With the EU’s Lisbon Treaty granting the European Union competence over Foreign Direct Investment, the European Commission released two documents in July that help chart the way forward: a draft regulation on how to deal with existing Bilateral Investment Treaties (BITs) of the EU Member States over the next five years, and a Communication that kick-starts the discussion on the EU’s future international investment policy. ITN Quarterly spoke to Tomas Baert of the Commission about both documents and what lies ahead.
Now that the European Commission submitted its draft regulation on establishing transitional arrangements for BITs between Member States and third countries, what happens next?
Now that we have an official proposal from the European Commission to the two legislators—the European Parliament and the European Council—we have entered into what is known as the Ordinary Legislative Procedure, formerly known as Codecision. The Council and the Parliament will consider the proposal and discuss their conditions for acceptance. At the same time, we continue to work on the broader, future aspects of the EU’s international investment policy, which are found in the Communication. But on the regulation itself, we need to wait for it to enter into force and be adopted before we can start dealing with the issues it contains.
The regulation assumes that the European Union now holds exclusive competence over foreign investment, which is interpreted to include the standards often found in Bilateral Investment Treaties. However, the Lisbon Treaty does not define ‘Foreign Direct Investment’, and a number of commentators have expressed uncertainty as to whether the EU’s competence encompasses all of the elements found in BITs. Do you expect this to be a point of debate with Member States?
I do think the question will be raised; in fact, it is already being raised. However, I don’t expect it will be a major issue in the discussion on the regulation. Of course, for the broader audience, it might be interesting to have a discussion on what Foreign Direct Investment exactly means, which as you point out is not defined in the Lisbon Treaty. But at the end of the day, that is not extremely important from a practical policy perspective. We will be negotiating on investment, and if the European Court concludes that our investment agreements contain an element which relates to mixed competence, so be it— we will obviously have to follow the appropriate procedures and ratification measures.
In fact, we believe there is a very good chance that our future investment agreements will be mixed agreements, not so much because of investment, but more for other reasons. We suggest in the Communication that we will deal with investment in particular (although not exclusively) in the context of free trade agreements (FTAs), and in our FTAs there are usually elements which are of mixed competence. On these agreements we work on what is known in the legal world as the “Pastis Principle”—a drop of Pastis in water turns the whole glass cloudy. In other words, even if you have the slightest element of mixed competence in an agreement, the entire agreement will become mixed. There are currently debates on the existence of EU competence regarding criminal procedures in relation to IPR violations and cultural cooperation. In that case, we will deal with it as we currently do in our FTAs.
Academically, of course, you can write books on this subject, and we will certainly follow that discussion. We will also listen very carefully to what the European Court of Justice (ECJ) has to say. But we don’t expect it to play a major role in the political debate on the regulation.
The proposed regulation would set the conditions in which Member States could enter into new agreements, one being that they may have to include an MFN clause in order to ensure that all Member States benefit from the treaty. Is the intention to have Member States negotiate on behalf of the European Union?
The assumption there is wrong. We have proposed a clause in the regulation, Article 9.2, which says we may ask our Member States to introduce certain standard clauses in future investment agreements. In the explanatory memorandum which accompanies the proposed regulation, we include some examples, such as termination clauses, transfer clauses (which is an issue which has been identified by the ECJ) and the possibility of introducing MFN clauses. Yet, that does not mean that we will automatically insist on having MFN clauses in every agreement.
That said, one of the key concerns for the European Commission is discrimination among EU investors: the fact that some investors now have better treatment than others, and some have no treatment under BITs for the lack of BITs. This is the issue we want to deal with. The MFN provision is an interesting mechanism to deal with the problem, essentially by asking our Member States to request from their partner countries to extend the benefits of a BIT to the other EU Member States’ investors.
However, this does not mean we envisage Member States negotiating on behalf of the European Union, or that they would be allowed to open the door to the internal market. The MFN provision could be a way to deal with the issue of discrimination among EU investors, and to ensure that there is a level playing field. Our preference is to deal with this issue through EU-level agreements. But in the intermediary period, we will consider other alternatives, and one of them may be standard clauses that we ask our Member States to use.
Does the Commission foresee eventually developing an EU model BIT?
No. The Communication is fairly explicit on this point, for several reasons. You can have a very interesting theoretical discussion on the perfect model BIT; however, in practice it would mean that we spend a year or more internally, and with the other institutions, discussing the perfect model. But in the end, the model may not prove very effective in our negotiations. That is one practical reason for why a model BIT is not necessarily helpful in defending our interests. The second reason is that there is a lot of history already on the table. When we negotiate with a third country, in some cases our Member States will already have up to 26 BITs with that country. In deciding how to replace those BITs, we need to consider their contents, and determine how we can most efficiently offer investment protection to all EU investors without differentiating on the basis on their nationality. That brings me to the third and final reason for not pursuing a model BIT. A model would entail a one-size-fits-all approach, and we don’t believe it is right to have one model for negotiations with developing, emerging and developed economies.
Having said all this, we will have standard policies and clauses. It’s not that we will envisage a different National Treatment provision in each agreement, for example. We will have certain model clauses, so that we don’t reinvent the wheel with each new negotiation.
How active have EU investors been in lobbying to ensure that the status quo is maintained with respect to BITs?
Investors have been active and they have been making their voices heard. Of course, there is a diversity of views and positions. There are investors that believe that they are today well protected from existing BITs. Those investors have indicated that they would like to maintain the status quo at a minimum. There are other investors from Member States that do not have the same level of treatment, or have no BITs at all, and those investors are less concerned with maintaining the status quo than they are with the future European investment policy. But generally what we do hear from the investment community is that investment agreements—whether a stand-alone agreement or part of an FTA—is something that they value.
Another group with an interest in the EU’s international investment policy is the law firms that are in the business of investor-state arbitration. Have they also made their voices heard?
Absolutely. There have been a lot of conferences and seminars on this issue, many of which have been organized by law firms. They are very interested in seeing what happens— both with respect to maintaining Member States’ agreements and future EU-level agreements —and in particular its impact on the investment-arbitration business.
The Commission’s Communication notes that transparency will be an important element of in investor-state dispute settlement procedures. If this becomes EU policy, should it be applied to current investment disputes involving Member States?
The first point I want to make is that the Communication raises a lot of questions, yet it does not necessarily have all the answers. On some issues, such as transparency, we try to get the debate going and suggest a general direction, without necessarily reflecting the specific and practical questions on how we introduce some of these issues in a common investment policy. I say this because there are a lot of questions which apply to the issue of transparency. Also, very practically, we may not be able to change all existing practices in agreements to which we are not a party today. But the idea is that we want one common European policy. The task now is to have a debate with Member States in the European Council on that policy, so that when Member States are authorised to negotiate themselves, they work in a common direction. Of course, we can’t have a common policy that is then contradicted by the practices of Member States.
The Communication also notes that a common investment policy needs to be guided by EU objectives such as human rights and sustainable development. Has the Commission considered including obligations for investors in areas of human rights and corporate social responsibility in EU investment treaties?
This has certainly been considered. But then again, as I just mentioned, there are a lot of questions to the debate. We raise them, and we do try to give a broad indication of our policy stance. But we don’t necessarily give all the answers. The answers should come when we start talking very specifically about the negotiations we are going to pursue, for which we then need negotiating directives. In that context, we need to see how we can deal with certain issues, including the ones you have just mentioned.
Now, on human rights and other principles, these concern other aspects of the EU’s external action; they are not limited to investment policy. I don’t see any huge hurdles in this area, but we do need to reflect further on how to make concrete proposals in our investment negotiations. On other issues like CSR, we need to take into account developments at the European Union and global level. We have already started considering these issues, such as in the EU-CARIFORUM negotiations, which covers investment. And we will certainly do so in future. At this stage, I don’t have a specific answer at this point on how it will be done. But it will certainly be an important question in the public and political debate on the EU’s investment policies.