W
T
WT/WGTI/W/54
2 September 1998
O
(98-3363)
Working Group on the Relationship between Trade and Investment
Original: English
COMMUNICATION FROM THE EUROPEAN COMMUNITY
AND ITS MEMBER STATES
The following communication, dated 28 August 1998, has been received from the Permanent
Delegation of the European Commission with the request that it be circulated to Members.
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CHECKLIST OF ISSUES, AGENDA ITEM IV: IDENTIFICATION OF
COMMON FEATURES AND DIFFERENCES IN INTERNATIONAL
INVESTMENT INSTRUMENTS
Existing Concepts on the Admission of Investment, in particular Non-Discrimination
I.
INTRODUCTION
1.
The last submission of the Community to this Working Group, i.e. document
WT/WGTI/W/30 of 27 March 1998, already contains a short chapter on the pre-entry questions.
From that document it already appears that the bilateral investment treaties concluded by the member
States of the European Community do not affect the right of Parties to regulate the admission of investors. However, both the EC Treaty itself and some other important instruments the Community and its member States have adhered to put obligations on the participant in this respect. Taken together, these obligations amount to a very open regime for access of investors to the European
Single Market. In all of these instruments, however, horizontal or sectoral exceptions allow participants to safeguard important interests, such as national security or public order.
2.
The Community recognizes that legal obligations on the admission of investment can raise political concerns, some of which have been or will be debated in the WGTI. This note does not take a view on these issues. It attempts a mere description of the concepts used, in particular regarding the central obligations of national treatment and most-favoured-nation treatment .
II.
THE INTERNATIONAL LAW SITUATION
3.
A brief look at the international law situation reveals that there is no right to invest or right of admission as such for foreign investors under customary international law. This means that any rights and obligations in this field are the result of the treaties and other international law instruments that a particular State has chosen to enter in. With regard to the WTO, this does not mean that there is a tabula rasa from which to start. It should be recalled here that under the GATS many countries have included market access commitments for commercial presence, i.e. investment.

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III.
THE MAIN CONCEPTS USED
(i) "Right to invest". This would be a far-reaching concept allowing for an absolute right for investors for direct or portfolio investment. While this concept may be found in academic papers, it is not part of current practice of any WTO Member, and should not be discussed here.
(ii) "Right of establishment". This is a narrower concept creating a subjective right of establishment in a country (which very often does take the form of an investment), including by natural persons. This right has been granted, subject to a number of horizontal and sectoral limitations, within the European Community and in the
Community’s relations to the accession candidates. It usually is part of a larger agenda of economic integration.
(iii) Non-discrimination: national treatment and most-favoured-nation treatment. These are the most common forms of obligations taken on in the multilateral fora (and, inter alia , in the OECD instruments, NAFTA, the draft MAI, the Energy Charter Treaty, as well as in the GATS in combination with "market access" (see below (iv))).
(iv) Market-access commitments. This is a concept used in the GATS, which allows
GATS Members to make liberalization commitments regarding market access in sectors inscribed in a GATS Member’s schedule.
4.
What follows is a closer look at the non-discrimination concept. It should be noted that some instruments (as in NAFTA, MAI) comprise the pre- and post-establishment "life" of an investment by a single provision, thus taking into account that it is sometimes difficult to distinguish between pre- and post-entry of an investment. This is in particular true when an agreement operates a broad definition of investment, including portfolio transactions. This fact explains why also nondiscrimination concepts developed (e.g. the OECD National Treatment Instrument) in a postestablishment context have been included where this was deemed useful.
The OECD instruments
5.
Within the OECD, the admission of investment is currently regulated by the Codes of
Liberalisation, but a valuable interpretation of its central concepts of non-discrimination and national treatment is also given in the National Treatment Instrument which, in general, applies once investment has been admitted.
6.
The wording used in Art. 9 of the Codes actually is based on MFN: "A Member shall not discriminate as between other Members in authorising the conclusion or execution of transactions or transfers …", contained in a list of operations which the Codes’ Members agreed to liberalize. The concept was very narrow (pertaining to authorizations only), but was subsequently enlarged by a 1984 decision, and it now amounts to national treatment regarding FDI. The scope of measures covered in this respect is a broad "regulation or practices … affecting the operation of enterprises … and raise special barriers or limitations with respect to non-residents".
7.
Later instruments are even broader, in that they simply refer to the "treatment" of investors
(e.g. ECT, NAFTA, MAI, see below).
8.
The National Treatment Instrument defines national treatment as "treatment consistent with international law and no less favourable than that accorded in like situations to domestic enterprises".
What is interesting in this context are some of the clarifications given at a later stage.

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9.
It was recognized in 1991 that situations existed in which it would not be possible to accord identical treatment in, for example, the financial or insurance sectors due to the special nature of these sectors. The treatment to be accorded in these cases would be "equivalent" treatment, which meant that differences could exist in the treatment accorded (justified in certain circumstances) while the overall competitive opportunities of foreign owned or controlled enterprises in the market would be maintained. Thus there should be no inequality which could result in an unfavourable situation for the foreign investor/investment.
10.
The "in like situations" criterion is valid only if the comparison is made between firms operating in the same sector. The OECD explanation of the NT Instrument also suggests that the policy objectives of the member countries could be taken into account to define the circumstances in which such a comparison is made, such objectives not being otherwise contrary to the NT principle.
11.
The instrument addresses all measures which result in discriminatory treatment towards a foreign enterprise, regardless of whether they are formally discriminatory, or whether the impact only leads to "de facto" discrimination. These measures may take the form of laws, regulations and/or administrative practices.
The provisions of the draft MAI, modelled after NAFTA
12.
The national treatment obligation is that of according to investors and their investments of a contracting party to the MAI "treatment no less favourable" than that accorded to the host country’s own investors, [in like circumstances] with respect to the "establishment, acquisition, expansion, operation, management, maintenance, use, enjoyment, and sale or other disposition" of investments.
It is obvious that the definition for non-discrimination used here is an attempt to cover all aspects of economic activity of an investor and its investments. Such an open list of investment activities which can be undertaken by the investor is meant to cover all activities of investors and their investment at the pre- and post-establishment stages.
13.
The MFN obligation in the MAI is that of "treatment" to be accorded to investors and their investments of a contracting party "no less favourable" than that accorded to investments of investors of another contracting party or non-contracting party, in regard to the same areas of activity as mentioned in relation to NT.
14.
In the MAI discussions, there was some support for the term "same" or "comparable" treatment instead of the phrase "no less favourable" treatment. But most delegations considered this to be a weaker standard of treatment for investors than the "no less favourable" standard. It is also obvious that the formula used allows for positive discrimination, for example a better treatment for foreign investors than for domestic ones in order to attract investment.
15.
Consideration was given to the inclusion of the term "in like circumstances", in relation to which it was pointed out that NT and MFN are relative and comparative terms. On the one hand, some have argued that the provision would permit fair and equitable difference in treatment justified by relevant differences of circumstances even without specific wording. This qualification, however, would only allow for discrimination if justified by "different circumstances". On the other hand, those favouring the inclusion of the term "like circumstances" consider that the goal of these standards is to prevent discrimination in fact or law as compared with domestic or third country investors or investments. The "like circumstances" proviso, however, should be included to ensure that comparisons are made on the basis of relevant criteria, allowing governments to accord differential treatment for legitimate policy reasons.
16.
The NT/MFN standards are of course intended to cover situations of both de facto and de jure discrimination.

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The GATS provisions
17.
The GATS is not an investment treaty as such, but the Working Group has already discussed that in particular the mode of supply "commercial presence" is relevant for investment.
18.
The GATS MFN obligation applies across the board to all services sectors unless an exception is contained in the country schedules, whereas the market access and NT obligations apply only in the sectors where commitments have been made.
19.
The MFN obligation in GATS is worded in the familiar "no less favourable" standard applicable to both the service and the service supplier of another Member. Most-favoured-nation treatment has been interpreted to mean the prohibition of "de facto" as well as " de jure " discriminatory treatment.
20.
In addition to MFN, the GATS operates a mixed approach for pre-entry obligations: market access combined with national treatment.
21.
Market access for services in the sectors in which a Member has undertaken commitments provides that these services and service suppliers can be treated no less favourably than specified in the Member’s schedule. The possible limitations are enumerated (Art. XVI GATS), and are mostly not discriminatory as such (e.g. numerical restrictions can also apply to domestic firms). The result is that there is little national treatment for the foreign service or service supplier in the pre-establishment phase under the market access provision of the GATS.
22.
However, the GATS contains an additional national treatment provision (Art. XVII GATS) which applies also to pre-establishment if the sector is inscribed in the Member’s schedule. The NT obligation refers to treatment, in respect of measures affecting the supply of services, which should be
"no less favourable" than that of like national services and service suppliers. This does not always mean formally identical treatment, as long as it is ensured that the treatment applicable does not result in less competitive market conditions for the foreign service or service supplier. This concept is in essence an economic approach, and differs from the more legal approaches discussed above.
23.
It should also be noted that there is a significant difference in the GATS NT provision in relation to the GATT provision on national treatment, applicable to goods, which is only applicable to the products in question and not the competitive conditions imposed on the producer.
24.
With respect to market access and NT the GATS obligation refers to measures "affecting the supply of services". This is intended to cover a broad range of measures, insofar as any measure affecting the conditions under which the service supplier supplies the service, while not directly pertaining to the service itself, could be considered to be contrary to the GATS if it is inconsistent with the general obligations and specific commitments of a GATS Member.
IV.
CONCLUSION
25.
The predominant instrument used to regulate the admission of investment in existing multilateral instruments is a combination of national treatment/most-favoured-nation treatment. Two conclusions are evident:
The scope of the non-discrimination clauses (MFN and national treatment) has been constantly enlarged and now covers the "treatment" of investors as regards the entire life of the investment, while initially pertaining only to limited measures such as authorizations.

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One multilateral agreement has chosen a different concept than non-discrimination for the admission of investment: the GATS operates a market access criterion backed up by national treatment in sectors scheduled, but MFN applies across the board. This shows that existing concepts allow for modulation according to the participants’ needs.
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