation or used for the purpose of economic benefit or other business purposes; and (IX) interests arising from the commitment of capital or other resources in the territory of a Party to economic activity in such territory, such as under (i) contracts involving the presence of an investor's property in the territory of the Party, including turnkey or construction contracts, or concessions, or (ii) contracts where remuneration depends substantially on the production, revenues or profits of an enterprise; but investment does not mean,

14 Some investment agreements that have been concerned primarily with FDI have adopted another approach in defining their scope, by focusing on foreign investment in an enterprise rather than in a variety of assets. This enterprise-based definition gives attention to the investor s objective of establishing a long-term relation with the economy of the host country, through the acquisition of a lasting interest in the ownership or management control of an enterprise. This approach is found, for instance, in the Denmark-Poland BIT of 1990, which defines investment as: all investments in companies made for the purpose of establishing a lasting economic relations between the investor and the company and giving the investor the possibility of exercising significant influence on the management of the company concerned 10. Another clear example of an enterprise-based definition may be found in the OECD Code of Liberalisation of Capital Movements, in its Annex A (Art. I), where it defines direct investment as: Investment for the purpose of establishing a lasting economic relation with an undertaking such as, in particular, investments which give the possibility of exercising effective influence on the management thereof: (A) in the country concerned by non-residents by means of: (1) creation or extension of a wholly-owned enterprise, subsidiary or branch, acquisition of full ownership of an existing enterprise; (2) participation in a new enterprise; (3) (3) a loan of five years or longer. (X) claims to money that arise solely from (i) commercial contracts for the sale of goods or services by a national or enterprise in the territory of a Party to an enterprise in the territory of the other Party, or (ii) the extension of credit in connection with a commercial transaction, such as trade financing, other than a loan covered by subparagraphs (IV) or (V); and (XI) any other claims to money, that do not involve the kinds of interests set out in subparagraphs (I) through (IX). 10 Agreement between the Government of the Kingdom of Denmark and the Government of the Republic of Poland for the Promotion and the Reciprocal Protection of Investments, Art. 1(1)(b). All BITs cited in the present study are publicly available in UNCTAD s online BITs database: aspx

15 Enterprise-based definitions, in principle, exclude from their coverage portfolio investment 11. This means, in sum, that assets such as equity securities, debt securities in the form of bonds and notes, money market instruments, and financial derivatives such as options and a variety of new financial instruments 12 are also excluded. For this reason, some countries some countries have preferred to opt for this approach in their investment agreements. Countries with particular industrial policy interests or concerns about the balance of payments and macroeconomic effects of removing restrictions on FDI, especially as it relates to short-term financial transactions, may opt for this kind of enterprise-based definition. Developing countries, in particular, have expressed their preference for this approach in the context of the Working Group on the Relationship between Trade and Investment (WGTI) of the WTO. Nonetheless, the overwhelming majority of investment agreements at both the regional or bilateral level, even those concluded between developing countries, have commonly adopted a broad assetbased definition. In brief, two main approaches exist in regard to the definition of investment: a broad asset-definition, which covers all assets of the investor, except those expressly excluded, and which usually encompasses both FDI and portfolio; and an enterprise-based definition, that is limited to FDI. 11 Nonetheless, several questions arise in particular cases, and distinguishing what constitutes foreign direct investment or portfolio investment may not always encounter a clear-line division. The OECD Code includes financial loans longer than five years in its coverage, which is not typical for this sort of definitions, and its belonging to the concept of direct investment may be arguable. The old Canada-US FTA of 1988 (as recorded in UNCTAD, Scope and Definition, op cit.), for example, adopting a precise enterprise-based definition, did not cover financial loans, regardless of their term. 12 IMF, Balance of Payment Manual, Washington D.C. International Monetary Fund, 5 th edition,

16 2.3 TREATMENT OBLIGATIONS Comparative standards of treatment: MFN and NT For the purpose of preventing discrimination among foreign investors from different home countries and among national and foreign investors, investment agreements include provisions on the treatment of foreign investors. By treatment it is commonly meant all sort of laws, regulations and practices from official entities that apply to or affect the investors or their investments. Investment agreements typically contain two comparative standards of treatment: most favoured nation treatment (MFN) and national treatment (NT). These two standards are comparative because they do not entail an objective level of treatment to be afforded to the foreign investor, but rather they main objective is to prevent discrimination by ensuring that foreign investors will not receive a treatment that is worse to the one granted to investors from other countries (MFN) or from the host country itself (NT). These standards, therefore, say nothing about the quality of the treatment itself: host countries may treat all investors badly, by imposing expropriatory taxes, or by setting unreasonable requirements, but as long as such measures are applied to all investors equally, the countries would be in full compliance with such standards. This leaves space for host governments to follow a wide range of investment policies, from a very liberal to a very restrictive one in regard to private investment, insofar as they do not entail preferences to one sort of investors in detriment of others. Usual practice shows, however, that these comparative standards of treatment, in particular, national treatment, do tend to guarantee an investment-friendly environment to foreign investors, as governments are typically not keen on imposing harsh requirements on its own national investors, and that they usually consider private investment as an important positive element of their economic policy. The most favoured nation principle is a key element of international trade law since the conclusion of the first Friendship, Commerce and Navigation

17 treaties. The principle implies that a country shall not discriminate among its trading partners, and obliges the country to grant to the other signatory of the treaty, the best treatment that it affords to any other third nation. In the context of trade in goods, such principle reflects on the tariffs that the products from the other party of the agreement has to pay. Where two countries sign a trade agreement imposing a MFN obligation between the two, neither of them may impose on the other country higher import tariffs than it imposes on any other country non-party to the agreement. In the context of international investment treaties, the thrust of the MFN principle remains that one of preventing discriminatory treatment among trading partners. Signatory countries agree to grant to the investment and investors of the other country a treatment not less favourable than the one they accord to investors and investments from any other country. Investors from a signatory country are therefore ensured than the host country will not deny to them rights and benefits that it affords to other foreign investors. Host countries, on the other side, are not prevented by the MFN provision to afford a more beneficial treatment to its own investors. In addition to the MFN obligation, investment agreements typically enshrine an obligation to grant national treatment to the investments and investors covered by the agreement. National treatment obligations seek to ensure to foreign investors a treatment at least as good as that one received by national investors. Contrary to MFN, this principle typically entails, a liberalization commitment for the host country, since it provides for the elimination of regulation that may benefit local over foreign investors, i.e. provisions that may tilt the conditions of competition in favour of national investors. According to the NT standard, nothing prevents national authorities from granting a better treatment to foreign investors rather than to their own nationals, and, although some countries have passed laws to impede such a reverse discrimination, it remains a fairly common practice by governments interested in attracting fresh capitals into particular sectors, usually in light of the possibilities of technology transfer that these investments involve. Most favoured nation and national treatment are independent obligations that provide different levels of treatment to foreign, being normally

18 national treatment the one most beneficial. As separate provisions, nothing prevents countries from adopting only of them in their investment agreements according to their investment policies. However, BITs and regional agreements with investment disciplines commonly feature both obligations together, with the aim of ensuring to their investors the best possible treatment in the host country. Some agreements, following to the MFN and NT provisions, expressly state that the investors shall be entitled to the most favourable treatment of the two. One relevant exception to usual practice are BITs promoted by Australia, which only feature an MFN obligation, but do not include a national treatment obligation. This allows Australian investors to free-ride on the national treatment obligations undertaken by Australia s BITs partners with other third countries, while allowing Australian authorities to discriminate in favour or its own national investors vis-à-vis foreign investors. It is clear that both standards of treatment, MFN and NT, are to be applied by national authorities as well as sub-national ones, like states, provinces or regions, but a particular concern arises in regard to national treatment when is applied by sub-national entities in federal countries. In such cases, sub-national authorities (typically states or provinces) can have the constitutional power to set regulations that favour local investors over investors from other states or provinces. Since states and provinces are also bound by international agreements signed by federal authorities, the question is then which national treatment foreign investors are to be granted: the best available treatment, normally the one reserved to investors from the same state, or the one afforded to investors from other states or provinces of the same country. While most BITs do not currently provide a legal answer to this matter, the issue has been squarely addressed in US free trade agreements and BITs. In this regards, the CAFTA, Art. 10.3, paragraph 3 provides that: 3. The treatment to be accorded by a Party under paragraphs 1 and 2 [national treatment] means, with respect to a regional level of government, treatment no less favorable than the most favorable treatment accorded, in like circumstances, by that regional level of government to investors, and to investments of investors, of the Party of which it forms a part

19 Therefore, according to this provision, a foreign investor is to be treated by a US state government as if it were an investor from another US state for the purpose of compliance with national treatment disciplines. Thus, if the host state offers preferential treatment to local investors and does not extend such treatment to out-of-state investors, the foreign investor cannot invoke national treatment to obtain similar preferences. All that the foreign investor can do is require treatment no less favourable than that accorded to out-of-state US investors 13. The same solution, although with a slightly different wording, is proposed by the US in its 2004 Model BIT and Canada, in its Model FIPA of Scope of the treatment provisions While the main idea of MFN and NT principles remains the same across different investment agreement, i.e. preventing discrimination among investors, the particular conditions of applicability in each case depend on the drafting of the clause featured in each agreement, as well as the overall scope of the investment agreement. The substantial reach of the MFN and NT obligations is largely determined by the scope of the agreement itself. They will cover FDI, portfolio investments, and intellectual property rights to the extent that these elements are encompassed in the overall definition of investment enshrined in the agreement. In that sense, the MFN and NT provisions usually apply to the investment and investors as defined in the agreement. Therefore, MFN and NT obligations in agreements featuring an asset-based definition will extend to all the sort of assets mentioned above. These principles will be limited to the assets directly related to FDI, instead, in those agreement featuring an enterprise based definition of investment. Additionaly, the wording given to the MFN and NT provisions themselves has major implications on the scope of the obligations. Typically, MFN

20 and NT principles are worded in similar terms, except the key reference to different foreign investors or national and foreign investors. In many agreements both principles are enshrined in one single provision that envisages both cases. This latter is particularly the case of European BITs; American BITs, in contrast, normally feature one provision per principle, both of them parallel in structure and almost identical in wording Treatment standards in regard to entry rights A key concern in BITs and RTAs governing foreign investment is the concession of admission and establishment rights to foreign investors in the economy or selected economic sectors of the host country. These matters, commonly defined as pre-establishment or entry rights, differ from postestablishment rights in regard to the precise moment (or phase of the investment cycle) that the guaranteed treatment (i.e., MFN, NT, fair and equitable treatment) is to be granted to foreign investors. Agreements providing post-establishment NT only may result in the ability of national governments to close their entire economy or -more commonly- specific sectors to foreign investments. For those sectors where foreign participation is allowed, national authorities are subject to national treatment disciplines, and thus compelled to provide foreign investors with at least the same benefits and privileges accessible to their own nationals. Agreements according both pre- and post- entry rights restrict the ability of host governments to limit or anyhow impede foreign investment in their economy (subject to regulated exceptions or reservations). As some economic sectors may be considered vital for purposes of economic and industrial development, national security reasons, or any other key national interest, governments may wish to restrain the ability of foreigner investors to involve themselves in some activities, hence limiting entry rights to certain economic areas. For these reasons, no investment agreement currently provides fully unrestricted pre-establishment rights to foreign investors. 13 See, UNCTAD, National Treatment, UNCTAD Series on issues in international investment agreements, New York and Geneva, United Nations, 1999, in regard to NAFTA provisions on national treatment

21 Entry rights involve both admission and establishment rights. While both concepts are closely linked, a distinction among the two can be made. Rights of admission deal with the right of entry of foreign presence in the host country s economy, whereas rights of establishment concern the type of presence that may be allowed. 14 The significance of this feature, in light of the implications it entails for investors and countries, determines the classification of BITs into two major models : a) a European model based on the Abs-Shawcross Draft Convention model endorsed by OECD Ministers in 1962; and b) a North American model developed in the early 1980s for the Bilateral Investment Treaty program launched during the Reagan administration 15. European model BITs are typically worded in the sense of limiting the scope of the most favoured nation and national treatment obligations to the stage subsequent to the admission and establishment of the foreign investment in the host country. The BIT between the United Kingdom and Argentina of 1990, Art. 3.2, exemplifies this, by stating that: 2. Neither Contracting Party shall in its territory subject investors of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investments, to treatment less favourable than that which accords to its own investors or to investors of any third State. Other European agreements do not present a list of operations (i.e. management, maintenance, use, enjoyment or disposal of their investments ) where the standard of treatment applies. Rather, they are limited to the indication that foreign investors of the other contracting party shall not be subject to a treatment less favourable than that accorded to investors of the other contracting party or to investors of any third states. In these cases, the standard of treatment does not include and specific reference to pre- or post- establishment rights, and the question 14 UNCTAD, Admission and Establishment, UNCTAD Series on issues in international investment agreements, New York and Geneva, United Nations,

22 may remain whether admission and establishment rights are reached by the MFN and NT disciplines. In most of these cases, however, another article provide that the host country shall admit investments by investors of the other Contracting Party in accordance with its legislation and administrative practice 16, intending that each party remains free in regard to the admission and establishment of foreign investors, which can be limited by the party s legislation or practices. On the contrary, North American model BITs normally provide for the extension of the treatment obligations to the so called pre-establishment phase of the investment 17. The US-Senegal BIT of 1983 states, in its Art. 2, that: 1. Each Party shall endeavor to maintain a favorable environment for investments in its territory by nationals and companies of the other Party and shall permit such investments to be established and acquired on terms and conditions that accord treatment no less favorable than the treatment it accords in like situations to investments of its own nationals or companies, and no less favorable than the treatment it accords in like situations to investments of nationals or companies of any third country. (emphasis added) More recent North American model BITs provide a more detailed and accurate language by describing the different operations related to the investment to which the treatment obligations applies. In this sense, the Canadian Model FIPA of 2004, Art. 3.1 states that: 1. Each Party shall accord to investors of the other Party treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, 15 OECD, Relationships between International Investment Agreements, OECD Working Papers on International Investment, number 2004/1, See, for instance, Denmark s second draft model BIT of 2000, Art The reference to North American model BITs is due to the origins of this model, featured in first instance by the United and States and later adopted by Canada. Since 2001,however, also the model BIT of Finland also embraced this approach

23 expansion, management, conduct, operation and sale or other disposition of investments in its territory. 18 (emphasis added) It appears clear that while UK s agreement does not impose an obligation to afford national or most favoured nation treatment until the investment has taken place and it is established in the host country, Canada s and US agreements provide for the obligation to grant such treatment also in what concern the ability of the investors to be admitted and establish themselves in the host country. These different scope of the treatment provision entails fundamental differences both for foreign investor and host country governments. From a foreign investor perspective, it means that American Model agreements ensure them that they will not be discriminated against in what concerns to the ability to enter the host country s market and engage in new businesses in its territory. Right from the beginning of the investment process, that is, from planning of the investment and obtaining the necessary governmental licenses and authorizations, foreign investors are granted with the same treatment than other foreigners and national investors. In this sense, the North American model features a more investor-friendly discipline than the European agreements. On the other hand, the European model allows governments to pursue a wider range of policies in regard to their investment policies. Governments may allow foreign investor to be admitted and establish in their market in the same conditions as nationals in those areas where they deem convenient to do so, while benefiting from the necessary policy space to reserve certain economic activities or geographical areas to national investors, which may help promoting the development of national enterprises and local capacities in certain areas, as well as ensuring greater spillovers into the local economy. The European model can be hence regarded as more policy-friendly than the American model in what concerns to admission and establishment rights. 18 Another article with alike drafting refers to most favoured nation treatment. The US Model BIT of 2004 features the same wording in its relevant articles

24 The different standards of treatment apply in regard to entry rights in the same way that they apply to the post-establishment phase of the investment. In North American BITS, MFN treatment ensures that foreign investors from the contracting parties are granted at least the same entry rights that investors from any other third states receive. National treatment obligation guarantees that foreign investors from the contracting party hold the same investment opportunities than investors of host country. While it would be possible for any country to decide to grant entry rights for only one of the treatment obligations, usual practice shows American BITs feature entry rights in regard to both standards of treatment, while European BITs limit the scope of both obligations to the post-establishment phase of the investment Absolute standards of treatment: F&ET Comparative standards of treatment, as explained above, operate through the extension of rights that are already afforded to some investors, to the investors and investments of the contracting party. These standards provide a guarantee that the covered investor will not be subject to worse conditions of competition that national investors or investors from third states. As explained above, they do not, however, provide an objective guarantee of good treatment. MFN and NT are of little help in the rather theoretical- case that the host country s authorities subject all investors to equally egregious treatment. Absolute standards of treatment are meant to fill that gap and ensure that foreign investors are not subject to egregious treatment, independently of the treatment that the host countries afford to its own investors or to investors from other countries. Several formulations are found in BITs that intend to express the obligation of the host state to provide a certain minimum standard of good treatment to foreign investors. Most of this formulations, however, are related to the most common requirement of ensuring a fair and equitable treatment (F&ET) towards investors. The antecedents of this standard can be found in the 1948 Havana Charter for an International Trade Organization, bilateral Friendship, Commerce and

25 Navigation Treaties concluded during the 40s and 50s, and the 1967 OECD draft Convention on the Protection of Foreign Property 19. In its origins, the inclusion of an absolute standard of treatment in investment agreements, in addition to the traditional comparative standards, reflected the concern of capital exporting countries of seeing their investors subjected to appalling conditions in developing countries. Currently, the F&ET standard is enshrined in the vast majority of BITs, even between developing countries, in regional agreements featuring investment disciplines such as the NAFTA, the Colonia Protocol of Mercosur, and the failed OECD Multilateral Agreement on Investment and United Nations Code of Conduct on Transnational Corporations. Notwithstanding such a long and broad use of the F&ET obligation, the exact content and meaning of the standard remains nowadays unclear. UNCTAD points out that at least two different views have been as to the precise meaning of the term fair and equitable treatment in investment relations: 1) the plain meaning approach, and 2) equating F&ET with the international minimum standard The meaning of F&ET The plain meaning approach is based upon the ordinary meaning of the terms fair and equitable. In this view, the duty of dispute settlement organs is to determine whether the investor has been subject to fair and equitable conditions. Clearly, the application of this approach is not without difficulties. In the first place, the concepts of fairness and equity are inherently subjective, and therefore vague and ambiguous. Moreover, capital importing countries typically, developing countries-, capital exporting countries and, even more, private investors, may not necessarily share the view of what may be fair and equitable in a given situation. A second approach suggests that F&ET is equal to the international minimum standard of treatment towards foreign investors and investments. This 19 UNCTAD, Key Terms and Concepts in IIAs: a Glossary, UNCTAD Series on issues in international investment agreements, New York and Geneva, United Nations, UNCTAD, Fair and Equitable Treatment, UNCTAD Series on issues in international investment agreements, New York and Geneva, United Nations, 1999e