Written by Laura Puccio
EU FDI stocks in the US amount to €1 651.6 billion and US FDI stocks in the EU to €1 685.5 billion. Investment access and protection are therefore critical to EU-US economic relations. However, the need for an investment chapter in the proposed Transatlantic Trade and Investment Partnership (TTIP), and an Investor-State Dispute Settlement instrument (ISDS), has been questioned repeatedly in the context of these two advanced economies. Concerns focus particularly on differing levels of legal protection for foreign firms, and on the potential impact of investment protection rules on the regulatory capacity of states. The main criticisms of substantive investment protection rules focus on both the vagueness of the legal provision – perceived to lead to expansive and inconsistent interpretations of protection standards – and the capacity of ‘letterbox’ companies to access protection under BITs. The public consultation launched by the Commission on investment protection in TTIP, currently under negotiation between the EU and the US, called for further reform of substantive investment protection clauses. Since the conclusion of the North American Free Trade Agreement (NAFTA), foreign investment provisions have also been criticised in the US. As a result, the US has revised its drafting of investment protection rules.
This analysis shows that investment-protection rules have been used as a safeguard against future changes in domestic protection levels. The US has investment-protection provisions in accords with 21 EU Member States; these may be very different, depending on the type of agreement used, and the time period in which the agreements were concluded. Among the agreements between the US and EU Member States, the most advanced investment-protection rules, including investor-state dispute settlement, are included in the BITs concluded between the US and nine Member States. In the recent agreement between the US and Australia, where no ISDS mechanism is foreseen, the investment chapter is still included as a guarantee in case the domestic situation should change.
Finally, both the US and the EU have taken measures to clarify the interpretation of the rules and avoid expansive application of protection standards, as well as to avoid frivolous claims or ‘forum shopping’. These approaches are often fairly similar, and can even be complementary. Development of the rules tends towards a more balanced approach, allowing both protection of investment and legitimate regulatory changes. The main difficulty in this exercise is to make sure that additional clarity does not constrain states’ actions, nor that the law loses the flexibility needed to cover all eventualities. A tentative EU answer to some of these issues has already been given by the Commission in its draft proposal for the TTIP investment chapter, published on 16 September. However, the draft EU proposal is still incomplete as several provisions have not yet been inserted and remain under discussion.
Both the EU and the US have, in the past, tackled the issue of ‘forum shopping’ by ‘letterbox’ companies established on their territories in their treaties. However, both the US and the EU investment protection rules are very different from the BIT models used in some EU Member States (such as the Dutch model) where foreign investment protection is both easily accessible and broad in scope. The problem of ‘forum shopping’ might therefore persist due to the continued application of intra-EU BIT, and the differences in investment protection standards applied in the intra-EU BITs and the investment chapters currently negotiated by the European Commission in EU FTAs.