For a Multilateral Investment Treaty: An Agenda for the Future

Soon after the successful conclusion of the Marrakech-Agreements on the new WTO in 1994, the new organization was faced with questions and demands regarding its future mandate. In particular, the extension of its goals and purposes beyond trade to matters of foreign direct investment (FDI) came to the forefront of the agenda. As early as 1996, the Singapore Ministerial WTO Round raised this issue, without, however, committing the WTO to any specific round of negotiations or any result(1). Five years later, the Doha Ministerial Declaration while setting up a "Working Group on the relationship between trade and investment", the question of any future negotiations on investment was still left open(2).

These initiatives for a new set of multilateral rules on foreign investment by industrialized countries followed an earlier first step of the WTO in this direction, embodied in the newly negotiated rules on trade-related investment issues in Annex 1 A of the Marrakech Agreements(3). More importantly, by 1996, global economic statistics indicated that both the substantive volume for FDI and its relative growth surpassed the figures for international trade. Indeed, between 1980 and 2004, it is estimated that the increase in annual percentage for FDI is six times higher than that for trade. FDI is four times higher than in 1990, with a total stock of 7,000 billion U.S. Dollars and with more than 50 million employees working for foreign subsidiaries of multinational companies, three times more than in 1982. In 2002, about 25 % of the whole FDI volume went to developing countries. About 80 % are being channelled to only a dozen or so, the main recipient of FDI in the third world being China.

A full understanding of the significance of FDI for the general development of the global economy and for the process of development in particular must highlight the lack of capital and of technology in developing states, with enormous needs in crucial areas for the supply of services of water, energy, health, education and agriculture. The Monterrey International Conference on Financing for Development held in 2002 considered the gap between available resources and the foreseeable needs from the point of view of development aid(4), but it is obvious that even if – contrary to the trend in the 1990's – aid programmes increased, a huge demand for foreign capital and technology would persist.

Against this background of the volumes of available FDI and of the need for a more even spread of wealth in the global economy, it is not surprising that after the conclusion of the Uruguay Round the debate began as to whether the global legal framework for a stable economy should, or could, be limited to issues of trade or whether there are good grounds to extend this framework to matters of investment. If the benefits of global trade were sufficient to justify a global legal framework to secure its stability, would not the same considerations and principles underlying the global legal regime of trade call for a parallel multilateral order for foreign investment? Is it not true even that the dominance of foreign investment, in relative economic terms as opposed to trade, makes such global rules for investment even more important than a normative framework for trade? If so, should these rules be negotiated and administered under the aegis of the WTO, thus creating unprecedented power in one global economic organization?

Since the start of the Doha Round of negotiations, these questions were debated in more than twenty meetings in the WTO "Working Group on the relationship between trade and investment."(5) So far, the result of these lengthy deliberations remains inconclusive. In comparison to the state of the debate in 1996, two dimensions were added to the debate, both of them not being novel in principle but being articulated more forcefully so as to cloud, in their sum, the core of the debate in a manner which eventually has led the negotiations of the current WTO to drop the initiative from the current agenda and to leave the matter for a successive round(6).

The first of the two developments concerns the negotiating position of the United States of America. Its experience as a defendant in cases before tribunals set up under the North American Free Trade Association (NAFTA) and its current preference for bilateral and regional arrangements have in effect meant that its support for a global legal framework for foreign investment has not been strong and outspoken. The second line of debate, which is today more articulated than in 1996, relates to arguments set forth directly against the desirability, at least at present, of the initiative itself. At the forefront on this defence line, Asian countries, in particular India, Malaysia and Thailand, but also Pakistan, have insisted both that the requirements of political and economic national sovereignty ("policy space argument"), and that the resources of developing countries are currently not sufficient to understand and administer a set of new global rules ("absorption argument")(7).

Before turning to the substance of this debate of the past years, it is worth to recall that plans for a global legal investment order have by no means been set forth in 1994. In fact, when the foundations of the international economic order were laid after 1945, the ill-fated Havana Charter, meant to be the global economic centrepiece, already contained certain rules on investment(8). Had the U.S. finally agreed to the rules, which its executive branch had originally proposed, the course of history in the area of the international rules on foreign investment would have been quite different. The path actually taken in the post-war period was first opened by the Federal Republic of Germany when it negotiated a Bilateral Investment Treaty (BIT) with Pakistan in 1959(9). This Treaty ushered in a transformation of the international rules on foreign investment which concerns the legal orders of most countries in the world and has grown to about 700 in 1995 and more than 2,300 in 2004. Even Latin America, in spite of its tradition to argue against international rules on foreign investment (the "Calvo tradition"(10)) has found it useful to join this trend, and indeed, in the recent past, has by no means been as outspoken against a multilateral order as have been the Asian Governments mentioned above(11). It is not surprising that China, being the main recipient of FDI, has itself concluded around 100 bilateral treaties and has decided not to join the outspoken opposition to a multilateral framework.

As to efforts to build a multilateral basis during the period of bilateralism beginning in 1959, the industrialised countries attempted to coordinate their policies and treaties in the late 60's,(12) and tried to negotiate a multilateral investment treaty in the 1990's(13). In between, the developing countries made their own effort, based on policies not relying on the forces of the market, to include rules on foreign investment when they voted for a Charter of Economic Rights and Duties of States in the UN General Assembly(14). All these attempts had in common that they were not designed as legal instruments freely negotiated between all parts of the world, and as a result they failed to produce a multilateral framework.

%%

After the success of the WTO in its first years, this new global forum was now available for global negotiations involving all major economic states and regimes, and the idea was born to bring this organisation together with the previous concept of a multilateral legal investment order. In essence, the advantage to be gained lies in the facilitation of the flow of foreign investments by way of a friendly investment climate creating stable, predictable and transparent order which would bind the governments and would convince foreign investor to accept the risks of sinking their money abroad in exchange for a fair return.

In practice, what specific rules and mechanisms would amount to such an investment climate? Traditional rules of international economic cooperation such as the most-favoured nation rule, the national treatment standard and the prohibition of discriminatory measures are firm components of bilateral treaties and would also serve as a basis for a multilateral framework, supplemented by more general principles such as the rule on fair and equitable treatment and the prohibition of arbitrary measures. Of course, the preconditions and the consequences of an expropriation of the foreign investor and of measures tantamount to an expropriation would have to be set forth, as would be the principle of free transfer of funds in favour of the investor and possible exceptions thereto in special circumstances. Moreover, the duration of the treaty and of the protection of investments must be agreed on. Finally, the settlement of disputes in the application and interpretation of the treaty in a specific case will have to be regulated. So far, in the area of investments, modern treaties have offered access to an international tribunal not just to the home state of the investor, but also to the investor himself,(15) in contrast to the practice in the trade area. The WTO has limited this right to the home state, thus leaving the investor dependent on his home state and creating a more politicised ambience in case of legal proceedings.

A survey of the nature, the acceptability, the consequences, the advantages and the burdens attached to such rules and principles will quickly show that in their sum they will indeed contribute to the objectives of stability, predictability and transparency of the legal order and thus create an investor-friendly climate. Does such a survey, if undertaken from the vantage point of the host state, in particular a host developing state, also reveal the concerns expressed by the opponents of a multilateral treaty such as India?

Of course, it is true that rules of this kind in effect limit the sovereign right of a host state more than the rules of customary law, which would apply in any event without the treaty(16). But it is also true that it is precisely the absence of the most-favoured nation rule, the lack of existence of precise rules on expropriation, the lack of an express recognition of the principle of fair and equitable treatment and the absence of some mandatory dispute settlement, for instance, that explains why potential foreign investors may hesitate to invest abroad and prefer the more secure legal environment in their home country. In other words, at stake is the sacrifice of the sovereign right to treat the foreign investor in a manner contrary to the principles listed above. Does not this price weigh much less than the circumvention of a state and its people on the part of the foreign investor who is averse to the risks posed by an unfettered government? What about the price for the host state of accepting an international tribunal instead of judges appointed by national authorities? Do limitations of such aspects of sovereignty touch upon nerves, which respond to the actual well-being of people or do they mainly hurt nationalistic ideological feelings which ultimately stand in the way of precepts against poverty reduction?

A short look at those areas, which were discussed in controversy without result in the WTO Committee, may serve to illustrate the nature of the debate(17). One of the strands concerned the question whether short-term investments should also be covered, and how foreign interests of less than 10 % should be treated. Another controversial aspect concerned elements of the requirement of transparency, in particular inasmuch as it goes beyond the publication of laws and rules and extends to procedure and administrative matters. Also, the reach of the principle of free transfer and especially exceptions to it were under discussion. Whereas these aspects may be characterized to be more on the technical side, two issues were debated at length with broader policy ramifications, relating to the principle of investment liberalisation and to the settlement of disputes.

The first of these controversial areas concerns a fundamental divergence in the approach so far adopted in BITs concluded by European and the pattern found in the US Treaties. While the first group views BITs as instruments which protect only such investments which have been admitted under the sovereign laws adopted by the host country, the US-model reaches further and in principle attempts to liberalize the process of admission ("pre-establishment commitments", principle of non-discrimination in the admission phase), allowing for exceptions to be determined by each country. No conclusion was reached in the WTO as to which of these two approaches would be desirable. The relevant discussion was linked to the demand of developing state for "policy space", to be embodied in "development clauses", including the right to regulate in the public interest in the process of screening and controlling foreign investments. The precise contours and limitations of such a right to regulate, itself recognized by the general rules of public international law, remained open. In particular, no attempt was made to spell out how this regulatory power should relate to the principle of compensation for expropriation, and, more precisely, to the rules developed, albeit not in a perfect manner, in the jurisprudence of international tribunals on the definition of an expropriation, which triggers the right to compensation. From the point of view of capital-exporting countries, this debate raised the question whether the demand for policy space in a development clause should in the end limit such rights of the investor, which he would enjoy even in the absence of a treaty on the basis of customary international law.

The second issue of a more fundamental nature, which remained controversial concerned the desirable type of dispute settlement. Over the past decades, a consensus seemed to have emerged on the international level that for purposes of investment treaties, the right of the individual investor to bring legal action should be recognized in addition to the right of his home state. Contrary to the rules accepted in the WTO, this "acquis communautaire", to use a term employed in the EU context, was reflected in more than thousand bilateral treaties, in the NAFTA Treaty and in the Energy Charter Treaty. However, it turned out that the ice of this global consensus has remained thin, given second thoughts not just on the part of some developing states and transition states but also on the part of the United States which reflected on the experience of being a defendant in NAFTA cases.

In their sum, the issues thus left open in the discussions in the WTO Working Group on "Trade and Investment" led to the conclusion that the entire subject of a multilateral treaty is currently not ripe for negotiation.

For the European Community, and in particular for Germany which still deems a multilateral treaty desirable, this state of affairs raises the question of the future of the project. One alternative lies in pursuing the road of plurilateralism rather than the multilateral path of the WTO(18). According to the WTO rules, the Ministerial Round may permit that the "single package approach" which integrates all agreements for all members in a binding manner will exceptionally be given up in favour of a scheme of options for each member, with trade in civil aircraft and government procurement currently being the most important of such plurilateral areas(19). If such an optional agreement would be negotiated, non-participating states could join later on and a gradual process of adhesion could be initiated. Such an approach would presume, however, that a sufficient number of states would support such an initiative at the outset. At this point, it is not clear whether this will be the case or not.

Leaving aside all complexities of detail and aspects of negotiation factors, how and to what extent do the concerns expressed in the WTO negotiations against the conclusion of a multilateral agreement relate to the arguments in favour of such a set of global rules? The impact of a treaty on legal stability, predictability and transparency and, thus, on an investment-friendly climate will not be doubted. As to the current legal situation with more than 2,000 treaties, while based on identical patterns, their variations cannot be underestimated in terms of a lack of transparency and manageability both for capital-exporting and capital-importing countries. If a country has concluded thirty, fifty or a hundred of such treaties, the concern for uniformity and simplicity instead of divergence and multitude becomes real, not just in theory but also in practice. One aspect pointing in the same direction is often overlooked, namely the effect of the most-favoured-nation rule as contained in nearly all of the bilateral treaties in one version or another(20). Whoever wishes to identify the law applicable to an investment governed by a bilateral treaty must consult, in view of the most-favoured-nation rule, hundreds of other treaties. In other words, the web of rules relevant for one investment has in the practice of formulating bilateral treaties become so entangled that both governments and investors must ask themselves whether they would not be better served by one multilateral treaty than by two or three thousand bilateral ones.

It is true that the questions expressed by capital-importing states in the WTO reflect genuine concerns. The fundamental issue, which so far remains open is whether these concerns cannot be, accommodated in future negotiations. There are good reasons to conclude that this will indeed be the case once all sides have decided to look at these concerns in a serious manner. The most compelling argument for a multilateral investment agreement lies in the objective need to channel foreign investment, for purposes of a more equal distribution of wealth and the corresponding reduction of poverty, to more than the dozens of governments, which today are the main beneficiaries of FDI. It is certainly true that today many countries may not be prepared, in terms of their capacity and their systems of government, to attract and to absorb FDI in the manner corresponding to their developmental needs. However, the answer to this serious problem does not lie in preserving the status quo and in ignoring the economic and legal conditions, which have led to the uneven global distribution of FDI and of wealth. Even today, the World Bank Guidelines on the Treatment of Foreign Direct Investment contain relevant standards and need to be understood and administered. Specifically in Asia, the Asia Pacific Economic Cooperation (APEC) has laid down the Non-Binding Investment Principles(21) and the Association of South-East Asian Nations (ASEAN) has negotiated a Framework Agreement on the ASEAN Investment Area(22). In Latin America, a Protocol to the Mercosur Treaty set forth rules on foreign investment in 1994(23).

A multilateral investment treaty negotiated with sensitivity and flexibility could go a long way in creating conditions which crowd out those factors and segments in the poor countries which have in the past stood in the way of openness, of growth and the creation of wealth. In other words, the failure in the current WTO Round to address this basic dimension of international economic law should be seen as a temporary deficit and the topic should return to the agenda as soon as possible, be it inside or outside the WTO.

Remarks:

• (1) The Singapore Ministerial Declaration, adopted 13.12.1996, reads: "(…) Investment and Competition: 20. Having regard to the existing WTO provisions on matters related to investment and competition policy and the built-in agenda in these areas, including under the TRIMs Agreement, and on the understanding that the work undertaken shall not prejudge whether negotiations will be initiated in the future, we also agree to: Establish a working group to examine the relationship between trade and investment; and establish a working group to study issues raised by members relating to the interaction between trade and competition policy, including anti-competitive practices, in order to identify any areas that may merit further consideration in the WTO framework.These groups shall draw upon each other's work if necessary and also draw upon and be without prejudice to the work in UNCTAD and other appropriate intergovernmental fora. As regards UNCTAD, we welcome the work under way as provided for in the Midrand Declaration and the contribution it can make to the understanding of issues. In the conduct of the work of the working groups, we encourage cooperation with the above organizations to make the best use of available resources and to ensure that the development dimension is taken fully into account. The General Council will keep the work of each body under review, and will determine after two years how the work of each body should proceed. It is clearly understood that future negotiations, if any, regarding multilateral disciplines in these areas, will take place only after an explicit consensus decision is taken among WTO Members regarding such negotiations. (…)"
• (2) The relevant passage of the Doha Development Agenda Ministerial Declaration reads: "20. Recognizing the case for a multilateral framework to secure transparent, stable and predictable conditions for long-term cross-border investment, particularly foreign direct investment, that will contribute to the expansion of trade, and the need for enhanced technical assistance and capacity-building in this area as referred to in paragraph 21, we agree that negotiations will take place after the Fifth Session of the Ministerial Conference on the basis of a decision to be taken, by explicit consensus, at that session on modalities of negotiations. 21. We recognize the needs of developing and least-developed countries for enhanced support for technical assistance and capacity building in this area, including policy analysis and development so that they may better evaluate the implications of closer multilateral cooperation for their development policies and objectives, and human and institutional development. To this end, we shall work in cooperation with other relevant intergovernmental organisations, including UNCTAD, and through appropriate regional and bilateral channels, to provide strengthened and adequately resourced assistance to respond to these needs. 22. In the period until the Fifth Session, further work in the Working Group on the Relationship Between Trade and Investment will focus on the clarification of: scope and definition; transparency; non-discrimination; modalities for pre-establishment commitments based on a GATS-type, positive list approach; development provisions; exceptions and balance-of-payments safeguards; consultation and the settlement of disputes between members. Any framework should reflect in a balanced manner the interests of home and host countries, and take due account of the development policies and objectives of host governments as well as their right to regulate in the public interest. The special development, trade and financial needs of developing and least-developed countries should be taken into account as an integral part of any framework, which should enable members to undertake obligations and commitments commensurate with their individual needs and circumstances. Due regard should be paid to other relevant WTO provisions. Account should be taken, as appropriate, of existing bilateral and regional arrangements on investment." (See Document WT/MIN(01)/DEC/1, 20 November 2001).
• (3) See Article 9 Agreement on Trade-Related Investment Measures: "Review by the Council for Trade in Goods": "Not later than five years after the date of entry into force of the WTO Agreement, the Council for Trade in Goods shall review the operation of this Agreement and, as appropriate, propose to the Ministerial Conference amendments to its text. In the course of this review, the Council for Trade in Goods shall consider whether the Agreement should be complemented with provisions on investment policy and competition policy."
• (4) See Report on the International Conference on Financing for Development, Monterrey, Mexico, 18-22 March 2002, Document A/CONF.198/11.
• (5) See e.g. the Reports of the Working Group to the General Council, e.g. Documents WT/WGTI/6 of 9 December 2002 and WT/WGTI/7 of 11 July 2003.
• (6) See the bracketed Draft Ministerial Declaration of the Cancún Conference (of August 2003): "Investment: 13. (Taking note of the work done by the Working Group on the Relationship between Trade and Investment under the mandate in paragraphs 20-22 of the Doha Ministerial Declaration, we decide to commence negotiations on the basis of the modalities set out in Annex D to this document.) (We take note of the discussions that have taken place in the Working Group on the Relationship between Trade and Investment since the Fourth Ministerial Conference. The situation does not provide a basis for the commencement of negotiations in this area. Accordingly, we decide that further clarification of the issues be undertaken in the Working Group.)". See also the most recent Decision on the Doha Work Programme adopted by the General Council on 1 August 2004 (WT/L/579): "Relationship between Trade and Investment, Interaction between Trade and Competition Policy and Transparency in Government Procurement: the Council agrees that these issues, mentioned in the Doha Ministerial Declaration in paragraphs 20-22, 23-25 and 26 respectively, will not form part of the Work Programme set out in that Declaration and therefore no work towards negotiations on any of these issues will take place within the WTO during the Doha Round."
• (7) See e.g. Communications from India: Document WT/WGTI/W/148 of 7 October 2002 on Development Provisions ("The less-developed countries in the WTO do not have the skills and the expertise that the richer countries have. Perhaps the best contribution that can be made to the cause of development is to understand the limitations of developing countries and focus only on trade issues within the WTO."); and Document WT/WGTI/W/149 of 7 October 2002 on Non-Discrimination ("… Developing countries need to retain the ability to screen and channel foreign direct investment consistent with their domestic interests and priorities. This is the reason why bilateral investment treaties are preferred the world over."). See also Communication from China, Cuba, India, Kenya, Pakistan and Zimbabwe: Document WT/WGTI/W/152 of 19 November 2002 focusing on "Investors’ and Home Governments Obligations" stressing the obligations of MNEs ("… The recent disclosures of corporate fraud and other malpractices have only underlined the need for greater disciplines on MNEs to bring about greater corporate responsibility and accountability. What is of serious concern to developing members is to ensure that the operations of foreign investors have positive effects and contribute to the meeting of national goals and development objectives of host member. Towards this end, governments of the host members must have sufficient regulatory powers and adequate policy space in relation to foreign investment, and the foreign investors should be obliged to respect the sovereign rights of host member states and contribute to their national and development objectives. Similarly, home member governments should undertake obligations to ensure the responsible behaviour of their corporations."…).
• (8) See e.g. G. Jaenicke, "Havana Charter", EPIL, Vol. II (1995), p. 679.
• (9) BGBl II 1961, 793.
• (10) See Donald R. Shea, The Calvo Clause, 1955.
• (11) Matthias Herdegen, Investitionsschutz in Lateinamerika: Neuere Entwicklungen im Verfassungs- und Völkervertragsrecht, 94 ZVglRWiss (1995), p. 341 et seq.
• (12) G. Schwarzenberger, Foreign Investements and International Law, 1969, p. 109 et seq.
• (13) See Joachim Karl, Internationaler Investitionsschutz – Quo Vadis? 99 ZVglRWiss (2000) p.143.
• (14) UNGA Res. 3281 (XXIX) of 12 December 1974. See Chr. Tomuschat, Die Charta der wirtschaftlichen Rechte und Pflichten der Staaten, 36 ZaöRV (1976), p. 444 et seq.
• (15) Ibrahim F. Shihata, Towards a Greater Depoliticization of Investment Disputes: The Roles of ICSID and MIGA, in: The World Bank in a Changing World (Tschofen/Parra, Eds.), 1991, p. 309 et seq.
• (16) See generally on standards in international economic law: Rudolf Dolzer in: W. Graf Vitzthum, Völkerrecht, 2004, part 6; §§ 15 et seq.
• (17) See Tillmann Rudolf Braun, Investment Protection under WTO-Law – New developments in the Aftermath of Cancún, Beiträge zum Transnationalen Wirtschaftsrecht (Halle/S., Mai 2004), p. 6 et seq.
• (18) See Tillmann Rudolf Braun, Investment Protection under WTO-Law – New developments in the Aftermath of Cancún, Beiträge zum Transnationalen Wirtschaftsrecht (Halle/S., Mai 2004), p. 8 et seq.; see generally on issues of plurilateralism in the WTO: John Jackson, The World Trading System, 1997.
• (19) Others being the International Dairy Agreement and the International Bovine Meat Agreement, both done at Marrakesh on 15 April 1994
• (20) See Rudolf Dolzer/Terry Myers, MFN Clauses in Investement Protection Agreements, ICSID Review (forthcoming).
• (21) APEC Non-Binding Investment Principles, Jakarta, November 1994.
• (22) Framework Agreement on the ASEAN Investment Area (AIA), 1998. See also the Protocol to Amend the Framework Agreement on the ASEAN Investment Area, 2001.
• (23) MERCOSUR/CMC/DEC No. 11/93: Protocolo de Colonia para la promocion y proteccion reciproca de inversiones en el MERCOSUR (Intrazona), 1994.

The Author:

Prof. Dr. Dr. Rudolf Dolzer is Director of the Institute for International Law at the University of Bonn.