The EU approach to international investment policy after the Lisbon Treaty
European Parliament | November 2010
The EU approach to international investment policy after the Lisbon Treaty
Stephen Woolcock
London School of Economics, UK
Overseas Development Institute, UK
The study is available on the Internet at
http://www.europarl.europa.eu/activities/committees/studies.do?language=EN or grab the PDF here
Executive summary
The Lisbon treaty’s extension of EU exclusive competence to cover foreign direct investment (FDI)
should enable the EU to conclude comprehensive trade and investment agreements, where in the past
its coverage of investment has been only very partial. This should in turn strengthen the EU’s ability to
shape international investment policy. The greater negotiating leverage gained from negotiating
comprehensive trade and investment agreements should also enable the EU to gain improved market
access for EU investors in key target markets. Increase EU competence also means the EU will be able
to establish uniform provisions for investors throughout the EU, in contrast to the current position in
which investors in some member states have better protection in some markets than others.
The Lisbon Treaty extension of EU competence to cover investment will not however, bring about
major changes in the short term. Change is likely to be progressive rather than dramatic with the EU
progressively extending the number of EU investment agreements. In the interim member state
bilateral investment treaties are likely to continue to remain in force.
The European Parliament needs to consider two central issues:
– what should be the EU approach to international investment policy; and
– how can the transition from the current position with many member state bilateral investment
treaties (BITs) to a common EU approach be managed?
Although the transitional arrangements are more short term, hence the more concrete nature of the
proposed Regulation and the immediacy of the need for the European Parliament to reach a position,
they cannot be separated from the question of what the EU approach should be. This is clear from the
fact that the Commission intends already to seek a negotiating mandate to cover the inclusion of
investment in the Comprehensive Economic and Trade Agreement it is negotiating with Canada.
The Lisbon Treaty does not define foreign direct investment. There is however a broad understanding
that FDI implies control and is therefore different from portfolio investment, which is not covered by EU
exclusive competence. The absence of a clear definition means that the scope of EU exclusive
competence remains a potentially contentious issue. This situation is not new. The Treaty of Rome
never defined the Common Commercial Policy with the result that the scope of EC de jure competence
in the field of trade remained contentious. But disagreements over the scope of competence did not
prevent the EC negotiating effectively on issues such as TBTs, procurement and services. This was
possible because mutual trust and confidence between the Commission and the Council allowed the
Commission to negotiate for the EC and member states on mixed agreements in consultation with the
member states. The difference between the establishment of the CCP from the 1960s onwards and
investment today is that the member states have existing investment policies in place with third
countries. This was not the case for the mixed competence topics of the 1970s and 1980s. Nevertheless,
the key to effective EU investment policy would still seem to be more likely found in the establishment
of mutual trust and cooperation between the EU institutions, now including the European Parliament
than in any specific text.
The approach to EU investment proposed by the Commission in its Communication appears to be in
line with the stated aims of EU policy, such as in the form of the Global Europe Policy of 2006. In terms
of the focus of EU initiatives, in other words the countries with which the EU should negotiate its first
investment agreements, the approach proposed by the Commission appears to be in line with the
criteria chosen. China, Russia and India represent countries with which the EU should consider
negotiating comprehensive agreements, because of the need to gain access as well as strengthen and
extend protection for EU investors in these markets. Canada and Singapore are already both relatively
open and provide a high level of investor confidence, but with these countries the Commission
proposes negotiating investment as part of wider agreements including market access and rules in
trade topics. The Commission’s proposed criteria also suggest a case for negotiating with some other
countries such as the members of the GCC, Malaysia and South Africa.
The inclusion of FDI in exclusive EU competence should help to promote EU competitiveness in the
sense that increased inward and outward investment can be expected to improve competitiveness. In
an increasingly interdependent international economy characterised by global production and value
chains, increased FDI is a means of ensuring that EU firms and the European economy as a whole can
remain competitive in the face of shifting comparative advantage. The employment effects of such
increased investment flows should, according to available research, be neutral. But the adjustment
costs are likely to fall disproportionately on the low skilled. This raises the question of what can be done
to provide adjustment assistance for this group of workers.
With regard to the standards of investment protection the existing EU member state BITs are less
detailed in their definitions of scope of investment protection offered then in some more developed
investment agreements. This appears to hold across the board for investment protection provisions,
including core issues such as the scope for national treatment, MFN and fair and equitable treatment.
The European agreements are also less precise in defining the scope for arbitration procedures and do
not include provision for review of the decisions of arbitral tribunals.
The options for an EU policy on investment protection standards are therefore broadly threefold:
– to retain the broad definitions of the existing member state BITs. This arguably provides for more
investor protection, but leaves scope for arbitral tribunals to interpret and define the scope of the
provisions.
– to argue for a comprehensive EU investment agreement that defines standards of protection and
expectations of investors that reflect European norms; or
– to examine the various standards of protection and methods of dispute settlement and
arbitration in detail and identify areas of best practice that best serve the interests of all EU
stakeholders. Such an approach would include consideration of how a measure of public control
over international investment law and arbitration could be re-established.
Coherence between EU investment policy and other policy areas such as sustainable development will
also need careful consideration. Only one member state has included sustainable development
provisions in its bilateral investment policy.
In terms of the transitional arrangements questions arise with regard to the compatibility of the existing
member state BITs with; (a) the EU exclusive competence for FDI, (b) existing EU law and (c) the Union’s
future international investment policy. All translate into a non-negligible degree of legal uncertainty
and might have repercussions on the confidence in the effectiveness of the existing BITs. The
Commission’s proposed Regulation purports to avoid legal uncertainty and reduce the risk of erosion of
the present level of protection.
The proposed general authorisation of existing BITs would enhance legal certainty. But it is more
questionable whether the proposed procedure allowing the Commission to scrutinize member state
BITs, and if incompatible with EU law, direct Member States to amend or terminate them, would achieve
this aim. The proposed publication of a list of authorised BITs whose authorisation could subsequently
be withdrawn does not promise to enhance legal certainty. Similarly the proposed powers for the
Commission to withdraw authorisation on the grounds that a BIT constitutes an obstacle to the
development of the Union’s policies in the field, will tend to add to rather than reduce the degree
uncertainty. It is not clear what criteria would be used to justify withdrawal of authorisation in the latter case except for some clear statement of EU policy on IIAs and there is unlikely to be an EU model BIT to
provide such criteria.
However, the proposed Regulation is legitimate in the sense that without a means of ensuring the
transition from member state to EU exclusive competence as provided in the TFEU, member state
reluctance to give up national BITs could block the evolution of EU policy. In turn, the absence of clear
provisions for the transition could result in a default option of increased litigation by the Commission
over the Member State’s duty of loyal co-operation, which would be costly, time consuming and not
provide the legal certainty sought by investors and member state governments. The option of setting a
time limit on the life of member state BITs would need to consider how long it would take to negotiate
EU agreements if these are to replace the member state BITs. Under international law, parties would, in
any case, retain rights under member state BITs for anything up to 20 years. A third option would focus
on process. Drawing on the experience with EC/EU external trade, EU policy on international
investment will only be effective if the EU institutions, Commission, Council and Parliament, have trust
in, and are content with, the decision making procedures for the pursuit of a common EU investment
policy. Again drawing on the experience with trade, such trust can probably only be established over
time and in the course of policy developments. The process option would therefore focus on who
should make decisions on how to manage the transition from member states BITs with a third party to
an EU agreement. This would involve a comitology procedure that would allow both the Council and
the Parliament to intervene where they suspect an excess of powers by the Commission.
To sum up the options for the EU on transition are:
– to reject the project as granting the Commission too much and unchecked power in shaping the
future investment policy of the Union;
– to support the Commission’s project so as ensure that the Union’s exclusive competence is
effectively developed and implemented despite potential – and expected – resistance by
numerous Member States; or
– to work towards an intermediate solution that would favour the development of the Union’s
policy on foreign investment by accepting the principle of a procedural framework as proposed
by the Commission but with a modification that would allow the Council to retain the control
over critical issues while, at the same time, ensuring a transparent public debate in the
Parliament.
