European international investment policy - guide
07 July 2010by eub2 -- last modified 08 July 2010
The European Commission today took the first step towards a comprehensive European international investment policy with two initiatives. A policy paper lays out how the new EU competence on foreign direct investment can be used to boost competitiveness and trade resulting in growth and jobs. At the same time a draft regulation sets up transitional arrangements offering guarantees on existing or pending bilateral investment treaties concluded between EU and Non-EU countries. Under the Lisbon Treaty, investment policy will be developed and managed at the European level giving the EU a strengthened negotiating hand to deliver better investment protection for all European businesses.
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What is the European Commission proposing and why?
From 1st December 2009, the Lisbon Treaty brought investment policy within the sphere of policy areas developed at the European level.
The European Commission has now issued two related documents:
1. A Communication that discusses how this policy area should be used to increase EU competitiveness and create growth and jobs in Europe.
2. A draft regulation which is designed to manage the transition towards a new EU comprehensive investment policy, notably by providing legal security for national bilateral investment treaties.
What is a bilateral investment treaty ("BIT")?
A Bilateral Investment Treaty is an agreement establishing the terms and conditions for investment by nationals and companies of one country in another country. It establishes a legally binding level of protection in order to encourage investment flows between the two countries. It grants investors a number of guarantees, which typically include fair and equitable and non-discriminatory treatment, protection from unlawful expropriation, free transfer of funds and full protection and security. On top of this, the majority of bilateral investment treaties also offer investors direct recourse to international arbitration against the country concerned when their rights under the treaty have been violated.
There are 1200 bilateral investment treaties concluded by European Union Member States and other countries. These are a therefore key issue addressed by the regulation.
My investment abroad is protected by a BIT. What will happen to that BIT now?
Nothing.
The more than 1200 Bilateral Investment Treaties concluded by MS remain valid under international law. However their existence may raise a question of compatibility with the EU law and the common commercial policy in particular. The proposed regulation makes it 100% clear that the benefits and rights available under Bilateral Investment Treaties cannot be denied (for example, under investor-state arbitration) even with the development of a comprehensive EU-level policy role on investment. The Commission has chosen a "zero-risk" approach to reassure investors that their rights are not affected. This is intended to build confidence and pave the way for the EU to exercise its new EU role on foreign direct investment.
Why does the EU need an open investment policy?
The value of investment for economic development is unquestionable. Investment is an important contributor to economic growth and to the well-being of citizens of any country. Outward investment makes a positive and significant contribution to the competitiveness of enterprises globally, and thus preserves jobs at home. Inward investment creates jobs, optimises resource allocation, allows transfer of technology, increases competition and boosts trade. That is why all countries around the world make significant efforts to attract foreign investment.
The EU is the biggest player in this field. It is the world's leading host of foreign direct investment as well as the world's biggest source of foreign direct investment outside the EU. By 2008 outward stocks of the EU FDI amounted to € 3.3 trillion while EU inward stocks accounted for € 2.4 trillion. This reflects the EU's openness and its active policy towards open markets worldwide.
The new role for the EU on foreign direct investment will support this global positioning. The Commission's proposed strategy on investment will assure investors that they are able to operate in an open, properly and fairly regulated business environment, both within and across a host country's borders. The EU will ensure that all investors enjoy a level playing field and that there are both uniform and optimal conditions for their investment. Such a comprehensive investment policy will undoubtedly increase competitiveness of the EU economy and thus contribute to the objectives of smart, sustainable and inclusive growth, as set out in the Europe 2020 Strategy.
Why the EU is launching its investment policy only now?
The EU has been already very active in tackling obstacles to investment. All instruments that provide for the abolition of inward and outward restrictions on investment and other capital movements in the EU are already in place and are guaranteed by the EU Treaty. The EU has also constantly pursued its market access objectives for investment in trade negotiations with third countries since the creation of the World Trade Organization. The major opportunity brought by the Lisbon Treaty is thus not to start building a new investment policy from scratch but rather to complement the existing one by making it more comprehensive.
Before the entry into force of the Lisbon Treaty, investment was a policy field with a specific division of work between the EU and its Member States. Their roles in shaping investment policies were complementary: whilst the EU pursued the liberalisation of foreign direct investment, in particular through its trade agreements with foreign countries, the Member States used to seek for protection of investment flows, by concluding Bilateral Investment Treaties (BITs). The Lisbon Treaty allows the EU to bring all these elements under the cover of a single EU common investment policy and thus to ensure its comprehensiveness.
What is the added value of the EU comprehensive investment policy?
A comprehensive investment policy should not only enable the execution by enterprises of an investment but should also enable and protect all operations of that investment post-establishment. Therefore, the EU comprehensive investment policy will seek to integrate investment liberalisation and investment protection. A divergence of geographical coverage of investment agreements concluded by Member States as well as differences in protection standards offered by these agreements, led to an unlevel playing field for EU investors. Now investment negotiations with Non-EU countries at the EU level will enlarge and protect the competitive space that is available to all EU investors, and make sure that the best levels of protection negotiated by some Member States are extended to all.
Furthermore, by negotiating as a block, the EU will have a better leverage than individual Member States. This is also how trade policy became such a success story. Finally: 50% of world trade happens between related companies, and that therefore increased investment flows will lead to increased trade flows.
Why can the Commission withdraw the authorisation for existing MS BITs?
The Commission will review the existing MS BITs. If it finds clauses that are incompatible with EU law (e.g. transfer clauses that would hamper the implementation of EU financial restrictions against a certain third country), it would ask the Member State to renegotiate such clause. If this proves impossible, the authorisation may be withdrawn as a matter of last resort.
Likewise, authorisations can be withdrawn if the EU negotiates an investment treaty at European level, and recourse to Member State BITs with the same third country is not necessary anymore.
Why does the EU common investment policy allow MS to negotiate investment agreements with foreign countries on a bilateral basis?
The draft Regulation as proposed by the Commission provides for a transitional mechanism that empowers Member States to enter into bilateral negotiations with Non-EU countries. This is mainly due to the fact that existing bilateral investment treaties maintained by Member States may require amendments in order to bring them in compliance with EU law. The same framework is intended to be available also for Member States that would like to negotiate and conclude new investment treaties with countries, which are not targeted for EU-wide investment agreements, e.g. for foreign policy purposes. An authorisation to start such negotiations and conclude new agreements will be conditional and the process closely monitored by the Commission, with a view to ensure the overall compatibility with the EU common investment policy.
With whom will the EU negotiate investment protection agreements in the future?
The EU should prioritise, including on the basis of investor needs. Therefore important determinants for defining priority countries for investment protection negotiations will include magnitude of investment flows to and from prospective candidate and its market potential for future investments, as well as stability and predictability of investment climate as guaranteed by political and institutional setting in that country. The EU will also be receptive in case our trading partners wish to engage in investment protection negotiations.
The best prospects for integration of investment protection into the common commercial policy arises in ongoing trade negotiations, where the EU has so far only focused on market access for investors, thus in the short run the Commission intends to consider to propose broadening the scope of ongoing negotiations with India, Singapore, Canada and Mercosur to the complete investment area. In parallel the EU will explore the desirability and feasibility of stand-alone investment agreements with countries which receive high proportion of EU investments, such as China and Russia.
Does the Commission envisage developing an EU Model Investment Treaty?
The Commission will define a check-list of elements that need to be included in a future agreement on investment. These elements would be inspired by best practices of Member States and be tailored to specific trading partner's needs.
What protection standards are to be offered to investors in the EU investment agreements?
The objective of the EU common investment policy will be to ensure that no European investor would be worse off than he would be under Member State's Bilateral Investment Treaties. Therefore in implementing its policy, the EU will follow the best available practices as developed by Member States. The key standards of investment protection for the EU investment agreements will include: the guarantee of fair, equitable and non-discriminatory treatment, full protection and security, as well as guarantee of protection against unlawful expropriation and free transfer of funds. In order to ensure effective enforcement; the EU investment agreements should also feature investor-to-state dispute settlement, which permits an investor to take a claim against a government directly to binding international arbitration.
How does the EU intend to ensure "policy space" in its investment agreements?
The EU common investment policy needs to fit with the way the EU and its Member States regulate economic activity within the Union and across its borders. EU investment policy has to be consistent with the other policies of the Union and its Member States, including policies on the protection of the environment, health and safety at work, consumer protection, cultural diversity, development policy and competition policy. Investment policy will continue to allow the EU, Member States and its trading partners to adopt and enforce measures necessary to pursue public policy objectives.
How will the EU balance investors' rights and obligations in its investment agreements?
Investors are not the only beneficiaries of investment agreements. Investment, being an important driver for economic and social development, equally benefits all stakeholders. Thus, protection of investors' rights is not an aim in itself, but serves a wider objective: to enhance investment and contribute to the well-being of society.
The EU investment policy will be guided by the principles and objectives of the EU in different policy areas. Investors must recognise and respect these principles and objectives when investing in foreign countries. The Communication refers to the OECD Guidelines for Multinational Enterprises as an important instrument designed to promote responsible investments. Those guidelines are currently being updated.
Furthermore, the EU will ensure a high level of transparency when the rights of investors are enforced in international arbitration.
Towards a comprehensive European international investment policy - Communication
Proposal for a Regulation establishing transitional arrangements for bilateral investment agreements between EU Member States and third countries
Source: European Commission
