11.1 Introduction
Brazil is often discussed as an outlier case in international investment law. Most developing states, which ratified their bilateral investment treaties (BITs), incurred, at times unwittingly, constraints on their policy space being susceptible to investor–state disputes. Fortuitously, Brazil left unratified all fourteen of the BITs it signed in the 1990sFootnote 1 and, as a result, managed to remain outside of the dominant regime of international investment law, now synonymous with neoliberalism.Footnote 2 Importantly, as is often highlighted, despite abstaining from the dominant regime, Brazil maintained a relatively high rank among the top global foreign direct investment (FDI) recipient states since the 1990s, and since the 2000s, it also saw a rise in its outbound FDI figures.Footnote 3
Within the context of the movement of revisions and reforms of traditional BITs, or what the United Nations Conference on Trade and Development (UNCTAD) referred to as the “re-orientation era,” Brazil launched negotiations for an Agreement on Cooperation and Facilitation of Investments (ACFI).Footnote 4 The genesis of the ACFI is closely connected to inter alia the position of Brazil, at the time, as an emerging exporter of FDI. Since it has been first proposed in 2013, the agreement has, however, been adapted rather flexibly to various bilateral and plurilateral partnerships.
Besides being a prominent and evidently successful global outlier that worked toward an alternative regulatory framework for FDI, Brazil’s agreements have also innovated by emphasizing and solidifying the concept of “facilitation” as the driving force behind investment regulation. Nonetheless, there remains doubt about what “facilitation” measures specifically mean, as well as their precise role in international agreements.Footnote 5 No less controversial is the distinctiveness of investment facilitation measures from those related to “investment cooperation” – the two invoked dimensions of the ACFI. While ACFIs are clearly not about investment protection, it remains to be clarified what investment “cooperation,” “facilitation,” and “promotion” entail and how they differ.Footnote 6
In this chapter, we describe the experience of Brazil and its treaty practice, along with how it developed governance mechanisms and institutions to implement the facilitation and cooperation commitments undertaken in its ACFIs. Using the Brazilian example, we aim at illustrating how those abstract concepts may work in practice.
In addition to Introduction and Conclusion, the chapter is divided into three other sections. In Section 11.2, we briefly describe the Brazilian experience with the ACFI since 2013, progressing from bilateral to plurilateral negotiations. In Section 11.3, we invoke the three-pillar framework of the ACFIs to illustrate how it is expected to coordinate with Brazil’s domestic governance structure on investment cooperation and facilitation. Section 11.4 then details the domestic implementation of the agreement and its supporting institutions. To do so, we describe the recent institutional reforms in Brazil designed to effectively accommodate such principles and measures. We then conclude the chapter discussing possible challenges for domestic governance structures for states participating in the plurilateral negotiation at the WTO on an Investment Facilitation for Development (IFD) Agreement and some final observations on the Brazilian experience.
11.2 Brazil: From Bilateral to Plurilateral Negotiations
As of November 2022, Brazil has signed more than 15 ACFIs with countries across multiple regions and keeps pursuing new partners.Footnote 7 Being a proponent of a regulatory approach that favors investment facilitation over investment protection, Brazil also led, along with China and other G20 countries, the launch of multilateral negotiations at the WTO. In this section, we briefly describe the most noteworthy shifts in ACFIs concluded by Brazil since 2013, the purpose being to highlight the comprehensiveness of the facilitation and cooperation measures and their increasing clarification.
With a model agreement finalized in 2013, Brazil signed its first set of ACFIs in 2015 with six developing states from Africa and Latin America.Footnote 8 It subsequently went on to sign a further seven agreements, the latest one being in 2020 with India. The number of successful negotiations and the diversity in the partner states suggests “interoperability” and an “intrinsic appeal” of the ACFI framework.Footnote 9 Brazil’s ACFIs have been viewed as a pragmatic and necessary response to its changing dynamics during the mid-2000s, wherein Brazil’s proportion of outward FDI was expanding and Brazilian firms were increasingly internationalizing. In fact, around the time the initial ACFIs were signed with Southeast African states such as Malawi and Mozambique, Brazilian firms, including both private and state-owned enterprises, had ongoing investment projects present within the same region.Footnote 10
Discussions of the historical context of the ACFI framework’s conception tend to broadly focus on two main periods: first, the mid- to late 1990s, and second, the early 2010s.Footnote 11
In the former period, like many other developing states, Brazil’s economy saw significant liberalization and its foreign service negotiated and signed several “traditionally drafted” BITs with largely capital-exporting member states of the Organisation for Economic Co-operation and Development (OECD).Footnote 12 Despite their negotiation and signing, as previously mentioned, none of these BITs achieved ratification and were eventually withdrawn from the Brazilian Congress by President Fernando Henrique Cardoso. While the set of conditions that led to this result were complex,Footnote 13 a key factor that is often credited with preventing Brazil being subject to BIT obligations was a “resistance”Footnote 14 from inter alia an influential minority within the Brazilian legislature that eventually “forced President Cardoso to withdraw” the BITs in December 2002.Footnote 15 Instead, Brazil successfully employed alternative legal solutions (such as contractual arbitration clauses in state contracts, arbitration law reforms, double taxation treaties, constitutionally guaranteed national treatment, and provisions allowing repatriation of funds) to provide sufficient protections to incentivize foreign investors while catering to its domestic concerns.Footnote 16
In the latter period, the early 2010, it is important to consider three key conditions that had immense consequences for the nature of the ACFI frameworks eventual formulation:
First, Brazil’s economy had seen greater internationalization and the emergence of a new constituency of Brazilian multinational corporations,Footnote 17 the interests of whom added momentum to the domestic demand for rules that are also “investor-friendly.”Footnote 18
Second, by the early 2010s, enough investor–state arbitration cases had taken place for there to be a sufficient body of literature discussing and establishing the system’s risks and flaws, validating Brazil’s earlier decision from the 1990s. This also included the determination of an unclear, dubious statistical relation between the existence of bilateral investment treaties with investor–state arbitration clauses and incoming FDI.Footnote 19
As a result, in 2012, the Council of Ministers of the Brazilian Chamber of Foreign Trade (CAMEX) granted a formal mandate to the Technical Group for Strategic Studies on Foreign Trade, a moment regarded as “the zenith of the process”,Footnote 20 to develop an entirely new type of investment agreement, crafted according to Brazil’s sovereign needs and in consultation of the Brazilian private sector.Footnote 21 So far, Brazil had been an “attentive bystander”Footnote 22 of the traditional BIT regime.
Third, Brazilian officials were also gaining their own experiences and building technical expertise in international state–state cooperation and dispute settlement at the WTO and MERCOSUR levels.Footnote 23 Such timely experiences of Brazilian diplomacy were drawn from and contributed to state preferences, thereby cross-fertilizing the nature of the ACFI model’s development.Footnote 24 In fact, it has been suggested that the adoption in an investment agreement of the very term “facilitation” was itself “a clear inspiration”Footnote 25 from the WTO’s 2013 adoption of the Trade Facilitation Agreement, which also contained facilitation measures, albeit in a different context.
The concrete result of these two highly consequential periods and the entailing “process of policy learning”Footnote 26 was the 2013 approval by CAMEX of the first draft ACFI to be negotiated with Malawi, Mozambique, and Angola. This result also marked the emergence of Brazil as a “laboratory for legal innovation” that chose “a revolutionary path”Footnote 27 and introduced the ACFI model being motivated by pragmatism and the “ideal of more balanced relations between the parties and players benefitting from the agreement.”Footnote 28
With the ACFI model being in place, the subsequent treaty practice conducted by Brazil during the following five-year period led to the conclusion and signing of thirteen agreements, with the latest one being with India in 2020.Footnote 29 Across this period, Brazil’s treaty practice may be seen as having taken four discernible paths.
The first such path is concentrated in sub-Saharan African states and includes Mozambique, Angola, and Malawi, each of whom signed ACFIs with Brazil in 2015, the initial one being Mozambique on March 30, 2015. Classified as least developed countries, these three treaty partners are largely net importers of capital in relation to Brazil, and hence, any disputes are most likely to be concerning investments made by Brazilian parties. The cooperation dimension in the text of these treaties is noteworthy and evidenced in the detailed thematic agenda in the annexure of each agreement. It is also remarkable that the agreements involving these partners do only allow for a party to unilaterally initiate state–state arbitral proceedings if an investment dispute is not successfully resolved via a Joint Committee dispute prevention procedures.Footnote 30
This feature is contrary to what is observed in the agreements entailed in Brazil’s second (and most fruitful) treatymaking period, which focused on its fellow Latin American states, specifically Chile, Colombia, and Mexico in 2015, along with Surinam, Guyana, and Ecuador in 2018 and 2019.Footnote 31 These ACFIs also saw considerable influences from other investment agreement negotiations in Latin America that, at the time, ran in parallel, such as the 2016 Brazil–Peru Economic and Trade Expansion Agreement, which contained an investment chapter, and the 2017 Intra-MERCOSUR Cooperation and Facilitation Investment Protocol, which contained, for example, clauses preserving the state’s right to regulate toward combating corruption and issues related to the environment, labor affairs, and public health. Together with the broader movements of BIT reforms and old BIT provisions (mainly the nondiscrimination clauses), such agreements influenced Brazil’s approach toward ACFIs.
The third and relatively recent path toward that Brazil’s treaty practice has seen success in the MENA region (including Ethiopia in 2018 and Morocco and the United Arab Emirates (the UAE) in 2019) and most recently, in India.Footnote 32 Within this group, the Brazil–India treaty has attracted the most attention, given the comparably large size of both economies and the individual prior attempts of both treaty partners at reformulating the traditional BIT models to better suit their needs as developing states.Footnote 33 The treaty itself, while containing some features in line with the Indian model (such as exclusion of an MFN clause and inclusion of specific wordings for security exceptions and investor obligations), is “certainly more tilted towards the Brazilian approach.”Footnote 34
This tilt is evident in the agreement giving center stage to investment facilitation and dispute prevention, unlike the Indian model agreement, which narrowly focused on specific strands of investment protection standards, permitting investor–state dispute settlement via international arbitration only once the investor has exhausted domestic legal remedies, that too for at least five years.Footnote 35 Nonetheless, it has been argued that the Brazil–India ACFI “represents a strong, original contribution to the safeguard of the right to regulate”Footnote 36 and that overall, Brazilian ACFIs have “improved with time through the progressive narrowing and strengthening of their jurisdictional, substantial, public policy and dispute resolution clauses.”Footnote 37
Of course, for a dualistic state such as Brazil, until international treaties that are intended to be binding are fully ratified and attain legal force, their value remains largely academic. Under Brazil’s national constitution, the president’s power to conclude international treaties, while exclusive, is nonetheless subject to mandatory approval by the Brazilian federal legislature, that is, the National Congress.Footnote 38 According to Brazil’s National Confederation of Industry (CNI), this process, on average, takes four and a half years.Footnote 39 To date, four agreements with ACFIs provisions (those signed with Angola, Chile, Mexico, and MERCOSUR countries) have completed the process and are in force, with 6 of the 15 agreements signed from 2018 to 2020 (Ecuador, Guyana, India, Morocco, Peru, and the UAE) currently under process with Brazil’s legislature and five (Colombia, Ethiopia, Malawi, Mozambique, and Surinam) awaiting ratification by treaty partners.Footnote 40
Concurrent with its later bilateral treaty practice, Brazil’s economic diplomacy also moved onto engaging in several plurilateral fora to promote the adoption of investment facilitation as a regulatory approach. For example, under the BRICS forum, although investment facilitation had occurred previously in conjunction with trade facilitation in 2014,Footnote 41 it was in 2017 that its member states, including Brazil, established an “Outline for Investment Facilitation,” an initiative aimed at facilitating intra-BRICS investments and featuring voluntary good practices that have much in common with Brazil’s ACFI model. These include the establishment or designation of a Direct Investment Ombudsperson (DIO) or a National Focal Point, a single-window system, and of guidelines on investor responsibilities and ethical business practices.Footnote 42 A second prominent example of this has been the signing of the MERCOSUR Protocol on Investment Cooperation and Facilitation in 2017.Footnote 43 Signed by Argentina, Brazil, Paraguay, and Uruguay, the protocol was significantly influenced by the ACFI model, including most of its key features such as transparency, state–state dispute prevention procedures, and national DIOs. Such influence has been regarded as “regionalization of the Brazilian model.”Footnote 44
Most prominent, however, has been Brazil’s participation and indeed leadership at the WTO with regard to building awareness and consensus on investment facilitation.Footnote 45 Together with China, Argentina, Colombia, Hong Kong SAR, Mexico, Nigeria, and Pakistan, on April 21, 2017, Brazil created the informal group “Friends of Investment Facilitation for Development” (FIFD) in the WTO. The aim was to launch a WTO Informal Dialogue on Investment Facilitation for Development.Footnote 46 On April 26, 2017, Brazil circulated in cosponsorship with Argentina the document “Possible Elements of a WTO Instrument on Investment Facilitation.” This Communication emphasized the need to incorporate regulations in both service and non-service sectors, avoid controversial issues, and include incremental implementation provisions along with special and differential treatment (SDT) clauses, and it summarized a list of thirteen “Possible Elements of a WTO Instrument on Investment Facilitation.”Footnote 47 The Brazilian–Argentine paper helped provide a stable basis for the talks, supporting delegations to systematize key elements and progressively deepen their understanding on investment facilitation.Footnote 48
On December 13, 2017, Brazil and sixty-nine other countries signed the Joint Ministerial Statement on Investment Facilitation for Development, right on the last day of the WTO’s 11th Ministerial Conference (MC11). Furthermore, in January 2018, Brazil was the first country to submit a complete draft proposal to offer a “concrete illustration of a possible WTO multilateral framework.”Footnote 49 The leadership role by Brazil clarifies that the draft proposal is not intended to serve as a negotiating text, but rather is meant to serve as a “concrete illustration” of what an agreement on investment facilitation could look like.
More recently, a third Joint Statement on Investment Facilitation for Development, endorsed by over 110 members,Footnote 50 was issued on December 10, 2021, in which the signatories stated their aim to conclude the text negotiations by the end of 2022 and their determination to further intensify outreach efforts. Such a document contributed to giving direction and consistency to the negotiations, consolidating the Brazilian vision of investment facilitation and building more confidence among reticent members. Brazil, notably, brought to the table the lessons learnt from its bilateral efforts and its national implementation process, and several of the provisions of the Brazilian draft are part of the informal consolidated text even today.
This means that the evolution of the Brazilian participation in the WTO alongside the country’s innovative take on investment agreements may have a direct influence on the IFD Agreement. The intrinsic appeal of the ACFI archetype has been confirmed in the last years. However, the alleged ACFI archetype flexibility – under the interoperability concept linking a diversity of provision – is still to be confirmed.Footnote 51 Yet its high dependency on the structure of domestic policies and institutions may pose further challenges to the international arena, as further exemplified in Section 11.4.
11.3 ACFI Pillars – Cooperation and Facilitation Governance
As previously described, the resultant agreement template for ACFIs, centered around cooperation and facilitation that dismissed the traditional protection-based approach, has been both authentically Brazilian and objectively innovative in the international landscape of state approaches to international investment law.Footnote 52 Such innovativeness expresses itself through the focus on more practically managing” foreign investment relations, preserving regulatory autonomy, and preventing investment disputes. ACFIs also adopt a relatively long-term perspective as compared to traditional BITs and do not aim to not only increase FDI flows but also foster a consistent and structured dialogue and cooperation between parties. In the following text, we provide a brief description of the main rationale behind the ACFI structure connecting the facilitation and cooperation action to the bodies designed for the governance of the agreement. In Section 11.4, we describe that dynamic between these notions and Brazil’s domestic-level institutional structures.
Essentially, the ACFI framework consists of three key pillars: (1) risk mitigation provisions, (2) a thematic agenda with special commitments between the parties, and (3) an institutional governance agenda.Footnote 53
11.3.1 Risk Mitigation
As a whole, the provisions in the Brazilian ACFI model create a framework that aims to mitigate potential risks involved for both state parties and foreign investors. It does so in four ways:
First, the main principle of the agreement concerns transparency. All Brazilian ACFIs contain a specific clause relating to transparency, but more importantly, almost all provisions of the agreement consider transparency as the guiding principle for accessibility, predictability, and consistency of investment regulation and policies. More recently, ACFIs also include the availability of information and channels of communication electronically, in part linked to the transparency pledge.Footnote 54 Other principles were also part of the language of the first agreements but not yet explicitly drafted in such a way. These were the provisions on nondiscrimination and the right to regulate, which were later incorporated in special clauses as risk mitigation strategies.Footnote 55 Specific rules on the right to regulate were also added, such as on tax and macroprudential measures, along with security exceptions.
Second, drafting of the substantive content of the ACFIs excludes certain typical investment protection standards such as fair and equitable treatment, full protection and security, and indirect expropriation. The ACFI model is known for not being about protection of investors. Although it does explicitly provide for the prohibition of direct expropriations, it recognizes public interest exceptions as far as they are conducted in a nondiscriminatory way, in accordance with due process of law and, most importantly, with payment of effective compensation.Footnote 56 Compensation rules, on the other hand, also consider cases of potential balance of payments limitations of one of the parties.Footnote 57
Third, the ACFIs also aim at preventing the potential risk of socially detrimental effects of incoming FDI that may be contrary to a state’s sustainable development goals. Risk mitigation therefore also serves the benefit of the state parties of the agreement and not only of the investor. On that note, since the first ACFI was signed in 2014, Brazil has consistently included corporate social responsibility (CSR) clauses encouraging foreign investors to respect human rights and environmental laws.Footnote 58 Also, since the second wave of agreements signed as from 2018 with other Latin American countries, the ACFIs have demarcated key areas of domestic regulatory space (such as relating to sustainable development goals and the protection of human, plant, and animal lives) for state parties and incorporated anti-corruption and anti-bribery clauses.Footnote 59
Last but not least, the backbone of risk mitigation is to prevent investment disputes. Such dispute prevention in the ACFIs operates at three levels of escalation, mobilizing both domestic and the agreement institutional structures. It initially consists of an investment ombudsperson to conduct consultations and negotiations, then with a Joint Committee that effectively functions in a mediatory role, and finally with state–state arbitration as a last resort. Although not all claims can be brought to the level of arbitration, it is expected that they all can receive institutional support, as in the previous levels.Footnote 60
Risk mitigation provisions are associated with both cooperation and facilitation measures, as they mobilize either unilateral actions by the state parties to facilitate investment flows or they may also allow for joint action by them through cooperation structures. In our view, facilitation and cooperation actions in the risk mitigation measures are closely linked, if one is the cause, the other may be the consequence, and vice versa. As a result, efforts to distinguish them are mostly theoretical at this point.
11.3.2 Thematic Agenda
A second pillar of the ACFI framework consists of thematic agendas for bilateral negotiations by state parties on special issues or commitments beyond the main agreement that cater to their specific and subjective domestic demands of the respective parties. Such negotiations under thematic agendas may lead to supplementary agreements or schedules that address subjects such as transfer of funds, visa proceedings, technical and environmental licenses or certifications, technology transfer conditions, capacity building, and other development-oriented domestic matters. Thematic agendas emphasize constant coordination between state parties and allow them to tailor the ACFI according to their changing development needs. In case of developing economies, special rules on such topics may constitute major ground-level obstacles for foreign investors.
The thematic agendas are occasionally named working agendas, in the sense that they are expected to be revised and complemented periodically. This allows ACFIs to be as such, “living” or dynamic agreements that may evolve even after the signing and conclusion of the original main agreement. The institutional bodies are in charge of monitoring the thematic agenda and their periodical review, as described here. Accordingly, thematic agendas are strongly associated with the cooperation dimension of the ACFIs, as they depend on joint efforts by the parties to convene on their priorities to facilitate investment flows.
The thematic agendas may serve to improve the cooperation between the parties and strengthen the infrastructure that enables the facilitation of investments. If in the earlier agreements, the thematic agenda started with a detailed list of topics as an Annexure to the agreement, it later lost its precision to broadly refer to areas for cooperation.Footnote 61 Furthermore, in the case of the last ACFI signed in 2020 by Brazil and India, one article of the agreement includes a best effort clause for the parties to further work on the thematic cooperation.Footnote 62 This trend admittedly challenges the role of having the thematic agenda as a pillar of the ACFI, in particular the cooperation dimension of the agreement.
11.3.3 Institutional Governance
The third pillar of the ACFI is the institutional governance structure. A significant part of the agreements is devoted to defining this governance framework. The ACFI creates two distinct institutions to run the agreement, promoting regular information exchange, preventing disputes, and, if a dispute may yet arise, mediating and facilitating negotiations toward an amicable settlement of the dispute, without recourse to state–state arbitration.
The first such institution consists of an ombudsperson (or focal point), a centralized mechanism appointed by each party to receive and analyze queries and demands from investors and subsequently to coordinate with various state entities or with other focal points to provide a concrete solution in return. Inspired by a similar South Korean policy,Footnote 63 the ACFI’s DIO as an institutional structure has the mandate to foster a healthy business environment and provide an effective means for foreign investors to overcome regulatory challenges in their host state, while maintaining their investment. The DIO is also known as the single-window or one-stop shop for investors operating in the other state party territory to access information and settle its grievances.Footnote 64 This is the operational backbone of facilitation in the ACFI model. And, as exemplified with the Brazilian case in Section 11.4, although it is part of the agreement, it will always depend on each state party effort to have this institutional-level working properly.
The second distinct institution provided for by the ACFI framework is a single joint committee consisting of representatives of both state parties. Such a committee is tasked with, above all, allowing for state–state level cooperation, including supervising the implementation of the agreement, sharing information about investment opportunities, and coordinating agendas for cooperation. Part of its work is guided by reports and recommendation of the focal points, through the adequate coordinating bodies at the national level (see illustrative examples in Section 11.4). The joint committee is also the locus for dispute prevention, aiming at resolving possible disagreements related to bilateral investments in an amicable manner. Its recommendations to settle investment-related disputes, however, are nonbinding, so if it were so that the parties to the dispute are not satisfied with the report, they may then move, as a last resort, onto state–state arbitration.
In addition to the bodies created to coordinate the actions between the parties and further development and supervision of the agreement, increasingly the ACFIs signed by Brazil have defined the main guidance for any arbitral tribunal established to resolve disputes between the parties. Such agreements decide upon the constitution of the tribunals, the profile of the arbitrators, the applicable rules of procedure, and also the costs incurred by the parties.Footnote 65 The ACFI Brazil–India was the first one to detail a Code of Conduct for Arbitrators, as Annex II to the agreement.
11.4 Governance at the Domestic Level: Implementation of Facilitation Institutions and Cooperation Support
One of the anchors of the ACFI is the domestic structure to implement measures related to investment facilitation and cooperation. In that sense, countries that have signed ACFIs need to designate an institution to both serve and implement the cooperation and facilitation measures.
In such an institutional structure, the main body is the direct investment ombudsperson. This is the body that is meant to respond to two of the main purposes of the agreement: (1) transparency and (2) exchange of information. The DIO also responds as a single window to queries of both national and foreign investors, and it coordinates with other national bodies and its counterparts in other states.
It is also understood that the role of the DIO may support the prevention of any doubts and complaints of investors and the state parties of the agreement. This is the sole domestic body that all ACFI agreements request the parties to implement domestically. The national DIOs in the bilateral agreements coordinate with the bilateral joint committees, composed of representatives of the parties to the agreement.
However, in the Brazilian context, there are also other bodies that support and amplify the role of the DIO, with which the DIO coordinates its actions. In the next sections, we first provide a brief description about the creation and implementation of the DIO in the Brazilian context and then provide an overview of the bodies that support its activities, as well as those of the joint committee.
11.4.1 The Direct Investment Ombudsperson (DIO): Objectives and Flow of Work
As previously mentioned, the national DIOs are part of ACFI commitments, being incorporated in the institutional governance chapters. The ambition here is to have just one agency responsible for supporting investors from the other party in its territory – thereby, its co-denomination as the focal point.
After signing the initial few ACFIs since March 2015 but before the entry into force of the same,Footnote 66 the direct investment ombudsperson system was created within the Brazilian government structure in September 2016.Footnote 67 And as part of the text of the first agreement signed with Angola, Brazil had appointed the Brazilian Chamber of Foreign Trade (known by the acronym CAMEX) to perform the role of the DIO.Footnote 68 Since then, the rules of procedure of the Brazilian DIO have been revised, but it still maintains its position in the CAMEX system.Footnote 69
According to the recent reforms in the structure of Brazilian central public administration,Footnote 70 CAMEX is a collegiate body currently placed in the structure of the Ministry of Economy, composed of eight other collegiate members and an executive secretary. Among the collegiate is the National Committee of Investment (known as CONINV), that is, the central body for foreign investment facilitation policymaking in Brazil and for encouraging and facilitating Brazilian investments abroad.Footnote 71 Such structure is further detailed in Section 4.b as supportive agencies to the national DIO.
According to the texts of the ACFIs signed by Brazil, the main responsibility of the national DIO is to provide relevant information to foreign investors from the other party of the agreement. Domestic regulations in Brazil have extended that responsibility to include two other groups of interest. First, in 2016, it had already allocated the responsibility of coordination with its counterparts in supporting Brazilian investors with consultations and questions. Second, in reforming the national DIO rules of procedure in 2019, the regulation extended the work of the institution to other consultations and questions from and about non-ACFI parties.Footnote 72 That regulation benefited both nationals from Brazil and foreign investors from countries with which Brazil still does not have an ACFI.
The national DIO is often compared with the Korean Foreign Investment Ombudsman, as it was inspired from the experience of the latter.Footnote 73 However, the main functions and their institutional environment of the Brazilian and the Korean ombudsmen are somehow different. In the case of Brazil, the DIO was created as a single window to operate at two levels: in direct contact with investors and in coordination with other relevant domestic agencies. Its work concerning investors’ interest is linked to the mandate of (1) providing information on relevant legislative and regulatory issues, favoring transparency in investment legislation and procedures, and (2) addressing complaints or grievances regarding measures affecting investors and their investments, whether in the form of law, regulation, rule, procedure, decision, administrative ruling, or any other form, with a view to preventing disputes.Footnote 74
The second dimension of activities of the DIO is about (1) its coordination with public agencies responsible for topics concerning investments at the federal, state, and municipal levels in Brazil that may cause doubts or uncertainties among investors or that bring difficulties to a particular investment situation; and (2) connected with those doubts and difficulties of investors that the ombudsman is also in charge of recommending to the competent authorities, as and when appropriate, measures to improve the investment environment.Footnote 75
As described, although most of the mandate of the Brazilian DIO concerns aftercare – such as the Korean one – it also includes some information support, along with a coordinating role. In this respect, it is interesting to note the diversity of institutional structures and mandates that can result from bilateral and/or plurilateral negotiations on investment facilitation. Again, the main commonality should be the one-stop agency, operating preferably as a single electronic window.Footnote 76
The ACFI already provides the type of information that may be requested from the DIO. They include regulatory conditions for investments, relevant public policies and their legal framework, customs procedures and tax regimes, government procurement, public concessions and public–private partnerships, social and labor legislation and requirements, immigration law, and land regulation. The Rules of Procedure of the DIO in Brazil, updated in 2020, also list the topics and main areas of regulation about which the DIO is expected to be consulted.Footnote 77
Considering the importance of building trust between the DIO and the investor, both the international agreements and domestic regulations on investment facilitation have devoted clear provisions to the treatment of protected information and the responsibilities of public officials in accessing them.Footnote 78 A second concern for investors is about the efficiency of the proceedings. It is understood that a singular structure allows for supporting the investor in charge of responding to demands within a short time. The domestic regulation has detailed the maximum of time for responses from the DIO to request and inquiries from investors. The time period for requests of information is twenty days, extendable by no more than ten days; and, in case of inquiries, the time limit is of ninety days, extendable once to an equal period of ninety days.Footnote 79 In Figure 11.1, we provide a simplified flowchart for the requests and inquiries before the DIO.
Figure 11.1 The DIO request and inquiry systems.
According to the World Bank, up to October 2020, the DIO received a total of 19 cases, 8 consultations, and 11 investor’s grievances.Footnote 80 Eighteen of the cases were solved and one was still pending. Most of those requests and inquiries were about tax and labor legislation. This is not surprising as Brazil is under a process of deep macroeconomic reforms since 2017 when Congress approved a major Labour and Employment Reform and in 2019 its Pension System reform. The Tax System reform is expected to be the next in line.Footnote 81
As it is illustrated in Figure 11.2, the DIO can be supported by three consulting groups: (1) the Investment Grievance Mechanism (IGM), (2) the Domestic Focal Points Network, and (3) the Advisory Group. The IGM is the ordinary support for the work of the DIO either in replying to requests for information or in addressing grievances from investors. The Domestic Network is composed of other focal points in different bodies of the state bureaucracy, at the federal, state, and municipal levels.Footnote 82 This network is expected to be triggered frequently and be ready to answer information requests in no more than fifteen days. The relevant focal points of the networks can also be invoked to answer inquiries about corresponding legislation and conflict with rules and requested actions, as well as about specific cases, including in conjunction with the IGM. The Advisory Group, in its turn, is the supervising agency of the work of the DIO and is composed of representatives from different ministries and bodies of the Ministry of Economy that will consider the necessary adjustments and recommendations for legal and/or administrative changes in investment regulations and procedures.Footnote 83
Figure 11.2 The supportive structure to the Brazilian DIO.
Note: About the colored boxes: The bodies of the Ministry of Economy are in gray. CAMEX collegiates are in orange; CAMEX committees are in blue; the DIO mechanisms are in rose; a separate institution of the Brazilian government working on investment promotion is in green.
Developing such institutional architecture is complex, especially in a large economy with a federal system of government. The DIO office since its establishment in 2016 has been fully operational, and it has also developed the designated institutional coordination at the domestic level. Going forward, its main priorities at that level involve (1) increasing partnerships and strengthening collaboration among public agencies at the subnational levels; (2) building the capacity of other relevant government agencies at the federal level; (3) guaranteeing the monitoring and evaluation framework to measure impact, based on the experience of IGM and the network of focal points; and furthermore (4) putting in action the IGM and the Advisory Group, based on concrete situations in the future.
11.4.2 CAMEX and the Supportive Structure to the DIO
In addition to the direct assistance bodies to the National DIO, there are other bodies of the Brazilian public administration that also deal with investment policies. They are, to varying degrees, connected to the work of the DIO. The most relevant ones are illustrated in Figure 11.2.
Right above the DIO is the Secretariat of Foreign Investments (acronym in Portuguese, SINVE), which is the direct administrative support to the DIO, performing the operational activities for all requests and inquiries to investors (see Figure 11.1). This Secretariat, based on its experience, is also in charge of proposing better regulatory practices to facilitate investments in the country and of recommending new measures by the CONINV to facilitate inbound and outbound investments. In addition to that, SINVE coordinates the IWG-NPC.
The IWG-NPC is the national contact point to handle inquiries and to promote the resolutions of alleged nonobservance of the OECD Guidelines for Multinationals. Brazil adopted the Guidelines in 1997, but the IWG-NPC was finally institutionalized in 2010.Footnote 84 Since then, this body has been active in assisting enterprises through mediation and conciliation with their stakeholders and civil society groups to implement the OECD Guidelines in Brazil.Footnote 85 It is understood that IWG-NPC may help implement investor responsibilities as defined in the ACFI.Footnote 86 Such coordination is built through requests of information to the IWG-NPC in Brazil by CONINV and through biannual reports of the IWG-NPC to this committee. Just as the OECD Guidelines, corporate social responsibility clauses in the ACFIs and those related to the respect to labor, environment, and human rights regulation are voluntary in nature. The processes then tend to be more a naming-and-shaming system for foreign investors, and an alert to the authorities to potentially address the issues at the political and strategic levels.Footnote 87
The CONINV, in turn, is the first level of guidance and evaluation of public policies and actions related to both inbound and outbound investments in Brazil. Right after the creation of the DIO in 2016, the CONINV was established as an interministerial body to coordinate the actions toward investments and to coordinate the technical bodies working in the field.Footnote 88 The Committee has the role of intermediating the work of technical bodies – the blue boxes of the organization chart in Figure 11.1– with the strategic actions at the political level. This is also the forum for coordination with the private sector and with subnational entities for the promotion of investments.
CONINV is composed of Secretariat-level representatives who are assisted by a Technical Group of public servants from the ministries and agencies that are part of CONINV. This group has to meet at least bimonthly and to report to CONINV that will meet every six months. Public officials from the current Ministry of Economy report that both the Technical Group and the CONINV have followed that agenda.Footnote 89
CONINV reports then to both the CAMEX Executive Committee (GECEX) and the Council on Trade Strategy (CEC). These are two strategic bodies of the CAMEX structure which address the broader public policy of investments in Brazil, aiming at increasing the productivity and competitiveness of the Brazilian economy. The Council of Trade Strategy receives the recommendations from GECEX for a decision on strategic actions, including those connected to international negotiations.Footnote 90 This is a Ministers-level body that meets biannually or upon request of the President. As such, GECEX, which meets at least once a month, coordinates among the lower level of ministers’ representatives the daily routine.
In addition to those agencies, it is worth mentioning the Brazilian Trade and Investment Promotion Agency (known by the acronym in Portuguese APEX). This is the oldest structure in the institutional design for investments promotion in Brazil. APEX is placed in the structure of the Ministry of Foreign Affairs, and it has been considered as part of the investment cooperation and facilitation system by the regulation of the main bodies operating in the system.Footnote 91
11.4.3 Coupling the Domestic Governance and the ACFI Governance
The institutional structure of Brazil’s ACFI domestic governance was designed after the signing of the agreements by Brazil and so were created reflexively in accordance with the same. As previously mentioned, APEX and with the IWG-NPC were the sole domestic agencies exclusively focused on investments before 2016. We can then identify that the actions for facilitation and cooperation – in spite of their gray zones – are somehow distributed among the national agencies in tandem with the ACFI’s two major bodies (the joint committee and the DIOs).
In Figure 11.3, we couple the domestic organization chart and the international institutional governance structures in order to illustrate the cooperation and facilitation actions, from the Brazilian institutional design.
Figure 11.3 Cooperation and facilitation coordination among domestic and international institutional governance structures.
As the concepts of cooperation and facilitation overlap in practice, we can see that the works from the more technical and administrative perspectives of the facilitation bodies (in blue) bring the inputs for cooperation at the strategic and political levels. The purpose being that the political level would be able to respond more efficiently to the needed reforms and revisions appointed by the ground-level experiences of investors and concerned groups together with the technical groups that expect to facilitate the investment process.
It is important to consider that most of the institutional reform and the pairing of the national and international levels still need to be tested in practice. This will require time, as well as investment flows from and to countries with which Brazil has signed the ACFI and others.
The same structure applied to bilateral relations is also expected to be in action to plurilateral agreements, such as the intra-Mercosur, the Mercosur and agreements, and the negotiations at the WTO level.
11.5 Conclusion
During the international investment’s regimes “Era of Re-orientation,”Footnote 92 Brazil launched a new framework agreement for regulating foreign investment focusing on cooperation and facilitation of investments. This framework not only shifted the focus from investment protection to investment promotion and cooperation as alternative perspectives, but it also contested one of the main pillars of BITs governance: the investor–state arbitration system. In doing so, the ACFIs decided upon new language, the exclusion of certain clauses, and in adding new legal safeguards to international investment agreements. In addition, a new governance structure was designed to promote continuous coordination among the parties, along with risk mitigation and dispute prevention. The fact that there is no single standard or model agreement for the ACFI, but rather an interoperable framework, has raised reservations about the potential of this new framework.
Sections 11.2 and 11.3 of this chapter aimed at highlighting the brief history of those negotiations and the flexibility of the content of the agreements. The purpose was to highlight the adaptability of the ACFI, according to the parties, but also the building up process for new rules. Since Brazil has increased the number of agreements it has signed, proposing the framework to nontraditional economic partners of the country, it is noticeable that the cooperation agenda became less operative and that the ACFI is increasingly focused on the functioning of the institutional governance of the agreements.
Section 11.4 has described in detail the reforms in the Brazilian state bureaucracy to accommodate the principles and structures of the ACFI. Most of the reforms have been taken in the last seven years, and they were adjusted to the reforms taken in 2019 when President Bolsonaro took office. Given the two central governance structures of the ACFIs – the DIO and the joint committees, the former should be part of institutions already in place, all referenced in the ACFI texts. Then, most of the innovation is expected to take place in the implementation of the single-window system. In the case of Brazil, Figure 11.1 details the processes of request and inquiry. Its functioning has been amplified to any investor, including non-ACFI origin, and is somewhat active. In the case of Brazil, then, the DIO became central to the facilitation processes to investors. Additionally, there has been an effort to integrate other support agencies and to connect them, as illustrated by Figure 11.2, mainly around SINVE and CONINV. Furthermore, the interplay of those two agencies in connecting the national and the international levels are essential for the good performance of the ACFI in Brazil.
A second feature in the governance structure of the ACFI is the joint committee. However, this may be a bottleneck within the governance structure. Such structure is composed of representatives of the ACFI parties and depends upon a certain level of political commitment.Footnote 93 The joint committees are the pivot system for cooperation and risk mitigation, and in case of any complaint of an investor of the parties, this is the first mandatory step to take. So, coordinating at the diplomatic level is crucial. Taking into account that a plurilateral agreement is under negotiation at the WTO, the implementation of a contact point at that level may favor the centralization of such coordination.
It is still too early to make a proper evaluation of the ACFI as a stimulus for cooperation and facilitation for investments but may be considered a promising model when compared to the wider scheme of proposals submitted so far. Even if not yet a model, at least the ACFI framework, its contestations and proposals, as well as the experience of implementing a facilitation system in a middle-power country as Brazil may serve as inspiration in the continuous reorientation of the investment regime.
12.1 Introduction
Until recently, investment facilitation, which aims to ensure the transparency, predictability, and efficiency of the investment regulatory environment, was a niche topic promoted mostly by Brazil and a handful of economies of the Global South in their bilateral or regional agreements. In 2017, however, investment facilitation gained traction on the agenda of the World Trade Organization (WTO) and became the core theme of a Joint Ministerial Statement broadly circulated in the Buenos Aires Ministerial Conference in December. In all, seventy economies supported this call (the number had reached 112 by December 2021). The European Union (EU) was one of them, and it has since played an active role in developing this agenda and taking on an increasing leadership position in the negotiations. This stands in sharp contrast to the United States (US), which has until now chosen not to sign the Buenos Aires and the subsequent Shanghai Joint Statements on investment facilitation. The EU’s espousal of the investment facilitation agenda takes place in an ambiguous policy context consisting of mixed political and economic signals. One the one hand, the last two decades have unquestionably ushered in a period of intensified global competition for foreign direct investment (FDI), with countries actively promoting themselves as attractive investment locations. On the other hand, investment issues have been the catalyst of widespread popular skepticism toward international trade and investment agreements, from the aborted Multilateral Agreement on Investment (MAI) in 1998 to the cancelled Transatlantic Trade and Investment Partnership (TTIP) between the EU and the United States in the mid-2010s. While Donald Trump’s victory in the 2016 United States presidential elections blew the TTIP a fatal blow, in Europe intense popular discontent with the investor–state dispute settlement (ISDS) mechanism had already taken much steam out of the negotiations by 2014.Footnote 1
Not all skepticism against FDI has originated at the grassroots level. EU member states themselves have been ill at ease with some potential risks for public order and security posed by recent FDI patterns. After repeated attempts from 2007 on, they finally managed in 2017 to convince the European Commission to propose a screening mechanism on Inbound FDI. In 2019, the EU adopted the first pan-European foreign investment screening mechanism.Footnote 2 In 2020, this mechanism entered into force, together with new restrictive EU rules on foreign subsidies and increased vigilance over merger control in the context of the COVID-19 pandemic. Last but not least, the European Commission on February 18, 2021, announced its new strategy of ‘open strategic autonomy’, with the aim of restoring multilateralism while asserting core EU values and interests.
This ambiguous context raises the following questions. Why has the EU espoused the investment facilitation agenda, an issue which could hardly be said to be part of the EU’s priorities before 2017? And why has it become one of the foremost international proponents of this agenda? Our main goal in this chapter is to clarify and explain the circumstances under which the EU became a promoter of investment facilitation. Furthermore, we aim to probe the potential for the EU to become a rule-maker in the global investment regime by taking the leadership of the investment facilitation initiative.
We argue that the EU’s embrace of investment facilitation takes place amid the post-Cold War transformation of the European trading states, which had crystallized after WWII under the twin constraints of United States-shaped multilateral trading regime and European integration.Footnote 3 This transformation is shaped by crisscrossing trends including new economic and geopolitical realities testing the EU–United States relationship and the consolidation of the internal political–legal order of the EU empowering it to act in matters of foreign investment regulation. Embracing the WTO investment facilitation agenda serves EU strategic goals of reviving multilateralism, bringing the fractious United States–China relation back into the fold of multilateral disciplines, and asserting itself as a leader in the field of sustainable development.
We proceed in four steps. First, we trace the emergence of the investment facilitation agenda at the international level to the impasse of the WTO Doha Round negotiations and the compromise agreement reached in Bali around the 2013 trade facilitation agreement (TFA), which provided the template for moving on in the investment area under the impulse of developing countries. Second, we highlight the puzzling character of the EU’s embrace of the multilateral investment facilitation for development (IFD) agenda by highlighting the low salience of the TFA and of investment facilitation in the EU. Third, we show that changing institutional and (geo)political conditions provided the EU with a window of opportunity to act in 2017. In the last part, we briefly discuss the key elements shaping the EU’s preferences toward the IFD Agreement as well as the factors shaping its capacity to become a rule-maker.
12.2 Inventing ‘Investment Facilitation’ – The Critical Juncture of 2013
The emergence of the idea of ‘investment facilitation’ on the international agenda has multiple roots – multilateral, unilateral, bilateral, and regional.Footnote 4 In this section, we locate the rise of this agenda to the mid-2010s and trace it to the policy entrepreneurship of Brazil and China, as the EU and the United States failed to secure multilateral and regional support for more ambitious investment agreements. We outline the rise of this agenda from the 1996 Singapore WTO conference to the 2017 Buenos Aires Joint Statement, highlighting the 2013 Bali TFA as a critical juncture and the puzzling character of the conversion of the EU and its member states to the new agenda. The question of defining multilateral disciplines on international investment had gained broad prominence in the post-Cold War years, as part and parcel of a renewed and expanded global multilateral agenda, encompassing many more economies and many more issues. From 1995, international investment kept popping up in various international organizations, migrating back and forth between the WTO and the Organisation for Economic Co-operation and Development (OECD), reflecting the fact that investment issues were seen as a key concern of developed countries, chief among them the United States and EU countries, as trade within companies in the mid-1990s represented ‘about one third of the $6.1 trillion total for world trade in goods and services’.Footnote 5
The WTO initially seemed poised to play a key role in these issues as investment was one of the four new salient issues highlighted in the first WTO ministerial conference held in Singapore in 1996 – from then on known as ‘the Singapore issues’. The other Singapore issues were competition, government procurement, and trade facilitation. The inclusion of investment issues on the WTO’s agenda epitomized the wish to ‘further strengthen the WTO as a forum for negotiation’ and deepen the ‘liberalization of trade within a rule-based system’.Footnote 6 The Singapore declaration called for a potentially far-reaching examination of investment issues as they related to trade liberalization and established a new working group on ‘trade and investment’ dedicated to this agenda. This grand opening did not mention facilitation other than with reference to ‘trade’. While trade facilitation was born, the term of ‘investment facilitation’ was not coined, and the idea had not even formed yet. As developing countries showed little appetite for the Singapore issues, a range of advanced economies set on to negotiate an ambitious Multilateral Agreement on Investment (MAI) in the OECD. The OECD’s ambition was to reach a ‘state-of-the-art agreement [that] would be an important step on the road to a truly universal investment regime’.Footnote 7 Some of the measures envisioned are now commonly understood as pertaining to investment facilitation (e.g., obligations of transparency in the establishment and post-establishment phases). However, they were still not labeled as such, and it would not have made sense to do so for the simple reason that the MAI’s essence was not about singling out specific aspects of investment issues for multilateral discipline but about fleshing out a comprehensive multilateral investment regime, enmeshing various issues together. The negotiations had started out behind closed doors. However, public opposition soon formed around growing mobilization from labor groups to environmental activists, after an early draft was leaked to a rights advocacy citizen organization.Footnote 8 In December 1998, the negotiations collapsed and the French government ‘suggested a change of venue, such as the WTO, to address investment concerns’.Footnote 9 This venue change was caught in the difficult travails of the Millenium round, expected to be launched at the 1999 Ministerial Conference in Seattle. Outside the WTO, activists protested the secretive character of the discussions, which, they argued, biased the agenda as the round was ‘being prepared in a quite similar way as the MAI negotiations, with a strong influence from business which excludes citizen concerns’.Footnote 10 Inside the WTO, a North–South division increasingly cleaved the discussions.Footnote 11 The Millennium round of the WTO collapsed in the face of deadlocks on the Singapore issues, agricultural liberalization, and the differential treatment of developing countries.Footnote 12
In September 2003, the rescue of the now-dubbed Doha round collapsed amid massive opposition from the developing world, amplified by ‘deep-seated tensions within the WTO’s institutional framework, both in terms of the processes that underlied its working and the substance of its agreements’.Footnote 13 The only part of the Doha Development Agenda and the Singapore 1996 declaration that outlived the chaotic process of the 2000s was the ‘trade facilitation’ agenda, around which the WTO members found an agreement at the 2013 Ministerial Conference in Bali – the so-called Bali Trade Facilitation Agreement. The lesson was that the trade liberalization agenda could be fractured along issue segments and that multilateral support could be found in favor of a very narrow and rather shallow agreement. The TFA not only sealed the fate of deep and comprehensive multilateral trade agreements, it also helped fashion a new type of multilateral investment agenda. The idea of ‘investment facilitation’ was born.
A few months after Bali, the BRICS highlighted ‘trade and investment’ as two priority areas and announced an action plan in the field of trade and investment facilitation building on the diverse experience of their members.Footnote 14 The BRICS spearheaded the new investment agenda in the context of the G20Footnote 15 and UNCTADFootnote 16 but also soon in the WTO. Brazil and China moved to the forefront of these and subsequent initiatives. From 2015, Brazil started embedding its approach to investment facilitation in a range of cooperation agreements with Latin American countries and African countries.Footnote 17 In 2016, China initiated a working group on trade and investment at the G20, where it held the presidency, tasked with the formulation of ‘guiding principles for global investment policymaking’. These guidelines included ‘facilitation efforts that promote transparency and are conducive for investors to establish, conduct, and expand their businesses’,Footnote 18 the issues that formed the core of the Buenos Aires Joint Statement. Not all developing countries have welcomed the facilitation agenda. India and South Africa have opposed the inception of WTO talks on investment facilitation for various reasons – among them not to be ‘handing over policy space to decide on things such as the foreign direct investment norms and arbitration clauses’.Footnote 19 Among developed countries, the United States has held an open attitude and not been supportive, while the EU, Canada, Australia, and Japan have joined the initiative.
12.3 Why Did the EU Embrace the Investment Facilitation Agenda?
Since the Buenos Aires Joint Statement of December 2017, the WTO members have now completed the phase of preparation leading to the opening of formal negotiations. This initial phase was devoted to specifying the shape that an agreement on investment facilitation could take. This was done essentially through developing a checklist of elements that could be part of such a framework and sharing textual examples of bilateral agreements in order to transform these elements into more concrete language and sets of rules. With this preparatory phase finished, the members in December 2019 expressed the need to move into negotiations. The negotiations started formally in September 2020 with the two most comprehensive proposals presented by Brazil and the EU, as well as other less comprehensive proposals from a host of countries or regions, including China, Chinese Taipei, Turkey, Japan, Canada, Argentina, and Korea. Unlike the EU, the United States has not made any proposals under the Trump administration. While attending the meetings,Footnote 20 the United States delegation never took the floor or issued a formal statement on this initiative. It is thus particularly interesting that, while not one of the original sponsors of the IFD initiative, the EU has become one of its foremost promoters today, together with Brazil, its original sponsor. Why has the EU taken such a prominent role in developing this new international agenda?
To be sure, the EU and its member states had developed investment facilitation instruments before joining the multilateral negotiations in 2017, and they had incorporated such instruments in third-country agreements, though under different names, before the term became en vogue in the late 2010s. In fact, this kind of measure is arguably as old as the European bilateral investment treaties (BITs) themselves, as evidenced by data from the World Trade Institute’s Electronic Database on Investment Treaties (EDIT).Footnote 21 Besides the fact that some of the measures identified as ‘investment facilitation’ stretch back to the first BITs, several other points emerge, based on these preliminary data. Clearly, investment facilitation provisions surged in the 1990s (see Figure 12.1). The rise of investment facilitation measures in this decade is perhaps not very surprising, bearing in mind the particular context of the immediate post-Cold War years. We know that these years incepted a twenty-year long ‘golden age of globalization’ during which ‘the scale and scope of such [international] investment increased dramatically … growing twice as fast as international trade did’.Footnote 22 Therefore, a steep rise in ‘investment facilitation’ measures corresponded with a period of rapid expansion of international investment. This does not mean, however, that EU member states had become particularly interested in ‘investment facilitation’ as such – in fact, talking about investment facilitation measures for this period would be an anachronism, as we showed in the previous part. More likely, the increasing number of investment facilitation measures during the 1990s and 2000s is simply a mechanical effect of a steep rise in international investment agreements.
Figure 12.1 Number of international agreements entered by the EC/EU or its member states, with investment facilitation provisions (1950–2020).
A relatively limited number of European players drove this trend (see Figure 12.2). In the 1990s, these players mostly consisted of a handful of (contemporary or future) member states. This reflects the fact that the EU prior to 2009 did not have any policy competences in the area of international investment and mostly got involved in that area indirectly, through agreements of cooperation, association, or stabilization with third countries. Among the member states, the most active were Italy, France, Austria (joining the EU in 1995), and Slovenia (joining the EU in 2004), as well as the Netherlands (which had already experienced a surge in the 1960s). Again, we need to be careful with the interpretation of these results because we only have absolute figures. It is clear from the EDIT data, however, that member states and the EU itself had practiced some form of investment facilitation long before the concept of ‘investment facilitation’ was ‘invented’ and became fashionable on the international agenda.
Figure 12.2 Number of BITs signed by EC/EU member states, including investment facilitation provisions, by country (1950–2020).
Note: ‘Bleu’ refers to Belgium–Luxembourg economic union.
In sum, in all likelihood, as the EDIT data show, the EU and its member states had developed some elements of investment facilitation before the 2010s. Like Molière’s Monsieur Jourdain famously spoke prose without knowing it, the EU member states had just tackled investment facilitation ‘without knowing it’: because it was anachronistic to speak of investment facilitation and because, as a corollary, these elements were not thought to have an independent existence. In fact, the perception, probably widely shared in the European Commission, is that the member states’ BITs did not deal at all with the regulatory aspect of investment, a fortiori investment facilitation concerns which did not exist before the mid-2010s.Footnote 23
The EU started becoming involved in international investment agreements (IIAs) after the mid-1990s, most notably with the important Cotonou Agreement, signed in 2000 with seventy-nine countries situated in Africa, the Caribbean, and the Pacific. As PolancoFootnote 24 writes, the Cotonou Agreement went ‘further [than previous EC agreements which were mostly focused on promotion and protection investment cooperation] to develop a model investment treaty: The Cotonou Agreement even provides an overview of the content of such model agreement, including fair and equitable treatment, most-favored-nation, protection against expropriation, transfer of capitals and profits, and investor-state arbitration’. Significantly, it is also one of the ‘very few IIAs [to] include provisions on investment facilitation through direct financing of investment projects’, specifically the Investment Facility set up in 2003 and managed by the European Investment Bank (EIB).Footnote 25 Cotonou therefore stands out not only as a successful case of international investment agreement between the EU and developing countries, it also stands out as an ambitious toolkit of measures bringing together a broad range of distributive and regulatory instruments. In this sense, Cotonou is the exception that confirms the overall lack of prominence of the investment facilitation in the EU prior to the late 2010s.
The pattern emerging from this cursory overview highlights some puzzling aspects in the decision of the EU to embrace the international agenda on investment facilitation, for even though the EU and its member states had developed some instruments of investment facilitation before the 2010s, there is no suggestion that they meant to make it an independent, let alone central, pillar of their FDI policy – on the contrary, they were probably best thought of as ‘corollary’ measures in a more comprehensive agenda on investment liberalization, good governance, and sustainable development. Even now, investment facilitation remains only one leg of the broader triptych of investment policy principles guiding the EU and its member states, including the weighty principles of ‘investment liberalization’ and ‘investment protection’. In this light, pursuing an international agenda on investment facilitation explicitly and contentiously disconnected from investment protection and market access issues seems to short-change the EU’s strategic priorities and strengthen the hand of emerging countries, like Brazil.Footnote 26
Moreover, it is not clear what benefits the EU would reap from such an agreement. For one, arguments in support remain vague, including references to the ‘EU sensing an interest’, seeing a ‘clear benefit for all’, or seeing this initiative as ‘really a development initiative’.Footnote 27 More specific arguments refer to the need to modernize the multilateral agenda to make it more fit for an economy increasingly based on investment flows. However, looking back at the case of trade facilitation, the results of the Bali TFA seem to be meager, raising the question of whether pursuing this kind of segmented agendas is worth the effort. The preliminary assessments of the TFA have highlighted its very narrow scope, its soft commitment methodology – with a preference for best endeavor language – and its highly flexible implementation scheme.Footnote 28 This suggests that ‘it seems myopic to consider that the ATF [sic!] will bring significant economic impacts’ even though the TFA can still be considered ‘a tool of trade facilitation reform in the long-run’.Footnote 29 Arguably, the same might be likely to happen with a narrow investment facilitation agreement, raising the question of why the EU would bother the effort. Importantly, there is no impact assessment of the IFD to this date, meaning that arguments about its benefits and its costs lack an evidentiary basis at the EU level.Footnote 30
Even if the multilateral agreement were to succeed, the relative benefits derived by the EU would be smaller than the benefits for other parties to the agreement. While the potential gains are estimated to be large for many developing economies, the expected gains are more modest for the EU and for other developed economies. According to the Investment Facilitation Index, EU countries already have good regulatory practices facilitating investment. Fifteen EU member states – Germany, the UK (which was still an EU member until 2020), the Netherlands, Denmark, Austria, Sweden, France, Luxembourg, Finland, Belgium, Poland, Ireland, Estonia, Slovenia, and Spain – were among the top thirty countries with the best performance in terms of existing investment facilitation.Footnote 31 This is also perceived by Commission officials who acknowledge that the investment facilitation agenda does not make a difference for the EU (interview on January 22, 2021). The study by Balistreri and Olekseyuk estimates that the EU would gain modestly from the successful conclusion of an agreement.Footnote 32 In fact, one possibility is that the investment facilitation agenda sharpens the global competition for FDI by making developing and emerging countries more attractive recipients of FDI.
12.4 Seizing a Window of Opportunity
To explain this puzzling EU embrace of the multilateral investment facilitation agenda, we need to understand the evolving economic, institutional, and political factors shaping the ‘European trading states’, which crystallized in the Cold War at the intersection of the multilateral trade regime and European integration. Externally, the European trading states pursued policies of embedded liberalism in the GATT and later multilateralism through the WTO. Internally, the process of European integration supported this orientation by fostering notably the upward shift of trade policy competences to the supranational levelFootnote 33 and the abandonment of egregious policies of industrial subsidization and protection,Footnote 34 coupled with the development of other policies pursuing economic and social welfare goals.Footnote 35 This section traces key post-Cold War changes that have opened up a window of opportunity for the EU to simultaneously assert leadership at the global level and ‘rescue’ multilateralism from globalization backlash.
12.4.1 Changing Economic Stakes: The Legacy of the Economic and Financial Crises
For the EU, whose very essence depends on participating in and defending an open world economy, the stakes of developing some semblance of international regime governing FDI are high. Today the EU is arguably a world leader in trade and investment in a rapidly changing environment. While in 1948, the United States’ GDP represented two-thirds of the total GDP of all GATT members, in 2000, it represented only one-third of the total GDP of all WTO members – roughly at the same level as the EU (31 percent),Footnote 36 and in 2017, China, the United States, and the EU were the three largest economies with 16.4 percent, 16.3 percent, and 16 percent of the world GDP (expressed in purchasing power standards, PPS), respectively.Footnote 37 FDI has played an increasing role in the world economy since 2000, with the share of FDI stock rising from roughly one-fifth of the world GDP in 2000 to a little more than one-third today.Footnote 38 There too, the EU has grown to become a major global power – in fact the leading power, judging by the official statistics posted on the European Commission’s website. These pages cultivate the image of a global leader in matters of trade and investment. One can read that the EU is: ‘the largest economy in the world’; the ‘world’s largest trading bloc’; the ‘top trading partner for 80 countries’, whereas ‘by comparison the United States is the top trading partner for a little over 20 countries’; and in fact ‘the most open to developing countries. Fuels excluded, the EU imports more from developing countries than the United States, Canada, Japan, and China put together’ – last but not least, the EU ‘ranks first in both inbound and outbound international investments’.Footnote 39
In the last decade, the economic development of the European trading states has taken place against an increasingly volatile context and amid an intensified global competition for FDI. EU FDI flows were significantly affected by the economic and financial crises, as Figure 12.3 shows. The relative decline in EU FDI flows following the crisis has now been compounded by the COVID-19 pandemic, which has depressed FDI flows worldwide and challenged the organization of global supply chains, while simultaneously making foreign investment essential to the post-pandemic economic recovery. In 2020, while global FDI flows shrunk by more than 40 percent, the EU was particularly hard-hit by the squeeze with inbound FDI flows falling by more than 60 percent,Footnote 40 compared with a roughly 50 percent drop in the United States, and 30 percent drop in the ASEAN region.Footnote 41 Developing countries performed better, although the better performance primarily reflected the continued rise of FDI in China and India; Africa and much of Latin and South America, including Brazil, witnessed a contraction of FDI flows.Footnote 42 Developing countries now account for 70 percent of global FDI flows.Footnote 43
Figure 12.3 EU FDI stocks and flows, inbound and outward, 1990–2018.
Note: The number of member states increased from 12 to 28 during the period covered by the data, as a result of successive EU enlargements.
12.4.2 Changing Geopolitical Environment: The Turning Point of the Trump Presidency
The leading role now played by the EU in investment facilitation also comes from its assessment of recent geopolitical transformations, notably the assertiveness of China and the disengagement of the United States from multilateral governance. The most significant development in FDI flows worldwide over the past decade has been the rise of China as an outward investor.Footnote 44 From a small player in the early 2000s, China became one of the world’s top three investors. Internally, this rapid rise of Chinese investment has presented both challenges and opportunities for the EU. This new source of foreign investment in the EU has brought economic opportunities, in particular to EU countries that have been suffering from high unemployment and low growth in the wake of the Eurozone crisis.Footnote 45 The new influx of Chinese investment has also ushered in a series of political challenges, mostly centered on issues of national security and technology transfers.Footnote 46 As a result of these challenges, the political context for FDI has become less hospitable in Europe in recent years. For the first time in its history, in 2019, the EU adopted a supranational foreign investment screening mechanism, which became operational in October 2020,Footnote 47 after pressure by key Western member states.Footnote 48 In 2020, in the early days of the pandemic, the EU also adopted restrictive rules on foreign subsidies.Footnote 49 In 2021, the Commission presented a new anti-coercion instrument to enable the EU to respond to the weaponization of trade by third countries. Simultaneously, however, the EU concluded the protracted negotiation of the EU–China Comprehensive Agreement on Investment (CAI) in December 2020,Footnote 50 though it has not been ratified as of writing.
Externally, the rise of China as a major investor worldwide also presents the EU with challenges and opportunities. One major challenge is the competition to European investments represented by Chinese FDI in many developing countries, especially those with little transparency, which may give Chinese investors an edge. Another challenge is the norm-bending effect of the growing assertiveness of China internationally as an alternative political model and the market distortions introduced by its state subsidies and state-owned enterprises. Multilateral investment negotiations, which would entail greater transparency worldwide, might restore a level-playing field for European investors.
The second major development in the geopolitics of investment negotiations is the disengagement of the United States from multilateral governance during the Trump administration. On the one hand, the United States proved to be no longer a reliable partner for the EU by withdrawing from a variety of international negotiations and organizations and even by accusing the EU, in President Trump’s words, of being the ‘biggest foe’ of the United States. Moreover, this confrontational ‘America First’ agenda weakened multilateralism itself. During the Cold War, multilateral institutions were molded under quasi-unilateral United States hegemony; later, from the 1970s, they evolved in response to increasingly shared EC–United States governance.Footnote 51 Yet without United States support or presence, progress and even activity in the WTO faltered, such as the appointment of judges to the Appellate Body or the nomination of a new director-general. With Trump’s switch to tit-for-tat trade relations and dispute resolution, it is the very concept of multilateralism and rules-based trade that has been challenged. This weakening of multilateralism represents an existential threat to the EU, whose very project is itself based on rules and enforcement to transcend nationalism and protectionism.
On the other hand, the absence of the United States from the multilateral negotiating scene also created an opening for the EU to take on a leadership role, which may achieve two objectives. For one, European leadership in the negotiation on investment facilitation could protect the multilateral trading system by delivering an easy win after so many years of stunted progress in the WTO, notably the failure of the Doha Development Agenda. A successful agreement, even if not very consequential, could boost confidence in the strength of multilateralism, while waiting for the United States to rejoin. Second, a successful negotiation could assert further the international power of the EU, both by showing that it can deliver a positive outcome when it takes the lead and by taking the normative ‘high ground’ in displaying its respect for rules even if there is not a lot at stake for itself.
12.4.3 Changing Institutional Competence: Clarified EU Competences after 2017
Finally, the emergence of investment facilitation at the WTO has coincided with the emergence of the EU as the main actor in investment policy in Europe. For decades after the creation of the European Economic Community, the EU did not have competence over FDI policy. Unlike trade, foreign investment is not governed by a multilateral institution, for historical reasons going back to the breakdown of the Havana Charter in 1950. The 1957 Treaty of Rome did not bring foreign investment under supranational reach, leading member states to negotiate their own investment deals over the next fifty years, including over a thousand Bilateral Investment Treaties.
This changed fundamentally with the 2009 Lisbon Treaty, which formally transferred the competence to negotiate agreements on FDI from the national to the supranational level. Indeed, Article 207 of the Treaty on the Functioning of the European Union explicitly folded ‘foreign direct investment’ under the Common Commercial Policy. After the competence transfer, the EU found itself able to take over the negotiation of all international investment agreements for the member states in order, notably, to liberalize foreign markets, protect European investments abroad, and harmonize the rules for screening inward investments in Europe. Indeed, the EU has been actively using this newfound competence by engaging in investment negotiations with a multitude of partners through bilateral trade and investment negotiations (such as Singapore, Canada, Vietnam, Japan, and the United States) and specific investment negotiations (with China).
This competence transfer, however, was controversial, and the exact scope of the EU’s newfound powers remained uncertain until about 2017. As MeunierFootnote 52 has analyzed, the competence transfer was not the result of a long, publicly debated policy decision; rather, it happened ‘by stealth’, with most member states not realizing the implications of this transfer. Therefore, the initial implementation was mired in political and legal controversies over the exact scope of the EU’s competence over FDI.
A series of judicial rulings sorted out the issue of EU competence, both at the external and internal levels. Externally, the Court of Justice of the European Union (CJEU) ruled in 2017 in Opinion 2/15 on the EU–Singapore Agreement that the EU has exclusive competence over investment treaties, though some provisions fall under mixed competence, notably ISDS provisions.Footnote 53 In 2019, the CJEU ruled in Opinion 1/17 about the EU–Canada CETA that the Investment Court System, a new institutional creation to deal with investment protection and disputes, was compatible with EU law.Footnote 54 Internally, the 2018 Achmea ruling led to the termination of intra-EU BITs after the CJEU declared investor–state arbitration between member states incompatible with EU law.Footnote 55 After 2019, once the competence disputes were sorted out, it was clear that the EU could engage fully in international negotiations over foreign investment (but not ISDS), and thus negotiate investment facilitation.
The timeline of the investment facilitation negotiations has coincided with the timeline of the judicial and political resolution of the competence issue in the EU. Even though member states are present in the room during the negotiations in Geneva, investment facilitation is the first multilateral investment agreement collectively negotiated by the EU on behalf of its members. They are an important step for the EU to assert its newly gained authority, especially by trying to deliver on such a noncontroversial issue.
12.5 A Stepping Stone toward the Broader ‘Open Strategic Autonomy’ Agenda of EU Trade Policy
The European Commission on February 18, 2021, announced its new strategy of ‘open strategic autonomy’ to guide its trade policy over the next five years.Footnote 56 This strategy aims at a more assertive promotion of EU values and interests in the world through multilateralism and the reinforcement of strategic partnerships. It also singles out investment facilitation as one of the EU’s priorities in the modernization of the WTO’s rules. We argue that investment facilitation serves these strategic goals by rescuing multilateralism one step at a time, thereby containing the centrifugal forces of power shift rivalries, and by asserting soft power leadership through the EU’s distinctive commitment to the rule of law and long-standing engagement in support of sustainable development.
12.5.1 Rescuing Multilateralism
A cornerstone aim of the Commission’s new trade strategy is to reinforce the various components of the multilateral trading system in order to defend EU values and interests more effectively. This means relaunching the negotiation pillar of the WTO, while insisting on a tougher and stricter implementation of international trade agreements. The EU’s diagnosis is that the WTO’s ‘crisis’ which ‘affect all three functions: negotiations …, the dispute settlement …, and the monitoring of trade activities’ is detrimental to EU interests because it promotes lawlessness and expediency. This situation plays into the hand of China and the United States, which have trodden out of the disciplines of the WTO to manage their conflict. Barring the reform of the WTO, ‘the trade relationship between the US and China, two of the three largest WTO members [will continue to be] largely managed outside WTO disciplines’.Footnote 57
This unmanaged rivalry also spills over into other realms than the immediate cause of trade conflicts between the two, by weakening the alliances and partnerships that are central to the EU, that is, ‘the transatlantic partnership’ and partnerships with ‘neighboring countries and Africa’.Footnote 58 The COVID-19 pandemic has already highlighted growing concerns in Europe that ‘China may use its ‘mask diplomacy’ to further its influence in Europe’ where it already has established strong ties, particularly in some Central and Eastern member states.Footnote 59 Africa, where FDI has plummeted in the wake of the COVID-19 pandemic, has also become the object of growing attention from emerging and developed countries – Brazil – since 2015,Footnote 60 but also China, as part of the One Belt One Road (OBOR) initiative launched in 2013, a major infrastructure development strategy later renamed Belt and Road Initiative (BRI). In January 2017, China accelerated its engagement in Africa by announcing, in the context of the Forum on China–Africa Cooperation, ten cooperation plans organized with trade and investment facilitation as one of three strategic pillars of cooperation (the other ones being: human resource development and infrastructure development).Footnote 61
In this respect, the fact that the current negotiations are embedded in the WTO is certainly one of the major attractions of the current investment facilitation agenda. It provides the EU with a chance to ’rescue’ multilateralism, one small building block at a time. The Trump administration’s hollowing out of the WTO has not been the only source of danger to trade and investment multilateralism. The multilateral trade agenda has suffered from its ambition to be broad and comprehensive, which has led to a series of failures and a seeming inability to deliver results. The IFD negotiations provided an opportunity for the EU to revitalize and reform trade multilateralism by breaking down broad ambitions (such as creating a multilateral investment regime) into small, manageable chunks that can actually produce results. This is consistent with French president Emmanuel Macron’s recent argument that ‘the enemy of multilateralism […] is slowness and ineffectiveness’ and that ‘the key is multilateralism that produces results’.Footnote 62 Investment facilitation is a low-hanging fruit to get started on this revitalization agenda because its noncontroversial nature may show that the WTO can again be the place where developing, emerging, and developed countries can make compromises. More generally, the European Commission will take center stage in the negotiations and can be expected to be one of the most ardent supporters of this initiative since it gives it a relatively easy way to showcase its newly clarified competence under Lisbon.
Given the liberal ethos of the Directorate-General (DG) for Trade,Footnote 63 the part of the European Commission services in charge of the investment facilitation negotiations at the WTO, the EU negotiators can be expected to prioritize such concerns as the coherence of the emerging investment facilitation initiative with cognate elements of the multilateral trade and investment regime – out of the motto that ‘no one wants an agreement that creates new legal uncertainties’.Footnote 64 Accordingly, whatever the EU negotiates here, according to Commission officials, it ‘has to be careful that it does not diminish obligations under the GATT and avoids legal uncertainty. These concerns are playing an important role in the active negotiation phase. The capitals look at this. Possible interactions with other agreements raise concerns.’Footnote 65 Thus, much of the Commission’s emphasis is about assessing gaps, shortcomings, loopholes, and, where possible, finding horizontal rules.
12.5.2 Asserting the EU’s Distinctiveness
While enabling the EU to rejuvenate multilateralism, the investment facilitation agenda also gives the EU an opportunity to upload to the global level many of the institutional practices and know-how that have long been ingrained in the DNA of its European trading states and that have shaped the core of the EU’s development policies with countries in Africa and the Caribbean (ACP). Those very practices and know-how can form the core of the EU’s soft power in the Xi Jinping and post-Trump era. No EU member states dispute the investment facilitation multilateral agenda founded on the promotion of transparency and the rule of law,Footnote 66 even though some Visegrad countries (Poland and Hungary especially) can be expected to be foot-dragging when EU or international agendas threaten the grip of their illiberal rulers on domestic politics.Footnote 67
Side by side with the WTO initiative, investment facilitation has been an integral part of the EU’s international development policies, although these measures were not labeled as such until 2018 or 2019.Footnote 68 Since 2017, these measures have been grouped under the so-called Pillar 3 of the European External Investment Plan (EIP) with developing countries in the Neighborhood and Sub-Saharan Africa,Footnote 69 and they have been referred to as policies aiming at creating a good ‘investment climate’.Footnote 70 These policies have been spearheaded by other services of the Commission, in particular the DG for International Partnerships (INTPA, formerly known as DEVCO). They have given birth to a discourse of European distinctiveness, which relies not only on its financial muscles but above all on the value its policies and private–public partnerships add for the societies of developing economies – for example, through a sustained focus on job creation, inclusiveness, and transparency – and summed up by the axiom ‘We invest where others don’t’.Footnote 71 To accompany this investment facilitation narrative, the EU has steadily stepped up its financial commitment. In the current negotiations on the long-term budget framework of the EU for 2021–2027, the EU has agreed to establish a Neighborhood, Development, and International Cooperation Instrument (NDICI), which should provide for a tenfold increase in the EU’s development budget, now channeled through the flexible European Fund for Sustainable Development + (EFSD+).Footnote 72
All of this is taking place simultaneously to the renewal of the Cotonou Agreement, originally signed in 2000. In December 2020, the signatories of the previous agreement reached a political deal on a post-Cotonou agreement, which has yet to be adopted, ratified, and enter into force. As mentioned earlier, the 2000 Cotonou Agreement stood out by its level of ambition in the field of investment and wove ‘investment facilitation’ into a far-reaching set of distributive and regulatory tools.
12.5.3 Balancing Potentially Conflicting Goals
The European trading states, however, are no longer dominated by executive actors (Commission and member states) as they were just a decade ago; this changing political context adds pressure on the Commission to stake out a more developmentally ambitious leadership.
One of the most significant recent institutional trends has been the legislative empowerment of the European Parliament and the growing assertion of the national parliaments. The European Parliament has gained real decisional power in the successive treaties of the 1990s and 2000s.Footnote 73 It is now a co-legislator with the Council on domestic trade- and FDI-related legislation. It also has extensive information and consent powers in matters related to the negotiation of international agreements. As the only directly elected EU legislature, the European Parliament has had an incentive to represent the broader set of ideas and interests displayed in the European citizenry at large as well as traditional producer interests. In trade and FDI matters, this means that diffuse citizen interests can find allies in the European Parliament. In the TTIP and CETA negotiations, for example, the European Parliament joined the cause of social activists by pushing for greater transparency of the EU decision-making process and requesting a reformulation of the ISDS mechanism.Footnote 74 Even though the clarification of the issue of competences means that national parliaments are not required to ratify the IFD Agreement, we can expect them to continue to be vigilant and relay a variety of local and national concerns articulated in civil society organizations.
Some of these concerns are already articulated in the various consultative fora established by the European Commission to ‘take the temperature’ of civil society. The January 2020 civil society dialogue meeting organized by the European Commission on the topic of investment facilitation provides a preliminary indication of societal concerns. After a brief presentation of the negotiations at the WTO, European Commission officials were asked questions ranging from how to deal with the issue of ‘phantom investment’?Footnote 75 Would the EU not endorse this phenomenon by participating in international discussions on investment facilitation? And how would one make sure that international measures really served sustainable development? Would these measures apply to the extractive industries? And why was the United States not supporting these negotiations? These were some of the questions that were raised by the participants, suggesting an at best unconvinced public.Footnote 76
12.6 Conclusion
This chapter has shown that since 2017, the EU has embraced the multilateral investment facilitation agenda, even though it had originated in a group of countries primarily located in the Global South. We have argued that the EU has now emerged as one of its foremost proponents at the global level because it serves its broader agenda of ‘open strategic autonomy’. In particular, investment facilitation is seen as a small, noncontroversial building block in the EU’s broader strategy to ‘rescue’ multilateralism – from United States disengagement, from the rise of China, and from past multilateral failures to deliver because of unrealistic ambitions. The main attraction of the investment facilitation agenda is that it enables the EU to take the lead of a multilateral negotiation that will deliver results, since it is a low-hanging fruit given the common interests between emerging and developed countries. The strategic goals are to assert global leadership in sustainable development by drawing on the distinctiveness of the EU’s long-standing involvement in international development action and, in the longer term, to bring the fractious United States–China relationship back to the fold of multilateral disciplines, by rejuvenating the WTO. A successful investment facilitation agreement could also further the opportunity for WTO reform, with a new momentum provided by the election of Joe Biden in the United States and the election of Ngozi Okonjo-Iweala as the new WTO Director-General – though the new United States stance remains to be tested.
We have embedded this argument in a broader analysis of the post-Cold War evolution of the ‘European trading state’, a concept coined by SteinbergFootnote 77 to refer to the historically specific set of institutional structures and decision-making procedures shaping the trading activities of European states, as they engaged in the twofold postwar process of multilateral trade regime formation and European integration. The EU’s embrace of investment facilitation takes place at a time of deepening and reassessment of the European trading state, opening a window of opportunity for uploading at the global level an agenda where European trading states excel, and enabling the EU to promote its new policy of ‘open strategic autonomy’.
A challenge for the EU will be to ‘put its money where its mouth is’ and match ‘soft power’ with ‘hard capabilities’, as China has pressed it to do since 2009 on the issue of climate change.Footnote 78 It is unclear what such bargaining could entail in the multilateral investment facilitation negotiations – a form of redistributive instrument à la Cotonou, transfers of know-how and technology as in the climate change negotiations, or some institutional capacity building along the lines of the European Ombudsman.
The COVID-19 pandemic poses major challenges but also presents opportunities, for the EU strategy. The pandemic has accelerated the urgency of clarifying rules for international investment, undertaking structural reforms to facilitate FDI flows, and solving issues multilaterally. FDI has plummeted worldwide with the pandemic, collapsing by more than 42 percent in 2020.Footnote 79 Estimates are very pessimistic for 2021 as well, especially in developed economies, except in the healthcare and technology sectors. Investment flows may look different in the post-COVID-19 world, as global value chains are reorganized and the economy becomes increasingly digitized. The EU is therefore willing to enact any measure that will facilitate investment, both at home and abroad, and will stave off the protectionist impulses currently popular in the political discourse of many developed economies.
13.1 Introduction
Investment facilitation is an important means to attract foreign investment and promote outward investment. The importance of investment facilitation measures have been recognized at national and international lawmaking and policymaking. China is a major economy in the world, and it is of interest to explore how China deals with the issue of investment facilitation, as China’s approach could be critical to the creation of the rule of law in international investment facilitation.
13.2 China’s Investment Facilitation Practices in National Investment Laws
China has adopted a variety of measures that can facilitate both inbound foreign investment and outward Chinese investment. The Department of Foreign Investment Administration of the Ministry of Commerce of the People’s Republic of China (MOFCOM) is responsible for the management of foreign investment, informing about new policies, investment opportunities, investment services, and enterprise inquiries and other services. Investment promotion agencies exist not only at the national level but also at the local level. The Department of Foreign Investment and Economic Cooperation of MOFCOM provides services such as informing about new policies, country (region) guidelines, foreign investment development reports, online services, and online inquiry mechanisms. At the same time, MOFCOM is also responsible for the management of Overseas Economic and Trade Cooperation Zones in other countries. The Investment Promotion Bureau of MOFCOM is responsible for the specific implementation of these measures.
13.2.1 Historical Review of China’s Investment Facilitation Measures
13.2.1.1 Investment Facilitation before the Adoption of the FIL
Before the Foreign Investment Law (FIL) was enacted in 2019, there were three Chinese laws to regulate foreign investment, namely, the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures,Footnote 1 the Law of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures,Footnote 2 and the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises.Footnote 3 However, these laws focus on the operation and organization of the three types of foreign-funded enterprises, as well as the supervision and protection of foreign investment. They also provide foreign-funded enterprises preferential tax treatment. In general, there are few investment facilitation provisions in these investment laws, with provisions on visa facilitation as a probable exception.
China’s opening up is accompanied by efforts of streamlining administrative procedures and delegation and decentralization of power to create a favorable business environment based on the rule of law. The practice of China’s free trade zones (FTZs) is a reflection of this policy. In September 2013, the Shanghai FTZ was set up; in April 2015, FTZs were set up in Guangdong Tianjin and Fujian; and in March 2017, more FTZs were set up in Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, and Shanxi. Many measures adopted in these FTZs aim at promoting and facilitating foreign investment.
Notably, to simplify the administrative procedure, three key measures have been adopted. First, the streamlining and speeding up administrative procedure related to the admission and establishment of foreign investment. In FTZs, most foreign investment enterprises are set up through a simple record-filing procedure instead of a burdensome approval procedure. Furthermore, a large part of the approval authority is delegated from the central government to the local government, and the approval procedure is also shortened. Second, for the establishment of foreign investment enterprises in the FTZs, the requirement of registered capital is reduced. Third, reform measures are adopted through easing the burdens of taxes and fees on foreign investment enterprises. The experiences and best practices gained in FTZs are supposed to be adopted nationwide. Precisely for this reason, the term FTZ is prefixed with the word “pilot”.
In September 2016, aiming at reforming the relevant administrative review and approval requirements stipulated in the three foreign investment laws, the Standing Committee of the National People’s Congress (NPC) decided to amend these laws. These amendments put an end to the foreign investment approval mechanism, and the level of investment facilitation has been greatly improved.
In 2017, the Central Committee of the Communist Party of China put forward a policy to implement “high standard liberalization and facilitation on trade and investment” and claimed that “all businesses registered in China will be treated equally”.Footnote 4
As can be seen, investment liberalization and facilitation measures are actually an important policy tool for implementing China’s opening up and reform policy. While this policy had heavily relied on granting foreign investment preferential treatment, it has shifted its focus to creating a favorable business environment for all market players.
13.2.1.2 Investment Facilitation after the Enactment of the FIL
The FIL replaced the three foreign investment laws and became China’s unified legislation on foreign investment regulation. On January 1, 2020, the Regulation for implementing the FIL (“Regulation”) came into effect.Footnote 5 Upholding investment liberalization and facilitation, the FIL not only introduces national treatment subject to a negative list approach for market access of foreign investment but also stresses investment facilitation.
The general provisions of the FIL states that China “implements high-level investment liberalization and facilitation policies, establishes and improves the foreign investment promotion mechanisms, and builds a stable, transparent, and foreseeable investment environment with a level playing field”. The FIL and the Regulation do not draw a clear distinction between investment promotion and facilitation and treated them combined. The investment promotion clauses also reflect the various elements of investment facilitation.
First, transparency of policy and law. Various articles of the FIL and the Regulations provide that transparency is needed in the making of relevant policies and laws. Article 14 of the Regulation emphasizes the transparency of the work of the standardization administration. Article 10.1 of the FIL ensures the right of foreign-funded enterprises to comment and make suggestions in appropriate manners on relevant laws, regulations, and rules related to foreign investment and to participate in the formulation and amendment of laws, regulations, and rules. Article 10.2 provides that regulatory documents and adjudicative instruments, among others, relating to foreign investment, shall be published in a timely manner.
Second, simplification of administrative procedures and improvement of investment services. Article 11 of FIL provides that China should establish and improve its foreign investment service system. Article 8 of the Regulation further proposes methods of providing services through government websites and integrated online platforms. Article 18 of the FIL and Article 19 of the Regulations provide local governments should improve investment promotion and facilitation policies and measures. Article 19 of the FIL and Article 20 of the Regulations provide that the government shall optimize services for foreign investment of various aspects. Article 35 of the Regulations also requires the government to improve foreign investment licensing and approval efficiency.
Third, enhancing international cooperation. Under Article 12 of the FIL, the state establishes multilateral and bilateral mechanisms for investment promotion with other countries, regions, and international organizations to enhance international exchange and cooperation in the field of investment. The Investment Promotion Bureau is actively exploring investment promotion cooperation and exchanges with many foreign bilateral agencies, for example, by signing Memorandums of Understanding (MOUs), aiming at strengthening investment information exchanges, co-organizing investment activities and other ways to provide services and support for companies and institutions.Footnote 6
Fourth, facilitating investment flow through FTZs. Under Article 13 of the FIL and Article 12 of the Regulation, FTZs can be established to promote foreign investments. China has set up a number of FTZs in the recent decade, primarily aiming at facilitating trade and investment. Preferential policies are adopted to attract foreign investment in the FTZs. Prominent facilitation mechanisms adopted include the “single window system” and simplified and rapid registration procedures.
Fifth, establish and improve investment complaint mechanisms. Under Article 26 of the FIL, China shall establish a working mechanism for dealing with complaints of foreign-funded enterprises to address their concerns in a timely manner and coordinate and improve the relevant policies and measures all with the aim of avoiding the initiation of legal dispute settlement proceedings. Article 29 of the Regulation further provides that the governments at or above the county level shall establish and improve a complaint mechanism for foreign-funded enterprises. MOFCOM’s Measures on Complaints for Foreign-invested Enterprises have further refined the substantive and procedural requirements of the complaint mechanism.Footnote 7 A “National Foreign Investment Complaint Center” will be established, and relevant local agencies will also be designated to handle complaints from foreign enterprises. MOFCOM, in conjunction with relevant ministries and committees of the State Council, shall also establish an interministerial joint conference system for foreign-invested enterprise complaints at the central level as well as complaints of local foreign-funded enterprises.
13.2.2 Home State Investment Facilitation Measures in China
Since the incorporation of the “Going Abroad” strategy in the Outline of the 10th Five-Year Plan for National Economy and Social Development in 2001 and the adoption of the “Belt and Road” initiative in 2013, China has issued a series of regulations and rules for regulating outbound investment.Footnote 8 Most of them focus on regulating the conduct of Chinese investors. In order to contribute to the sustainable development of the host states, Chinese enterprises are required to comply with local laws and ensure their corporate social responsibility. Since 2006, China began publishing the Catalogue of Countries and Industries for Guiding Overseas Investment and published Guiding Policies for Overseas Investment Industries. Many of these regulations and rules contain investment facilitation measures, such as improving taxation, foreign exchange, insurance, customs, and information services and establishing information service systems.
Setting up overseas economic and trade cooperation zones are an important foreign investment promotion and facilitation measure adopted by China. Since 2014, under the initiative of MOFCOM, some Chinese enterprises established such zones abroad in accordance with local laws.Footnote 9 In these zones, infrastructures and other public service are provided for investment enterprises. Chinese enterprises established in these zones were able to enjoy various benefits through investment facilitation provided by the host country. The Department of Outward Investment and Economic Cooperation of MOFCOM is responsible for supervising these zones. This department, through China Investment Promotion Agency (CIPA) and in cooperation with other investment promotion agencies, also carries out various investment promotion and facilitation services, such as providing information about relevant overseas investment policies and specific country (region) guidelines.Footnote 10
13.3 China and International Investment Facilitation Rulemaking
China’s involvement in international investment facilitation rulemaking can be seen from its active participation in the discussions in G20, World Trade Organization (WTO), and negotiations of free trade agreements (FTAs).
13.3.1 China’s Participation in the Making of an IFD Framework in the WTO
Regarding the elements that should be included in a WTO IFD Agreement, China has put forward its suggestions in the document entitled “Possible Elements of Investment Facilitation”, relating to transparency, efficiency, and special opinions “responding to developing and least-developed members’ needs”.
Transparency aims to increase the certainty and predictability of rules, which is an important aspect of the formal rule of law in both national and international laws.Footnote 11 It has a broad coverage, ranging from publication of laws and regulations, setting up enquiry points, and engaging stakeholders in the rulemaking process. The efficiency of administrative procedures includes streamlining of licensing and qualifications procedures, specifying reasonable time frames, providing timely notice of decisions, and fostering “institutional cooperation and coordination” of regulatory authorities, especially “one-stop” services. China advocates for the “special and differential treatment” principle, which includes technical assistance and capacity building with priority consideration given to the “special economic situation and development needs of least-developed members”.Footnote 12 China also stresses improving the “efficiency of outward investment screening and approval process” and providing “appropriate policy support for outward investment”, such as insurance and promotion services.
China actively participated in the preparation and making of an agreement of investment facilitation for development in the WTO. In April 2017, China and some developing country members formed the “Friends of Investment Facilitation for Development” (FIFD), an informal group open to all WTO members. The FIFD held informal dialogues hoping to use the WTO as a forum to discuss the issue of investment facilitation for development.Footnote 13 In December 2017, structured discussions for a multilateral framework on investment facilitation had been initiated, upon the proposals of China and other developing countries.Footnote 14 In the 11th WTO Ministerial Conference, the Joint Ministerial Statement on Investment Facilitation was adopted.Footnote 15 In 2019, China signed a joint ministerial statement with many WTO members, emphasizing that the core objective of the framework is “facilitating greater developing and least-developed Members’ participation in global investment flows”.Footnote 16
13.3.2 China’s Role in the G20 Global Investment Guiding Principles
China was the chair of the G20 Meetings in 2016. The G20 Summit approved the G20 Guiding Principles for Global Investment Policymaking (“Guiding Principles”),Footnote 17 which caters for the needs of China and other developing countries. The Guiding Principles may be regarded as the first comprehensive multilateral framework on investment policymaking in the sense that the ICSID Convention deals only with investor–state investment disputes (ISDS), while the GATS and the WTO Agreement on Trade-Related Investment Measures (TRIMs) only touches upon a limited range of investment measures mainly relating to commercial presence and performance requirements. Notably, the Guiding Principles embody the intention of China and world leading economies of advancing investment promotion and facilitation at the multilateral level.Footnote 18 Furthermore, the anti-corruption principles and action plans issued at the Hangzhou G20 Summit also reflect the aim of advancing sustainable investment. Though the Guiding Principles are not legally binding, they are of great significance for unifying the investment policies.
13.2.3 Typical Investment Facilitation Provisions in China’s FTAs
Both the China–Korea FTA and China–Australia FTA include investment facilitation provisions that go beyond China’s existing investment facilitation commitments in other investment agreements. Besides, the China–Mauritius FTA as the first FTA between China and an African country also contains some investment facilitation provisions. The provisions in these FTAs will be analyzed in the following.
First, provisions of establishing contact points. According to Article 12.19 of the China–Korea FTA, both countries shall designate “contact points”, which encompass both the central government and local government levels, for improving the contracting parties’ investment environment through promptly responding to the complaints and difficulties of investors. The contact points from the two countries will also endeavor to provide advisory services available with regard to establishment, liquidation, and investment promotion activities as much as possible. The contact points can be understood as a kind of mechanism of facilitating communication between host state actors and foreign investors.
Second, provision of transparency. Under Article 12.8 of the China–Korea FTA, except for special circumstances, each Party shall promptly publish, or otherwise make publicly available, its laws, regulations, administrative procedures, and administrative rulings and judicial decisions of general application as well as international agreements to which the Party is a party and which pertain to or affect investment activities. Transparency is essential to ensure the predictability of laws and regulations by giving the public the opportunity to comment on new laws and by introducing time intervals before they take effect. The China–Australia FTA contains similar transparency provisions in Articles 2, 3, 4, and 5.
Third, provisions of improving efficiency and effectiveness of investment-related visa approval procedures. Both the China–Korea FTA and Australia–China FTA highlight the facilitation of visa and residence-related procedures. These elements are shown in Articles 11.2 and 11.3 and Annexes 11-B and 11-C of the China–Korea FTA. Besides, the Australian government also agreed to provide certain visa facilitation arrangements to relevant personnel of Chinese enterprises who enter Australia for investment-related purposes.Footnote 19
Fourth, provision of cooperation for investment facilitation. Under the three FTAs, an “Investment Committee” is established to address matters related to investment facilitation. This requirement is embodied in Article 12.17 of China–Korea FTA, Article 7 of the China–Australia FTA, and Article 12.1.3 of the China–Mauritius FTA.
13.4 Features and Prospects of China’s Investment Facilitation Approach
13.4.1 Implementing Two-way Investment Facilitation
Outbound investment can bring benefits to the home state, such as increasing trade, obtaining necessary resources, and strengthening political and economic relationship. It may also give rise to some concerns over industrial relocation, domestic employment, technology transfer, and national security. Thus, it is not surprising that many countries have enhanced investment review of outbound investment. Given that some countries, especially LDCs, may lack sufficient capability for investment review, it is hoped that the home state of the investor will take investment promotion and facilitation measures and help LDCs to take relevant measures promoting sustainable development.Footnote 20 It has been argued that China’s outbound investment regulatory framework is relatively sophisticated and is shifting “from restricting to encouraging” to “facilitate and support outward FDI to create globally competitive Chinese firms”.Footnote 21
13.4.1.1 Stressing Sustainable Development in National Regulations and IIAs
It is often mistakenly believed that China allows its state-owned enterprises (SOEs) to do whatever they want overseas, thereby reducing the cost of Chinese overseas investment and gaining competitive advantages over their competitors.Footnote 22 This is not the case, and China’s various regulations and IIAs stress home country regulation of overseas investment for sustainable development considerations.
The Administrative Measures on Overseas Investments and the Administrative Measures for Outbound Investment of Enterprises include provisions on environmental protection, labor protection, and corporate social responsibility (CSR). The Guidelines for Environmental Protection in Overseas Investment and Cooperation emphasize environmental protection policy and specific implementation methods. Several Opinions on the Construction of Chinese Overseas Corporate Culture stresses anti-corruption. The Guiding Opinions on Further Guiding and Regulating the Sectors of Overseas Investment also restrict overseas investment that does not meet the laws and regulations on environmental protection, energy consumption, and safety standards of the investment destination.
Stress on sustainable development is also clear in China’s IIAs. For instance, the 2010 Chinese draft model BIT states that contracting parties are “… willing to strengthen cooperation between the two countries, promote healthy, stable and sustainable economic development, and improve people’s living standards”. The China–Canada BIT stresses that it is important to recognize “the needs to promote investment based on the principles of sustainable development” and, in Article 18.3, provides that “it is inappropriate to encourage investment by waiving, relaxing, or otherwise derogating from domestic health, safety or environmental measures”.
A reference to CSR is contained in the preamble of the China–Tanzania BIT. It states that the contracting parties are “encouraging investors to respect corporate social responsibilities; and desiring to intensify the cooperation between both States, to promote healthy, stable and sustainable economic development, and to improve the standard of living of nationals”.Footnote 23 And according to Article 16.2 of the BIT, a state party may request consultations with the other party if it considers that the other Contracting Party has offered an encouragement that may derogate the protection of environmental and public health.
In light of this, one may see Chinese overseas investments are guided by the principles of sustainable investment and win–win outcomes. Chinese enterprises shall consider the national conditions of the host country and promote mutual benefit and win–win cooperation.
13.4.2 Prospects of China’s Investment Facilitation
13.4.2.1 Deepening International and National Investment Facilitation Measures
Despite all the efforts and achievements, China still has room for further efforts in investment facilitation. For instance, according to Global Enterprise Registration, there is no online single window for registering enterprises in China, and the rate of obtaining English information through the information portal of the Chinese government website is relatively low.Footnote 24
Problems may exist in domestic investment facilitation measures. For instance, according to the aforementioned regulations, China has gradually loosened restrictions on outbound investment, but it still needs to considerably simplify the approval process and provide more efficient one-stop service for outbound investment.Footnote 25 China also needs to further strengthen its relationship with other countries through closer international cooperation at the multilateral, regional, and bilateral levels on investment facilitation. China also needs to align its investment facilitation measures with international standards, such as those in the UNCTAD’s Global Action Menu for Investment Facilitation and the IFD Agreement in the WTO.
13.4.2.2 Enhancing Competitive Neutrality of Investment Facilitation
Regarding China’s outbound investment regulation measures, concerns mainly focus on their competitive neutrality.Footnote 26 It has been argued that China’s measures are “undesirable” by a number of developed countries as they distort competition and “may in the future be evaluated in terms of their impact on competitive neutrality”.Footnote 27
Investment facilitation measures are not as controversial as investment promotion measures, which often target specific countries and specific subject areas. However, investment facilitation and the issue of competitive neutrality are closely linked.Footnote 28 It is believed that Chinese investment facilitation measures are unequal and discriminate foreign investors. For instance, Chinese SOEs may benefit more from China’s measures, such as faster approval procedures.Footnote 29 It is necessary that investors should be given the same level of investment facilitation. Actually, since the 1990s, China has begun reforming its SOEs, trying to achieve fair competition among SOEs, small and medium-sized private enterprises, and foreign-funded enterprises. The value orientation of fair competition can be found in the FIL.
The issue of unfair or distorted competition that may be caused by outbound investment promotion measures has attracted attention from OECD member states. As early as in 1976, OECD member states signed the OECD Declaration on International Investment and Multinational Enterprises and recognized that due consideration should be given to the interests of other countries affected by the official promotion measures for outbound investment. If the adversely affected country proposes a consultation request to reduce the adverse impact, it should be considered by the home country. During the negotiations of the China–United States BIT, it has been discussed that it is important to ensure the competitive neutrality of SOEs, whereby SOEs should not have additional competitive advantage due to their special linkages with the government, and the United States put forward this issue in 2016 in the context of the TPP.Footnote 30 Similarly, the EU–China Comprehensive Investment Agreement also deals with the issue of competition neutrality.Footnote 31
Competitive neutrality should not be an abstract concept. In the absence of specific legally binding principles and rules of international law, competitive neutrality can only be a guiding principle. Specifically, competitive neutrality should mean that companies from different countries can compete with the same status and follow the same rules in a host country’s market. This kind of competition should be maintained by the host country in accordance with the laws of the host country.
13.4.2.3 Promoting Shared Sustainable Development
Many existing investment facilitation instruments do not mention development. The Outlines for BRICS Investment Facilitation (2017) and Guiding Principles are two examples.Footnote 32 Traditionally, development is mainly used in the context of promoting economic development of DCs and LDCs. After the 1970s, DCs put forward the concept of the “right to development” during their struggle to establish a new international economic order.Footnote 33 The development advocacy of developing countries was affirmed by a series of UN General Assembly Resolutions in the 1970s and 1980s.Footnote 34 However, since the 1990s, the traditional concept of development has largely been replaced by concept “sustainable development”, and over time, the new paradigm has entered in various international legal instruments, ranging from international environmental law to other branches of international law. Sustainable development emphasizes the development in all dimensions of economy, society, and the environment.
China should play a role in clarifying the theoretical basis and policy orientation of sustainable development when negotiating international instruments, such as the WTO IFD Agreement. On the one hand, the right to development cannot be put in a position completely opposite to sustainable development, and shared sustainable development of DCs and developed countries will certainly promote the common prosperity, peace, and stability of all countries.Footnote 35
In fact, in the WTO, there are views of both opposing and safeguarding the right to development. Some developed countries have complained about the special and differential treatment enjoyed by DCs, and especially China’s status as a developing country.Footnote 36 In order to mobilize the enthusiasm of those developed countries, it is suggested that the WTO IFD Agreement and other investment facilitation instruments should avoid to only emphasize the development of DCs. China should uphold and advocate the concept of shared sustainable development and emphasize the sustainable development of all members.
Investment facilitation is a tool for advancing shared sustainable development. The goal of investment facilitation is to align investment with the shared sustainable development of the host country, the home country, the investors, and other stakeholders. Not only should Chinese outbound investment comply with sustainability requirements, but foreign investment in China should also be required to play a helpful role in promoting China’s sustainable development. The FIL does not clearly reflect the investment policy objectives of sustainable development. However, the Regulation reflects the dimension of sustainable development.Footnote 37 Future investment promotion and facilitation should integrate principles and standards of sustainable development. China should consider the needs of DC and LDCs, share best practices and relevant information on investment facilitation with them, and grant them special and differential treatment, including technical assistance and capacity building.
13.5 Conclusion
In the era of anti-globalization and investment protectionism, strengthening investment facilitation and international cooperation is more important than ever. This concerns DCs and LDCs, as well as developed countries. All these countries need to facilitate investment for sustainable development.
China has adopted investment facilitation measures with Chinese characteristics. China’s pilot free trade zones greatly advance investment facilitation. Of course, as investment facilitation measures are growingly diversified and improved, China’s investment facilitation measures in both international treaties and domestic laws should also be expanded, with due consideration given to sustainable development and fair competition. China’s investment facilitation measures may promote shared sustainable development, such as promoting the environment and labor and human rights, while promoting economic development. Domestic and foreign investments in the Chinese market should compete with each other on an equal basis.
China should advocate the shared sustainable development in the making of the WTO IFD Agreement to achieve higher engagement from developed countries. China may also promote investment facilitation through other fora, such as the China–Africa Cooperation Forum and the Belt and Road Initiative. China’s domestic and international practices related to investment facilitation may play a major role in enhancing the rule of law related to investment facilitation in the future.
14.1 Introduction
In recent years, we began to witness South–South international investment agreements (IIAs) too. Overall, the IIAs and preferential trade agreements (PTAs) that have investment chapters are estimated to be sitting at 3,300.Footnote 1 Most developing countries and least developed countries (LDCs) concluded IIAs with the understanding of attracting investment that every nation so desperately desires while developed nations used them as a shield against uncompensated and/or illegal expropriations by the host. Nevertheless, the IIAs did not lure investors to invest in countries that concluded them; rather, some developing countries and largely LDCs were unable to attract investments.Footnote 2 Instead of attracting investment, IIAs became a tool for preventing governments from legislating in the public interest, and this affected all nations – whether developed, developing, or LDCs.Footnote 3 The International Centre for Settlement of Investment Disputes (ICSID) tribunals enforced the IIAs with vigor and handed down hefty awards against recalcitrant governments yet with no mechanism to appeal the tribunals’ ruling, even if such rulings are incorrect.
The IIAs became very attractive to senders of capital such that during the negotiations in the first ministerial council’s conference post the establishment of the World Trade Organization (WTO) held in Singapore in 1996, mostly developed nations, particularly the European Union (EU) and Japan, wanted investment on the agenda. One will remember that the Trade-Related Investment Measures (TRIMs) Agreement only deals with aspects of investment that affect trade because the WTO is established as a trade body; therefore, a wholesome investment agreement dealing with market access, standards of protection, and investor–state dispute settlement (ISDS) could not be negotiated under the WTO framework. As indicated before, investments (and other issues) that were introduced in Singapore, which mostly developing countries felt that were not in their interest, were taken off the Agenda since the August 1, 2004 Decision.Footnote 4
The scrapping of investment from the WTO Agenda occurred against the backdrop of governments experiencing harsh consequences of the IIAs. Thus, with governments’ inability to regulate in the public interest coupled with hefty awards against host governments, many states, developing and developed, started to reflect on the IIAs framework. Some withdrew from the ICSID Convention and/or its Additional Facility,Footnote 5 while others renegotiated their IIA’s commitments and/or revised their model BIT.Footnote 6 Yet others sought to find alternatives to the IIA regime altogether.Footnote 7 Specifically with the latter, Brazil is at the forefront of advancing investment facilitation and cooperation agreements, which focus more on cooperation than on adversarial provisions in the IIAs while limiting the scope of protection normally found in the IIAs. Brazil took its quest to expand its investment facilitation framework to the WTO. Specifically, in December 2017 at the 11th WTO Ministerial Conference held in Buenos Aires, the group of countries – Friends of Investment Facilitation for Development (FIFD) – sought to have, as part of the outcome of the 11th Ministerial Conference, a proposal to start negotiations towards an agreement on investment facilitation. Accordingly, the forty-three members issued a joint statement on investment facilitation for development (IFD), highlighting a need for structured discussion on the subject.Footnote 8 Furthermore, the statement indicated that IFD Agreement would not deal with contentious issues such as market access, standards of protection, and ISDS. Rather, it emphasized, as central to IFD, the following themes: transparency and predictability of investment measures; streamlining administrative procedures and requirements; enhancing international cooperation including exchange of best practices and relations with relevant stakeholders; and dispute prevention.Footnote 9 The statement added that the right to regulate would be central to the IFD.Footnote 10 Finally, the statement offered technical assistance to developing countries and LDCs toward the implementation of the multilateral agreement on IFD.Footnote 11
As of October 2019, there were seventy countries associating with IFD.Footnote 12 Of those seventy member countries, only five were African countries – Benin, Guinea, Liberia, Nigeria, and Togo.Footnote 13 This attracts interest because the IFD is prima facie to the benefit of developing countries and LDCs, and some academics have hailed it a game changer that will benefit African countries.Footnote 14 By the time of the 12th Ministerial Conference, there were ninety-eight countries, with African countries’ representation increasing to nineteen with the additional participation of the following countries: Burundi, Cabo Verde, Central African Republic, Chad, Congo, Djibouti, Gabon, The Gambia, Guinea-Bissau, Mauritania, Seychelles, Sierra Leone, Zambia, and Zimbabwe.Footnote 15 The latest accessible membership list as of November 2021 stands at 110, and the African countries’ representation increased from nineteen to twenty-two with the addition of Mauritius, Morocco, and Uganda.Footnote 16 Looking at the geographic location of African membership to the IFD, the countries are mostly from West Africa, and this does not come as a surprise because Nigeria is at the forefront of IFD discussion. As evidenced by its robust involvement in the IFD, Ambassador Chiedu Osakwe of Nigeria held a press conference on December 11, 2017, announcing that forty-two members, counting the EU and its members states as one member, would begin ‘structured discussions with the aim of developing a multilateral framework on investment facilitation,’ including on improving transparency, streamlining administrative procedures, and facilitating FDI.
Notable also about the membership of IFD Agreement is that the United States, South Africa, and India are not parties to it; in fact, India issued a statement to the effect that the WTO is not a proper forum for investment.Footnote 17 The other salient feature of the membership to the FIFD Group is that developing countries, largely emerging markets that have now become senders of capital, are leading the IFD agenda, while developed nations are just rallying behind with a notable exception of the EU, which has become more involved in the negotiations and starting to incorporate some IFD principles in its own agreements with third parties such as EU–Angola.Footnote 18 Examples of the emerging countries are Brazil, Argentina, China, and Russia. These countries have more at stake than meets the eye; they are not interested in the upliftment of African countries but want to facilitate their own investments in Africa. Brazil is concluding agreements similar to the IFD after being one of the few countries without IIAs. This is so because Brazil has become a sender of capital and seeks to protect its investors abroad while sensitive to the constitutions of other countries abroad.Footnote 19 It is for this reason – facilitating investment for Brazilian corporations while protecting their interests – that the cooperation and facilitation investment agreements (ACFIs) were signed with countries that are main recipients of Brazilian FDI.Footnote 20 Russia is another rent seeker in Africa.Footnote 21 For China, Singh notes,
In 2016, the combined value of China’s outbound mergers and acquisitions (M&As) reached $160 billion. However, some high-profile cross-border M&As deals by Chinese enterprises (both state and privately-owned) have come under increased scrutiny around the world. As Chinese enterprises may face tougher regulatory and political hurdles in pursuing M&As deals, particularly in high technology, infrastructure and strategic sectors, China is getting increasingly concerned with the potential roadblocks to its outward investments. Therefore, investment facilitation and investment protection measures have now become important components of China’s new “going out” strategy consisting of outward FDI, financing large-scale infrastructure investments through public and private investments, concessional loans, development aid, and insurance to investors.Footnote 22
Although the negotiations on IFD started way back in 2017, the text was never released to the public until the end of 2021 when the text was leaked on the Internet. Until this time, any academic discussions about fears and potential benefits of this Agreement were done in a speculative manner, as there was no concrete text to base debates on. However, speculations seem not to be too far off from the leaked text of the Agreement as it shall be revealed here.
With this background in mind, this work seeks to interrogate investment facilitation for development with the objective to understand Africa’s skepticism against the Agreement, which aims at increasing FDI that will bring development in their respective economies. In so doing, the work will also discuss the consequences of African countries’ nonparticipation to the IFD Agreement. Ironically, there are clauses on investment cooperation or regulatory cooperation in African PTAs/IIAs, yet many of African countries are not participating in the WTO debate on IFD. In addition, South Africa being vocal against IFD has ironically developed nonbinding frameworks for investment facilitation with Brazil, Russia, India, and China, yet rejecting IFD,Footnote 23 and incorporated IFD principles in its Protection of Investment Act. Perhaps this contribution will explain this conundrum.
14.2 Understanding Investment Facilitation for Development and the Potential Impact on the African Economies
In respect of the themes that the IFD Agreement seeks to cover, it will include the following themes: transparency of investment measures; streamlining and speeding up administrative procedures and requirements; enhancing international cooperation; home state obligations; sustainable investment; and dispute settlement.Footnote 24 Although the Group supporting IFD initially emphasized the right to regulate, home country measures and dispute prevention, as being central to the initiative,Footnote 25 seem to have lost prominence in the leaked Draft Agreement. The omission of the emphasis on the states’ right to regulate is lamentable, especially because critics of IFD, including the Africa Group, fear that an IFD Agreement would restrict their policy space and ability to regulate investment entering their markets. Finally, the statement and hence the Draft Agreement offer technical assistance to developing countries and LDCs toward the implementation of the multilateral agreement on IFD. This section will discuss these themes with a view to determine the potential impact of the IFD Agreement on the African countries. Interestingly, many of the themes in the Draft Agreement resemble the principles that the Organisation for Economic Co-operation and Development (OECD) subscribes to, and these include transparency, consultation, impact assessments, and maximization of benefits.Footnote 26 Indeed, discussions on Investment Facilitation were conducted at the OECD before they reached the WTO’s agenda.
14.2.1 Scope of the Investment Facilitation for Development Agreement
FIFD, in their joint statement, gave a negative list of issues that would not form part of the multilateral agreement on IFD, and those were market access including decision by competent authorities on whether or not to admit investment, investment protection, and ISDS. These exclusions were indeed omitted from the July 23, 2021 Revised Easter Text,Footnote 27 which then gives assurances to those members that feared sneaking market access through the back door. The Agreement will not apply to the existing or future IIAs; as such, IIAs will not be used to interpret the IFD Agreement, and vice versa.Footnote 28
There, however, seems to be a discord with regard to market access as it relates to the decision by the competent Authority on whether or not to admit investment. While this is excluded from the scope of the IFD Agreement, it seems to be brought through the back door because of the following:
– Definition of investor: It includes a would-be investor by reference to a person or entity that “attempts to make” an FDI in the territory of another member.Footnote 29 The person who is attempting to make investment will undoubtedly be dealing with admission challenges. One can therefore conclude that it is not true that this Agreement will not deal with market access as long as investor includes a person who is attempting to make investment in the territory of another member state.
– General principles of authorization: This obligates members to ensure that authorization measures it adopts or maintains do not unduly delay establishment.Footnote 30 Furthermore, any such authorization procedures should be based on objective and transparent criteriaFootnote 31 and provide reasons, in writing, when an application is rejected.Footnote 32 One cannot think of a better way to secure market access than by requiring members to publicize criteria for admission (authorization of application) and where the applicant is unsuccessful, to be furnished with reasons in writing, which can be subject to review or appeal.Footnote 33 Whereas these obligations may seem just, investment is different from trade to the extent that the former allows for establishment of a foreign entity within the borders of the host state. Despite the quest for inward FDI for developing countries, especially African countries, not every investor is desirable, even though a sector may have been opened. The origin of investor is crucial, as some investors may threaten national security.Footnote 34 Therefore, states need to play their cards very closely in as far as inward FDI is concerned. We have recently seen how countries reacted toward Chinese investments.Footnote 35
When the IFD Group first shared the themes that IFD would cover, there was caution from some scholars that IFD should focus on transparency in the administrative requirements for investors who are already established in the host state, instead of creating certain expectations and obligations for host states regarding entry.Footnote 36 However, the Text has done the opposite – expectations are created for would-be investors. This can only be seen as facilitating market access. The Agreement does not only limit itself to administrative issues but also to investment measures, a term that is very broad and far-reaching.
14.2.2 Transparency of Investment Measures and Cooperation
Before delving into the discussion on transparency of investment measures, we first need to understand the term “investment measures”. Investment measures refer to a set of requirements, conditions, and processes expressed in law, policies, or administrative actions, which are often imposed on the foreign investors/investments, upon entry, operation, or exit. On a procedural level, there is typically a long, complex, and expensive process for getting authorizations from the authorities in a host government, and this frustrates the flow of FDI. On a substantive level, the most typical investment measures are local content requirements, transfer of skills, export restrictions, and others. The adverse nature of these conditions attracted the attention of the GATT/WTO membership such that members adopted TRIMs to govern the imposition of these measures because of their restrictions to free trade. Specifically, the TRIMs Agreement prohibits imposition of local content requirements that violate Article III of the GATT (nondiscrimination) and quantitative restrictions that violate Article XI of the GATT. It follows that the FIFD refers to the transparency in the application of investment measures that are not prohibited by TRIMs such as skills transfer, technology transfer, hiring of local staff, and others. Ordinarily, these investment measures are often quite transparent, especially for the developing countries who are always clear that they expect investors to transfer skills and technology while creating employment. As an example, South Africa imposes investors to have equitable representation of black people in the staff complement, beneficiation, skills development, and others as contained in the Employment Equity Act, Mining Charter, and several other pieces of legislation. Predictably, investors seldom transfer skills and technology because foreign firms use local staff for administrative and menial jobs, often arguing lack of skilled labor in the developing countries and LDCs. Nevertheless, the culprits, when it comes to the use of investment measures that are nontransparent, are developed countries. Specifically, developed countries mask investment measures under the umbrella of rules of origin, voluntary export restraints, and antidumping measures. Accordingly, the IFD Agreement will be important to developing countries to the extent that it will require developed nations to be transparent in their use of investment measures.
It is worrying that member states will have to undertake impact assessment of their investment measures when preparing major regulatory measures as required in the Revised Easter Text.Footnote 37 This is so because there is plenty of literature discouraging investment measures on economic grounds.Footnote 38 Consequently, it is highly likely that any impact assessment undertaken on major investment measures will disqualify such measures. Once this happens, the losers of IFD Agreement will be capital-importing countries – developing countries and LDCs – because they often impose investment measures, which capital-exporting countries view as bad for investment. Meanwhile, investment measures are probably the only strategy through which capital-importing countries can force investment to yield development.Footnote 39 As an example, if broad-based black economic empowerment (BBBEE) were to be subjected to impact assessment in South Africa, it would not fly through as studies have proved its negative impact on business competitiveness;Footnote 40 meanwhile, BBBEE is probably the only way in which black people can be included in the economy in South Africa, thereby redressing apartheid legacies. In the same manner, Article 17 of the Pan African Investment Codes, which embraces performance requirements, would not see light of the day, if impact assessment were to be undertaken on these measures.
The Easter Text provides obligations for members to publicize their existing laws and other investment measures and to accord other actors an opportunity to make submissions in respect of proposed new laws, administrative decisions, and other investment measures.Footnote 41 In addition, members are encouraged to undertake periodic review of their measures to determine if such measures need to be streamlined, revised, or repealed to respond to investment facilitation needs.Footnote 42 On a positive note, it seems as though IFD will ensure that existing laws relating to investment measures are made available to the public, and this is a noble objective, given how tedious it can be to look for applicable laws and other measures in some countries. In fact, 10 percent of the investment measures recorded by United Nations Conference on Trade and Development between 2010 and 2017 were about inefficiencies caused by inaccessible and tedious administrative processes.Footnote 43
There is no doubt that the cost of having to find hidden laws, policies, and regulations governing foreign investment can be very high. Often times, the investor has to hire local firms just to get hold of laws and policies relating to investment. In some countries, even the locals do not know the applicable policies and laws governing investments. The result can be even more catastrophic when the investor enters a particular economy and only to be surprised by undesirable measures after entry, which the investor could not have known.
On a suspicious note, we are confronted with a situation where member states have to undertake periodic review of their investment measures and be transparent in adopting new measures by giving foreign actors a platform to make comments/submissions in respect of new measures, which must be considered and not just window-dressing. There is no doubt that members may find themselves coerced, under the guise of technical assistance, into changing their laws (investment measures), as also advanced by some scholars,Footnote 44 so that they are conducive and transparent to the investors. This aspect – reviewing and revising national laws/policies on investment measures – goes against the current wave in which national governments want to reclaim policy space to regulate. Consequently, IFD may seem to be worse than IIAs because IIAs never sought to change national frameworks to ensure smooth entry, operation and exit of investors; rather, IIAs were largely used as protection mechanisms.
Furthermore, IFD requires member states to accord foreign actors a platform for comments in the design of investment measures.Footnote 45 With this comes the threat of interference by foreign investors and foreign governments. Nevertheless, this may not be as alarming as it sounds;Footnote 46 thus, foreign actors and governments make submissions on the proposed laws of another country from time to time without necessarily forcing parliaments to yield to their demands. For example, when the Protection of Investment Bill of South Africa was read in Parliament, stakeholders, including foreign representatives in South Africa, made their submissions expressing their discontent about the Bill, alleging that the Bill would scare the investors away from South Africa.Footnote 47 Convinced of the legitimacy of the Bill, the South African Parliament passed the Bill into law, despite the international outcry. On the other hand, the United States’ influence on the South African Copyright Amendment Bill has been so huge that the President returned this Bill to Parliament, probably fearing United States’s antagonism.Footnote 48 While foreign influence is strong on the executive in many countries, it is not so much so on parliaments, which are fortunately the law-making arms of governments. Of course, one cannot completely rule out foreign influence on national parliaments or parliamentary capture by foreign actors, especially in weak democracies, which are common in developing countries and LDCs. Furthermore, international influence in the domestic affairs will always be there; thus, even powerful nations such as the United States have allegedly experienced international influence, especially in the presidential election, which saw President Trump moving into the White House. Therefore, developing countries, especially LDCs, should remain on guard against ruthless lobbying by powerful foreign stakeholders; otherwise, their legislative process might be hijacked.Footnote 49
In light of this discussion, it is not hard to imagine why most African states, and indeed other states, have not warmed up to the IFD yet because many countries have experienced the harsh effects of IIAs. Even developed nations such as United States are skeptical of some FDI, particularly Chinese FDI, and reacted by strengthening regulation and review mechanisms for screening inward FDI.Footnote 50 Therefore, to expect states, especially weaker states, to give in to the mechanism that seeks to change national laws in order to relax investment measures, thereby ensuring smooth entry, operation, and exit of investment is a bit too much at this stage.
14.2.3 Streamline and Speeding up Administrative Procedures
It is trite that in many, if not all, countries, an investor has to move from one government department to the other during entry, operation, and exit in order to fulfill the administrative requirements such as licenses and registration of the company. The process is time-consuming and expensive because often investors need to engage local consultants to do this job. It is therefore understandable that the FIFD Group want the IFD Agreement to streamline administrative procedures to lower the cost of investment.
The text under this theme seems to focus more on authorization of an investment,Footnote 51 and this is not what one would expect under this theme. Under this theme, one would expect to see emphasis on one-stop shops, and indeed many countries have, to date, made efforts to streamline their administrative procedures and requirements through Investment Promotion Agencies.Footnote 52 However, to achieve wholesome streamlined administrative procedures is difficult due to different structures of governance among and within countries and outside the remit of IPAs.Footnote 53 The complexity of streamlining administrative processes is compounded by the fact that even within one country, different regions have different administrative requirements and processes because different regions deal with different challenges. Nevertheless, the Revised Easter Text rather requires one-stop shops to the extent that it requires member states to avoid subjecting applicants to more than one competent authority in seeking the approval of their investment.Footnote 54 This is a fair requirement, and it is beneficial not only to LDCs but also to all countries seeking speedy processing of investment administrative requirements.
Going back to authorization of investments, which is at the heart of streamlining and speeding up administrative processes, the requirement is that members should ensure that their measures do not unduly delay establishment, acquisition, management, operation, expansion, or sale/disposal of the investment.Footnote 55 Furthermore, the requirements for authorization must be objective and reasonable. In addition, there must be adequate procedures for applicants to demonstrate whether they meet the requirements.Footnote 56 Once an application has been submitted, members must ensure that it is processed without undue delay and that reasons are provided for in the event that the application is rejected.
As indicated under the theme on transparency, whereas the ideals pursued herein seem noble to the extent that they require transparency in dealing with authorizations and that authorizations must be done within a reasonable time or within specified time lines where these are provided for, this approach will expose states to unwillingly accept certain investors they would not want to admit. Thus, whenever an investor applies and meets the requirements as set out by the member in accordance with such a member’s national laws, it appears as though the state will be expected to admit such an investor. Consequently, the obligations on authorization threaten members’ sovereignty over who to admit or reject, regardless of meeting the specified authorization requirements. This is a threat to national security. Thus, it is not every investor who is desirable, despite meeting the required entry requirements; as an example, countries view Chinese investors with suspicion, and it would threaten countries’ national security if they have to admit such investors simply because they meet the requirements.
14.2.4 International Cooperation and Focal Points
The IFD Agreement binds members to have focal points and share information voluntarily or on request regarding investment opportunities, experiences in respect of implementing the IFD Agreement, promotion of facilitation agendas, creation of information networks, and others.Footnote 57
Currently, there are IPAs in about 130 countries, as per data available at the World Association of Investment Promotion Agency, whose main focus is to foster international cooperation and exchanging best practices. It is particularly for this reason that IPAs formed a global association – World Association of Investment Promotion Agencies (WAIPA), which has an overall objective of “provid[ing] the opportunity for investment promotion agencies (IPAs) to network and exchange best practices in investment promotion”.Footnote 58 IPAs have done very well in achieving this objective to such a degree that many countries today have focal points and one-stop shops, with the latter providing for most administrative services (usually registration and licensing) under one roof, instead of sending the applicant from one department to another. Therefore, there is no need to have this in a legally binding treaty unless the aim is to turn best practices into legally binding obligations. I want to reiterate here that while this formulation works well for trade issues under Trade Facilitation, it is different with investment because any binding obligations can potentially cultivate fertile ground for market access, which many countries are opposed to. Taken cumulatively, the binding language used in the IFD Agreement, starting with mandating formation of the focal point to forcing members to accept investment that meets entry requirements as set out by the member, has potential to facilitate the market access.
14.2.5 Investment for Development
While host countries open their markets for investment in hopes of attaining development, investors have not done their part in terms of ensuring that their investments yield developmental goals in the host. To this end, African countries remain poor, despite significant FDI trickling into the continent. As an example, South Africa is in the top three of African countries recipients of FDI;Footnote 59 however, South Africa is in the top 10 countries with the highest levels of poverty.Footnote 60 Whereas one admits that FDI alone cannot eradicate poverty or result in economic growth if states do not have absorptive capacity,Footnote 61 it is worrying that FDI that flows into South Africa is arguably not improving the country’s economic situation, thereby not aiding in attaining development if South Africa can be among the top African countries receiving FDI yet also among the top countries with highest levels of poverty.
The reasons for FDI’s failure to result into development in the developing world are twofold: (1) There are no obligations on investors that can cause investment to lead to development, and (2) the home state of the investor is not doing much either to ensure that its investors abroad carry out development investing in the home state. The leaked Draft IFD Agreement contains obligations of the home state,Footnote 62 albeit with disappointing nonbinding language; one would have expected binding obligations similar to TRIPs Articles 66(2) and 67, which bind developed member states to provide incentives to enterprises in order to promote technology transfer to LDCs and to provide technical and financial assistance. In addition, the Revised Easter Text contains soft obligations for member states in respect of their investors. To this end, member states shall encourage investors to voluntarily incorporate international standards, principles, and practices on conducting business in a responsible manner.Footnote 63 This is a slap on the face for developing countries. It is notable that the Draft Agreement has no concrete steps toward investing to achieve Sustainable Development Goals, yet it is dubbed investment facilitation for development.
Professor Sauvant argues that all investment is potentially sustainable and that it is a matter of discovering and putting in place the appropriate policy and institutional frameworks.Footnote 64 Since most countries have liberalized their markets unilaterally in the quest to attract investment, the starting point for IFD to ensure sustainability for development must be on investor obligations. The irony about all FDI initiatives is that they are largely silent or scanty about investor obligations and the role that the home state can play to ensure that investors invest responsibly, and one would have expected the IFD Agreement to embody these commitments. The home state obligations are particularly important especially for investments in developing and least developed nations because often investors have more economic muscle than these countries, and it would take a home state to bring such an investor to book than the host state. The “state capture” revelations in South Africa indicate how the investor can capture the entire executive to the detriment of country’s objectives, thereby requiring home states to intervene.
The 17 Sustainable Development Goals (SDGs) are well known, and there is no need to repeat them here. It is not clear how transparency of investment measures, streamlining and speeding up administrative processes, international cooperation, nonbinding home state, and investor obligation can help developing countries or LDCs to achieve the SDGs; thus, it is not clear how streamlining and speeding up administrative procedures account for the reality of what SDGs require from countries.Footnote 65
Nevertheless, it is commendable that the Draft Agreement seeks to uproot corruption, which has ravaged economies in Africa. As an example, the State Capture Enquiries in South Africa show how one investor, the Gupta family, captured the executive and amassed the country’s wealth, leaving state entities crumpling with unprecedented levels of debt due to maladministration emanating from corruption.Footnote 66 In Lesotho, the country almost lost its assets (water royalties in South Africa and other assets in Mauritius, the United Kingdom, and the United States) as a result of litigation emanating from a German investor who entered into a corrupt agreement to provide solar energy to Lesotho.Footnote 67 In Madagascar, the Malagasy government was overthrown after it entered into a corrupt deal with Daewoo, a deal which could have seen Daewoo getting access to 1.3 million hectares intended for growing maize for export.Footnote 68
14.2.6 Technical Assistance
There exists an established practice that whenever a new agreement is concluded, LDCs and developing countries will require technical assistance in order to implement a new treaty. Accordingly, treaties often have a provision for technical assistance, and this therefore does not come as a surprise that the IFD group intends to include technical assistance in the Agreement.
The envisaged technical assistance will help states streamline administrative processes, obtain transparency in investment measures, foster international cooperation, and establish focal points. Interestingly, developing countries adopt transparent investment measures, while developed nations are typically known for their complicated investment measures, which often masquerade as rules of origin. As said earlier, IPAs are already doing a good job in streamlining administrative processes and sharing of best practices, thereby making technical assistance unnecessary.
Nevertheless, it is commendable that the Agreement obligates developed states to provide technical assistance and spelling out the themes that technical assistance must address to make it meaningful. Thus, it is generally known that African countries do not attract as much investment as it would be expected, and even when they do get FDI, it does not seem to have a positive impact as one would expect.Footnote 69 In fact, it has been established that FDI does not have an unmitigated positive effect on economic growth.Footnote 70 Much of the positive effect of the FDI rests on the absorptive capacities of the host,Footnote 71 which many African countries lack. Therefore, there is an apparent need for technical assistance in order for African countries to reap the benefits of FDI. On the other hand, the absorptive capacities needed for countries to have impactful FDI are GDP, volumes of trade, and human capital.Footnote 72 This means that technical assistance can only respond to the human capital need, while GDP and volumes of trade cannot be addressed by technical assistance. Accordingly, it seems as if even with technical assistance, challenges of having FDI that leads to economic growth and hence development are yet to remain for African countries even after the IFD Agreement comes into force. This bolsters the conclusion arrived at earlier that without incorporating specific commitments toward the realization of SDGs in this Agreement, it is not clear how the IFD Agreement can lead to FDI for development.
14.2.7 Dispute Settlement
The Agreement contains binding obligations, and it is therefore subject to the dispute settlement processes of the WTO, very much to the contrary of how IFD was canvassed initially. Thus, the IFD Agreement was to feature dispute prevention over dispute settlement, which was a selling point, given how debilitating adversarial IIAs were on member states. Currently, the agreed text (Article 31.5) on dispute settlement reads as follows:
For any disputes concerning the interpretation and application of the provisions this Agreement, Members shall only have recourse to the Understanding on Rules and Procedures Governing the Settlement (DSU) of the WTO.
This undoubtedly means that those provisions of the IFD Agreement that carry a binding force shall be subject to the DSU, and this is likely to bite African countries as they have not been active participants under the DSU.Footnote 73
Under the IFD Agreement, one is expecting to see the following issues as subject of dispute settlement processes under the DSU: challenging investment measures for not being transparent, administrative procedures that are not streamlined and failure to allow affected parties to make submissions in the adoption of investment measures and administrative processes, and failure to adopt best practices facilitating flow of investment. Interestingly, corruption seems to be excluded from the DSU, and given how investors have overreached in the host developing countries as shown earlier in countries such as South Africa, Madagascar, Lesotho, and others, there seems to be dereliction of responsibility on corruption that has wreaked havoc in Africa. These issues that form jurisdiction rationae materiae are far-reaching compared to jurisdiction rationae materiae under IIAs, which was basically founded on standards of protection. The jurisdiction rationae materiae under the IFD Agreement goes to the heart of government regulation and makes investors together with their home countries active players in the domestic affairs of the host country in regulating investment.
14.3 Consequences of Staying Outside IFD for South African and African Countries at Large
The picture I painted earlier is not too attractive about the IFD Agreement. However, the title of the proposed agreement – investment facilitation for development – is so attractive that even though the contents pose a lot more questions than answers and also do not really point to development, it is worth considering the consequences of being left out for South Africa and many African countries that are not yet taking part in this discussion.
South Africa has specifically distanced itself from this discussion questioning the suitability of the WTO as a forum for hosting this discussion. Whereas the concern is legitimate, especially because UNCTAD is already dealing with reform of investment agreements, we can no longer divorce trade from investment because the two are inextricably linked. Nevertheless, there are concerns that investment issues are more sensitive than trade issues as they are centered on alien presence and ownership of resources; therefore, they argue that to bundle trade with investment and seek to develop harmonized procedures is difficult.Footnote 74 Consequently, the expectation would be that the WTO would focus on trade and leave investment to other institutions that are especially tasked to handling investment issues. Nevertheless, the cost of staying outside the agreement is too high, despite these well-founded concerns.
14.3.1 Rule-Takers
Many African countries are new to international diplomacy and international rule-making because these countries are mostly after around sixty years old into independence postcolonization. By staying outside, South Africa and other African countries that often raise an issue that they never had a chance to negotiate international agreements due to colonization when the agreements were concluded deny themselves an opportunity to shape this agreement. Resultantly, they will remain rule-takers because the truth of the matter is that these countries will eventually accede to the agreement. As small players in the global economy, they cannot sustain their absence. In the unlikely event that these countries remain adamant to stay outside of the agreement, the norms of IFD will eventually apply to them as they become internationalized as it was the case with telecommunications agreement negotiated among developed nations, which although it is plurilateral, it ended up being multilateralized.Footnote 75 In fact, given that international standards are minimum standards, it is a given that countries will use the IFD Agreement as a blueprint for their bilateral investment facilitation agreements, as indicated in the case of EU where IFD provisions are already prevalent in the negotiations with Angola and Eastern and South African (ESA) countries; not to mention Brazil, which is a pioneer of the investment facilitation agreements.
If African countries can participate in the discussion of this proposed agreement, they are many enough (54 countries) to influence the outcome of the debate and ensure that their interests are taken into account. At this point in time, the text of the Investment Protocol to the African Continental Free Trade Area is not yet published, and it is difficult to imagine the intention of African countries on investment facilitation. The Pan-African Investment Codes can provide insights on how to take into consideration the interests of African countries. To this end, the objectives of the Codes include facilitation of investment that foster sustainable development.Footnote 76 In order to achieve this objective, the Codes impose rights and obligations to states and investors, unlike the IFD Agreement. Thus, chapter 4 of the Codes embodies the investor’s obligations, which include corporate governance, sociopolitical obligations, prohibition of bribery, corporate social responsibility, and obligations on the exploitation of natural resources, as well as business ethics and human rights. In addition, chapter 3 of the Codes provides for the development objectives, which include performance requirements and support for investments that have upstream and downstream linkages, as well as technology transfer. The issues highlighted here from the Codes are not featuring in the IFD Agreement, and these are the issues that African countries should fight for their incorporation in the Agreement.
While it is mostly said that IFD discussions are led by developing countries, these are basically the emerging markets that have become active players in exporting FDI. Accordingly, their interests, which form the agenda of IFD, do not resemble the interests of African developing countries and LDCs, as exemplified earlier with the contents of Codes vis-à-vis IFD Agreement.
It would be prudent therefore to participate now, rather than later and avoid being rule-takers in the twenty-first century.
14.3.2 Bad Signal to Investors
All countries, and African countries in particular, are desperate to attract FDI in order to achieve their developmental goals. Even though the discussion in Section 14.2 of this chapter does not necessarily consider the IFD Agreement to potentially result in any development given the scarcity of its provisions, it is not a good signal to investors out there that African countries have stayed away from this discussion, and for South Africa in particular, to openly reject the proposed agreement no matter how legitimate the concerns are.
Whereas international investment agreements, on their own, do not increase FDI inflows.Footnote 77 This is so because investors look for things such as market size, participation of the host in the global value chains, and natural resources for extractive industries, they are, however, a very good signal. In fact, international agreements provide for policy certainty, which is key for attracting FDI because there is guarantee that certain minimum standards cannot be changed at the whim of the will of the host. Indeed, UNCTAD also noted the importance of policy certainty as follows:
In recent months, significant tensions have emerged in global trade, encompassing a number of major economies. The resultant atmosphere of uncertainty could cause [multi-national enterprises] MNEs to cancel or delay investment decisions until the trade and investment climate is more stable. If tariffs come into force, trade and global value chains in the targeted sectors will be affected and so, consequently, would be efficiency-seeking FDI. MNE profitability would be affected in some sectors, further weakening the propensity to invest. MNEs could also be incentivized to relocate production activities to avoid tariffs.Footnote 78
14.4 Conclusion
No doubt investment facilitation for development has taken the international community by storm especially because it is led by developing countries, and in particular Brazil, which is one of the top recipients of FDI. The IFD Agreement is hailed as a game changer for poor developing countries, especially African countries, because it is dubbed as an Agreement that will bring sustainable development through FDI into Africa and other poor countries. However, African countries, other than mostly those in West Africa, have stayed away from the discussions of the IFD Agreement, and perhaps this indicates weariness toward solutions that are imposed from abroad. Nevertheless, this contribution examined the text of the leaked IFD Agreement with a view to unravel the skepticism toward the Agreement that is seen as a panacea to African problems. The chapter analyzed the following aspects: scope of the Agreement, transparency of investment measures, streamlining and speeding up administrative processes, international cooperation, investment for development, technical assistance, and dispute settlement.
Concerning the scope of the Agreement, whereas it is commendable that contentious issues such as standards of treatment/protection, ISDS, and market access are excluded, it is also a concern that market access seems to be brought in through the back door. This is so because the definition of an investor extends to natural persons or juristic persons attempting to invest in the member’s territory as opposed to limiting the definition of the investor to those that have already established in the territory of the host. Accordingly, the investor seeking entry and establishment can challenge investment measures that hinder entry and establishment. The IFD Agreement is therefore far-reaching in this respect to the extent that potential investors can question entry and establishment measures. In addition, to the extent that IFD Agreement pays particular attention to authorization of investment applications in that member states are required to adopt objective requirements for authorizations and avoid undue delay in processing authorizations, this is an indication for facilitating market access. Furthermore, since members are required to provide reasons, in writing, for rejecting applications and that the decision to reject is subject to review or appeal, it is concluded herein that IFD Agreement brings market access in disguise contrary to the initial statements made by the Group. Initially, IFD Agreement ought to have underscored the right to regulate as its central theme – the fact that this theme no longer features in the IFD Text is a cause for concern, especially to developing countries that feared that the IFD Agreement would encroach their regulatory space. Besides exclusion mentioned immediately earlier, IFD Agreement contains a positive list of themes obligations that will guide investment for development, and it is concluded herein that these themes do not seem to have any relationship with sustainable investment for development; rather, they are aimed at reforming domestic regulation and administrative processes relating to investment.
With regard to transparency of investment measures, it is worrying that the Agreement does not only require transparency in the existing measures; rather, it requires members to undertake period review to assess the investment measures and revise or repeal them as necessary if they frustrate investment flows. Even more disturbing is the requirement for members to undertake impact assessment of measures whenever they adopt new significant measures. Countries are not only focusing on growing economies but they also have to balance social dynamics, with the latter not always being the most effective tool for robust economic development. As an example, countries such as South Africa need to address apartheid legacies; in doing so, they sometimes have to adopt measures that not only advance the interests of capital but also redistribute justice. If members have to undertake these impacts assessments, it is concluded herein that IFD Agreement will inhibit the right to regulate.
Whereas one would have expected streamlining of procedures to be focusing on one-stop shops to reduce multiple applications and lengthy processes, the IFD Agreement circumscribes conditions for authorizations and seems to force members to admitting investors provided they meet requirements. This is a threat to national security, as countries would sometimes let go a lucrative deal if it threatens national security as we have seen in the case of Australia in respect of Chinese investments.
Finally, although investment for development is supposed to be the central theme to this Agreement, it disappointingly contains nonbinding home state obligations, yet it is accepted that home states can play a positive role in ensuring that their investors carry out responsible investing abroad. Equally, it is accepted that investment can yield development if investors carry obligations to transfer skills and contribute to developmental goals of the host. The theme that was supposed to be central to the Agreement (investment for sustainable development) became its weakest link as the text has no element whatsoever of sustainable development.
Based on the previous discussion, one can understand why most African countries decided to keep away from the Agreement. To this end, the Agreement promises less than canvassed, and it threatens market access as well as regulatory space.
Despite this, it is lamentable that many African countries stayed away from the discussing the text of the Agreement because they will eventually join the Agreement and be rule-takers. To this end, they deny themselves the opportunity to shape the Agreement, thereby ensuring that their interests are taken into account. Equally, it becomes a bad signal to the investment community that African countries are not open to FDI Agreement, yet this is not the case.
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