This past fall, Columbia University’s Program on International Investment (CPII), led by Karl P. Sauvant, formerly of UNCTAD, released a comprehensive report evaluating the receptivity of the world, on a regional and country-by-country basis, towards foreign direct investment. (For a copy of this report, undertaken together with the Economist Intelligence Unit, entitled “World Investment Prospects to 2011: Foreign Direct Investment and the Challenge of Political Risk,” see http://www.cpii.columbia.edu/pubs/.) A month later, CPII organized an impressive conference of leading academics, policy-makers, and practitioners on the subject of future investment policy (for a copy of the program and a brief conference assessment, see here). Both the Report and the conference came to the same ambiguous conclusion: while the prospects for ever-rising levels of FDI are bright and most countries continue to encourage free investment flows within a framework of continuing liberalization of their FDI laws and an expanding, interlocking network of bilateral and regional investment and free trade agreements, there are growing signs of discontent both with certain forms of FDI and with the legal rules by which these are governed. Like much else in international law, the FDI regime that governs much of global capitalism may be shifting in fundamental ways. More interesting still, the shifts are occurring not only in predictable places (e.g., Hugo Chavez’s Venezuela or Evo Morales’s Bolivia) but in places where such change would be least expected, including Bush’s United States and Harper’s Canada.
The World Investment Prospects Report gives free traders much to cheer about. It predicts continuing robust levels of FDI flows (led by cross-border mergers and acquisitions (M&As)), with the United States and Europe continuing to dominate as recipients of world FDI. (Indeed, the Report predicts that the United States is likely to remain the world’s leading FDI recipient over the 2007-11 period.) The Report predicts that China will continue to be the main FDI recipient of FDI among emerging markets, capturing some 16 percent of projected inflows into those markets, and that labor-intensive manufacturing will continue to go to emerging markets, along with an accelerating level of off shoring of services. At the same time, investment by companies from emerging markets, especially from the BRICs (Brazil, Russia, India, and China) will gain in importance. Overall, the Report prognosticates that the global trend for liberalization and deregulation of domestic markets will continue for the foreseeable future.
Free trade lawyers can also draw considerable comfort from the data presented. The Report cites UNCTAD for the proposition that out of 2,348 changes in national FDI laws between 1991 and 2005, 92 percent were in the direction of creating a more favorable climate for foreign investors. It also indicates that the bulk of the manufacturing sector in an overwhelming number of countries is now legally open to FDI and that sectors traditionally less open to FDI, such as natural resources and services, are increasingly receptive. Such changes in national laws reflect the existing capitalist international regulatory framework, consisting of 2,572 bilateral investment treaties (BITs) among 174 countries through the end of 2006 and another 241 regional free trade agreements that include investment protection standards. Virtually every country now has some obligation, at least bilaterally with respect to another, to grant foreign investors from that state national and most-favored-nation treatment, to pay prompt and adequate compensation in case of expropriation, and to protect investors from other harms resulting from breaches of their investment contracts or violations of customary international law (such as government action in violation of “fair and equitable” treatment). Even those countries that in the past had adhered to the Calvo Doctrine have agreed to permit investor-state disputes to be heard not by their own courts, but at the option of the investor, by international arbitrators. The Report reflects a legal landscape that is -- and is expected to remain -- fundamentally more receptive to foreign investor rights, including to their rights of access to international dispute settlement, than anyone could have predicted in 1974 when the General Assembly approved by overwhelming vote its Charter of Economic Rights and Duties of States. Despite the hopes of neo-Marxists such as Hugo Chavez (whose country is given in this Report a “business environment rank” of 81 out of 82 countries ranked, a bit below Cuba’s rank at 78 and just above Angola at 82), the Report demonstrates that the “New International Economic Order” does not have much hope of making a comeback.
At the same time, that Report identifies the negative implications of some of the data highlighted above; that is, growing protectionist sentiments towards FDI in the United States and the risk of comparable backlash sentiments here and elsewhere (in part because of fears generated by relocating of manufacturing or the off shoring of services), growing scrutiny on entry of foreign investors, particularly for certain forms of FDI (such as those stemming from government controlled entities or sovereign wealth funds) and often allegedly prompted by post-9/11 “security” concerns, and growing appeals to nationalism in the developed world stemming from the rise of multinationals from the South. The Report contends that the “risk of adverse changes in regulatory frameworks represents the single most important threat to the future of FDI flows.” (Sauvant, “Regulatory Risk and the Growth of FDI,” Report, at 71.) What the Report indicates is hardly controversial. Even current officials of the Office of the U.S. Trade Representative acknowledge that we are now living in an age of trade “anxiety.” See Remarks of Amb. John K. Veroneau, Deputy U.S. Trade Rep., Sept. 11, 2007 here.
For those who are knowledgeable about the history of ambivalence with respect to foreign investors, even in leading free trade countries such as the United States, much of what is described in the Report is familiar. That in Germany, leading politicians now describe private equity groups’ attempts to take over companies in distress in order to break them up and make a “quick buck” as a “plaque of locusts,” that certain takeovers of strategic industries or national champions are triggering public outcries or government resistance in both rich and poor states, or that investments by state-owned enterprises or sovereign wealth funds are viewed with acute suspicion because it is feared these respond to forces not wholly dictated by the market – all of these are reminiscent of periodic concerns in the United States when distinct waves of foreign investment reached our shores. The 1980s’ wave of Japanese FDI coming into the United States, after all, produced such over-heated condemnations of foreign investment as Martin and Susan Tolchin’s Buying into America (1988) and Pat Choate’s Agents of Influence (1990).
But what the Report and the subsequent Columbia conference highlighted was that today, the usual resistance to FDI takes more legalistic forms. Investor-state disputes, involving some 70 countries throughout the world, have now been initiated by multinational corporations in 258 known treaty-based arbitration cases filed by the end of 2006. Some 73 percent of these disputes have arisen over the past five years. The World Bank’s International Centre for Settlement of Investment Disputes (ICSID), where 2/3 of these disputes have been filed, has gone from a sleepy, little known enclave to an adjudicative venue whose level of activity now surpasses that of the WTO’s Dispute Settlement Body. And as the world learned with respect to the WTO, intense supranational adjudicative activity tends to be accompanied by greater attention to what is being litigated and by whom. The high profile nature of many of these FDI disputes – including challenges by prominent corporations to high level governmental decisions undertaken to protect the public in the midst of an economic crisis in Argentina, to protect ground water in California, or to protect the environment in Canada – has led to increased NGO scrutiny and greater public concerns with the alleged “privatization” of justice made possible by the turn to arbitration. (For Public Citizen’s highly critical 2005 Report of NAFTA investor-state claims, “NAFTA’s Threat to Sovereignty and Democracy,” see here.) And it has not been only the NGO community that has been critical of investor-state dispute settlement. The Argentine government, the state with the greatest number of pending investor-state claims against it, has at times stated that it would refuse to pay arbitral decisions rendered against it; Bolivia withdrew from the ICSID Convention in May of 2007; and few can predict with confidence the fate of foreign investors seeking to arbitrate their disputes with the government of Venezuela.
Despite the fact that the United States has yet to lose a single NAFTA investor-state dispute brought against it, the Bush Administration has begun to respond to such concerns by quietly modifying its model investment agreement. As is suggested by this side-by-side comparison of some provisions from the United States’ 1984 Model BIT and the more recent U.S.-Uruguay Agreement, see here, the latest U.S. model international agreement is considerably more cautious when it comes to protecting the rights of foreign investors, as with respect to protecting them from “fair and equitable” treatment or with respect to protecting them from regulatory takings of their property. In addition, in the wake of the aborted Dubai Ports deal, the United States has modified the procedures for screening of incoming foreign investment through its Committee on Foreign Investment in the United States (CFIUS), which is authorized to suspend or prohibit FDI that poses a threat to the national security of the United States. As is suggested by these “client alerts” by some of the leading U.S. law firms, (see here and here), these changes could hamper the entry of FDI, especially given the absence in U.S. law of a clear definition of what constitutes the “national security” and the presumption in that law that state-owned enterprises need to be reviewed.
That the United States, the world’s leading proponent of investor rights, after 10 years of experience as a NAFTA defendant defending itself against foreign investors’ claims and during a Republican Administration regarded as strongly supportive of business rights, now appears to be having second thoughts about such rights may say quite a bit about the future of the FDI regime. Although the United States was a relative latecomer to the negotiation of BITs, its Model BIT circa 1984-86 was regarded as the world’s most generous agreement for the foreign investor since, for example, it extended its national and MFN treatment protections to entry and not merely post-entry rights. If the recognized leader of a liberal FDI regime, the United States, is re-calibrating the balance struck by that regime as between investor and state rights, others are sure to follow. Indeed, the Report highlights the likelihood that other countries are likely to emulate the United States’ more intrusive “national security” screening mechanism, for example.
Canada’s own NAFTA experiences also appear to be affecting it. That country, which unlike the United States, has actually lost a few NAFTA cases, has since modified its Model BIT in ways that go even farther towards protecting sovereign prerogatives at the expense of investor rights. (For the most recent Canadian Model BIT, see here. Note in particular the ample scope reciprocally provided for FDI host states under the “General Exceptions” from the guarantees accorded to investors in Article 10 of this Model.)
Given these realities, the October FDI conference at Columbia, held at a propitious time in the short life of the FDI regime, produced lively debates about whether international investment rules have constructed a single “regime” or merely consist of a patchwork of disparate treaties, and if there really is a distinct FDI regime, whether it is “in crisis.” Although most at the conference accepted the need for such a regime and echoed the sense of the Report that it was not yet in crisis, many thought international investment rules need re-examination in terms of the respective rights of investors and the host states in which they operate. Some argued for a renewed attempt to negotiate a multilateral treaty on investment (although not within a “biased” venue such as the Organisation of Economic Cooperation and Development (OECD)). Others suggested the need for further changes to bilateral and regional investment agreements. (The most radical set of these have been proposed by the International Institute for Sustainable Development, whose Model International Agreement on Investment for Sustainable Development can be found here.)
Others suggested a renewed World Bank “soft law” effort to enunciate relevant “general principles” or the production, under academic auspices, of a “Statement of Foreign Investment Law” (modeled on the American Law Institute’s Restatements). Others opined that priority be given to reforming the relevant arbitral mechanisms, rather than changing the substantive rights of foreign investors or the duties of host states. Apart from proposals, also urged by the U.S. Congress when it passed trade promotion authority for U.S. negotiators, to establish some kind of appellate mechanism for investor-state disputes, arbitral reformers have argued for procedures to increase, for example, ICSID’s transparency and accountability, as through greater and more uniformly applicable procedures for admission of amicus submissions and public access to all relevant documents (including briefs and expert witness statements). Some have sought to focus attention on the need to apply uniformly agreed rules of professional responsibility (including applicable conflict of interest rules) to all participants in the arbitral process or the need to establish new institutionalized vehicles to provide greater technical assistance to LDCs engaged in the negotiation of investment agreements or the arbitration of disputes (e.g., along the lines of the Advisory Centre on WTO Law).
Although the world’s capitalists prevailed at the end of the Cold War, one of their most obvious victories, the expansion and consolidation of the FDI regime, is in obvious ferment. The object and purpose of investment agreements was originally to protect foreign investors and thereby increase the flow of cross-border investment. That regime was intentionally unbalanced in the sense that it focused on protecting the foreign investor and not on protecting the sovereign discretion of host states. Those who believe that this regime needs to be “re-calibrated,” no longer accept that proposition. They want to engage investment lawyers in conversations that were once the exclusive domain of human rights or environmental lawyers. While such questions have long engaged WTO lawyers, a move to a “second stage” of investment agreements will not be easy – and not only because private parties who have acquired rights under the original treaties will surely resist it. Re-calibrating a regime that is grounded in diverse bilateral and regional agreements and shows little prospect of moving to a single multilateral compact any time soon will prove more cumbersome. The effort will, however, make investment law one of the more exciting fields within public international law. Whatever it once was, if there is such a thing as a “FDI regime,” it is no longer self-contained.
For examples of such concerns in the United States and Canada, see, e.g., Anand Giridharadas, “Lobbying in U.S., Indian Firms Present an American Face,” New York Times, Sept. 4, 2007, at C1; Aaron A. Dhir, “Of Takeovers, Foreign Investment and Human Rights: Unpacking the Noranda-Minmetals Conundrum,” 22 Banking and Finance Law Rev. 77 (2006). As Dhir indicates, resistance to foreign takeovers may also be cast in human rights terms.
For an account of these historical cycles in other nations (along with a controversial explanation for why they occur), see, e.g., Amy L. Chua, “The Privatization-Nationalization Cycle: The Link Between Markets and Ethnicity in Developing Countries,” 95 Col. L. Rev. 223 (1995).
See, e.g., Bruno Simma and Dirk Pulkowski, “Of Planets and the Universe: Self-contained Regimes in International Law,” 17 EJIL 484 (2006).
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