CORE PRINCIPLES IN INVESTMENT

There are two core principles identified in the Doha Declaration; transparency and non-discrimination. The latter is exemplified by two basic standards, ‘most-favoured-nation treatment’ (MFN) and ‘national treatment’ (NT). However, for international investment agreements (IIAs), another standard, ‘fair and equitable treatment’ can also be considered. These principles are important to a multilateral framework for investment (MFI) in ensuring a transparent, stable and predictable investment environment. This paper is working on the premise that a potential MFI in the WTO is under consideration.

1. Non-discrimination

The principle of non-discrimination is fundamental to virtually all international trade and investment agreements. The standards of MFN and NT establish that a country should not differentiate between its trading partners, or between its own and foreign products, services or nationals, thereby providing equal competitive opportunities.

How can the principle of non-discrimination be extended to a potential MFI?

The Doha Declaration has recommended use of GATS-type of approach for an MFI. The GATS’ bottom-up approach stipulates that certain principles and requirements are applied only to those sectors committed by individual Member states.

However, GATS differs from an MFI in respect of the non-discrimination principle in that this applies mainly to the post entry phase while for an MFI, both pre- and post-establishment phases have to be considered. Some countries (Canada WT/WGTI/W/130) are of the opinion that drawing such a distinction will undermine the non-discrimination concept. According to Canada, there is little conceptual justification for discriminatory treatment of foreign investors pre- or post entry, noting that the latter can sometimes effectively amount to expropriation. Nonetheless, there is no investor right to ‘invest’ or for ‘admission’ in international legal framework. The non-discrimination principle merely requires the elimination of a measure that discriminate between the foreign investors and domestic ones.

a. MFN Treatment

This gives a guarantee for equality of competitive opportunities among investors/investments from different foreign countries. The wording of the provision in a MFI will determine its basic scope and mode of implementation.

It may be expressed in a unilateral or reciprocal, conditional or unconditional, limited or unlimited manner. One element already pointed out is whether the MFN treatment should apply at the pre- or post-establishment stage. MFN treatment has traditionally been applied to the latter i.e. only after an investment has been made, though recent IIAs have extended the principle to post entry phase e.g. US and Canadian model of bilateral investment treaties (BITs) as well as NAFTA. In fact the US is suggesting a pre-entry commitment to MFN for an MFI.

Qualifying phrases, such as “in like circumstances” (used in agreements such as NAFTA) or “in like situations” (used in US BITs), allow the granting of differential treatment of investors in different objective situations, as it would be difficult to grant an ‘identical’ treatment.

The wording will also affect the object of the treatment, thus applying to either the investments, the investors or both.

According to the WTO Secretariat Note (W/119, para 11), “applying MFN treatment does not interfere with a country’s ability to impose measures that give any competitive advantage to national producers over their foreign competitors.” What tends to matter to most countries is the flexibility to differentiate between nationals and foreign investors as opposed to distinguishing among the latter. This means that MFN can reasonably be applied as a general principle irrespective of the entry phase with the necessary exceptions and exemptions. Suggestions have been made to use the GATS’ MFN exemption list as a model in that respect. Such exceptions are particularly important in providing developing countries with flexibility to pursue their economic development objectives while deriving benefits from the application of the principle.

b. National Treatment

National Treatment (NT) obliges Members to grant foreign investors/investments treatment equal to the one granted to domestic investors/investments. The substantive content of the NT standard involves two issues; the factual situation to which the principle will apply, and the definition of NT itself.

With respect to the first issue, NT clauses usually contain a variety of qualifying terms that describe the limits of the factual comparisons of the principle. Some of these terms state that investors need to be in “identical situations” or “same/like circumstances” in order for NT to apply. These may be more restrictive than provisions, which require that the investors be in “like circumstances” or “like cases” or “like situations”. In GATS, an illustrative list of economic activities and/or industries is listed for which NT principle applies. Nonetheless, the primary focus of most NT application is the competitive relationship between different investors that exists in the market.

On the definition of NT, the possibilities can cover, inter alia, a strict formulation of the quality of treatment as well as techniques of comparison, the applications of which are limited to factual situations. These may include concepts such as “identical treatment”, “treatment as favourable as” or “treatment no less favourable than”. The last is found in most IIAs and GATS, and could be interpreted to mean that a foreign investor might be able get more a favourable treatment that the locals.

Moreover, the NT may apply either ‘de jure’ or ‘de facto’. This means respectively, the treatment given to foreign investors in accordance to the domestic laws and regulations, and measures that although not discriminatory per se, in practice may disadvantage foreign investors as a result of their being ‘foreign’. Some countries consider that the focus should be on discriminatory measures based on nationality considerations only as most existing bilateral and regional investment instruments do.

Thus developing countries should seek a formula that, on the one hand, provides foreign investors with legal security and certainty and, on the other hand, provides host countries with adequate flexibility to both regulate the activities of foreign investors carried out in their territories and pursue their development and other domestic policy objectives. The GATS’ approach can satisfy both demands since it reflects a model that takes into account the different realities.

Outline

Under GATS, NT is a specific commitment allowing Members to select the sectors in which the principle will apply in order to be able to continue offering preferential treatment to domestic service suppliers. The same position is being suggested for an MFI. This is despite what some countries view as the increasing necessity and merits of having it as an unconditional post-establishment phase general obligation. Most IIAs accept this but with exceptions and qualifications to the rules. Taiwan (W/127) noted that NT principle allowing conditions to be attached under the GATS has effectively rendered the applicability of such a principle post-establishment.

The provisions of NT like the MFN’s also have certain aspects that not only make each provision unique but that have implications for the process of development as well. These include:

Beneficiaries - this matter raises the question of the objective basis to apply NT, the investor, the investment or both.

Scope - the application of NT in the field of investment goes beyond that in trade. The activities that foreign investors can carry out in the host country are diverse covering the operation, maintenance, use, sale or liquidation of an investment. Thus the potential range of policies and measures that is subject to the principle of non-discrimination is correspondingly broader than under trade agreements.

Stages of admission of an investment - whether NT only protects foreign investment after it has been admitted in accordance with the laws and regulations of the host country, or whether it also applies to the entry of the foreign investment. Provision of full NT places a foreign investor on equal footing with national investors and removes to a very large extent the means that a host country has of supporting and protecting it own investors as well as the ability to screen investment.

c. Fair and Equitable Treatment

Fair and equitable treatment (FET) provides a yardstick by which relations between investors and host countries may be assessed. It acts as a signal from host countries, indicating a country’s willingness to accommodate foreign capital on terms that take into account their interests. FET is an absolute standard, in contrast to MFN or NT standards, which depend entirely on the actions of the host country vis-à-vis investors from third countries or its own nationals.

The problem with the FET standard is that it is inherently subjective, and therefore lacking in precision. Moreover, difficulties of interpretation may arise because even in its plain meaning, the concept does not refer to an established body of law or to existing legal precedents.

In as much as FET may encompass both NT and MFN, it differs from them in that for instance, NT protects foreign investors from discriminatory treatment, though this treatment might not necessarily satisfy the standard of FET. The concept of FET overlaps with transparency, the other core principle, in that transparency may be required, as a matter of course, by the concept of FET. Moreover, where a foreign investor wishes to establish whether or not a particular country’s action is fair and equitable, as a practical matter, the investor will need to ascertain the pertinent rules concerning the country’s action, only possible if this is transparent.

Although the concept now features prominently in IIAs, different formulations are used in connection with the standard. At least four approaches are in practice, namely:

Ø    One that omits reference to FET.

Ø    One in which it is recommended that countries should offer investment FET, (the hortatory approach).

Ø    A legal requirement for countries to accord investment ‘fair and equitable’ treatment, ‘just and equitable’ treatment, or ‘equitable’ treatment.

Ø    A legal requirement for countries to accord investment FET, together with other standards of treatment, such as MFN and NT.

2. TRANSPARENCY

Transparency refers to both general and specific requirements in international trade and investment agreements to make their relevant rules and procedures clear and predictable (Secretariat Note, W/109). The ‘transparency requirement’ obliges Members to provide sufficient information so that other Members can determine whether or not obligations are in fact being met. It is also a requirement that the administration of rules be reasonable and non-discriminatory. The transparency obligation especially procedural transparency is relatively more important in areas where the role of WTO rules of general application is limited and where the scope for discretionary government action is greatest.

Standard provisions on transparency involve three core obligations:

(1) to make information on laws, regulations, and other policies related to trade publicly available;

(2) to provide notice of (notify) the laws and regulations and changes to them; and

(3) to ensure that laws and regulations are administered in a uniform, impartial and reasonable manner.

BITs are largely silent on the question of transparency. One notable exception is the US’ prototype BIT concerning the encouragement and reciprocal protection of investment. The NAFTA also has comparable transparency provisions to the WTO.

Discussions in the Working Group centre on three themes: the purpose of transparency; the possible relevance of WTO transparency provisions to the area of investment; and the technical and resource requirements for meeting different levels of transparency. They reveal that the policy questions that arise in the context of an MFI are about the transparency’s scope and application. The scope for ‘transparency’ in an IIA depends not just on obligations on publication, notification and administrative procedures, but on the ambition and breadth of the IIA’s substantive commitments.

With respect to the development dimension, a balance has to be strike between pursuing more transparency and avoiding the imposition of burdensome obligations. Moreover, technical assistance would be required to assist developing countries to comply with the transparency requirements.

The general and specific transparency provisions often contain exceptions making it clear that Members are not required to disclose confidential information, which would otherwise be prejudicial to public or commercial interests.

CONCLUSION

The hybrid approach adopted by GATS might be a good approach especially the sector-by-sector positive commitments, which would allow governments to retain control of investments flowing into their countries without discriminating between investors by reason of nationality. The above principles could be considered as basic standards of application to which all Members could abide by in a potential MFI. However, the degree, the range of existing operations, the phase, will differ according to the countries needs and the nature of commitment adopted.