International Investment Agreements Indispensable to Protect Investment Abroad
Germany is a winner of globalisation. German companies are not only highly integrated in global markets through their exports and imports but also through foreign direct investment. FDI of German companies has increased almost six-fold since 1990 to around 1.2 trillion euros (2017).
FDI is becoming increasingly important not only for Germany, but for the global economy as a whole. Between 1990 and 2018, FDI stocks increased fourteenfold worldwide. While global FDI stocks amounted to 10.1 percent of global economic output in 1990, they stood at 22.8 percent in 2000 and by 2018 had increased to 36.7 percent. FDI is an indispensable part of the modern, globalised economy.
Investment Protection more Important than ever
FDI goes hand in hand with great opportunities for prosperity and development, but it also entails major risks for investors. In addition to economic risks, investors face political risks. The necessary protection is provided by BITs BITs (Bilateral Investment Treaties, BITs; International Investment Agreements, IIAs), of which Germany has concluded 129 with other countries – more than any other country. Worldwide, the number of BITs stood at 2,896 at the beginning of 2020. These agreements usually offer protection against uncompensated direct and indirect expropriation, unfair and unreasonable treatment, as well as discrimination. Many of them guarantee free transfer of capital.
- Protection against discrimination: The parties agree to observe the prohibition on discrimination. Investors from the partner country must not be treated any worse than domestic investors (national treatment). Nor may investors from the partner countries be treated worse than investors from other countries (most favoured nation treatment, MFN).
- Protection against expropriation without compensation: The parties agree not to expropriate investors either directly or indirectly. Exceptions are permitted where the measure is proportionate to the public interest. In such a case, the expropriation must be non-discriminatory and transparent. It must also be proportionate and rapidly completed, and the investor must be suitably compensated.
- Protection from unfair and unreasonable treatment: The parties agree to safeguard the investor’s justified expectations in relation to their investment. For example, treatment is not fair and reasonable if the investor is denied access to national legal channels or put under pressure politically, or government decisions are opaque.
- Guarantee of free movement of capital: The parties agree to only restrict movement of capital in specific cases. Investors must be able to transfer capital – such as interest, profits, or loan repayments – abroad at any time.
In most BITs, the parties define which investors and which types of investment fall under the agreement. More recent BITs also include clauses underlining the right of the state to take appropriate and proportionate regulatory action in the public interest, for example to protect health and the environment.
According to German budget law, an investment must enjoy sufficient legal protection in the host country in order to be eligible for an investment guarantee by the German government. This requirement is fulfilled if a BIT between Germany and the respective host country is in place. Investment guarantees are particularly important for small and medium-sized enterprises in Germany when investing in developing countries.
Effective Protection Requires Investor-State Dispute Settlement
Most BITs provide for investor-state dispute settlements to resolve disputes. The agreements specify which institution represents the forum for ISDS cases. One such recognized institution is the International Centre for Settlement of Investment Disputes (ICSID) in Washington, D.C.
The number of known ISDS cases worldwide is growing in tandem with the increasing global FDI stock; by the end of 2018, the number stood at 942 cases. In 2018, 71 new cases were reported. So far, the majority of the complaining companies came from industrialised countries. The countries most frequently complained against are Argentina (60 cases), Spain (49 cases), Venezuela (47 cases), and the Czech Republic (38 cases). To date, German investors have used the instrument 62 times – most often to take action against EU countries. So far, investors have only won 29 percent of the cases. No investor has yet won an ISDS lawsuit against Germany.
Investment Protection within the EU
With a stock of 506.4 billion euros (2017), almost half of German FDI is invested in other EU member states. The foreign sales generated by German companies through these investments (1.2 billion euros) far exceed exports to these countries (0.8 billion euros) (2017). These investments are protected by 14 German BITs (intra-EU BITs), such as with Bulgaria, Poland, and the Czech Republic. Although this is only slightly more than ten percent of the total of the 129 valid German BITs, more than half of the ISDS arbitration proceedings initiated by German companies are directed against states of the EU-28.
There are 196 intra-EU BITs. In June 2015, the European Commission issued a written request to the member states to terminate all remaining intra-EU BITs. Early 2019, the EU member states decided to abolish them all. At the same time, the European Commission is working to improve legal protection for intra-European investments. To ensure sufficient protection, a new EU-wide dispute settlement mechanism is needed. Such a mechanism needs to be effective, cost-effective, SME-friendly, and binding.
BITs in Need of Reform
In recent years, criticism regarding BITs has soared. At the centre of the debate, which was fuelled by the negotiations on the Transatlantic Trade and Investment Partnership (TTIP), stands ISDS. While some of the criticism might be justified, the solution is not to do away with ISDS completely. As globalisation continues, investment protection will become ever more important not only for Germany but also for many developing and emerging countries. For this reason, the aim must be, above all, to improve existing procedures.
Among other things, improved transparency is necessary in ISDS procedures, for example through the publication of documents which allow insight into the proceedings. Legal concepts and definitions such as “indirect expropriation” and “fair and equitable treatment” must be spelled out more precisely. Moreover, BITs must include safeguards against frivolous claims, as well as exception clauses to protect the public interests of states.
The Way ahead
For years, the United Nations Conference on Trade and Development (UNCTAD) has been working on new standards for investment protection. These are reflected in many of the newer BITs as well as the chapters on investment in the EU’s recent trade agreements such as with Canada (CETA). The European Commission is also seeking to put ISDS onto a multilateral footing. German industry welcomes the work of the United Nations Commission on International Trade Law (UNCITRAL) to develop the basis for the establishment of a Multilateral Investment Court (MIC).