International Investment Treaties Increasingly Important for Global Business

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For companies, foreign investments go hand in hand with both economic and political risks. Agreements promoting and protecting investment (Bilateral Investment Treaties or BITs) as well as investor-state dispute settlement (ISDS) offer much needed protection against political risks. As foreign direct investment is increasing worldwide, the number of such treaties and the number of investor-state disputes are also on the rise. At the same time, public criticism on the design of BITs has intensified.

Germany is a globalisation winner. Evidence for this are not only the large volumes of German exports and imports, which, combined, amount to 84.3 per cent of German economic output (2016). Witness to the interconnectedness of the German economy is also the high level of German foreign direct investments (FDI) abroad, which since 1990 have increased around fivefold to one trillion euros (2015). Linked to these investments are foreign holdings in some 36,000 companies, through which German business is responsible for seven million jobs abroad (2015). On this basis, the companies have a foreign turnover of 2.7 trillion euro – more than double the value of German exports.

FDI will become ever more important not only for Germany but also for the global economy as a whole. FDI stock increased elevenfold worldwide between 1990 and 2016. In 1990 global FDI stock amounted to 9.8 per cent of global economic output; in 2000 the corresponding figure was 22.3 per cent and in 2016 34.3 per cent. Moreover, FDI is also gaining in importance in relation to the global trade in goods. While global FDI stock amounted to 18.5 per cent of the volume of global trade in 1990, the corresponding figure for 2016 was 27 per cent.

More FDI = more political risk

While increasing foreign investments are contributing to prosperity abroad, they always carry an economic risk for the company involved. Moreover, going abroad goes hand in hand with political risks for investors. Protection from such political risks are offered by international investment agreements (IIA), of which Germany has 129 with other states – more than any other country. These international treaties between two or more states protect the foreign investor of the treaty partner from discrimination, from expropriation without compensation, as well as from unfair and unjust treatment in the other partner country (countries). Also important for investors is the guarantee of free capital transfer.

As of the end of 2016, there were 3,324 international agreements worldwide incorporating rules on cross-border investments. Of these, 2,975 were regular bilateral investment treaties (BITs); in 367 cases, regulations on investment protection constituted parts of other treaties (such as trade agreements). The year 2016 saw the conclusion of 37 new investment agreements. Turkey was particularly active in concluding new BITs in 2016 (seven such agreements), followed by Canada, Morocco, and the United Arab Emirates. However, despite the global increase in FDI, there are countries that have turned their backs on BITs in recent years: in 2016 no fewer than 19 BITs were revoked, 11 of which by Indonesia alone and seven by India.

Effective protection requires investor-state dispute settlement

As a rule, BITs provide investor-state dispute settlement (ISDS) for the case that the rights of investors are being violated. They are indispensable to ensuring that the material rights and obligations which are laid down in the treaty are effectively enforced.

The number of known ISDS disputes worldwide is growing in tandem with the increasing global FDI stock; at the end of 2016, they totalled 767 worldwide. Sixty-two new cases were reported in 2016 and as many as 74 in 2015. Until now, the companies filing suit have come largely from industrial countries: the states against which ISDS procedures have been most frequently initiated are Argentina (59 cases), Venezuela (41), and the Czech Republic (34). German investors have made use of this instrument 51 times so far, most often to take action against other EU member states. But by no means all investors who bring ISDS disputes are successful. To date, only 27 per cent of all investment complaints have been decided in favour of the investor – and just 20 per cent in the case of disputes against EU countries. And to this day no investor has won an ISDS case against Germany.

BITs in need of reform

In recent years, criticism regarding IIAs 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 procedures 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.

What is needed, among other things, is more transparency in ISDS procedures – for example, by publishing documents that provide an insight into the proceedings. Legal concepts and definitions such as “indirect expropriation” and “fair and equitable treatment” must be spelled out more clearly. Moreover, IIAs must offer protection mechanisms against frivolous claims as well as exemption clauses to ensure the state’s right to regulate.

The way forward

For years, UNCTAD, the United Nations agency that deals with trade and development, has been working on new standards for IIAs. Both the investment chapter of the EU trade agreement with Vietnam, which was concluded last year, and the investment chapter of the trade agreement between the EU and Canada (CETA) provide for a dispute settlement mechanism. These reflect the many proposals not just by UNCTAD but also by critics of ISDS; they also provide for far-reaching reforms in all areas mentioned above. For example, a more robust investment court system is foreseen to replace the ad hoc panels of dispute settlement. Moreover, the European Commission is seeking to put ISDS onto a multilateral footing. A consolidation of the IIA landscape with its more than 3,324 worldwide recorded IIAs would be highly welcomed by companies.

Apart from investment protection, an issue gaining in prominence is investment facilitation. Only through private investment will it be possible to achieve the “Sustainable Development Goals” (SDGs) of the United Nations. In recent months and years, the BDI has been seen and heard at UNCTAD, the G20, the WTO, and the European Commission putting forward its ideas on promoting and protecting foreign investments, on multilateralising investment protection and on investment facilitation

Growing significance of foreign direct investment (FDI) for the world economy

Global FDI stock (outward) in relation to global GDP in percent

More investment worldwide demands more investment protection

Foreign direct investment (FDI) and number of ISDS cases