A general Investment Agreement in the wto? Lessons from Chapter 11 of nafta and the oecd multilateral Agreement on Investment



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The Jean Monnet Program
Professor J.H.H.Weiler

European Union Jean Monnet Chair

Jean Monnet Working Paper 6/02


Jürgen Kurtz
A General Investment Agreement in the WTO?

Lessons from Chapter 11 of NAFTA and

the OECD Multilateral Agreement on Investment

NYU School of Law New York, NY 10012


All rights reserved.

No part of this paper may be reproduced in any form

without permission of the author.

ISSN 1087-2221

© Jürgen Kurtz 2002

New York University School of Law

New York, NY 10012

USA



A General Investment Agreement in the WTO?

Lessons from Chapter 11 of NAFTA and

the OECD Multilateral Agreement on Investment

Jürgen Kurtz

Lecturer

Law School

The University of Melbourne

Victoria 3010 Australia

Telephone: (61 3) 8344 4770

Facsimile: (61 3) 8344 9971

E-mail: j.kurtz@unimelb.edu.au

Abstract

At the recent Ministerial Conference at Doha in Qatar, the WTO member states agreed to commence investment negotiations at the next Ministerial Conference in 2003. Yet it was only in 1998 that similar negotiations in the OECD towards a Multilateral Agreement on Investment (MAI) ended without result. The MAI provisions in turn were heavily influenced by the detailed investment provisions in Chapter 11 of the North American Free Trade Agreement (NAFTA).


This paper examines the experience of both NAFTA Chapter 11 and the MAI to draw some suggestions for the investment negotiations within the WTO. The paper argues that there are two fundamental challenges negotiators face in creating investment rules in the WTO. Firstly, it is argued that a WTO agreement must reflect the interests of developing countries. In this respect, WTO negotiators should avoid a MAI-type scenario of simply replicating the very strong investment liberalization and protection provisions of NAFTA Chapter 11. The paper examines the way in which host states typically regulate foreign investment as a means to suggest realistic ways in which to craft an investment agreement broadly reflective of both North and South members of the WTO. The paper also puts forward a second formidable challenge for WTO negotiators. This is to address some of the concerning jurisprudence that has emerged from the NAFTA Chapter 11 arbitral case law. The paper focuses on the way in which some arbitral cases have extended the coverage of NAFTA Chapter 11 beyond de jure discriminatory measures to encompass seemingly legitimate regulations with little adverse impact on foreign investors.
The paper concludes with a modest but realistic set of recommendations for a WTO investment agreement.
Table of Contents

I. Introduction 7

II. Background 9

A. Foreign Investment in the Global Economy 9

B. International Investment Rules: A Fragmented Landscape 11

III. Host State Regulation of Foreign Investment 17

A. Pre-Admission Restrictions: The Political Sphere 17

B. Post-Admission Restrictions: Capturing Economic Gains 20

C. Incentives: A Competitive Dilemma 22

IV. The NAFTA Chapter 11 Model 25

A. Overview 26

1. Scope of Application: Article 1101 26

2. Investment Liberalization: Articles 1102 to 1104 and 1106 28

3. Investment Protection: Articles 1110 and 1105 29

4. Dispute Settlement 31

5. Absences: Incentives and GATT Article XX-type Safety Valve 32

B. Some Problematic Chapter 11 NAFTA Case Law 35

1. Metalclad Corporation v United Mexican States 35

2. S.D. Myers, Inc. v Government of Canada 37

3. Methanex v United States 42

C. A Limited Retreat: The NAFTA Free Trade Commission Interpretation 45

V. The MAI Episode: A Cautionary Tale 47

A. Overview 48

B. The MAI Provisions: Extending the NAFTA Chapter 11 Model 52

1. Scope of Application 53

2. Investment Liberalization 55

3. Investment Protection 57

4. Dispute Settlement 58

5. Absences 58

C. Another Retreat: The Chairperson’s Package Proposing Changes to the MAI 59

VI. The WTO, Foreign Investment and the Doha Agenda 64

A. The Doha Ministerial Declaration 66

B. Is There Really Agreement to Commence Negotiations on Investment? 68

C. Suggestions for a WTO Investment Agreement 70

1. Scope: A Narrower Definition of “Investment” 72

2. Liberalization 73

(a) Pre-Admission Restrictions: A GATS Bottom-Up Structure 73

(b) Post-Admission Restrictions: A Top Down Structure 74

(c) The Grand Bargain: Investment Incentives/Performance Requirements 74

(d) National Treatment and the Difficult Question of De Facto Discrimination 75

3. Investment Protection: A Step Back 77

4. Dispute Settlement 78

5. Investor Responsibilities 78

VII. Conclusion 79


I. Introduction

Unlike the system of trade liberalization in the World Trade Organization (WTO)1, there has never been a comprehensive, multilateral agreement on foreign investment. Binding international initiatives on foreign investment exist largely at the bilateral2, regional3 and sectoral4 levels. This is despite exponential growth in rates of foreign investment and the increasing complementarity of trade and investment as strategies for penetrating domestic markets.


At the Fourth WTO Ministerial Conference at Doha in Qatar, agreement appears to have been reached to commence investment negotiations at the Fifth Ministerial Conference in Mexico in 2003.5 Yet, it was only in 1998 that similar negotiations in the Organisation for Economic Co-Operation and Development (OECD) towards a Multilateral Agreement on Investment (MAI) ended without result. The MAI provisions themselves were heavily influenced by the detailed investment provisions in Chapter 11 of the North American Free Trade Agreement (NAFTA). This paper will examine both of these instruments and attempt to draw some suggestions for the investment negotiations within the WTO. The paper will argue that there are essentially two challenges that negotiators face in creating investment rules in the WTO.
Firstly, a WTO agreement must reflect the interests of developing countries. Historically, developing countries (as largely host countries for foreign investment) have resisted initiatives to develop investment rules at the multilateral level. Indeed, the choice of the OECD (a grouping of developed states) as the negotiating forum for the MAI was driven by a desire to exclude developing countries from negotiations due to the concern their demands would dilute the MAI commitments. Yet, the options for negotiations should not be viewed in absolutist terms as either full liberalization of discriminatory regulation or full protectionism. A more subtle approach is warranted. In part, the answer to this question depends on understanding the different rationales and methods by which states regulate foreign investment. The paper will undertake such an analysis so as to suggest realistic ways in which to craft a WTO investment agreement broadly reflective of both North and South members of the WTO.
But there is a second formidable challenge. The NAFTA Chapter 11 model (and that of the MAI) provides for a trinity of strong investment liberalization, protection and dispute settlement provisions. In recent years, there has been a proliferation of arbitral cases brought by investors under NAFTA Chapter 11. The jurisprudence that has emerged from some of these cases extends the coverage of NAFTA Chapter 11 beyond clearly discriminatory measures to seemingly legitimate regulations with little adverse impact on foreign investors. This raises the difficult issue of drafting a WTO investment agreement in such a way as to preserve core components of regulatory autonomy. The paper will argue that WTO negotiators should not simply look to the NAFTA precedent as the only model available. Instead, the paper will suggest ways in which negotiators can define commitments in a WTO initiative to avoid some of the problems that have arisen under NAFTA Chapter 11.
The paper will organised as follows. Section II offers some background material. It examines some statistical evidence that shows developing countries are largely host states for foreign investment. It also details the shifting policy attitudes of host states towards foreign investment and the way in which those changes have influenced the content of existing international rules on investment. Section III then outlines the way in which states typically regulate foreign investment under a complex mix of political and economic motives. A particular focus is on the common (but distortive) practice of using incentives to attract foreign investors. Section IV then examines the NAFTA Chapter 11 model and the jurisprudence that has emerged from some of the NAFTA arbitral cases. Section V examines the MAI, its heavy reliance on the NAFTA model and belated attempts to rectify some of the problems inherent in that model. Section VI considers the Doha negotiating agenda and prospects for concluding an investment agreement in the WTO. It ties together the lines of enquiry and puts forward a series of suggestions for WTO negotiators. Section VII concludes.

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