6.3.1 China

As coordinator of FIFD, China was a major force behind the 2017 joint statement in support of the IFD Agreement. Even before informal discussions on the IFD Agreement were launched, China encouraged consensus building on investment facilitation measures during its tenure as president of the G20.Footnote ²⁰ China has since become one of the most vocal proponents of the agreement inside and outside of the WTO. Scholars attribute China’s interest in investment facilitation to its status as a net exporter of capital.Footnote ²¹ Multilateral rules on investment facilitation will reduce the transaction costs for Chinese firms and state-owned enterprises when investing abroad. However, China’s economic status does not fully explain why the Chinese government sees the WTO as an appropriate venue in which to advance multilateral investment rules nor why it stopped short of pursuing investment protections. As this section discusses, China’s interest in investment facilitation reflects a confluence of international and domestic pressures as well as its growing confidence on the world stage.

Chinese outward foreign direct investment (OFDI) has increased steadily since 2002, surpassing inward FDI flows for the first time in 2015 (see Figure 6.1) and OFDI stocks soon followed, exceeding inward FDI stocks in 2017 (see Figure 6.2). It is true therefore that China’s interest in investment facilitation has grown in step with its status as a capital exporter. But its interests also reflect important changes in China’s domestic economic and political landscape, which made this status possible.

Figure 6.1 China FDI flows inward and outward (US$ billion).

Source: Own compilation based on data UNCTADStat, ‘Foreign Direct Investment: Inward and Outward Flows and Stock, annual’, online at: https://unctadstat.unctad.org/wds/TableViewer/tableView.aspx (accessed 13 June 2023).

Figure 6.2 China FDI stocks inward and outward (US$ billion).

Source: Own compilation based on data from UNCTADStat, ‘Foreign Direct Investment: Inward and Outward Flows and Stock, annual’, online at: https://unctadstat.unctad.org/wds/TableViewer/tableView.aspx (accessed 13 June 2023).

Prior to the late 1970s, China’s foreign economic policy was predominantly protectionist. The imposition of foreign investment on China after the Opium Wars and the Sino-Japanese War during the nineteenth century fostered resentment toward foreign capitalists in the decades that followed. Chinese leaders began instituting reforms aimed at liberalizing the domestic investment market as part of a broader program of ‘opening up’ the economy toward the late 1970s. By then, attitudes toward foreign investment had begun to warm amid growing demands for economic modernization. Foreign investment – and the promise of new technology, managerial skills, and access to foreign markets – came to be seen as a necessary means to modernize industrial sectors where productivity lagged. Even then, FDI was restricted to special economic zones near urban centers where foreign investors received preferential terms, including tax incentives, export duty exemptions, and fiscal and foreign exchange privileges.Footnote ²²

The Chinese government began moving away from its ‘permissive’ approach toward an active program of FDI attraction in the mid-1980s. Further reforms were introduced in the 1990s, including the 1995 Interim Provisions on Guiding Foreign Investment and the Catalogue for the Guidance of Foreign Investment Industries, which aimed to attract FDI into favored sectors while protecting sensitive industry like banking, cultural industries, and telecommunications. China’s 10th Five-Year Plan marked an important departure. Launched in 2001, the Plan committed to encouraging national firms to go overseas.Footnote ²³ Following the Plan, the Chinese government relaxed approval processes for overseas investment and established minor financial and diplomatic support to would-be investors. However, OFDI remained low and concentrated in a limited number of sectors. In 2012, China switched from a policy of ‘going in’ to a policy of ‘going out’, involving the more active promotion of Chinese FDI abroad. This policy was epitomized in the 2013 launch of the Belt and Road Initiative (BRI).Footnote ²⁴

The shift in Chinese foreign investment policy was for the most part a state-led initiative. In a one-party state, private enterprise lacked effective channels of influence in policymaking circles. Chinese OFDI was also dominated by a relatively small number of state-owned enterprises administered by the Central Government’s ministries and agencies (anywhere between 73.5 and 86.4 percent of OFDI between 2003 and 2006). The remaining share of FDI flows and stocks were made by SOEs administered by regional governments. The private firms’ share of FDI was minimal: In 2005, private firms accounted for 1.5 percent of OFDI, and by the end of 2006, just 1 percent.Footnote ²⁵

According to Cheng and Ma,Footnote ²⁶ the Chinese government’s interest in promoting OFDI grew as a result of competitive pressures, such as the desire to secure key natural resources and technologies to feed its internal development. OFDI was directed toward sectors like agriculture, cattle breeding, fisheries, mining, manufacturing, and service industries. China’s 11th Five-Year Plan (2006–2010) emphasized the need to secure the domestic energy supply by tapping foreign sources. OFDI in oil, gas, and other forms of energy helped feed China’s massive growth rates. There was also a growing awareness that Chinese firms needed to compete in the global arena as foreign firms expanded their presence in China. As such, China sought to promote the multinationalization of select enterprises. But as BrownFootnote ²⁷ observes, China also needed to find a new way of spending its massive foreign exchange reserves. By the mid-2000s, China had amassed over a trillion dollars in foreign reserves due largely to the country’s trade deficit with advanced economies like the United Kingdom and the United States. Outward investment provided higher returns than purchasing additional United States’ debt and helped alleviate excess liquidity in the Chinese economy.

Promoting OFDI also fit into China’s non-material concerns. China’s international reputation suffered after the June 4 incident. International concern over the country’s human rights record remained high throughout the 1990s. As a result, the Chinese government undertook a rebranding exercise aimed at replenishing its soft power. Pledging investment and aid to developing countries was a means of improving China’s image. And more developing countries came to view China as a positive role model for how a country could transform and modernize its economy through state intervention.Footnote ²⁸ Over time, the Chinese Communist Party also came to depend increasingly on the promise of economic progress and poverty alleviation for its political appeal at home.

Changing ideas about the role of foreign investment, global economic competition, and the search for soft power at home and abroad help explain the country’s burgeoning interests in exporting capital. Yet, China’s capital-exporting status does not fully explain why the Chinese government pursued investment facilitation measures at the WTO instead of bilateral and regional arrangements, which are easier to negotiate and where it arguably has greater bargaining power.

Understanding China’s interest in investment facilitation requires understanding its own experience in resolving bureaucratic hurdles needed to achieve its investment policy objectives. Indeed, Chinese investors did not respond automatically to government incentives aimed at promoting OFDI. Administrative barriers dampened OFDI flows until investment facilitation measures were introduced. In the 1980s and 1990s, Chinese investors were required to obtain approval from the Central Government before undertaking an investment project. The regulation of OFDI was further dispersed across various government agencies with limited administrative capacity. According to Yang and others,Footnote ²⁹ many would-be investors found the approval process slow, complicated, and opaque. Beginning in 2009, the Chinese government began introducing measures aimed at simplifying the approval process (e.g., by delegating the power of approval to local departments). As a result, the pace of overseas investment began to increase.

The Chinese government overhauled its outward investment regime again in 2013 to coincide with the launch of the BRI. The administrative review process was further streamlined and loosened, and vertical and horizontal cooperation among regulatory agencies was enhanced.Footnote ³⁰ Then in 2017, the National Development and Reform Commission launched the National Investment Project Online Approval and Supervision Platform with the aim of enhancing the efficiency and transparency of investment governance. This platform is akin to an SEW in that it provides a single access point for domestic and outbound investors to the investment approval and supervision process. As a result of these changes and other measures aimed at improving its business environment, China rose on the World Bank’s now defunct Ease of Doing Business Index from 90th place in 2008 to 32nd in 2019. China’s faith in investment facilitation measures may therefore reflect its own experience in tackling the bureaucratic obstacles needed to realize its capital-exporting status.

Efforts to multilateralize investment facilitation measures via the WTO reflect China’s increasing willingness to occupy center stage in the global arena. China’s confidence has grown in step with its economic clout. Chinese nationals have taken on leadership roles in several international institutions, including in UN agencies and the G20. Generally, China is not interested in restructuring or doing away with existing global economic institutions. The Chinese government has not offered new models of governance for global finance, trade, or investment. Rather, China has sought to repurpose Western laws and institutions so that they better suit the interests of new (i.e., developing country) actors and a wider array of political and economic models.Footnote ³¹

It follows that China has taken a more assertive role in defining the future of the WTO, largely by layering on top of existing trade rules those that better suit the needs and interests of non-Western countries. For the first fifteen years of its membership, China’s engagement within the WTO reflected a policy of ‘active learning’ aimed at building its capacity to navigate extant rules and structures. Much has changed in the last half decade. China has played an important role in several new joint statement initiatives, including investment facilitation and e-commerce. These initiatives have been framed as part of an effort to share the lessons of China’s own economic success, which includes investment facilitation. China’s permanent representative and Ambassador to the WTO Zhang XiangchenFootnote ³² explained this goal best when he stated, ‘China needs to make greater contributions and add Chinese wisdom to global trade liberalization and investment facilitation, as well as help create an in-time reform of the multilateral trade system’. The Chinese government learned from its own experience the added value of investment facilitation and now aims to export these lessons as part of a ‘win–win’ strategy.

It should also be noted that China continues to negotiate standard investment protections in bilateral and regional arrangements, including the Regional Cooperation and Economic Partnership agreement concluded in 2020. China now belongs to the second-highest number of investment treaties out of any country in the world (next to Germany). And until recently, China was a rule-taker, not a rule-maker in treaty negotiations. However, China has become more assertive in treaty negotiations. According to Levine,Footnote ³³ Chinese drafters demonstrate a desire to experiment with novel formulations that expand or narrow investment protections according to China’s own interests, and recent treaties suggest that it has been successful. However, consolidating investment protections in the WTO is all but unfeasible, given the historic resistance of developing countries to these standards and the current legitimacy crisis engulfing BITs.

Championing investment facilitation measures is also more consistent with China’s foreign policy principles of nonintervention and mutual gain. As advocates argue, investment facilitation measures are less constraining on the policy space of signatory governments and therefore offer greater flexibility to governments across different political and economic systems. Investment facilitation measures are also less threatening to host-countries with lingering concerns over Chinese OFDI. The majority of China’s OFDI continues to be made by firms that have a close relationship with various levels of government, and most overseas investment by private firms continues to require government approval. Some countries have responded to the growth of Chinese investment with national security concerns as a result and have imposed new restrictions on Chinese investment. For instance, EU and the United States governments tightened the screening of Chinese investments amid concern that they might compromise national security.

Historically, China’s foreign investment policy reflected its state interventionist tradition as well as the more traditional concerns of capital-importing countries. But by the end of 2012, China moved toward a strategy of ‘going out’, combining a more concerted effort to promote the internationalization of Chinese firms with a growing role on the world stage. China aims not to revise existing trade rules but to layer on top of them rules that are more inclusive and that better fit the perceived interests of Global South members. However, as discussed in the next section, China’s efforts in layering may be hindered by the rather unstable foundations provided by the defunct Doha Development Agenda.

6.3.2 India

India was an early and vocal critic of the IFD Agreement. While some signs suggest its position has warmed, India’s signature is absent from joint statement issued in favor of the IFD Agreement in December 2021. That is not to say that India opposes international rules on investment facilitation. India has signed a host of bilateral arrangements that include investment facilitation measures, including an Investment Cooperation and Facilitation Treaty with Brazil in January 2020. Rather, India’s objections fall squarely on the inclusion of investment facilitation measures under the WTO. The Indian government frames its opposition with reference to two main points: First, Indian officials believe that no new issues should be added to the WTO agenda before the Doha Development Agenda is completed, and second, Indian officials are concerned that investment facilitation rules would constrain domestic policy space. This section details the domestic and international pressures that inform these concerns.

India has been a vocal proponent of developing country interests within the WTO since the organization’s foundation in 1995. The Indian government strongly contests asymmetries in existing trade rules, particularly in the Agreement on Agriculture. As leader of the G33 coalition of developing countries, India has pressed for protections in agriculture that would promote food security, rural livelihoods, and rural development. India’s habit of pushing back against the demands of advanced economies reflects the country’s colonial past and the historic predominance of import substitution industrialization as a policy paradigm, which began under the Nehru government (1947–1964) shortly after the country’s independence from Britain. Despite its pro-business rhetoric, the government of Narendra Modi and the Bharatiya Janata Party (BJP) (2014–present) has pursued what Elizabeth ChatterjeeFootnote ³⁴ calls a new developmentalist strategy combining liberalization (and the promotion of favored private industry) with the maintenance of selective intervention. Reflecting this strategy, the Modi government has sought to navigate the global trade regime and promote the growth of externally oriented business while maintaining room for India’s new developmental state. This time, however, India’s concern for policy space pits it against other developing countries.

Somewhat ironically, discussions on an IFD Agreement were in part inspired by a 2016 proposal from the Indian government to discuss a Trade Facilitation in Services Agreement, which included measures to facilitate the commercial presence of foreign services providers. Yet, India’s interests in multilateral investment rules are limited to services firms. FDI remains heavily politicized, particularly in light of recent public backlash against ISDS cases. India faced a wave of investment arbitration claims beginning in 2010, which brought public scrutiny to its investment treaty commitments. The Indian government launched a review of its BIT program, which resulted in the introduction of a new treaty model in 2015. The new model is aimed at better preserving the policy space and excludes provisions, which were the subject of controversy in ISDS cases. For instance, the model excludes the most-favored nation (MFN) clause likely as a result of India’s experience in the White Industries case, in which the MFN clause was evoked to import provisions from another Indian BIT.Footnote ³⁵

The Indian government has also faced pressure from civil society and academics who oppose the agreement. They argue that the IFD Agreement may constrain the policy space, regardless of the purported technical nature of the agreement. Nedumpara and ChandyFootnote ³⁶ observe that even seemingly innocuous requirements, for example, that the processing of investment applications be ‘objective’, can generate challenges for host-state policy, given that parties may disagree about what defines a policy’s objectivity. Others have claimed that the IFD Agreement is not well suited to the Indian context. Singh,Footnote ³⁷ for instance, observes that in India – as in other heavily federalized countries – the administrative impediments experienced by foreign investors often occur at the local levels where authority over the vetting and management of investment projects has been devolved. Resolving these impediments, he argues, requires a ‘bottom–up’ approach that begins with local authorities. Such an approach would ensure local buy-in and democratic accountability while preserving countries’ ‘freedom to choose policy instruments that conform to the institutional architecture of the country concerned.’Footnote ³⁸

Critics also express concern over the potential adjustment costs associated with placing the IFD Agreement into force. Instituting an SEW can be a costly undertaking, given the human resources and capital needed to create and maintain a highly complex electronic platform. They have further noted that many economies that now lead FDI attraction did not have to cope with the costs of meeting high transparency standards at earlier stages of their own development and may have benefited from a lack of transparency in their investment market. Investment facilitation measures may not attract significantly high FDI inflows to justify the adjustment costs, given that FDI is determined by other factors (e.g., the size of domestic markets, the quality of infrastructure, labor costs, trade openness, taxation policy, and the political environment).Footnote ³⁹ Civil society concerns over policy space and adjustment costs likely resonate with government officials because they feed into traditional concerns about asymmetry in the multilateral trading system.

To be sure, proponents of the IFD Agreement have attempted to address concerns over the policy space by incorporating into the Easter text language, which makes clear the exclusion of issues related to market access and the treatment of foreign investors from the treaty coverage. For instance, proposed wording in provision 3.2 of the Easter Text explicitly states that ‘This Agreement shall not serve as a means to interpret any provisions of an International Investment Agreement of a member, and shall not be used as the basis for a claim or in any way by a claimant under the procedures for the resolution of investment disputes between investors and states provided for in an International Investment Agreement.’ Wording in the preamble proposed by Brazil also recognizes members’ commitment to promoting sustainable development, including social development, environmental protection, and the welfare of present and future generations. Members have also proposed language around SDT and potentially home-country and investor obligations to create more balance in the commitments made by stakeholders. So far, these reassurances have not brought sceptics like India to the negotiating table.

India’s desire to revitalize the Doha Development Agenda may pose a more existential threat to the IFD Agreement. India has been especially concerned with advancing negotiations on agriculture, which reflects the continued centrality of agriculture to the Indian economy. Namely, the Indian government hopes to secure new flexibilities that would help protect agricultural workers from import competition and alleviate food insecurity. Along with other G33 members, India has pressed for a special products exemption that would allow developing countries to shield some products from tariff cuts as well as a special safeguard mechanism that would enable governments to raise tariffs in response to an import surge. As Kristen HopewellFootnote ⁴⁰ explains, two-thirds of India’s population depends on the sector, most of whom are poor, subsistence producers. Agriculture is also India’s most politically sensitive sector as agricultural workers tend to be highly mobilized. Given their vulnerability to trade liberalization, agricultural workers tend to oppose further market opening and may only support further trade liberalization if these flexibilities are secured.

India is also concerned with securing a permanent solution to the public stockholding for food security and domestic subsidies – issues that were central to agricultural talks during the Doha rounds. India has struggled with food insecurity due to persistent poverty rates and drought. Under existing rules, a WTO member’s food subsidies should not exceed 10 percent of the value of its agricultural production. India’s food security programs, which provide subsidized food to over 800 million people, risk breaching this cap over time. The Indian government has sought a revision to these rules that would protect its food security programs from legal challenge. In December 2013, WTO members at the Bali ministerial meeting agreed to the Peace Clause, under which members agreed to refrain from challenging a breach in the prescribed cap committed by a developing country. They further committed to revisiting discussions with the aim of arriving at a more permanent solution during the 11th ministerial conference (“India to pitch for permanent solution for food security at the WTO”, 2021). However, public stockholding was left off the 12th ministerial conference agenda in June 2022.

Finalizing trade rules on agriculture and manufacturing is also essential to advancing discussions on trade in services, an area of strategic interest to India’s long-term economic goals. As HopewellFootnote ⁴¹ explains, India seeks to be a global leader in services, particularly given China’s dominance of the global manufacturing sector. In the last two decades, India’s services exports have grown faster than those of any other country in the world, and India seeks rules that would secure its leadership while helping it to expand into higher value-added service activities. However, influential member countries made it clear that only once terms were agreed on trade in goods could the WTO’s negotiating agenda turn to services.

Concluding the Doha Development Round is therefore essential to several of India’s short- and long-term political and economic interests. India sees the introduction of new issue areas on the WTO negotiating agenda as detracting from this goal. India, South Africa, and other developing countries have opposed several joint statement initiatives on this basis. At the December 2020 General Council meeting, India, Cuba, and the African Group presented a communique entitled Strengthening the WTO to Promote Development and Inclusivity (the Communique), which reminded members that they accepted the responsibility of addressing asymmetries in existing trade rules in 2001 as a pillar of the Doha Development Agenda. The Communique also stated that ‘the slate of new rules proposed by some country members, while essential elements of the Doha Development agenda went unaddressed, was moving the WTO away from the principles enshrined in the Marrakesh Agreement’, which gave the WTO an explicit developmental purpose. India continues to push back against the introduction of new agenda items and has been successful in generating support among like-minded countries. This may ultimately limit proponents’ efforts at multilateralizing the IFD Agreement.

It should be noted that India’s hesitation to negotiate new trade rules has been exacerbated by rising tensions with China, which many perceive to be a leader of the IFD initiative. India pulled out of the China-backed RCEP agreement after a standoff at the Sino-Indian border, citing concerns over the import of cheap Chinese goods. India’s opposition to the IFD Agreement reflects a lingering concern for policy space, interest group pressure (for a return to the Doha Development Agenda), and geopolitical interests. Only some of these concerns may be accommodated within the context of the IFD Agreement negotiations.

6.3.3 Brazil

Like China, Brazil was an early and eager advocate of the IFD Agreement. The Brazilian government was the first to submit a full draft agreement, which it did just months after the initial Joint Ministerial Statement on Investment Facilitation for Development was released. The purported aim of Brazil’s draft was to illustrate what a potential agreement could look like and to provide a base for further discussion. As a member of FIFD, Brazil also took part in informal discussions on the agreement and helped convene high-level meetings on investment facilitation to build support among WTO members. However, Brazil’s position differs from that of China in that it reflects a stronger mix of defensive interests. This section discusses the domestic and international pressures that inform Brazil’s interests in the IFD Agreement.

Brazil has also been a staunch defender of developing country interests at the WTO. Brazil resisted United States’ efforts to place investment on the WTO’s negotiating agenda during the Doha Development Round over concerns that it would secure the United States’ economic advantage and constrain Brazilian policy space. While Brazil is one of the largest sources of FDI in Latin America, it is overall a net importer of capital. And like India, Brazil continues to press strongly for fairer and more balanced trade rules, including rules that would end ‘agricultural trade-distorting domestic support entitlements’.Footnote ⁴² Brazil has therefore shared many of the concerns of its emerging economy counterparts.

Unlike China and India, Brazil stands out in the global politics of investment as one of few countries never to have ratified a BIT. Brazil joined other developing countries in the rush to signing BITs during the 1990s as part of a more general program of economic restructuring. Yet, the government fell short of ratifying the agreements due to congressional opposition. Legislators opposed the agreements over fears they would constrain policy space and the possibility that they would disadvantage national investors. Concern for equality between national and foreign investors has dominated debates on foreign investment protections since the introduction of the Calvo Doctrine. And Brazil has been a strong objector of ISDS dating back to the negotiations that led to the establishment of the International Centre for the Settlement of Investment Disputes in the 1960s. FDI inflows accelerated throughout the late 1990s and early 2000s, regardless of the fact that the BITs were not in force (see Figures 6.3 and 6.4). This confirmed for many political elites that BITs were not necessary to securing Brazil’s advantage in attracting FDI.Footnote ⁴³

Figure 6.3 Brazilian FDI flows, 1995–2020 (US$ billion).

Source: Own compilation based on data from UNCTADStat, ‘Foreign Direct Investment: Inward and Outward Flows and Stock, annual’, online at: https://unctadstat.unctad.org/wds/TableViewer/tableView.aspx (accessed 13 June 2023).

Figure 6.4 Brazil FDI stocks, 1995–2020 (US$ billion).

Source: Own compilation based on data from UNCTADStat, ‘Foreign Direct Investment: Inward and Outward Flows and Stock, annual’, online at: https://unctadstat.unctad.org/wds/TableViewer/tableView.aspx (accessed 13 June 2023).

An important change in Brazil’s stance on international investment rules occurred in 2015 when the Brazilian government under Dilma Rousseff (2011–2016) launched a treaty-making program. In its first year, the program saw Co-operation and Facilitation Investment Agreements (ACFIs) signed with Mozambique, Angola, Malawi, Colombia, and Chile. Unlike BITs, Brazil’s ACFIs excluded standard investment protections (e.g., on fair and equitable treatment and indirect expropriation) and ISDS in favor of provisions aimed at encouraging cooperation between contracting parties, the establishment of institutions that foster communication between investors and host-governments (i.e., national focal points), and the implementation of dispute prevention mechanisms. They also referenced corporate social responsibility and provided for state-to-state dispute settlement in lieu of ISDS.

Several factors appear to have driven Brazil’s ACFI program. For one, Brazil’s business interests became increasingly transnational. Following a brief but severe economic crisis in 2000, Brazil saw a massive expansion of its agricultural and natural resource industries. As a result, Brazil became a significant exporter of FDI, particularly to Latin America, Africa, and other emerging economies.Footnote ⁴⁴ Unlike in China where the expansion of OFDI was state-led, in Brazil, growth in OFDI correlated strongly with cycles of inward FDI. Tomio and AmalFootnote ⁴⁵ argue that inward FDI contributed to a learning process whereby Brazilian companies were encouraged to engage more in the global economy. In the 2010s, Brazilian investors began pushing the government to seek rules that would ease their outward investment.

According to Moraes and Cavalcante,Footnote ⁴⁶ most investors did not press for BIT-like investment protections, but instead sought a framework that would help them ease their entry and operations in investment markets, such as navigating bureaucracies and licensing requirements. This reflects the widespread acceptance of the equal treatment principle: Brazilian firms for the most part accepted the idea that foreign investors would be given the same legal rights as domestic firms. The result was that the ACFI preserved the principle of equal treatment and excluded issues of market access and investment protection. A third likely factor behind Brazil’s ACFI program was the conclusion of the TFA in 2013. Maggetti and MoraesFootnote ⁴⁷ argue that Brazilian drafters were inspired by the idea that international treaties could be used to promote the facilitation of trade and investment as opposed to locking in rules with little flexibility. They took this idea forward into domestic policy debates.

According to some scholars, Brazil’s ACFI program has made it a ‘norm entrepreneur’ in investment treaty law.Footnote ⁴⁸ As one of the first countries to integrate investment facilitation measures into bilateral treaties and FTAs, Brazil demonstrated that a viable means of attracting FDI exists outside of the traditional BIT model. Indeed, Brazilian ACFIs demonstrate that governments can promote a better business environment while better preserving government policy space. Brazil has since concluded ACFIs as a stand-alone agreement or as chapters in FTAs with much of South America (excluding Bolivia and Venezuela) and with African countries (namely, Angola, Mozambique, Malawi, Ethiopia, and Morocco). It also successfully used its ACFI model to influence the design of the 2017 Intra-Mercosur Protocol on Investment Cooperation and Facilitation, suggesting that its entrepreneurial aims were not confined to bilateral arrangements.

Brazil’s launch of its own treaty-making program aimed at securing investment facilitation measures makes it a natural champion of the IFD initiative. The IFD Agreement provides Brazil the opportunity to elevate domestic norms from the bilateral and regional levels to the pluri- and multilateral levels. This would explain Brazil’s early delivery of its draft for an IFD Agreement, which was influenced heavily by its ACFI model. Like ACFIs, Brazil’s draft agreement provides for cooperation across national focal points, establishes an SEW, and promotes the principle of corporate social responsibility.Footnote ⁴⁹ Brazilian support for the IFD Agreement therefore fits into a broader effort to influence the future direction of international investment law.

Another explanation for Brazil’s support of the IFD Agreement is that it helps demonstrate to the international community the government’s commitment to the liberal trading order. Dilma Rousseff was replaced by Michel Temer as interim president in 2015 following a corruption scandal that gripped national and international headlines. The same year, Brazil’s economy began to contract, with GDP growth declining to −3.5 and −3.3 percent in 2015 and 2016, respectively. The combination of a sensational corruption scandal and renewed economic crisis proved fertile ground for the rise of Jair Bolsonaro, a right-wing populist figure who espouses a commitment to economic and political freedom. The Bolsonaro government has used the WTO as a platform on which to build his government’s reputation as a champion of the liberal international trading system. At the 2019 WTO informal ministerial gathering in Davos, Brazil’s Minister of Foreign Affairs Ernesto Araújo (2019) reiterated the government’s commitment to instituting ‘long overdue reforms, to reduce costs, to deregulate, to facilitate business and entrepreneurship and to open up [Brazil’s] economy’. Araújo also expressed a desire to reinvigorate the negotiating arm of the WTO, stating that ‘Brazil is prepared to discuss any agenda or matter whatsoever … Brazil will be ambitious on all negotiation fronts, from investment facilitation to electronic commerce’. Araújo was also careful to highlight Brazil’s openness to new SDT rules.

It should also be noted that Brazil stands to benefit from the informational and material resources the IDF Agreement could help mobilize. Unlike other emerging powers who have seen steady improvements in their domestic business environment, Brazil continues to struggle with addressing the bureaucratic hurdles faced by foreign investors and domestic business. In 2019, Brazil was ranked 124th on the World Bank’s Ease of Doing Business Index.

Brazil’s support for the IFD therefore reflects defensive interests, including a preference for more flexible investment facilitation arrangements in lieu of more constraining investment protections. Brazil also shares a desire to address historic asymmetries in trade rules with India. However, Brazil is willing to forgo its desire to revisit old trade rules in the context of the IFD initiative as a means of reassuring WTO members of its support for the liberal trading order, at least under the current government. Political leadership and the desire to spread Brazilian norms on foreign investment governance help explain Brazil’s eagerness to lead the IFD Agreement.

7.2.1 The Concept of Foreign Direct Investment

At the core of the FDI concept are investment projects that involve all of the following four elements: contributions of assets or money originating from abroad, a certain duration of the project, an element of risk, and contribution to economic development in the host country.Footnote ¹

Whether and to what extent the four elements must be fulfilled in order for an investment to qualify as FDI are context dependent and remain contested in many situations. One example is the distinction that is frequently drawn between “direct” investment and “portfolio” investment. Short-term portfolio investment would not qualify according to the four criteria. Nevertheless, it is clear that such investment is covered by many treaties that protect and/or promote FDI.

FDI may cover investment from a broad range of investors, including public investors and intergovernmental institutions, for example, state-owned enterprises, sovereign wealth funds, and international financial institutions. We shall focus on FDI originating from private parties – individuals and corporations – as well as from state-owned enterprises and sovereign wealth funds. Financial contributions to fund projects where public authorities or private entities of the host country become or are intended to become owners are not considered. The same applies to official development assistance or other forms of public or private aid,Footnote ² as well as projects funded through loans to governments from multilateral financial institutions such as the World Bank.

7.2.2 Sustainable Development

There is a long-standing claim and ambition in international investment law that treaties and customary law contribute to economic development in countries hosting investment. However, this claim remains controversial and is hotly debated among academics.Footnote ³ Our focus shall be on the concept of sustainable development, including intergenerational perspectives as well as social, economic, and environmental development.Footnote ⁴

The link between FDI and sustainable development has been subject to significant attention since the Brundtland Commission brought the concept onto the political agenda in 1987.Footnote ⁵ During the first period after the “Washington Consensus,” that is, during the late 1980s and the 1990s, it was argued that a basic distinction could be drawn between (1) FDI in manufacturing and assembly, which would most likely be beneficial, and (2) FDI in natural resources and infrastructure, which would most likely be harmful.Footnote ⁶ In more recent years, consensus seems to emerge that the relationship between FDI and sustainable development is more complex and context dependent. UNCTAD has taken the lead in establishing principles and guidelines for countries, intergovernmental organizations, and stakeholders. A separate chapter on an “investment policy framework for sustainable development” was included in its 2012 World Investment Report (chapter IV), and further elaborated in UNCTAD’s “Investment Policy Framework for Sustainable Development” (2015). Of particular interest are the 10 Core Principles for Investment Policy-Making elaborated by the UNCTAD Secretariat. Their starting point is the overarching objective to promote investment for inclusive growth and sustainable development. While these principles build on UNCTAD’s decades of experience with providing investment policy advice to developing countries, countries have only endorsed them implicitly or ad hoc.

In 2015, as the deadline for fulfilling the Millennium Development Goals (MDGs) expired, the United Nations General Assembly adopted the SDGs to be achieved by 2030.Footnote ⁷ While the MDGs did not specifically address FDI,Footnote ⁸ some of the targets of the SDGs are highly relevant. Target 17.5 calls for the adoption and implementation of investment promotion regimes for least developed countries (LDCs). Moreover, other targets concern the use of foreign investment as a means to end poverty and hunger; achieve food security and improved nutrition; promote sustainable agriculture; ensure access to affordable, reliable, sustainable, and modern energy; and reduce inequality within and among countries.Footnote ⁹ Among the countries identified as being of particular concern are “least developed countries, African countries, small island developing States and landlocked developing countries.”Footnote ¹⁰ Particular attention should also be paid to “countries in situations of conflict and post-conflict countries.”Footnote ¹¹ While the Declaration mentions the potential role of multinational enterprises,Footnote ¹² it generally pays very limited attention to their potential to contribute FDI. There is some mention of the role of FDI in indicators established to monitor the achievement of the SDGs.Footnote ¹³ In essence, the targets and indicators emphasize the positive role that FDI may play and do not address the potential need to limit negative effects of FDI.

Of particular relevance to the implementation of the SDGs, the Third International Conference on Financing for Development adopted the Addis Ababa Action Agenda, which was subsequently endorsed by the UN General Assembly.Footnote ¹⁴ The Agenda points out important challenges regarding FDI: “Foreign direct investment is concentrated in a few sectors in many developing countries and often bypasses countries most in need, and international capital flows are often short-term oriented.” It moves on to clarify that foreign investors’ host and home countries as well as the Multilateral Investment Guarantee Agency have important tasks in ensuring that FDI contributes positively to sustainable development in a broader range of developing countries.Footnote ¹⁵

7.2.3 The Right to Development

The Declaration on the Right to Development addresses some issues of relevance to FDI. It underlines the right of peoples to exercise “full sovereignty over all their natural wealth and resources” (art. 1.2) and establishes that states shall ensure “equality of opportunity for all in their access to basic resources, education, health services, food, housing, employment and the fair distribution of income” (art. 8.2).Footnote ¹⁶ These are normative expectations regarding states’ regulation of the activities of foreign investors and set a framework for foreign investors’ legitimate expectations.

Recent initiatives to elaborate approaches to the RtD also contain statements regarding the relationship to FDI. In 2010, the High-Level Task Force on the Implementation of the Right to Development set out criteria and indicators to implement the RtD. These emphasize the need to secure stability of investment in order to reduce the risks of domestic financial crises, to ensure that trade rules regarding performance requirements and protection of intellectual property rights do not prevent developing countries from enjoying the benefits of science and technology, and to provide for fair sharing of the burdens of development by compensating for negative impacts of development investment and policies.Footnote ¹⁷ These three elements are of particular interest to the topics discussed in this chapter. However, the criteria and indicators exposed significant disagreement among states when considered by the Working Group on the Right to Development. The Working Group has so far (including its 20th session) been unable to conclude the process to revise the criteria.Footnote ¹⁸ There is disagreement regarding the status of the criteria, the relative roles of states, international institutions and private actors in taking measures to realize the RtD, and the substantive content of the criteria, including the elements mentioned earlier.

The Human Rights Council launched an alternative approach to the challenge of progressing in the implementation of the RtD in September 2018. A divided Council decided to request the Working Group to “commence the discussion to elaborate a draft legally binding instrument on the right to development through a collaborative process of engagement, including on the content and scope of the future instrument.”Footnote ¹⁹ A first draft instrument set out several provisions addressing the duties of foreign investors, international institutions, and investors’ home states relating to the RtD.Footnote ²⁰

7.2.4 Concluding Remarks

The evolving consensus among countries on goals for (sustainable) development stands in contrast to the significant disagreement among countries on how to approach the RtD. The diverging approaches to FDI may possibly be one explanatory factor for why progressing with the RtD has divided countries, while the MDGs and SDGs have gathered consensus. In light of the lack of consensus among countries on how to proceed with criteria for the RtD, countries are likely to have diverging opinions on UNCTAD’s Core Principles for Investment Policy-Making. There is need for further clarification of the relationship between rules and institutions involved in the rights and duties of foreign investors as well as their host and home countries. Such clarification may facilitate progress in identifying the contexts in which the relationship between the SDGs, the RtD, and FDI is synergistic or conflictual. A key question in the following is how the existing WTO agreements and investment law, both international and domestic, affect the policy space for developing countries to take measures to fulfill the RtD and achieve SDGs.Footnote ²¹

7.3.1 Investment and Trade in Services

There are multiple links between FDI and trade in goods and services. The most direct link is where FDI is a condition for trade to occur. In many service sectors, delivery is to varying degrees dependent on some form of commercial presence, in other words FDI, in the importing country. This includes services in SDG-relevant sectors such as health, education, water and sanitation, energy, and construction and engineering.

Most of the LDCs (35 of 46) are members of the WTO.Footnote ²² In general, these have undertaken few commitments in SDG-relevant services sectors. However, there is significant variation among LDCs in this regard (see Table 7.1). Some LDCs have committed to provide market access and national treatment for commercial presence in SDG-relevant sectors (see arts. XVI and XVII of GATS). A significant majority of these have accepted broad commitments, that is, not listed limitations in their schedules of commitment, for example, in terms of access to public funding or share of foreign ownership. Afghanistan, Cambodia, and Laos are examples of LDCs with extensive commitments. The commitments made by LDCs mean that they have opened the sectors to FDI and limited their ability to take restrictive policy measures controlling foreign services providers.

Other important links between trade in services and FDI, which to a larger extent overlap with the IFD Agreement, include art. VI of GATS on domestic regulations. The significant resistance among WTO members in terms of moving forward with negotiations on detailed disciplines on domestic regulations, both in the context of sector-specific and general negotiations,Footnote ²³ is indicative of the sensitivity of these issues in terms of countries’ policy space. Since the negotiations essentially failed in 2011, development issues have been prominent on the agenda of the Working Party on Domestic Regulations.Footnote ²⁴

In recent years, some members have chosen to negotiate a “Joint Initiative on Services Domestic Regulation.” These negotiations have resulted in agreement among sixty-seven WTO members to amend their services schedules of commitments to include specified disciplines, as well as an invitation to other members of the WTO to join the Declaration and undertake corresponding commitments.Footnote ²⁵ The sixty-seven members include all EU and OECD members, but no LDCs or countries classified by the World Bank as low-income economies.Footnote ²⁶ A comparison based on the OECD FDI Regulatory Restrictiveness Index of 2020 shows that a selection of nonparticipating members has markedly higher scores for the restrictiveness of regulations within their services (“tertiary”) sectors than participating members.Footnote ²⁷ With a few noteworthy exceptions,Footnote ²⁸ these characteristics of participating and nonparticipating WTO members support the hypothesis that concerns regarding regulatory space in sensitive sectors have been a main reason for the inability of WTO members to negotiate disciplines on domestic regulations within the WTO.

7.3.2 Trade-Related Investment Measures

In the field of trade in goods, the most significant rules in terms of investment can be found in the Agreement on Trade-Related Investment Measures (TRIMs). Such measures are frequently referred to as “performance requirements” or “local content requirements” and have often been used by countries as part of their development strategies.Footnote ²⁹ The procedures to negotiate or impose performance requirements could be covered by both the TRIMs Agreement and the IFD Agreement. Article 2 of the TRIMs Agreement prohibits the use of such measures as a basis for quantitative restrictions on imports and discrimination between domestic and foreign products. The annex to the Agreement contains an illustrative list of measures that are unlawful, including requirements that enterprises buy “products of domestic origin or from any domestic source” and restrictions on enterprises’ use of imported products. As an acknowledgment that developing countries might need to resort to such measures as part of their development strategies, art. 4 of the Agreement allows such members to “deviate temporarily” from art. 2. Moreover, art. 5 provides a flexible transition period for developed (two years), developing (five years with a possibility of extension), and least developed members (seven years with a possibility of extension).

The flexibility applies only to measures that have been notified. If we take a look at notifications submitted according to art. 5.1 (i.e., the duty to notify measures “that are not in conformity with the provisions of this Agreement”), we find that currently, 28 WTO members have notified art. 5.1 measures, of which five (Bolivia, Chile, Cuba, Cyprus, and Poland) have notified that they no longer have relevant measures in force. Another five members (Honduras, Mauritius, Slovenia, Switzerland, and Zambia) are no longer on the list. Among the only LDCs that have made such notifications, Uganda remains on the list and Zambia is no longer listed. Many of the twenty-three countries that remain listed with measures that might be incompatible with the TRIMs Agreement can hardly be regarded as developing countries, and only two countries have joined the WTO after 2000.Footnote ³⁰ This indicates that the implementation of the TRIMs Agreement has been of limited concern to developing countries.

One proxy for the effectiveness and impact of the TRIMs Agreement is the extent to which countries bring cases to the WTO Dispute Settlement Mechanism (DSM) in which they rely on the Agreement. Less than 5 percent of the cases formally registered with the WTO DSM mention the Agreement, and the number of cases has varied significantly and might seem to follow a downward trend (see Figure 7.1).

Figure 7.1 Number of cases invoking provisions of the TRIMs Agreement.

Source: Author, based on WTO, “Disputes by agreement (as cited in request for consultations),” online at: www.wto.org/english/tratop_e/dispu_e/dispu_agreements_index_e.htm?id=A25#selected_agreement (last accessed 13 June 2023).

None of the cases were initiated by or against LDCs. Nevertheless, approximately two-thirds of the cases were initiated by countries with significantly higher levels of human developmentFootnote ³¹ than the respondents, and some of these concluded that violation of the TRIMs Agreement had occurred.Footnote ³² In contrast, some cases were initiated by countries with significantly lower levels of human development than respondent countries, but none of these resulted in any finding of such violation.Footnote ³³ Moreover, a very significant number of cases (more than one-third of the total) has been initiated by WTO members with well-established automotive industries against members with such industries that are less well established.Footnote ³⁴ Finally, a significant number of recent cases contest measures concerning renewable energy and recycling of materials.Footnote ³⁵

In sum, the rules and practices under the TRIMs Agreement do not seem to have promoted development or developing country perspectives to any significant extent. While there is no definitive evidence that the TRIMs Agreement has limited the policy space of LDCs, we may nevertheless question whether practice under the Agreement indicates that it has restricted developing countries’ policy space. On the one hand, the practice associated with the notification of measures inconsistent with the TRIMs Agreement indicates significant flexibility with regard to its implementation, and thus that the Agreement is unlikely to have limited countries’ policy space to any significant degree. On the other hand, countries’ use of the DSM indicates that the Agreement might deter or undermine efforts to promote sustainable development.

7.3.3 Trade-Related Intellectual Property Rights

The WTO has become a significant factor to consider in the context of developing countries’ access to technology and know-how, a topic addressed by SDG targets 17.6 to 17.8. In particular, the Agreement on Trade-Related Intellectual Property Rights (TRIPs) contains detailed minimum requirements concerning protection of patents (arts. 27–34). Article 8 of the Agreement acknowledges the need to take measures to “protect the public interest in sectors of vital importance to their socio-economic and technological development” and to prevent the abuse of intellectual property rights in ways that “adversely affect the international transfer of technology.” However, it also states that such measures have to be in compliance with the requirements of the Agreement. The initial flexibilities during the transition period admitted to LDCs (art. 66, ten years with a possibility of extension) as well as developing countries and countries transforming to a “market, free-enterprise economy” (art. 65, four years with a limited possibility of extension) have expired for most members.

Making FDI conditional on transfer of technology and providing local producers with opportunities to learn from and copy foreign investors have traditionally played important roles in countries’ development strategies.Footnote ³⁶ However, while the early years of the WTO saw a large number of disputes invoking the TRIPs Agreement, the number of such disputes seems to have stabilized at a low number (see Figure 7.2) and remains at less than 5 percent of the cases brought to the WTO DSM. This, taken together with the fact that no cases have involved LDCs, may indicate that restrictions on developing countries’ policy space flowing from the TRIPs Agreement have been limited in practice, but it could also be due to compliance of LDCs with their obligations under the Agreement.

Figure 7.2 Number of cases invoking provisions of the TRIPs Agreement.

Source: Author, based on WTO, “Disputes by agreement,” online at: www.wto.org/english/tratop_e/dispu_e/dispu_agreements_index_e.htm?id=A26#selected_agreement (last accessed 13 June 2023).

While more than half of the DSM cases involve countries with similar levels of human development, two WTO members (the EU and the United States) have initiated twelve cases against countries with significantly lower levels of human development, of which a significant group of cases concerns patent protection in sensitive sectors such as pharmaceutical products and agricultural chemicals.Footnote ³⁷ On the other hand, three main cases were initiated against WTO members with significantly higher levels of human development,Footnote ³⁸ including against United States’ patent legislation, the EU seizure of generic drugs in transit, and the Australian tobacco plain packaging legislation. But none of these cases were successful.Footnote ³⁹ The practice of the DSM indicates that this enforcement mechanism is more likely to promote the interest of countries with high levels of human development than the interests of countries with lower levels of such development. The DSM has so far been of very limited importance from the perspective of LDCs in the context of TRIPs.

Under the TRIPs Agreement, developing countries’ access to medicines has been particularly controversial. At the Ministerial Conference in Doha in 2001, WTO members agreed that the Agreement “does not and should not prevent members from taking measures to protect public health.” Of particular importance are statements regarding the interpretation of art. 31 (compulsory licenses) and art. 73 (security exceptions). The Declaration states that members have “the right to grant compulsory licenses and the freedom to determine the grounds upon which such licenses are granted” and “the right to determine what constitutes a national emergency or other circumstances of extreme urgency, it being understood that public health crises … can represent a national emergency or other circumstances of extreme urgency.”Footnote ⁴⁰

However, this decision did not address the problem that many developing countries would be unable to benefit from compulsory licenses and emergency measures due to lack of technological ability. Therefore, in 2003, the WTO General Council adopted a waiver that allowed countries to export pharmaceutical products that had been subject to compulsory licensing.Footnote ⁴¹ Continuing discussions of this issue resulted in the addition of a provision allowing the exportation of pharmaceutical products that have been subject to compulsory licensing to LDCs and other countries having notified the WTO (TRIPs Agreement, art. 31 bis and annex).Footnote ⁴² The amendment was adopted in 2005 and did finally enter into force in 2017. By the end of 2021, as many as one-third of the WTO LDC members had not yet accepted the amendment.Footnote ⁴³ Moreover, fifteen years after the adoption of the waiver, there had been only one case in which the new export opportunity had been notified – a case involving export of AIDS medicines from Canada to Rwanda.Footnote ⁴⁴ The carefully circumscribed mechanism established by the waiver and made permanent through the TRIPs amendment therefore seems to be an example of extensive diplomatic efforts and negotiations resulting in reforms of very limited value to the most vulnerable countries and populations. This seems to confirm views that the procedures and conditions imposed were too cumbersome as well as predictions that the initiative would have limited effects.Footnote ⁴⁵ Similar problems have emerged in the context of the lengthy and so far unsuccessful efforts to adopt a waiver for the production of COVID-19 vaccines.Footnote ⁴⁶

Other issues regarding access to and transfer of technology have received much less attention under the TRIPs Agreement. According to art. 66.2, developed countries undertake to “provide incentives to enterprises and institutions in their territories for the purpose of promoting and encouraging technology transfer to least-developed country members in order to enable them to create a sound and viable technological base.” As a follow-up to this provision, the Council for TRIPs decided to require developed countries to report annually on their implementation of art. 66.2.Footnote ⁴⁷ However, also this initiative seems to have been unsuccessful from the perspective of LDCs. As justification for a proposal to revisit the effectiveness of art. 66.2, Cambodia made the following statement on behalf of the LDCs in 2018.

Notwithstanding mechanisms and processes introduced in the TRIPs Council, LDCs have observed the continued lack of clarity in notifications on the nature of incentives and whether such incentives sufficiently result in technology transfer to LDCs, fostering the creation of a sound and viable technological base for least developed countries. Many notifications continue to demonstrate that incentive programs identify recipients that are not LDCs, and where LDCs are identified, incentives do not result in transfer of technology. Some developed members claim that it is difficult for governments to ensure technology transfer because technology is the subject of private contracts and rights.Footnote ⁴⁸

7.3.4 Concluding Remarks

WTO rules regarding trade in services and goods and the protection of intellectual property rights can limit the policy space of LDCs and developing countries in terms of designing measures to ensure that FDI contributes to fulfilling the RtD and achieving the SDGs. So far, there are some indications that these rules have had such effects. The longer-term and indirect effects, including “regulatory chill,” are harder to trace and may be more significant.Footnote ⁴⁹ So far, reform efforts to make the existing WTO rules more conducive to sustainable development have been slow and of limited significance.

New initiatives regarding investment facilitation in the WTO should take into account the lessons learned from efforts to enhance the contribution of existing WTO rules to sustainable development, in particular the reform of the TRIPs Agreement. Moreover, the negotiation of an investment facilitation regime must avoid undermining reforms to establish synergies between the WTO rules discussed earlier and sustainable development.

7.4.1 International Investment Agreements

For a long period, researchers from several disciplines have been debating whether there is empirical evidence that IIAs in practice have generated increased flows of FDI. So far, studies that trace the extent to which IIAs affect flows of FDI show varying results. While evidence indicates that IIAs can lead to increased FDI flows, the extent and conditions under which they do so remain disputed. A main distinction can be drawn between studies that focus on dyadic relationships – exploring whether IIAs influence the flow of FDI among the parties to specific treaties,Footnote ⁵⁰ and studies on the impact that the signing and ratification of IIAs have for the flow of FDI into countries.Footnote ⁵¹ Studies also focus on the differences between ratified and non-ratified IIAs.Footnote ⁵² Studies concern the flow of FDI into developing countries generally,Footnote ⁵³ into certain regions,Footnote ⁵⁴ or into certain sectors.Footnote ⁵⁵ There also exist studies of how subsequent investment treaty arbitration affects FDI.Footnote ⁵⁶ To what extent and in which ways such studies control for other factors that influence FDI differ significantly,Footnote ⁵⁷ and in the exceptional cases where replication of previous studies has been carried out, findings indicate that previous conclusions may have limited robustness.Footnote ⁵⁸

One interesting study suggests classifying FDI according to the motivations of investors, distinguishing between “four types of FDI: resource-seeking FDI, market-seeking FDI, efficiency-seeking FDI, and asset-seeking FDI.”Footnote ⁵⁹ Among these, resource- and efficiency-seeking FDI seem particularly relevant in the context of achieving SDGs. The study proposes to distinguish between “three main types of resource-seeking FDI: FDI seeking physical resources, FDI seeking unskilled or semi-skilled labor, and FDI to firms seeking technological capabilities, management of marketing expertise, and organizational skills.”Footnote ⁶⁰ These distinctions could be helpful when analyzing the potential role of IIAs in promoting FDI that contribute to achieving the SDGs, but space does not permit further elaboration here.

From an investment facilitation perspective, we shall focus on the ways in which IIAs directly promote the flow of investment by including provisions relevant to the right of establishment of foreign investors or limit countries’ opportunities to restrict flows of FDI. UNCTAD’s mapping of the content of IIAs indicates that approximately 14.7 percent of IIAs contain provisions that call for investment promotion activities.Footnote ⁶¹ Some IIAs also contain operational clauses that protect the rights of investors to establish in the contracting parties. According to data from UNCTAD, approximately 8.1 percent of IIAs include provisions that prohibit discrimination in the preestablishment phase, which means that foreign investors enjoy the same right of establishment as do domestic investors.Footnote ⁶³ These figures indicate that IIAs only to a limited extent operationalize investors’ rights to establish in other countries.Footnote ⁶⁴

In order to further explore the potential for IIAs to facilitate FDI, we need knowledge about the extent to which countries that have fallen behind in terms of sustainable development have joined IIAs. Table 7.2 shows that countries classified as low-income economies by the World Bank have on average low levels of participation in IIAs that provide consent to investor–state dispute settlement, ranging from a saturation level of only 7.5 percent of potential bilateral treaties with upper-middle-income economies to 16.1 percent among low-income economies. Similarly, lower-middle-income economies have on average the second-lowest level of participation in IIAs, with saturation levels ranging from 11.4 percent to 21 percent. These two groups of countries are presumably those with the highest need for incentives to attract FDI to achieve their SDGs. Against this background, it is relatively clear that the current structure of IIAs is unlikely to assist countries with the highest need for FDI to fund their achievement of SDGs.

In sum, there is little empirical evidence that IIAs have been instrumental in promoting FDI of importance to developing countries’ fulfillment of the RtD or attainment of sustainable development. The current design of IIAs and their geographical distribution indicate that they are unlikely to perform such functions in the relatively near future.

7.4.2 Promotion of FDI through Investment Legislation

Given the limited participation of LDCs in IIAs, we may assume that investment legislation has a particularly important role to play in promoting investment for this group of countries. The World Bank has had a key function in this respect through its focus on national legislation and policies in its long-term program to improve the “investment climate” of developing countries. In particular, the World Bank has provided country-by-country advice through its Facility for Investment Climate Advisory Services (former Foreign Investment Advisory Service) since 1985.Footnote ⁶⁵ As part of this program, the World Bank issued guidelines in 1992 and a handbook in 2010.Footnote ⁶⁶ Given the lack of focus on FDI in the MDGs, it is perhaps not surprising that the 2010 handbook does not contain any references to the MDGs. However, the handbook hardly mentions the concept of sustainable development and is primarily focused on improving the investment climate from the perspective of foreign investors.

One fundamental question is why developing countries should adopt general investment legislation. In his introduction to the handbook, Joseph Battat, the former Manager of the World Bank’s Investment Climate Advisory Services, answers this question by emphasizing that investment laws contribute to “the quality and characteristics of the investment climate” and “provide in one place a succinct coverage of much of the investment policy of a country and its legal underpinning, as well as a signal that the government is welcoming investment.”Footnote ⁶⁷

Very few OECD countries have general investment laws; such legislation is a phenomenon mainly found in developing countries, and in particular in the LDCs (Figure 7.3).Footnote ⁶⁸ Moreover, sustainable development is the least frequently mentioned objective in the investment legislation of LDCs (see Figure 7.3).

Figure 7.3 Frequency of investment legislation within OECD and LDCs and stated objectives in LDCs investment law.

Note: UNCTAD distinguishes between “investment laws” and “FDI Screening laws.” The legislation of 120 countries is classified as “investment laws,” in 22 countries it is classified as “FDI Screening laws,” and in 7 it is classified as both. These numbers include EU Regulation 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (counted as one).

Source: Author, based on UNCTAD’s Investment Laws Navigator, online at: https://investmentpolicy.unctad.org/investment-laws (last accessed 13 June 2023), which provides coding investment-related legislation of 149 countries (as of January 2022).

There are generally few conditions or restrictions on FDI in the investment legislation of LDCs.Footnote ⁶⁹ According to UNCTAD’s coding, no LDC law is classified as “FDI Screening laws” and only a few contain other conditions or restrictions on investment (see Figure 7.4).

Figure 7.4 Entry conditions for FDI in LDC laws.

Source: Author, based on UNCTAD’s Investment Laws Navigator, online at: https://investmentpolicy.unctad.org/investment-laws (last accessed 13 June 2023).

In recent years, as exemplified by its data collection and work on investment policies and sustainable development, UNCTAD has focused more extensively on domestic investment legislation. UNCTAD has also provided country-by-country advice, inter alia, through its Investment Policy Review program established in 1999.Footnote ⁷⁰ To date, 20 LDCs have gone through the review process.Footnote ⁷¹ However, these data do not indicate that the review process has had a significant impact on the incidence of sustainable development-related clauses in the legislation of LDCs or low-income countries.

7.4.3 Concluding Remarks

When considering the relative importance of IIAs and investment laws for the role of FDI as a potential contributor to sustainable development, these findings show that investment laws are by far the most important. IIAs have had limited importance so far, in particular for LDCs and low-income economies, while investment laws are likely to remain key instruments for increased contribution of FDI to sustainable development. However, these findings indicate that such countries have used investment laws to promote sustainable development only to a limited degree. One key question is therefore whether initiatives to facilitate investment within the WTO are likely to enhance or undermine countries’, in particular LDCs’, ability to use investment laws more actively to promote sustainable development.

7.5.1 Promotion of FDI – The Relative Roles of Host and Home Countries

According to SDG target 17.5, countries should “adopt and implement investment promotion regimes for least developed countries.” The indicator for this target is the number of countries that have adopted investment promotion regimes, and UNCTAD has the task of monitoring relevant actors’ efforts to achieve the target.Footnote ⁷² In its 2014 report on investment in SDGs, UNCTAD estimated that given the current level of investment in SDG-relevant sectors, “developing countries alone face an annual gap of US$2.5 trillion” and that the “role of private sector investment will be indispensable” to fill the gap.Footnote ⁷³

However, when we look closer at the specific SDG targets associated with the funding of SDG-relevant sectors, we find that the focus of their related indicators is on official development assistance and that they pay limited attention to the role of FDI. Only three indicators refer directly to FDI.Footnote ⁷⁴ Moreover, only one addresses the role of investors’ home countries; indicator 17.5.1 maps the number of countries that adopt and implement investment promotion regimes for developing countries, including the least developed countries. However, rather than focusing on the extent to which developed countries promote investment into developing countries’ SDG-relevant sectors, UNCTAD initially focused on the extent to which LDCs establish mechanisms to attract FDI. For example, in 2016, UNCTAD noted that 81 percent of LDCs had established an investment facilitation agency.Footnote ⁷⁵ Subsequently, UNCTAD has paid some attention to instruments for promoting outward investment into other countries, defined as follows:

As of the end of 2020, UNCTAD concluded, “Promotion tools targeted specifically at supporting investment in LDCs could not be identified, nevertheless a limited number of countries promote outward investment in selected developing or transition economies.” It also observed,

The approaches chosen when implementing the SDGs illustrate a significant dilemma regarding investment in SDG-relevant sectors. On the one hand, developing countries in general and LDCs in particular have very large funding gaps in these sectors, and FDI could contribute significantly to fill the gaps. On the other hand, most SDG-relevant sectors are sensitive in the sense that public authorities need to ensure fair and effective distribution of benefits. Consequently, public authorities need to retain significant flexibility to adopt relevant policy measures within such sectors. The dilemma emerges due to the emphasis within the WTO as well as within domestic and international investment law on host country measures to attract FDI into these sectors. Due to lack of funding, the main way in which these LDCs and many other developing countries can attract such FDI is by offering favorable conditions to investors, including high return on the investment and low political risk. The latter, which host countries can achieve through investment treaties and legislation,Footnote ⁷⁸ limits public authorities’ ability to take policy measures if they experience negative consequences or nonfulfillment of expected benefits.Footnote ⁷⁹

This dilemma is also reflected in UNCTAD’s Core Principles for Investment Policy-Making. On the one hand, principle 5 states that host countries have “the sovereign right to establish entry … conditions for foreign investment, subject to international commitments, in the interest of the public good and to minimize potential negative effects.” Principle 8 adds, “investment promotion and facilitation should be aligned with sustainable development goals and designed to minimize the risk of harmful competition for investment.”Footnote ⁸⁰ On the other hand, principles 6 and 10 state, “In line with each country’s development strategy, investment policy should establish open, stable and predictable entry conditions for investment” and “[c]ollective efforts should also be made to avoid investment protectionism.”

So far, the WTO, IIAs, and investment legislation have focused on improving host countries’ ability to attract FDI. In recent years in particular, UNCTAD has paid some attention to the contribution of FDI to SDGs. The role of investors’ home countries in strengthening their investors’ contribution to SDGs in relevant host countries has in essence been absent in these instruments. Nevertheless, some relevant elements in this regard do exist, including examples that IIAs and investment legislation refer to investors’ responsibility for human and environmental harm associated with their investment, and provisions that make investor privileges and investment protection dependent on compliance with SDG-related standards.

7.5.2 The WTO IFD Agreement – Contributing to Sustainable Development?

The aforesaid analyses show that existing international rules, policy documents, and institutions for promoting FDI into SDG-relevant sectors rely heavily on limiting developing countries’ policy space. When considering whether investment facilitation initiatives in the WTO contribute to sustainable development, we shall therefore distinguish according to whether such initiatives (1) focus on measures to be taken by host countries, (2) focus on measures to be taken by home countries, or (3) are neutral in the sense that measures involve both host and home countries. The underlying hypotheses are as follows: (1) If the WTO IFD Agreement essentially reinforces the existing emphasis on limiting the policy space of developing countries, it is likely to undermine developing countries’ achievement of the SDGs. (2) If the WTO IFD Agreement essentially provides incentives to home countries to promote investment into SDG-relevant sectors, it is likely to contribute to developing countries’ achievement of SDGs.

Based on publicly available information about the status of the negotiations at the end of 2021,Footnote ⁸¹ the negotiations of the IFD Agreement contained three sections that concern measures to be taken by host countries, that is, section II on transparency of investment measures, section III on streamlining and speeding up administrative procedures, and section IV, inter alia, on domestic regulatory coherence. Some of these elements are potentially sensitive from a policy space perspective. On the one hand, increased transparency of investment measures may improve FDI’s contribution to SDGs. On the other hand, creating single information portals may incentivize host countries to oversimplify procedures that need to take into account complex causalities and indirect effects associated with long-term investment projects, and thus undermine achievement of SDGs. Similarly, domestic regulatory coherence is an objective to which most would subscribe, but if such coherence is prioritized over the need to find workable solutions to complex social or environmental challenges, the pursuit of coherence may negatively affect the long-term fulfillment of SDGs. From a sustainable development perspective, the call for streamlining of administrative procedures is potentially the most restrictive proposal in terms of its effect on host countries’ policy space. Such streamlining is likely to reduce the reliance of public authorities on thorough impact assessments and public scrutiny of investment projects when issuing permits to investors. These elements of the IFD Agreement therefore risk affecting host countries’ attainment of SDGs negatively. Negotiations on these issues should therefore consider how to mitigate or reduce such risks.

Section IV of the IFD Agreement also contains a provision on “home state obligations” based on a proposal “aimed at recognizing the role of home States in facilitating outward sustainable investment, by encouraging members to adopt or maintain, and make publicly available, appropriate measures to facilitate outward investment in areas such as investment guarantees, insurance, investor support services and fiscal measures.” The discussions of this proposal was met with arguments that it was outside the scope of the Agreement since its focus should be on “inward investment” and that “the adoption of measures to facilitate outward investment should be at Members’ discretion.”Footnote ⁸² This seems to be a divisive issue among the members and unlikely to generate significant home country duties.

Section VI of the draft, under the heading “sustainable investment,” includes measures to be taken by home countries regarding responsible business conduct and corruption. The proposed provision regarding responsible business conduct addresses “the issue of how governments could encourage investors to voluntarily incorporate RBC standards.”Footnote ⁸³ As such, it would be of limited added value besides already existing commitments to promote such standards.Footnote ⁸⁴ The OECD Guidelines for Multinational Enterprises and associated practice show that investors’ home states can play a very important role in preventing corporate practices that undermine achievement of SDGs in host countries. According to the Guidelines, home countries undertake to “encourage” their enterprises “to observe the Guidelines wherever they operate, while taking into account the particular circumstances of each host country.”Footnote ⁸⁵A review of the 518 cases initiated before National Contact Points during the period from 2000 to the end of 2021 shows that 87 cases (16.8 percent) involve eighteen LDCs and that more than a third of the cases concerns one host country – the Democratic Republic of Congo.Footnote ⁸⁶ The mining sector is by far the most important sector (30), followed by manufacturing (17) and wholesale and retail sale (13). The IFD Agreement should build on the practice of the OECD.

Measures relating to corruption can be particularly important when taken by home countries in cases where host countries have limited ability to enforce strict standards vis-à-vis foreign investors or to prosecute corruption. Widespread corruption associated with FDI has the potential of significantly undermining developing countries’ achievement of SDGs (SDG 16). As shown in Figure 7.5, it is clear that while LDCs suffer from high levels of corruption, the main home countries (here illustrated by OECD members) have correspondingly low levels of corruption. Political corruption increased within LDCs from 1970 until 1994, stayed very high for almost two decades, and has been on a downward trend since 2012. Corruption in OECD countries has been on a downward trend during the whole period.

Figure 7.5 Political corruption, 1970–2017.

Note: ‘Section 4.0.19: The corruption index includes measures of six distinct types of corruption that cover both different areas and levels of the polity realm, distinguishing between executive, legislative, and judicial corruption’, V-Dem Codebook V8. See also K. M. McMann et al., “Strategies of Validation: Assessing the Varieties of Democracy Corruption Data,” 23 V-Dem Working Paper Series 23 (2016).

Source: Author, based on V-Dem data.

The UN Convention against Corruption (2003) has almost universal adherence.Footnote ⁸⁷ It sets out rules of particular interest to FDI regarding bribery of foreign officials (art. 16), liability of legal persons (art. 26), extent of national jurisdiction (art. 42), international cooperation during prosecution of crimes (part IV), and recovery of assets that have been lost due to corruption (part V). In this context, it should be noted that the UN General Assembly has identified the rules on asset recovery as particularly important in relation to the RtD.Footnote ⁸⁸ This is a recognition that foreign investors’ home countries have a duty to ensure that benefits achieved by their investors in other countries through corruption or bribery are returned to such countries. Such a duty is of particular importance in relation to those countries that have limited means to combat corruption.

The OECD and the Council of Europe have elaborated conventions of particular interest in terms of home country responsibilities in corruption cases. Article 1 of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (1997) states that

With important reservations, this duty extends to “legal persons” (art. 2). Under this Convention, data are collected on the extent to which the parties (all OECD countries and eight other countries) prosecute cases of bribery of foreign public officials. By the end of 2020, 16 of 44 parties to the Convention had not reported any relevant cases. Germany (360) and the United States (278) alone had prosecuted almost 70 percent of the 684 individuals and 245 legal persons that reportedly had received criminal sanctions for foreign bribery.Footnote ⁸⁹ Moreover, while Germany and the United States reported very few acquittals (only 6), Austria, Belgium, and Finland reported far more acquittals than sanctions.Footnote ⁹⁰ These are clear signs that the implementation of the Convention varies significantly among parties, despite the fact that it has been in force for more than two decades.

While there are signs that corruption in LDCs is on a downward trend, the differences in the level of corruption between LDCs and OECD members as well as between LDCs and the world average have remained significantly higher since the end of the 1990s than during the previous period. This illustrates the ability and the need for investors’ home countries to take measures to control their investors. Against this background, there should be significant opportunities for the IFD Agreement to support and complement the UN and OECD conventions. However, negotiations so far indicate that such an outcome is unlikely.Footnote ⁹¹

8.3.1 Good Regulatory Principles in Services Trade

8.3.2 Good Regulatory Principles in Investment Facilitation

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.