The UN Conference on Trade and Development (UNCTAD) describes bilateral investment agreements as “the most important protection of international foreign investment.” Investment liberalization has always been controversial. Attempts to negotiate a multilateral agreement on investment at the World Trade Organization or the OECD have failed to come up with a binding agreement and met with significant popular opposition. Many governments, especially poorer ones, have been wary of the claims made about investment liberalization and have opposed moves to make a global agreement which would bind them to open up their economies by removing all regulations on foreign investment. The success of that opposition is a major reason why there are now so many bilateral investment agreements throughout the world. Such agreements create more rights and powers for foreign investors — particularly the transnational corporations which dominate the global economy.
At some time, most countries have imposed regulations on investors in line with national development priorities. They wanted to try to ensure that foreign investment would benefit the host country as well as the investor. Many governments determined that foreign investors could not own more than a certain percentage of telecommunications or other strategic national infrastructure sectors or set conditions on ownership. Many countries imposed performance requirements on foreign investors so that they had to hire a certain proportion of local workers, or use a particular level of local content.
Environmental, health and safety legislation set standards in order to ensure that foreign investments were not detrimental to the environment and the health and safety of the workers and the public. Labour and environmental laws are also being aggressively targeted in the negotiations and implementation of international trade and investment agreements. The right of current and future governments to set regulations is being constrained by participation in such international investment agreements.
Foreign investors want governments to give them and their investments no less favourable treatment than domestic investors and their investments. By including broad definitions of terms like “investor” and “investment”, most bilateral free trade and investment agreements offer very broad protection to foreign investors, including rights under contract, their rights of establishment and entry as well as its operations and exit. Under many bilateral free trade and investment agreements, all sectors of the economy are covered unless explicit reservations are made in the agreement’s annexes.
Investor-state dispute mechanisms in bilateral free trade and investment agreements give investors enforceable rights to take their cases directly to international arbitration, sidestepping domestic courts and in virtual secrecy. These procedures are costly to defend for governments, and often result in decisions that multi-million dollar compensation be paid to TNCs or other foreign investors, as well as casting a chilling effect on present and future investment rule-making. Through secretive and binding disputes mechanisms in these agreements, foreign investors — often TNCs — are able to challenge any government law, measure, omission or policy which they claim adversely affects their investment. Many of these disputes are lodged by corporations which have taken over provision of privatized services such as water. For example, Argentina and Bolivia have both been targeted by water TNCs using investor-state dispute mechanisms under bilateral investment agreements, following major debacles around water privatization in cities like Tucuman, Bahia Blanca and Cochabamba. Another recent instance of investor-state disputes over issues of public policy include Philip Morris’s claims against Uruguay and Australia over the respective governments’ laws on cigarette marketing and packaging. In the first instance, Philip Morris used a Switzerland-Uruguay bilateral investment treaty to challenge pictorial health warnings on cigarette packets and a law which states that 80% of the package be devoted to public health warnings.
Bilateral deals provide a step-by-step approach which can form a launch pad for more comprehensive multilateral agreements in the future. Once governments have signed on to bilateral investment agreements, it will be harder to resist global agreements on investment at the multilateral level. Recently, investor-state dispute mechanisms have been cited as major concerns in Korea (as the Korea-US FTA was ratified), by Indian officials who insist that they will not enter into FTAs which have investor-state clauses, and by the Argentinian government over its refusal to pay compensation to two US companies after ICSID rulings, and subsequent suspension of trade benefits by the Obama administration in early 2012. A clear priority for the US Administration and corporate sector is liberalizing China’s investment regulations to open up the economy further to American capital.
last update: May 2012
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