Converging towards NAFTA: an analysis of FTA investment chapters in the European Union and the United States.

• Author: Fontanelli, Filippo

The present study is concerned with the evolution of investment chapters of Free Trade Agreements (FTAs). Our purpose is to observe the structure and recurrent patterns of the normative content of these chapters in order to ascertain and analyse certain trends. The sample of agreements reviewed is limited to the investment agreements concluded (or about to be concluded, when there is sufficient information) by the two major importers and exporters of Foreign Direct Investment (FDI)--the United States and the European Union.

After an overview illustrating the history and layout of the EU and U.S. systems of investment protection (Part I), we provide a breakdown of the provisions that create a gulf between the two models (Part II). In Part III, we describe and analyse the current impasse in the European Union's newly centralised management of investment policies. Our central claim is then illustrated in Part IV, where we argue that the U.S. (NAFTA-like) template is likely to prevail over the European one, in the long run, because it fills the gaps in incomplete treaty regimes like those recurrent in European Bilateral Investment Treaties (BITs). The Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union seems to confirm this trend. In light of these remarks, we conclude that, in the future, pluri- and multilateral negotiations will increasingly lean towards the NAFTA model and gradually distance themselves from the European BIT standard.

INTRODUCTION I. THE EU AND U.S. SCENARIOS A. The European Union B. The United States II. KEY PROVISIONS THAT MAKE THE DIFFERENCE A. Substantive Provisions 1. Minimum Standard of Customary International Law 2. Indirect Expropriation 3. Sectoral Coverage 4. Umbrella Clause 5. Establishment Guarantees B. Procedural Provisions 1. Access to Investor-State Dispute Settlement 2. Amicus Curiae Briefs 3. Binding Agreement Interpretation III. THE EUROPEAN UNION'S INTERNAL DIVIDE IV. THE INCOMPLETE CONTRACT A. The Natural Path Towards Contractual Completeness B. The Chinese Experience: Recouping Policy Space CONCLUSION INTRODUCTION

The factual premise of this study is the normative diversity of Free Trade Agreements (FTAs). These international treaties are signed between two or more states with the primary objective of protecting and promoting trade and investment flows between them, usually under preferential terms compared to those granted to third countries. When FTAs provide for protection and/or liberalization of foreign investments, host states commit to grant foreign investors and investments a series of substantive and procedural guarantees. The differences between the norms of the various FTAs that regulate investment flows have significant implications in the real world. The exact scope of treaty commitments determines the nature and the width of the obligations that each contracting party to an FTA must discharge in favour of the investors from the other parties. As a result, the benefits to investors (1) are inversely proportional to the policy space reserved to the host state. In a hypothetical spectrum that runs from absolute autonomy and freedom for the investors to absolute state control over foreign investments, treaties occupy different intermediate points, each of which reflects a different balance between the protection of the investor against state action and the regulatory sovereignty of the government of the host country. (2)

FTAs display an extremely high level of diversity. (3) Taking the subject matter of the World Trade Organization's (WTO) agreements as a baseline, it is possible to show that the width of FTAs varies, especially with respect to WTO-plus or WTO-extra obligations. Respectively these clauses deepen the level of commitment enshrined in WTO agreements (for instance, by tightening the protection of intellectual property rights) or are simply absent in the WTO package (like those relating to the protection of the environment). (4) One of the recurrent WTO-extra matters regulated by FTAs is the protection of foreign investments. (5)

In fact, rules benefitting foreign investors are also included in the WTO-like section of many FTAs (i.e., the section that replicates WTO rules such as liberalisation of trade, tariff reduction, etc.), namely the rules on the liberalisation of services. (6) These rules normally mirror those of the General Agreement on Trade in Services (GATS), the agreement that encapsulates the carefully negotiated commitments of each WTO member to grant (or not grant) non-discriminatory treatment and/or market access to foreign services. FT A rules cover services provided according to GATS Mode 3 (commercial presence), and therefore protect those investors that establish or seek to establish their activity in the host state in order to provide services. Faithful to their WTO equivalent, rules on services are typically geared towards the liberalisation of trade and ensuring non-discriminatory treatment in the pre- and post-establishment phases. This is limited to certain commitments specified in the schedules, and only to a certain category of services (unlike the GATS and most EU FTAs, U.S. FTAs follow the negative list approach, which means that they list the types of services on which the United States is not entering into any liberalisation commitment).

The present study is concerned instead with the protection of direct investments (as such, and not as services) that is often included in a separate chapter of FTAs. The North American Free Trade Agreement (NAFTA) is a prime example of this conventional arrangement. Chapter XI of NAFTA is devoted to the promotion and protection of foreign investments. These separate chapters are comparable, on average, to self-standing Bilateral Investment Treaties (BITs). They can include both rules on investment liberalisation (non-discrimination safeguards) and investment protection (substantive standards of treatment afforded by the host state to the foreign investor or investment). The purpose of this study is to observe the structure and recurrent patterns of these chapters in order to ascertain and analyse certain normative trends. The sample of agreements reviewed is limited to the investment agreements concluded (or about to be concluded, when there is sufficient information) by the two major importers and exporters of Foreign Direct Investment (FDI)--the United States and the European Union. Indeed, the combined share in global FDI inflows of these two entities was approximately thirty percent in 2013, (7) and even higher before the global financial crisis (fifty-six percent was the average for 2005-07 (8)). Furthermore, given their role in the world economy, the European Union and the United States "will continue to play a pivotal role in international standard setting," (9) and this is also true for global standards in investment protection treaties.

Part I contains an overview illustrating the history and layout of the EU and U.S. systems of investment protection. While U.S. FTAs usually include chapters on investment, EU ones have not featured them until very recently. This is because until 2009 the European Union had competence only for trade liberalisation, whereas investment protection remained within the competence of the member states. The United States has thus had time to experiment and develop a coherent model, whereas the European Union is still grappling--as shown below--with inconsistencies among the agendas of its institutions, and with its new double role as investment importer and exporter.

In Part II, we provide a breakdown of the provisions that create a gulf between the two models. In Part III, we describe and analyse the current impasse in the European Union's newly centralised management of investment policies. On the one hand, the European Union wishes to maintain the same (high) level of protection currently afforded to investors by BITs signed by member states. On the other, it wishes to preserve the host states' freedom to pass legislation to pursue public policy objectives, which might easily collide with investors' rights.

Our central claim is then illustrated in Part IV, where we argue that the U.S. (NAFTA-like) template is likely to prevail over the European one, in the long run, because it fills the gaps in incomplete treaty regimes like those recurrent in European BITs. To support the observation of treaty practice with a theoretical framework, we use the incomplete contract approach and use China's experience in drafting investment chapters as a case study. In light of these remarks, we conclude that, in the future, pluri- and multilateral negotiations will increasingly lean towards the NAFTA model and gradually distance themselves from the European BIT standard. These findings are corroborated through reference to the norms of the investment chapter of the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union.

1. THE EU AND U.S. SCENARIOS

   From the outset, it is possible to notice a general trend: FTAs concluded by the United States often include rules on investment protection. Until very recently, EU FTAs did not. A prominent example of this divide is the comparison between the U.S.-Korea FTA and the EU-Korea FTA. The former (signed in 2007) includes a chapter on investment protection, whereas the latter (signed in 2009) only includes rules on investment liberalisation and does not provide for a system of investor-state dispute resolution. (10) There is simply a generic obligation to periodically "review the investment legal framework" to assess and remove obstacles. (11) Many other FTAs concluded by the United States confirm this trend, for instance those with Australia, Colombia, Dominican Republic-Central America (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua), Morocco, Oman, Panama, Singapore, and Peru. EU FTAs, by contrast, have only just started to include...