Category Archives: Trade agreement

Comprehensive Empirical Study on Impact of BIT to the flow of FDI

isdsbitpostA recent empirical paper by CPB Netherlands Bureau for Economic Policy Analysis, a research institute under the Dutch Ministry of Economic Affairs, explains the effects of BITs (Bilateral Investment Treaties) on bilateral foreign direct investment (FDI) stocks for various regions and country income groups.

The sample in this paper is formed by 217 countries from 1985 to 2011, making it the largest and most recent period utilized in nearly all studies covering the effect of BITs on FDI. Other papers have often used a shorter period of time or a smaller sample. Reference can be made to a paper by the United Nations Conference on Trade and Development which reviews different studies on this issue. Our previous post has discussed this paper.

Below are some findings of the CPB paper:

  1. If countries have ratified a BIT then they invest on average 35% more in terms of stocks than country pairs without a ratified BIT.
  2. The effect differs between countries classified by income group (based on World Bank’s classification). Upper middle income countries seem to benefit the most from BITs. The impact on FDI stocks is about twice the average effect. Examples of upper middle income countries are Romania, Greece and Hungary.
  3. Region-wise, FDI impact is much larger if the host country is located in East Asia or Middle and Eastern Europe.
  4. The number of BITs among developed countries is about 500.

Just published: A response to the criticism against ISDS

European union flag against parliament in BrusselsThe European Federation for Investment Law and Arbitration (EFILA) recently published the paper “A response to the criticism against ISDS”, addressing 11 specific criticisms commonly voiced by ISDS opponents in the context of the TTIP negotiations.

EFILA is a Brussels-based think tank that brings together leading investment law and arbitration specialists, former judges and investor representatives from various EU member states. To read more about EFILA, go to www.efila.org.

SCC seminar on ISDS & TTIP at the European Parliament

isdsbloggbrysselThe Stockholm Chamber of Commerce took an initiative to organize a seminar on ISDS at the European Parliament on 5 May 2015. The aim was to discuss the importance of the mechanism in support of the global economy – with a special focus on the Transatlantic Trade and Investment Partnership (TTIP).

Participants came from the Members of the European Parliament offices, governments’ representatives including the European Commission and different NGOs. The panel consisted of experts from different backgrounds and was moderated by Andreas Hatzigeorgiou, Chief Economist at the Stockholm Chamber of Commerce.

ISDS comes in the form of international arbitration and it is therefore essential to understand how the mechanism has been used. Annette Magnusson, the Secretary General of the Arbitration Institute of Stockholm Chamber of Commerce explained that historically, arbitration served as a neutral dispute resolution venue in times of geopolitical crisis, among others during the fall of the Soviet and Iran-U.S crisis. Today, ISDS plays an even more important role. In recent years, investors in the renewable energy sector have used ISDS to enforce investment protections in IIAs. This demonstrates that ISDS has the potential to protect investment in sustainable development efforts.

Rikard Wikström, a partner at White & Case in Stockholm, explained that rule of law and legal principles underpin ISDS as a procedural mechanism. The disputing parties in ISDS have equal rights to present their case, arguments are made based on the law and due process should exist throughout the process.

ISDS reform is underway, among others by the adoption of international rules to enhance transparency in ISDS proceedings. Timothy Lemay, the Principal Legal Officer of the United Nations Commission on International Trade Law (UNCITRAL) explained how the UNCITRAL Transparency Rules work in practice. By the application of these rules, most documents in an ISDS proceeding will be made public, the public will be able to access the hearings through video-streaming and participate in the proceedings by submitting amicus curiae.

Turning to the question of ISDS in the TTIP, Christofer Fjellner, a Member of the European Parliament, emphasized that having investment protection in the TTIP is a matter of rule of law. It is a matter of ensuring that foreign property will not be expropriated without fair compensation and that investors are treated without discrimination. ISDS is just a mechanism to enforce this protection.

Finally, Freya Baetens, associate law professor of the Leiden University, conducted a cost-benefit analysis of including ISDS in the TTIP. She concluded that the TTIP may benefit from some improvements in the ISDS system, among others by invoking a loser-pays principle and ensuring that frivolous claims are dismissed at an early stage of the proceedings.

Above all, ISDS in the form of international arbitration is a well-established mechanism to resolve international disputes. It is governed by both international law and domestic law – which means that States maintain full control in the functioning of the system.

The European Commission Concept Paper on ISDS

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The European Commission has published a concept paper on proposals for a potential future ISDS-mechanism in the TTIP.

According to the paper, a new approach in the EU investment policy is needed, where “a major part of the challenge is to make sure any system for dispute settlement is fair and independent”.

It may be observed that the paper contains no clear elaboration on how the current system is unfair and not independent. In contrast, in our experience the current system in the vast majority of cases does represent the values of fairness and independence.

As a starting point, the paper asserts that the EU has achieved a certain level of ISDS reform as embodied in the EU free trade agreements with Canada and Singapore. The paper addresses “what should be further improved”.

Firstly, the paper proposes an exclusive roster of arbitrators pre-established by State parties of the investment agreement. Several arguments could be raised against such practice. It is impossible to foresee what future disputes under an agreement will look like and what specific expertise will be required. A pre-established roster may constitute an obstacle for the dispute to be resolved by the most suitable arbitrator.

Secondly, the paper proposes an appellate mechanism “to ensure correctness and predictability”. It deserves pointing out that the ICSID Convention or the provisions of New York Convention already serves this purpose. Under the ICSID system, an award can be annulled on procedural grounds, among others if the tribunal manifestly exceeded its powers.

If what is desired is to try the whole case again at the appeal stage, it will significantly increase the time and costs associated the dispute. An appeal mechanism in itself is no safeguard to enhance predictability – this is best achieved by well formulated substantive terms.

Finally, the paper foresees the creation of “a permanent multilateral system for investment disputes”. The Commission seems to ignore that such system is already in place through the Washington Convention and the ICSID system, which has been endorsed by more than 150 states.

The impression is that the reform proposals were made based on “perception”, or more precisely, misperception on the system. A stronger emphasis on empirical evidence would better serve a higher standard in the decision-making process ahead.

For more information, read the SCC’s remarks on the Concept Paper here.

Empirical research does not support perceived bias of ISDS awards

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A recent academic article by Susan D. Franck, Professor of Law of Washington and Lee School of Law analysed the issue of whether or not ISDS could be said to favour host states from either the developed or the developing world. To this end, all ISDS awards that are publicly available as of 1 January 2012 were analysed.

At the outset, it is noted that ISDS is intended to provide investors with a real forum for non-politicized rule of law adjudication.

The main conclusion of the empirical research is that States’ relative success in ISDS appears to operate independently of development status. This, according to the author, suggests that other factors, such as the host state’s level of democracy and domestic political infrastructure may have more influence in the outcomes of ISDS.

Therefore, purely based on outcomes of the cases, available data does not show that ISDS favours host states from the developed world.

The article also carefully puts numbers into perspective. States won in equal or greater proportions than investors. Even when investors won in ISDS, the tendency is that they recovered less than USD 20 million in compensation on average. Overall, investors roughly obtained only 30% of the amount claimed.

Putting these numbers in mind, it should be difficult, if at all possible, to conclude that ISDS is either pro-investor, or pro-state. As in any well-functioning legal system, the reality of ISDS is more balanced than this and does not lend itself to simplified descriptions of who the system favours, or not.

The IBA on ISDS

IBAblogpost

The International Bar Association, which has a membership of 55,000 individual lawyers across the globe, recently published a paper on ISDS. It is not only fact-based, but it also brings out some unfounded claims about ISDS that have not been widely addressed.

The paper mentions that it would be incorrect to state that ISDS is biased against developing countries as data on ISDS show no correlation between the success rates against states and their income levels.

Neither does ISDS enable investor to make “a fortune” from the system. Data show that even when investors won in ISDS, they have only recovered on average, less than half of the amount they claimed.

ISDS has at times been described as a one-sided system as it only allows investor to bring a claim against States. From a legal perspective, whether or not States can equally bring a claim in ISDS entirely depends on the exact language of the international investment agreement (IIA). This means that States retain the option to include this in the IIA. Case law also demonstrate that State-owned companies have frequently used ISDS.

Above all, it is not true that ISDS is not needed when domestic courts are already sophisticated. ISDS concerns questions of international law, hence international tribunal is needed to resolve those questions.

The IBA is further taking an initiative to analyse both the benefits and criticism on ISDS to make it a better system. To this end, the IBA is engaging with governments from both developed and developing countries, arbitral institutions, corporations and the legal profession.

ISDS reform is already happening

Governments of both sides of the Atlantic have made significant policy revisions of ISDS mechanism over the past few years, as concluded in this recent article.

A decade ago, the U.S introduced transparency and third-party participation in ISDS as provided in its 2004 Model BIT. The current US BIT model, the 2012 model, contains these provisions as well. The 2012 model further provides an opportunity for the investors to discuss the effects of change of regulations with the host government, which may prevent the initiation of ISDS by investors. This model serves as the template for US’ position in the negotiation of future investment agreements.

The European Union has also introduced new elements to the ISDS regime, most notably in the Comprehensive Economic and Trade Agreement between the EU and Canada (“CETA”). The ISDS provision under this agreement contains among others:

  1. Prohibition of parallel proceedings in domestic court or other international tribunals;
  2. Introduction of a fast-track system for rejecting frivolous claims; and
  3. Full transparency in ISDS proceedings.

In addition, the CETA is the first trade and investment agreement which contains a binding code of conduct for arbitrators. The code of conduct obliges arbitrators to continuously disclose any possible conflict of interest as well as to maintain their independency and impartiality. This code of conduct is also included in the draft free trade agreement between the EU and Singapore.

The negotiations of the CETA have been completed and the text will now undergo a legal review followed translation into all official languages of the EU. The agreement will, at the later stage, need to be approved by the Council and the European Parliament.