10.2.1 Market Openness

Most governments actively seek foreign direct investment in sectors like infrastructure, real estate development, and other areas where they face almost unlimited wants but limited fiscal means. Many governments have also realized the potential inherent to the technology industry and the digital economy to create large numbers of well-paid jobs and are keen to attract investment into these sectors for this very reason. This usually implies that the openness of investment markets in the technology and digital sectors tends to be a given. This will not be true, however where calls for an open investment regime are confronted by a similarly important set of policy imperatives in the form of national security or strategic industrial policy. Indeed, as this chapter lays out in more detail later, those constraints that persist and that have even been on the rise recently with respect to investment openness in the technology and digital sectors are almost invariably justified by virtue of either or both of these two higher-order policy considerations.Footnote ²

Where countries wish to signal the openness of their investment markets, they have several ways of doing this. One way for WTO members is to make commensurate commitments under mode 3 market access in their respective schedule of specific commitments of the General Agreement on Trade in Services (GATS). This is because mode 3 is just a technical term for commercial presence, otherwise understood as the ability of service providers to reach customers in foreign markets by setting up a local office or subsidiary there. Much of the value creation that pervades the digital economy resides in the provision of services.Footnote ³ Another way for governments to signal open markets to foreign investors is to make market access commitments in either bilateral investment treaties or in the investment chapters of free trade agreements.

One important aspect of signaling investment market openness is to limit the incidence or alleviate the burden of investment screening mechanisms. This chapter discusses in some detail the increasing use of investment screening mechanisms made by several governments in the technology and digital sectors, which, when combined with other measures, have led to a sudden and significant reversal of investment flows from China to the United States and the European Union (see Section 10.3.2). Apart from raising the level of uncertainty for a given transaction, investment screening mechanisms also raise costs and expose a potential investor to invasive and often unwanted scrutiny. This is in addition to the negative publicity (reputational risk) that will inevitably ensue if a proposed transaction is blocked, thereby resulting in immediate and negative fallout on a company’s share price.

The most common justification given by governments for both enacting investment screening mechanisms and using them to prevent the consummation of specific transactions is national security concerns. This particular policy rationale is favored for various reasons, but arguably the most important is the perceived freedom from judicial scrutiny that invoking national security affords governments.Footnote ⁴ Indeed, the limits of what governments can and cannot do in order to defend their own national security interests is something that there is currently little to no international consensus on. In fact, it is probably fair to say that the only consensus that seems to be emerging on this issue is that no government is willing to abide any form of constraint in defining the limits of its regulatory sovereignty when defending what it perceives to be the national interest.Footnote ⁵

10.2.2 Nondiscrimination

Nondiscrimination in the context of foreign investment is best understood as treating all investors equally in all areas of law and regulation, irrespective of their country of origin.Footnote ⁶ This has important implications for foreign investors, both in terms of procedural fairness as well as their ability to contest markets on a level playing field vis-à-vis other firms (both domestic and foreign). The underlying logic here is that it is simply not fair to apply laws more restrictively or make regulatory requirements tougher for foreign firms. In fact, doing so is very likely to skewer market outcomes in favor of a set of privileged firms that may simply not be as efficient as their foreign competitors. One important way that governments can implement this policy objective is by removing any reference to nationality or country of origin in the laws and regulations that govern both investment and different economic sectors and by ensuring that these laws and regulations are implemented evenly without favoring the interests of one group of actors over those of another.

Nondiscrimination for foreign investors is something on which there is really only an international consensus in principle since many governments continue to make nationality or country of origin a determinative factor in what companies are allowed to do in their economies and how the law is to be applied to them. This is permissible since – as shall be discussed in more detail later – many of the international initiatives to establish common standards on the treatment of foreign investors (and that explicitly mention nondiscrimination) are best endeavor frameworks that do not bestow obligations on sovereign governments or actionable rights on foreign investors. In the context of investment chapters in FTAs, countries get around strict adherence to nondiscrimination by explicitly scheduling any nonconforming measures that violate this principle (UNCTAD, 2006).Footnote ⁷

10.2.3 Sound Regulatory Governance

Sound regulatory governance has an inordinately important impact on the predictability of doing business in a country. Most business owners and investors prefer predictability because it allows them to engage in medium- to long-term planning and thus to optimize costs. Unpredictability essentially impedes proper planning, and in doing so raises exposure to increased costs. Sound regulatory governance manifests itself in a number of ways, such as by notice and comment procedures for the enactment of new laws and regulations, particularly when these are likely to impact sectors where foreign investors are present. Another indicator of sound regulatory governance is proportionality of regulatory interventions, meaning that regulators intervene following a careful weighing and balancing of the interests at stake through regulatory impact assessments.Footnote ⁸

These kinds of imperatives are starting to find expression in multilateral instruments on trade and investment, such as in the G20 Guiding Principles for Global Investment Policy Making, the UNCTAD Investment Policy Framework for Sustainable Development, and proposals for a draft agreement in the context of structured discussions currently ongoing at the WTO on Investment Facilitation for Development (all discussed in more detail in Section 10.4). This indicates a high degree of consensus in principle on this issue. However, making genuine improvements in the area of regulatory governance is a slow and difficult process since it goes right to the heart of a country’s underlying political–economy power structures. International agreements can be supportive of this process, but what is really needed here is strong political leadership.Footnote ⁹

10.2.4 Enabling Legislative Environment

A number of areas of the law are of general concern to foreign investors and of strategic importance to investment in the technology sector and the digital economy more specifically. One is intellectual property. Governments that want to attract investment, particularly foreign investment, into sectors that rely on research and innovation need to ensure adequate protection of intellectual property rights, both as a matter of formal law and in terms of their enforcement. When Singapore made the decision to become a global center of innovation in biotechnology, one of the first flanking policies it needed to implement was a tangible upgrading of its intellectual property laws.Footnote ¹⁰ Of course, countries also want to ensure that they can move up the value chain so that when they invite foreign firms into their markets, they want to encourage technology transfer. This needs to be done in a way that does not represent coercion and so that foreign firms feel they are not being strong-armed into giving up their most precious and cutting-edge intellectual property. Research seems to demonstrate that the right regulatory balance governments need to strike in the area of protection of intellectual property rights is one that is not too strict and not too lax, a kind of ‘Goldilocks ideal’ that allows new and innovative business models to thrive but also offers an effective level of protection to those who do invest significant resources to develop their own IP.Footnote ¹¹

Another important area of legislation that is of overriding importance to investors, but particularly to investors in the technology and digital sectors, consists of regulation of labor markets. This is largely because of the important role that skills and technical expertise play in these sectors. Governments wishing to attract investors or firms in these sectors need to either ensure that a sufficiently deep and broad pool of labor with these skills is already on hand or can be easily ‘imported’. Such labor market regulation often involves targeted policy interventions to create such labor pools (which can admittedly take decades), or a certain international openness and flexibility with respect to skilled labor mobility. Furthermore, the flexibility and openness that should characterize labor markets wishing to attract investment and firms in the technology and digital sectors cannot be limited only to technical professions and skills but must also extend to senior management. Firms in these sectors want the regulatory freedom of action to staff senior management roles, and domestic labor law requirements must be flexible and open enough to permit this. This imperative has already found expression in a number of bilateral investment treaties and FTA chapters on investment discussed in more detail under Section 10.4.3.

10.3.1 Closed-Door Investment Regimes

Many countries set strict limits on foreign investment into their technology sectors or into other areas of the digital economy, whereas other countries preclude such investment outright. To name just one example, Canada maintains what the United States has characterized as ‘one of the most restrictive telecommunication regimes among developed countries’ because of limits on foreign ownership of certain existing suppliers of facilities-based telecommunications services and a requirement that at least 80 percent of board members must be Canadian citizens.Footnote ¹² Closed-door or highly restrictive investment regimes run contrary to the principle of market openness, which many countries, including Canada, openly espouse in their commitment to international guidelines such as those developed by the G20 and UNCTAD and policy frameworks such as those elaborated by the OECD (all discussed in more detail earlier). However, investment market openness (like free trade) is not an absolute principle, but rather one that is relativized by other overarching considerations and policy priorities. For example, in justifying its closed investment regime in telecommunications, Canada invokes national security concerns and access to essential critical communications infrastructure. Furthermore, the guidelines and frameworks developed by the G20, UNCTAD, and the OECD are not intended to be binding treaty instruments that would engage state responsibility in the event of noncompliance. Even treaty commitments under WTO agreements or FTAs provide sufficient flexibilities (referred to as ‘policy space’) that allow governments to reserve and essentially carve out entire sectors from liberalization commitments such as an open-door investment regime.

10.3.2 Investment Screening Procedures

The history and evolution of investment screening procedures have been covered in great detail elsewhere.Footnote ¹³ Suffice to say here that in recent history, this has been the investment restriction of choice for governments seeking to prevent the acquisition of domestic technologies or other critical assets, particularly against investment from China.Footnote ¹⁴ The United States, as one of the most technologically advanced countries, with a handful of some of the most dominant companies in the digital economy, has arguably been at the forefront of establishing investment screening mechanisms as well as tightening their application to make them more surgically targeted at investments from its biggest emerging geopolitical rival, China.Footnote ¹⁵ In August 2018, then President Trump signed into law the Foreign Investment Risk Review Modernization Act (FIRRMA), in response to widespread concerns about the risks faced by United States’ technology companies primarily from FDI emanating from China. In addition to a number of procedural amendments, FIRRMA increased the scope of review powers of the Committee on Foreign Investment in the United States (CIFIUS) to include any noncontrolling investment in United States’ businesses involved in critical technology, critical infrastructure, or collecting sensitive data on United States’ citizens (Jackson, 2020).Footnote ¹⁶ This was part of a wider pushback against encroaching Chinese technological leadership that included an investigation into Chinese practices in the area of forced technology transfer and a concerted campaign against Chinese technology leaders such as Huawei and TikTok.

The European Union has also felt compelled to act in the face of massive FDI inflows from China and acquisitions by Chinese buyers that peaked in 2016 and set off alarm bells as well as a great deal of introspection as to how open Europe should be to investment from third countries across many strategic sectors. This introspection was deemed all the more important since China itself maintains strict controls on inbound investment to a long list of sectors, both strategic and otherwise. This culminated in a number of countries introducing new or tightening existing investment screening measures, whereas at the EU level, a new investment screening mechanism that had first been touted in 2017 entered into force in April 2019.Footnote ¹⁷ The underlying intent in adopting this framework was perhaps best summed up by Jean-Claude Juncker, President of the European Commission, in his 2017 State of the Union Address, in which he called for reciprocity in the EU’s trading relations, saying ‘we have to get what we give’, and also emphatically stated, ‘Let me say once and for all: we are not naïve free traders. Europe must always defend its strategic interests’.Footnote ¹⁸

10.3.3 Regulatory Constraints

Regulatory constraints come in many shapes and sizes, with various forms and functions. This chapter discusses three that have arguably the most far-reaching implications for the global technology sector and digital economy firms, namely, forced data localization (a relatively new problem), local content requirements (an old problem), and forced technology transfer (an old practice that recently became a problem).

Forced data localization requirements mandate that companies that collect, store, and process data on their customers do so within a confined territorial jurisdiction, usually the country or territory imposing the requirement. An increasing number of countries are resorting to these kinds of policies, for a range of different stated policy reasons. This is encountering considerable pushback from the global technology industry, which argues these measures do very little to achieve the purported objectives governments claim to be pursuing when enacting and enforcing them.Footnote ¹⁹ India (like many other countries) makes frequent use of data localization requirements in different sectors. For example, in the online payments sector, the Reserve Bank of India enacted legislation in October 2018 requiring all payment service suppliers to store all information related to electronic payments by Indian citizens on servers located in India.Footnote ²⁰

Although much has been made of the negative impact of data localization requirements on raising costs across the industry,Footnote ²¹ it is equally true that these and other data sovereignty policies are an important factor driving a wave of increased investment into the construction of new data centers, together with other significant structural trends that are likewise driving this growth.Footnote ²² In addition to this, there is also an important body of research that cites the contribution that geographically proximate data centers can have on lowering latency and thus improving user experiences and sales across a broad array of applications and scenarios.Footnote ²³ However, the cost–benefits analysis plays out, as investors and digital economy firms generally want or need to have the regulatory freedom of action to be able to decide what the best business solution is for either localizing data or transferring it abroad. Particularly the growth in importance of cloud computing services for enabling companies not only to save on data storage costs but also to avail themselves of a wide range of important digital technologies that are offered in the cloud means that data localization requirements are almost inevitably going to diminish the value of a given investment or raise the costs of investing in a jurisdiction that imposes them.

By the same token, local content requirements are seen by investors and digital firms as just another way host governments artificially and unnecessarily drive up compliance costs.Footnote ²⁴ Local content requirements can also give rise to severe business continuity problems since complying with them can be either economically infeasible or practically impossible. This is what has been happening over the last few years in Indonesia, where all 4G-LTE-enabled devices have been required to contain a minimum of 30 percent local content, and all 4G-LTE base stations have likewise been required to contain at least 40 percent local content. In order to meet these thresholds, companies importing these products must demonstrate local manufacturing, design, or development; the production of software applications; or investment commitments.Footnote ²⁵ In order to meet these requirements, Apple announced in 2017 that it would be opening an innovation center in Jakarta, and in 2018, it effectively opened a developer academy to purportedly ‘train the next generation of app developers on the world’s most advanced mobile operating system’.Footnote ²⁶ Samsung, for its part, opened a factory for the ‘production’ (meaning here assembly) of smartphones in Jakarta in 2015.Footnote ²⁷

It has been argued that forced technology transfer is something of a misnomer since companies choose to transfer technology in exchange for some form of consideration, usually market access. The country that comes in for some of the most wide-scale and vocal criticism with respect to forced technology transfer is China. The United States, who has long been the most active country in seeking to improve the protection and enforcement of IP in China more generally,Footnote ²⁸ took a more litigious approach in 2017 by launching a Section 301 investigation against Chinese policies and practices in the area of forced technology transfer. This investigation culminated in a set of reports published the following year expressing a number of grievances against China’s alleged practices in this area.Footnote ²⁹ Indeed, it was these reports that then President Trump used as the justification for the unilateral imposition of punitive tariffs, which started a trade war between the two countries and were also found to be WTO noncompliant some two years later by a WTO dispute settlement panel.Footnote ³⁰

The EU, for its part, has also sought to challenge the alleged widespread nature of forced technology transfer in China by launching a WTO case targeting these practices.Footnote ³¹ In its request for consultations, the EU alleges that China’s measures violate a number of its commitments under the WTO Agreement on Trade-Related Intellectual Property Rights (TRIPs). One specific allegation the EU makes in this context is that ‘China limits the rights of foreign patent holders to assign or transfer by succession patents and to conclude licensing contracts, contrary to its obligations under Article 28.2 of the TRIPs Agreement’ and that ‘[because] of these restrictions, China also fails to ensure effective protection for foreign intellectual property rights holders of undisclosed information contrary to its obligations under Article 39.1 and 39.2 of the TRIPs Agreement’.Footnote ³² For the global technology industry, the approaches taken by the United States and the EU are arguably a piece of geopolitical theatre or big-power posturing. Companies with proprietary technologies doing business in China have long appreciated the risk–reward calculus that underpins these kinds of business and investment decisions. They adopt various strategies to either safeguard their most sensitive secrets or conclude that, because technology is based on something as immaterial as information, knowledge, and skills, it is only a question of time before these factors become widely known and adopted by partner firms that may one day become competitors. Instead, technology firms reason that they must therefore maintain their edge by the superiority of their value proposition and the quality of their management practices more generally.Footnote ³³

10.4.1 Best Endeavor Initiatives at the G20, OECD, and UNCTAD

The initiatives concluded under the G20, the OECD, and UNCTAD all represent nonbinding, best endeavor frameworks that arguably do little to effectively constrain governments but that nevertheless lay out a set of common understandings in principle. Although the lack of an effective enforcement mechanism for these frameworks may limit their ability to constrain government intervention and as such likewise limit their usefulness for firms seeking greater predictability and security, this should not detract from the fact that they can serve a useful signaling purpose in terms of identifying where consensus is (or rather was) starting to emerge on what principles, rules, and limits should apply to regulating foreign investment and the space this affords investors in the technology sector and the digital economy.

The G20 Guiding Principles for Global Investment Policymaking are the culmination of an ambitious push, spearheaded by the Chinese government during its presidency of the G20 in 2016. They articulate a consensus on where policymaking should be headed as the interests of developed and developing countries start to converge now that they have each become both the source and the destination of increasing flows of foreign direct investment. The G20 Guiding Principles represent a fairly universally held consensus on a set of landing zones or lowest-common denominator benchmarks from which to start more ambitious negotiations in other fora, particularly the WTO Investment Facilitation talks – likewise discussed in more detail here. In terms of their substantive contribution to investment conditions for the global technology industry and digital economy firms, the Principles affirm the need to avoid protectionism and to have an open, nondiscriminatory, and predictable investment environment. In addition to this, the affirmation of the importance of legal certainty and strong protection for investors and investment, and of the desirability of stakeholder participation when developing new regulations that impact investment are equally welcome as statements of principle on raising the quality of regulatory governance generally. The Principles essentially demonstrate that governments in G20 countries have realized what investors need (market access, a level playing field and regulatory predictability) and their willingness to acknowledge this by embodying this realization in the context of an international declaration arguably provides some important signaling. At least this was the situation in 2016, before both the Trump presidency and the COVID-19 pandemic. The lack of congruity between the aspirations expressed in the Guiding Principles and the many investment policy measures taken by G20 countries since then are enough to give one considerable pause in pondering the value of such political declarations.Footnote ³⁴

The OECD Policy Framework for Investment represents a more consensus-based and constructive peer-review approach that was ultimately adopted in the wake of the failure of OECD members to negotiate a Multilateral Agreement on Investment (MAI) in 1998.Footnote ³⁵ Its focus is on providing recommendations – following voluntary reviews – to governments on how they can improve the investment climate in their respective countries. This approach, initially dubbed the Policy Framework for Investment, was first launched in 2006, with its methodology updated in 2015 to include investment policies conducive to supporting the Sustainable Development Goals (SDGs). Essentially the Framework asks policymakers to respond to a series of questions in various areas of policy and regulation that have a direct impact on the investment climate. These questions involve consensus issues such as nondiscrimination, minimizing the burden regulations imposed on investors, or striking the right balance of interests when fostering innovation and protecting intellectual property rights. This is a nonconfrontational and non-litigious way to encourage domestic reform in the area of investment policy since the incentives for the government under review and those conducting the review are aligned in a way that is fundamentally different than would be the case in the context of FTA negotiations or investor–state arbitration. By its very nature, the Framework compels host governments to think about the economic and efficiency implications of any shortcomings in their investment regimes, as identified during the review, and of ways in which the regulatory environment for investment can be improved.

The UNCTAD Policy Framework for Sustainable Development was launched in 2012 and represents one of many tools UNCTAD provides to policymakers in the area of investment, including country-specific investment policy reviews, of which more than fifty have been conducted since 1999. The Investment Policy Framework contains a set of principles that are nonbinding and somewhat light on prescriptive provisions that seek to set any kind of meaningful limits on governments’ regulatory autonomy. That being said, the UNCTAD Principles do implicitly exhort governments to attain a high standard of investment governance, by, for example, stating that investment policies ‘should be developed involving all stakeholders, and embedded in an institutional framework based on the rule of law that adheres to high standards of public governance and ensures predictable, efficient and transparent procedures for investors’.Footnote ³⁶ The UNCTAD Principles also exhort governments to have open investment regimes, to provide adequate protection to investors, and to treat them without discrimination. Although Principle 5 recognizes governments’ right to regulate, it does this in the absence of any exhortation to do so within the limits of proportionality or in a way that is minimally disruptive to the interests of established investors. Nevertheless, as a baseline for where consensus has already been achieved on sound investment governance, the UNCTAD Principles are helpful, and future work to elaborate binding and actionable rules on investment can take the UNCTAD Principles as a starting point. This is arguably what is happening in the context of the talks currently taking place at the WTO on a potential WTO Agreement on Investment Facilitation for Development, discussed in more detail in the following text.

10.4.2 WTO Disciplines Present and Future

Contrary to the aspirational and best endeavor frameworks discussed in the previous section, this section focuses on the harder and more binding rules of the WTO as they relate to investment. The analysis begins with the WTO Agreement on Trade-Related Investment Measures (TRIMs), before moving on to the GATS, and culminates in an examination of recently initiated efforts to establish a new set of rules on investment facilitation.

The TRIMs Agreement was one of the three new issues introduced into the Uruguay Round on the insistence of the United States, the other two being trade in services – culminating in the GATS – and Trade-Related Intellectual Property Rights – culminating in the TRIPs Agreement.Footnote ³⁷ Despite the original ambitions of the United States to negotiate an ambitious new agreement governing such measures, these ambitions were ultimately frustrated by the opposition of developing countries, led by Brazil and India.Footnote ³⁸ Because of this resistance, the TRIMs Agreement we have today is essentially just a restatement of GATT disciplines on national treatment (GATT Article III) and quantitative restrictions (GATT Article IX) as applied to an illustrative list of trade-related investment measures set out in an Annex to the Agreement and as articulated in a 1980s GATT Panel involving a set of requirements under Canadian law subject to which foreign investors would be allowed to invest in Canada.Footnote ³⁹ Despite its limitations, the TRIMs Agreement has had limited success in policing some of the most flagrant discriminatory investment-related measures, such as in the context of Indonesia’s ill-fated plans to launch a national automotive industry,Footnote ⁴⁰ although it has yet to be tested in the area of technology or the digital economy.

In contrast to the limited scope and applicability of the TRIMs Agreement, the WTO General Agreement on Trade in Services (GATS) and the mechanisms it creates for WTO members to undertake commitments with respect to mode 3 trade in services (provided through commercial presence) offer a considerable degree of regulatory certainty to investors. Provided their activities fall within the substantive scope of the GATS (i.e., they are services), foreign investors hailing from another WTO member can enjoy some degree of regulatory certainty in another WTO member by virtue of the general obligations that apply in the area of nondiscrimination and transparency. In addition to this, foreign investors can likewise rely on certain expectations with respect to market access, a level playing field, and domestic regulation when the host State (also a WTO member) has made commensurate (mode 3) commitments. Indeed, the obligations imposed on members with respect to domestic regulation, which recently were further clarified by WTO members under a new agreement, must be considered as an articulation of the principles of sound regulatory governance that enjoy a broad consensus within the meaning of the analysis of investment regimes being carried out here.

The WTO Joint Statement Initiative on Investment Facilitation for Development (IFD) is the culmination of many decades of efforts to increasingly codify, within the multilateral trading system, the obvious links that exist between trade and investment – links that even the architects of the abortive International Trade Organization (ITO) and its stillborn Charter were well aware of.Footnote ⁴¹ Although not formally endorsed as part of the Ministerial Declaration that was issued at the conclusion of the 11th Ministerial Conference in Buenos Aires, a sizeable group of seventy countries nevertheless issued a joint statement calling for the initiation of structured discussions with the aim of developing a multilateral framework on investment facilitation.Footnote ⁴² These talks are discussed in considerably more detail in other chapters of this volume; suffice to say here that at the time of writing, some 110 WTO members and thus two-thirds of the current membership are now participating in these talks, with a view to concluding a new WTO Agreement on Investment Facilitation for Development by the end of 2022.Footnote ⁴³

Based on the text proposals that were being discussed through the end of 2021, particularly the so-called Easter Text,Footnote ⁴⁴ a number of tangible outcomes are beginning to take shape that, if enacted, would be likely to go some way in addressing the needs of the global technology industry and digital economy firms (as discussed in Section 10.1 of this chapter). This is true, for example, of the proposed new disciplines to boost transparency under Section II with respect to both current investment measures and proposed measures, with a corresponding notice and comment period. Textual proposals on streamlining and speeding up of administrative procedures (Section III) could also potentially go a long way in reducing the compliance burden and accelerating approvals when specific transactions are time-sensitive and need to be cleared quickly, something particularly important in the fast-moving technology sector. This Section of the draft agreement would also include due process provisions that can only make a positive contribution to the investment governance of many WTO members, if implemented.

Finally, worth mentioning in the context of the analysis being undertaken here are the proposed provisions contained in Section IV of the draft agreement, which taken together, aim to improve internal and cross-border administrative cooperation and regulatory coherence.Footnote ⁴⁵ These provisions are again aimed at improving the quality of the domestic institutional landscape that foreign investors must navigate. By doing so, these provisions aim to reduce investors’ exposure to arbitrary, discriminatory, and other regulatory interventions perpetrated or tolerated by the host government that either drastically undermine the value of these investments or tilt the playing field against them in a way that is prone to dramatically upset the calculus of risk and reward that these investments were predicated on in the first place. In doing so, the structured dialogue on investment facilitation for development appears to be bringing the WTO incrementally closer to the objectives sought under the OECD Investment Policy Framework with respect to the quality investment regimes, economic governance, and rule of law outcomes that the latter seeks to promote.

10.4.3 Investment Chapters in Free Trade Agreements

This next and final section on international cooperation in investment examines what has transpired in the context of free trade agreements. It begins with a brief discussion of the historical antecedents of investment provisions in the context of broader treaty arrangements primarily focused on international trade. The discussion then moves on to the modern era, particularly when this trend really took off, namely, in the context of the North American Free Trade Agreement (NAFTA). The investment provisions of NAFTA have served as a template for many subsequent trade agreements both between the United States and its FTA partners and beyond, culminating in the first and most recent update of this agreement, the United States–Mexico–Canada Agreement (USMCA).

Investment was included in the abortive ITO Charter, negotiated as part of the postwar international economic architecture, and even then – as now – was closely linked to the issue of economic development.Footnote ⁴⁶ The investment provisions of the ITO Charter were focused more on guaranteeing foreign investors most-favored-nation (MFN), and national treatment, as well as providing protection to them against ‘unreasonable or unjustified action […] injurious to the rights or interests of national of other Members …’.Footnote ⁴⁷ Thus, in no small way, these provisions resembled those that were then being sought under different treaties of friendship, commerce, and navigation and later under bilateral investment treaties, and as well as in the investment chapters of FTAs.Footnote ⁴⁸

The current explosion in the negotiation of bilateral and regional free trade agreements arguably started in 1985 with the FTA between the United States and Israel, followed shortly thereafter by the 1987 FTA between Canada and the United States, which was itself followed by NAFTA in 1993. All subsequent FTAs that have been negotiated between the United States and its trading partners, including the 2018 USMCA and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP; which the United States ultimately withdrew from), have included provisions in their investment chapters largely predicated on the template that first emerged as NAFTA Chapter 11-Investment.Footnote ⁴⁹ In fact the set of standards or minimum base lines that started to emerge in NAFTA (discussed in more detail later) have also become the norm (with slight deviations and carve-outs) for the European Union and even in FTAs negotiated by large middle-income developing countries such as China, Indonesia, and India.

What one finds in NAFTA and the many FTAs that have followed this template since are a core set of provisions that seek to place material constraints on host governments’ regulatory autonomy, albeit subject to various different scope limitations, carve-outs, and exceptions. The first of these concern nondiscrimination, usually with provisions on both national treatment and MFN.Footnote ⁵⁰ The second set of provisions seek to guarantee a minimum standard of treatment for foreign investors and their investments ‘in accordance with international law, including fair and equitable treatment and full protection and security’.Footnote ⁵¹ The third set of provisions concern performance requirements and seek to stop host governments from setting minimum export requirements, or local content requirements, or technology transfer requirements or other policies that seriously constrain foreign investors or their investments from making decisions on sourcing and distribution on the basis of purely commercial considerations.Footnote ⁵² Yet another set of provisions concern expropriation, so that host governments refrain from doing this unless under specific circumstances, such as in pursuit of a public purpose, under due process of law, on a nondiscriminatory basis, and subject to ‘payment of prompt, adequate and effective compensation’.Footnote ⁵³ Yet another set of provisions concern the ability of foreign investors to expatriate earnings, profits, and other proceeds or payments back to their home country.Footnote ⁵⁴ Another set of provisions concern senior management and boards of directors and seek to constrain the ability of host governments to prevent foreign investors and their investments from appointing their own senior management personnel or running the executive organs of their corporate bodies in a way that allows them to retain effective control of these organs.Footnote ⁵⁵ Finally, these chapters tend to include detailed provisions on dispute settlement that provide either for third-party investment arbitration or in the case of the Canada–EU Comprehensive Economic and Trade Agreement (CETA), referral to the Tribunal established under the auspices of the agreement itself.Footnote ⁵⁶

As NAFTA was superseded by the Agreement between the United States of America, the United Mexican States, and Canada (USMCA) – which entered into force on July 1, 2020 – some commentators have highlighted what they interpret as a weakening of the protection provided under the new rules.Footnote ⁵⁷ Yet another important set of limitations in terms of the protection afforded to investors under the investment chapters of FTAs vis-à-vis the regulatory autonomy granted the authorities of host States come through the introduction in the USMCA of limiting language citing ‘legitimate public welfare objectives’ in the context of the two core nondiscrimination provisions (14.4 on National Treatment and 14.5 on MFN), which will attenuate any ‘like circumstances’ analysis made in the application of these provisions. The effective impact of this change remains to be seen, but what it says about where governments increasingly see the balance between the rights of investors and governments’ right to regulate is significant.Footnote ⁵⁸

Despite the limited rolling back seen in the domain of investment protection, USMCA did nevertheless set a series of new and important regulatory constraints that do far more for the global technology sector and digital economy firms than anything previously negotiated.Footnote ⁵⁹ For example, a comparison of the USMCA and corresponding CPTPP provisions on cross-border data flows (Article 14.11 of the CPTPP and Article 19.11 of the USMCA, respectively) shows that they both contain the same substantive obligations. Each sets forth a general ban on restrictions on cross-border data flows made in the course of business. However, this ban is caveated by a public policy exception, which is limited to interventions that are ‘not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade’. Moreover, these interventions must adhere to abide by the principle of proportionality (i.e., ‘not impose restrictions on transfers of information greater than are required to achieve the [legitimate public policy] objective [in question]’). However, the corresponding article in the USMCA goes slightly further, in that a footnote to it clarifies that ‘a measure does not meet the conditions of this paragraph if it accords different treatment to data transfers solely on the basis that they are cross-border in a manner that modifies the conditions of competition to the detriment of service suppliers of another Party’. This qualifying language further strengthens the position of affected companies while at the same time further proscribing the regulatory autonomy of intervening authorities.

By the same token, the (limited) protections afforded in the CPTPP against the mandatory disclosure of source code (Article 14.17) is likewise granted under the USMCA, but is – importantly – also extended to algorithms expressed in the source code and – equally importantly – the relevant USMCA provision (Article 19:16) does not contain the explicit substantive scope limitations set out in the CPTPP provisions, which only extend the article’s protections to mass-market software and explicitly exclude software used in critical infrastructure from these protections. These differences are again potentially important. First, the significance of explicitly extending the protection afforded to algorithms should not go unnoticed, given the 2020 furor over TikTok, which was based as much on the app’s collection and processing of private user information as it was on the power of its underlying algorithm – which is what makes it so addictive and thus so successful in the first place.Footnote ⁶⁰ Second, by expanding the protection offered under the article to both customized software applications and software in the critical infrastructure space, the language effectively captures several billion dollars’ worth of economic activity including those that design, implement, and operate bespoke software solutions to massively important sectors of the modern-day economy, including utilities, transport, and – perhaps most significantly – the financial system. These applications, service suppliers and sectors were all carved out of the corresponding provisions of the CPTPP, but this is not true under the USMCA.

Yet another important way in which the USMCA goes beyond the CPTPP in prescribing the regulatory autonomy of signatories with respect to the investments and activities of digital firms is in the area of data localization. Whereas here, the CPTPP pursues (in Article 14.13) a similar approach to that discussed earlier on cross-border data flows (i.e., a general rule, caveated by a public policy exception, which is itself limited by so-called chapeau-like language and a proportionality requirement), the corresponding provision in the USMCA contains only the general ban. This essentially means exactly what the provision (Article 19.12) says, namely, ‘[no] Party shall require a covered person to use or locate computing facilities in that Party’s territory as a condition for conducting business in that territory’. This is as unequivocal a ban on the use of forced data localization as the global technology industry is ever likely to desire and – moreover – ever likely to achieve since it is doubtful whether this kind of unqualified language would ever find traction outside of the specific negotiating dynamic that characterized the USMCA.Footnote ⁶¹

Thus, although the USMCA codified a retreat from the more expansive degree of investment protection achieved under NAFTA, particularly by putting significant strictures around investor–state dispute settlement (ISDS) and recasting the balance of interests between the investor and the regulator in the area of nondiscrimination claims, it also represented a significant expansion of the protections sought by important segments of the global technology industry. These protections are aimed at safeguarding against regulatory interventions that specifically undermine the cross-border viability of their business models, particularly as they relate to the core elements of their value propositions, namely, data flows, source code, and proprietary algorithms.

10.5.1 Geopolitical Tensions versus Technical Negotiations

The world has obviously changed since the wooly formulations that constituted the best endeavor declarations, and guidelines of the G20, the OECD, and UNCTAD were formulated and promulgated. The Global Financial Crisis, the rise and newfound assertiveness of China (and the reaction this has provoked from incumbent powers in the West), ,and more recently the COVID-19 pandemic with the massive – almost unprecedented – strain it placed on both national economies and international economic cooperation, have all forced a reassessment by national governments of their priorities with regard to a range of economic policy positions including investment openness.Footnote ⁶² The rollback experienced after investment flows between China and the West peaked in 2016 has taken on additional momentum during the pandemic to the point where it is questionable whether any of the additional restrictions imposed since 2020 are likely to be lifted and if so, how quickly and how indiscriminately.

Whereas at the geopolitical level, the overarching sensation is a continued distrust, this dynamic appears to be all but belied at the technical level as trade diplomats doggedly continue their efforts in Geneva to conclude a new WTO Agreement on Investment Facilitation for Development by the end of 2022. In doing so, they focus on reaching compromises on issues that – to many outsiders at least – are little more than arcane details buried in the legal minutiae of different textual proposals. However, the benefits that an IFD Agreement offer constitute the firm anchoring of principles and practice of sound regulatory governance, only this time in a legal and institutional setting that could offer the promise of actionable rights and enforceable obligations, at least if the WTO can restore its dispute settlement system to full functionality in the near future. This seems all the more important today as countries increasingly seek to distance themselves from the negative implications increasingly associated with ISDS, while at the same time growing less reluctant to invoke national security in order to evade treaty obligations or impose new restrictions.

10.5.2 Using the IFD Agreement to ‘Square the Circle’

Given the breadth and depth of the many commitments that have been made in the area of investment, particularly in bilateral and regional FTAs (as discussed under Section 10.4.3), and given the widespread engagement of both developed and developing countries in the G20, OECD, UNCTAD, and WTO processes (likewise discussed under Sections 10.4.1 and 10.4.2), it seems somewhat surprising that nobody has come along and ‘squared the circle’ so to speak at the WTO or elsewhere, by multilateralizing the many gains that have already been achieved in other fora (particularly FTAs).

Also surprising is that the three issues of market access, investment protection, and investor–state dispute settlement have explicitly been left out of the WTO IFD talks since arguably they would be needed in order to provide the quid pro quo for developed countries that must eventually ensue if a deal is to be done. Moreover, if the WTO Trade Facilitation Agreement (TFA) is the template for the IFD Agreement, then the flexible approach taken in the TFA should be a necessary but perhaps not sufficient precondition for achieving a meaningful negotiated outcome, at least with respect to what the agreement would offer developing countries in the way of negotiated concessions. The mechanism of allowing developing countries to make deeper commitments in future contingent on the receipt of technical assistance and perhaps other benefits should go some way to incentivizing many developing countries to engage seriously with these talks. One could even argue that this is even more so the case in the IFD talks since the ultimate outcome should be one in which scarce capital can flow more freely to those places where it can achieve the greatest rewards for the lowest risk. As such, an IFD Agreement as currently proposed would appear to offer developing countries both a mechanism and the means to improve this calculus by lowering the risks of investing in their jurisdictions.

10.5.3 Negotiating Coin in the Investment Facilitation for Development Talks

There is also the more fundamental issue of ‘negotiating currency’ and cross-sectoral trade-offs. Technical assistance and a limited set of other incentives capable of being offered in the context of the IFD Agreement may not be enough to get developing countries and LDCs that up to now have made no or minimal commitments on investment in any forum whatsoever to do this at the WTO. Recall that in order to get this constituency to accept new rules on trade in services and Trade-Related Intellectual Property Rights as part of the multilateral trading system in the Uruguay Round, it was necessary to offer them the quid pro quo of: (1) binding new rules on trade in agricultural products including the almost complete dismantling of residual quantitative restrictions on these products, as well as (2) an Agreement on Textiles and Clothing that promised (and then delivered) the comprehensive and irreversible elimination of the universally despised (by developing countries) system of import quotas on these products in developed country markets. No comparable trade-off is immediately apparent in the current context, given the absence of a broader negotiating round, which again means that the incentivizing role played by technical assistance commitments and the potential of future increases in inbound investment become all the more important to striking a deal in these negotiations.