Investment Agreements are Crucial to German Business Success Abroad

Investments always involve economic risk. Foreign investments are also exposed to political risks and International Investment Agreements (IIAs) offer protection against these political risks. The number of investor-state dispute settlement (ISDS) cases is increasing worldwide, with a majority of complaints originating from industrialized countries. About one-third of all cases is ruled in favor of the investor. Most cases are brought in economic sectors with strong state intervention. Small and medium-sized companies also make use of ISDS.

Germany benefits from globalization, which is one of the central strategies behind German business success. One expression of this interconnectedness is German foreign direct investment, which has grown roughly five-fold since 1990 to about €0.9 trillion (2013) (the comparison with 1990 can only be estimated, after the statistical method was modified in 2015). Through stakes in almost 35,000 companies, Germany industry shares responsibility for 6.7 million jobs abroad (2013). The foreign turnover generated by German businesses (2013: €2.4 trillion) is more than double the value of German exports (2013: €1.1 trillion).

Investments always involve economic risk. Foreign investments are exposed to political risks and International Investment Agreements (IIAs) offer protection against these political risks. Germany has more IIAs than any other country: 129 in total. These bilateral treaties protect investors operating in the respective partner country against discrimination, expropriation without compensation, and unfair and unreasonable treatment. A guarantee of free movement of capital is also important for investors. 

In January 2016, 3,325 IIAs were in force worldwide. Fourteen new IIAs were signed in 2014, and another ten in 2015. As well as new IIAs, 2015 also saw 14 other new investment agreements, including several investment chapters in free trade agreements, including those between Australia and China as well as China and South Korea. Investment promotion agreements were also concluded, for example between Brazil and Malawi. In half of all new IIAs in 2015, the signatories were either developing countries or emerging economies. New agreements increasingly contain arrangements for safeguarding the state’s right to regulate and the promotion of development goals.

 

The proliferation of IIAs is a consequence of the expanding global stock of foreign direct investment (FDI), which increased eleven-fold between 1990 and 2014. The increasing connectedness of the global economy over the past decades has also created a global demand for cross-border legal certainty and the protection against political risks. At the same time, IIAs are also being terminated at an increasing rate. For example, Indonesia has terminated its IIAs with France, Spain, and Denmark, while its IIAs with the Netherlands lapsed in July 2015. Indonesia has in fact announced its intention to terminate all its 67 remaining IIAs. Bolivia, Ecuador, South Africa, and Venezuela have also terminated IIAs in recent years.

 

The possibility of using investor-state dispute settlement (ISDS) to enforce codified rights is essential to the effectiveness of IIAs. The total number of investor state dispute settlement (ISDS) cases reported worldwide reached 696 in January 2016. Fifty-three new cases were reported in 2014, and 70 in 2015. Based on figures up to January 2016, most of the complainants came from industrialized countries (84.8 percent), with investors from the EU (56.5 percent) initiating significantly more cases than those from the United States (19.8 percent). The countries most frequently targeted by ISDS cases are Argentina (59 cases), Venezuela (36 cases), and the Czech Republic (33 cases). German investors have to date brought 51 cases, most frequently against EU member-states (52.9 percent of all German ISDS cases).

It is a myth that all ISDS cases are won by the investor: to date, investors have won only 27 percent of all investment cases and just 20 percent of cases against EU member-states. What is more, no investor has yet won an ISDS case against Germany.

The most frequent grounds for complaint in the ISDS cases recorded up to January 2016 were the violation of the principle of fair and equitable treatment (cited 347 times), followed by cases concerning indirect expropriation (cited 315 times).

ISDS is not the prerogative of major corporations, but also an important instrument used by small and medium-sized enterprises operating abroad to guard against political risks. According to an OECD study that investigated 95 ISDS cases brought between 2006 and 2010, 22 percent of the complainants were small or very small investors or individuals.

In the public discussion about ISDS over the past two years, particular ISDS cases have been cited frequently. One of these was Philip Morris vs. the Australian government. The complainant was brought forth by the corporation’s regional headquarters based in Hong Kong, based on the IIA between Australia and Hong Kong. In 2011, the Australian government had enacted the Tobacco Plain Packaging Act, requiring simple, standardized packaging without brand logos. The company felt that its property and brand rights were endangered by the new legislation and sued for compensation. In December 2015, the responsible tribunal rejected the complaint, ruling that the company was not entitled to base its complaint on the IIA between Hong Kong and Australia.