Trade and Investment
Dispute Settlement
Professor J. Anthony VanDuzer
Outline of Presentation
Introduction to Foreign Direct Investment (FDI)
Business rationale
Statistics
Government regulation
International Regime
WTO TRIMs Agreement
GATS
International Investment Agreements – NAFTA and EUCariforum EPA
WTO Dispute Settlement Understanding (DSU)
NAFTA State-to-State dispute settlement
EU-Cariforum EPA State-to-State dispute settlement
Strategic Trade Policy in Context
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Foreign Investment
• Definition
•
Establishment or acquisition of an interest in a
business in a foreign state
• Business Rationale
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•
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Access new market
Global allocation of production
• lower labour or other costs
• regulatory structure
• access to capital, inputs, raw materials
Facilitated by
• Reduction in costs of transportation
• Improvements in communication
• Reduction in tariffs
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Growth in Foreign Investment
• New openness in developing and transition
economies - Relaxation of national
restrictions
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Expansion of market based capitalism - privatisation and
deregulation
Insufficient domestic savings
Lack of access to international capital markets
FDI more stable than loans as source of external finance
Foreign investors bring efficiency gains
• Improved governance
• Technology transfer
Non-economic benefits – e.g. environmental practices
• May be better than domestic firms - the significance of
reputational effects
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Trends in Foreign Direct Investment
$
B
I
L
L
I
O
N
S
18000
16000
14000
12000
10000
FDI Inflows
FDI Inward Stock
8000
6000
4000
2000
0
1990
2005
2008
2009
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National Regulation of Foreign Investment
• Foreign investment subject to intrusive
regulation in many countries
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•
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•
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national security and defence
concerns about sovereignty
balance of payments concerns
protection of local industries
control over natural resources
protection of local culture
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National Regulation of Foreign Investment
• National regulation takes many forms
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•
•
•
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Limits on ownership, closed sectors (and priority sectors)
Approval requirements (e.g. Investment Canada Act)
Requirements as to form (e.g. joint venture)
Local content and/or employment requirements
Trade balancing
Export performance
“Performance
Product mandating
Requirements”
Technology transfer
Restrictions on
• land ownership
• repatriation of investment
• conversion of currency
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National Regulation of Foreign Investment
• May combine regulation with incentives
•
•
Free zones – imports and exports
permitted without duty
Foreign investment guarantees – e.g.’s
• Stabilization of taxes or tax relief
• Convertibility of local currency
• Repatriation of profits, proceeds of sale
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Foreign Investment - International Rules
• No comprehensive multilateral rules
•
•
WTO TRIMs Agreement
GATS commitments on commercial
presence
• Bilateral and regional international
investment agreements (IIAs) provide
more comprehensive rules
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WTO TRIMs Agreement
•
BASIC ELEMENTS
•
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Prohibition on TRIMs inconsistent with
national treatment or imposing quantitative
restriction contrary to GATT 1994
Illustrative list of prohibited TRIMs
• local content requirements (FIRA case)
• trade balancing requirements
• foreign exchange balancing
• restrictions on exports
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WTO’s General Agreement on Trade in
Services (GATS)
• All services are subject to GATS - including
services delivered through a commercial
presence (i.e. investment)
• Over 50% of new investment worldwide is in
services
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International Investment Agreements (IIAs)
•
•
Bilateral Investment Treaties (BITs)
• Comprehensive agreements on investment
• Different countries have different models
• US BITs and Canadian Model Foreign
Investment Protection Agreements (FIPAs)
based on NAFTA Chapter 11
Other international economic agreements like
FTAs
•
•
some deal with investment in manner similar to
BITs (e.g. NAFTA Chapter 11)
Others do not (e.g. EU Cariforum EPA)
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International Investment Agreements (IIAs)
Strands in the “spaghetti bowl”
More than 5,900 treaties worldwide dealing with investment
issues as of December 31, 2009
• Increased 40% in the past decade
– led by Asia
• More than 2,750 bilateral investment treaties (BITs)
involving 179 countries
– Annual rate of growth peaked in 2001, declined in
every subsequent year - until 2009
• More than 250 bilateral and regional preferential trade
and investment agreements (PTIAs)
– PTIAs doubled between 2003 and 2008
– Investment content varies – some like BITS, some
softer economic cooperation commitments
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International Investment Agreements (IIAs)
Canada’s Foreign Investment Promotion and
Protection Agreements (FIPAs)
26 signed, 24 in force
• 17 based on NAFTA Chapter 11
8 being negotiated
• including China, India, Vietnam
Free Trade Agreements with investment
chapters
5 signed, 3 in force, 11 being negotiated
After 2003 based on new Canadian model FIPA
Still like NAFTA Chapter 11 – with modifications based on
experience with Chapter 11
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International Investment Agreements (IIAs)
•
Purpose of IIAs
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Ensure stable predictable environment for
investors
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Investor protection
Encourage investment
Structure
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Substantive standards of behaviour for states in
dealing with investors
Investor has right to claim relief for losses caused
by measures of state not consistent with
substantive standards in binding arbitration
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Canadian Foreign Investment Protection
Agreement Model (FIPAs)
•
Core Obligations (i)
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•
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Better of national treatment and MFN
(Arts. 1102, 1103)
Canada must not discriminate against NAFTA
Investors in relation to the “establishment,
acquisition, expansion, management, conduct,
operation or sale” of their investments
Discrimination only prohibited if investors in “like
circumstances”
•
Scope to discriminate if for legitimate non-discriminatory
policy objective
– i.e. then not in like circumstances (Pope & Talbot)
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Canadian Foreign Investment Protection
Agreement Model (FIPAs)
•
Core Obligations (iii)
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Certain performance requirements prohibited
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Export performance
Domestic content
Domestic sourcing
Trade balancing
Foreign exchange balancing
Technology transfer
Product mandating
Broader than
TRIMs
Transfers of funds relating to investment must be
permitted
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Canadian Foreign Investment Protection
Agreement Model (FIPAs)
•
Core Obligations (iv)
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Minimum standard “treatment in accordance with customary
international law, including fair and equitable
treatment and full protection and security”
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Canadian Foreign Investment Protection
Agreement Model (FIPAs)
•
Core Obligations (v)
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Restrictions on Expropriation
•
Includes direct or indirect nationalization or expropriation
or measures tantamount to nationalization or
expropriation
•
Must be
•
•
•
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For public purpose
On non-discriminatory basis
By due process
With prompt, adequate and effective compensation
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Canadian Foreign Investment
Protection Agreement Model (FIPAs)
Investor-state arbitration
Investor of one NAFTA state can seek damages
for breach of Chapter 11 obligations by another
NAFTA State through binding investor-state
arbitration under
• UNCITRAL Rules
• ICSID Additional Facility Rules
• ICSID Rules
Investor Choice
(not applicable until Canada ratifies ICSID Convention)
Rules modified by treaty
Successful investor entitled to compensation only
• Not repeal or modification of measure
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Canadian Foreign Investment
Protection Agreement Model (FIPAs)
Process Issues:
Transparency
• Hearings public
Amicus curiae participation
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Investor-State Dispute Settlement
As of August 31, 2010
56 notices of intent to arbitrate filed under NAFTA
• 18 final awards
28 filed against Canada – all by US investors
• 13 withdrawn or inactive
• 8 completed
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–
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3 in favour of Canada
2 granting damages to the investor
2 settled
1 terminated because investor did not pursue
• 7 in progress
12 cases by Canadian investors against US under NAFTA
• None successful – two still in progress
A handful of cases by Canadian investors against foreign states
under other treaties
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Trade and Services in the EU-Cariforum
Economic Partnership Agreement
Commitments on Commercial Presence
Same concept as GATS – but applies to all
investors not just services suppliers
MFN all sectors re: commitments in future trade
agreements
• But some sectors excluded
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mining, manufacturing and processing of nuclear materials
production of or trade in arms, munitions and war materials
audio-visual services
national maritime cabotage
national and international air transport services
Market Access and National Treatment
(positive list)
• In sectors and on terms listed in Annex IV to Agreement
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Trade and Services in the EU-Cariforum
Economic Partnership Agreement
Separate Chapter on temporary presence of
natural persons for business purpose
Key personnel, graduate trainees, business
services sellers, contractual services suppliers,
independent professionals and short term visitors
for business purposes
Separate Chapter on regulation deals with
Mutual recognition, transparency and
requirements for administrative procedures
Specific commitments in certain areas
• computer services, courier services, telecommunications,
financial services, maritime transport, tourism, ecommerce
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Trade and Services in the EU-Cariforum
Economic Partnership Agreement
Separate Chapter on temporary presence of natural
persons for business purpose
Key personnel, graduate trainees, business services sellers,
contractual services suppliers, independent professionals
and short term visitors for business purposes
Separate Chapter on regulation deals with
Mutual recognition, transparency and requirements for
administrative procedures
Specific commitments in certain areas
• computer services, courier services, telecommunications,
financial services, maritime transport, tourism, e-commerce
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Trade and Services in the EU-Cariforum
Economic Partnership Agreement
Free movement of capital and payment
of funds for current transactions
Commitments on social aspects
commitment to regulate to ensure high
labour and social standards
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Dispute Settlement
DSU Process
Scope
Initiation
Standing
Establishment of a Panel
Panel process
Function
Third Parties
Fact finding and use of experts
Amicus Curiae briefs
Burden of proof
Most formal,
well developed
and used
state-to-state
process
Appellate Process
Implementation and Enforcement
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Scope of DSU Process
Can initiate dispute settlement process where
breach of a multilateral trade agreement listed in Appendix 1
and 2 to DSU (a Covered Agreement)
Nullification or impairment of any benefit due under a
Covered Agreement
• as a result of application of any measure
• any other situation
even if no breach
Administered by the Dispute Settlement Body (DSB)
– same membership as WTO General Council
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Initiation of Complaints
Request for consultation - notification to DSB
Member may participate as third party
If no settlement within 60 days of request
Complaining party may request panel
Parties may agree to alternative means of dispute settlement
including arbitration (never done)
On request of complaining party – panel must be established
by DSU unless consensus not to
(“automaticity”)
Parties decide upon composition of panels
At request of party - Director-General appoints if no
agreement between parties within 20 days of establishment
Member may participate as third party
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DSU Panel Process
Amicus Curiae briefs:
“friend of the court”
Controversial
Submissions often come from NGOs
Panels can accept and consider unsolicited
information and advice
• In their discretionary right
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DSU Panel Process
Submissions and proceedings confidential
If Panel finds that challenged measure is inconsistent with a
covered agreement
should recommend to DSB that offending measure be brought into
conformity
Panel circulates interim report to parties
Receives comments
Completes final report
Panel must normally complete its work within 6 months
(3 months in cases of urgency)
Within 60 days of issuance - final report is adopted by DSB
unless
Consensus not to adopt (“automaticity”)
One party notifies DSB of intention to appeal
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DSU Appeal Process
Only parties may appeal
Only on issues of law and legal interpretations by
Panel
Submissions and proceedings confidential
Appellate proceedings normally shall not exceed 60
days from date of notification of decision to appeal
Report adopted by DSB within 30 days of issuance by
Appellate Body
unless consensus against
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DSU Implementation
If Panel or Appellate Body Report adopted
Party in breach must notify DSB of its intentions
regarding implementation at DSB meeting within
30 days of adoption
If immediate implementation impractical
“reasonable period of time” for implementation
must be
• approved by DSB on proposal of Member not in
compliance
• agreed to by parties (within 45 days)
• fixed by arbitration (within 90 days)
DSB guideline = 15 months
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DSU Implementation
Vast majority resolved by removal of offending
measure
Implementation under regular surveillance by DSB
until resolved
Member in breach must make regular reports on
implementation
If disagreement about whether measure implements
report – issue may be referred to Panel
(“Art. 21.5 Panel”)
Report within 90 days
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DSU Implementation
If non-implementation within “reasonable period of
time”
parties may negotiate compensation
if not agreed within 20 days, party may seek authorization of
DSB to suspend concessions (“retaliation”)
• DSB will grant within 30 days of expiry of time frame for
implementation
• Disagreements regarding level of suspension may be
referred to arbitration (“Art. 22.6 panel”)
– should be equivalent to level of nullification and impairment
• Should be in same sector as violation unless not
“practicable or effective” – then under same agreement – if
not practicable or effective either – under another
agreement
Objective is implementation – not punishment or
compensation
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NAFTA State-to-State Dispute Settlement
under Chapter 20
Scope - Disputes
“regarding the interpretation and application of”
NAFTA
Except matters covered in Chapter 19
Whenever a party state believes that an actual or
proposed measure of another NAFTA state is or
would be inconsistent with that state’s obligations
under NAFTA
Where a party is concerned that a measure of
another NAFTA party nullifies or impairs the
benefit that the first party reasonably expected to
receive under the agreement, even if the measure is
not a violation of NAFTA
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NAFTA State-to-State Dispute Settlement
Process
Consultations (30 days)
Free Trade Commission Meeting (30 days)
Cabinet level representatives of each country
Panel established (15 days)
Reverse selection from roster
No appointing authority
Initial panel report (90 days)
Parties comment
Final panel report (30 days)
Findings of fact
Conclusions regarding whether measure is
consistent with NAFTA or causing nullification and
impairment
Recommendations - if any
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NAFTA State-to-State Dispute Settlement
Process
Process (part 2)
Disputing parties mutually agree on resolution
• “Normally” should conform to panel’s conclusions
– BUT No obligation not to implement or remove any
measure not complying with agreement or causing
nullification or impairment
• If no mutually agreed solution within 30 days,
complaining state can suspend trade concessions of
equivalent effect
Suspension can be challenged if “manifestly
excessive”
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Trade and Services in the EU-Cariforum
Economic Partnership Agreement
Consultations (60 days) on any dispute concerning interpretation or
application of the agreement
Mediation may be agreed to
Request for panel to EC-Cariforum Trade and Development Committee
- (ECTDC)
representatives of each country – normally senior officials
Panel established
Parties agree or
either Party may request the Chairperson of the ECTDC, or her or
his delegate, to select members by lot from list agreed by Parties
Initial panel report (120 days from appointment)
Comments from Parties
Final panel report (150 days from appointment)
Findings of fact
Conclusions regarding whether measure is consistent with NAFTA
or causing nullification and impairment
Recommendations - if any
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Trade and Services in the EU-Cariforum
Economic Partnership Agreement
Process (part 2)
Each Party shall take any measure necessary to
comply with the arbitration panel ruling
Compliance must be within reasonable time
• Agreed or determined by arbitration
Complaining party may request arbitration on any
purported compliance by the other party
If no compliance or agreement on compensation,
the complaining party may adopt “appropriate
measures”
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Weaknesses of NAFTA Chapter 20
Decisions not binding – reliance on agreed solution
No compliance process
Delays and lack of predictability
In practice between 17 months and 5 years
Problems with panel appointments
• No roster of panelists set up
• No appointing authority when parties default
Time lines for panel decision unreasonably short
Lack of independent, professional secretariat to
assist in drafting orders and decisions, provide
institutional memory
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Factors affecting choice of NAFTA
Chapter 20 dispute resolution?
What is possible?
Is action breach of WTO obligation, NAFTA
obligation or both
Where there is a choice - Why choose
NAFTA?
Avoidance of WTO precedent
Timely resolution
• Based on time lines – panel decision should be
issued within 8 months of request for
consultations
Confidentiality – important where issue is
politically sensitive
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Advantages of the WTO Process
WTO standards for antidumping and countervailing duties
More predictable and consistent process
Secretary-General acts as appointing authority if parties
default
WTO Secretariat provides greater support
Dispute Settlement Body (all WTO Members) – more
independent than FTC
Appellate Body
Compliance process
Possibility of
participation by and support of like-minded states
bringing more profile to dispute
Result: WTO dispute settlement more frequently used
than NAFTA Chapter 20 by NAFTA party states
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Issues in Design of State-to-State Dispute
Settlement Systems
Scope
Interplay with other dispute settlement
systems – especially WTO
Timelines
Opportunities for one party to delay or
frustrate resolution of dispute
Binding character and enforcement
procedures
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