Before the entry into force of the Lisbon Treaty, foreign direct investment did not directly fall under the EU’s Common Commercial Policy. In fact, foreign direct investment was a policy area with a specific division of work between the European Community and its Member States. The EU’s competence over this matter was very limited. The European Commission has negotiated multilateral and bilateral agreements covering investment market access and investment liberalisation, whereas Member States have focused on the promotion and protection of all forms of investment, by concluding Bilateral Investment Treaties (BITs). Investment agreements with third countries were therefore Member States responsibility.
However, there was a transfer of competences of foreign direct investment to the EU when the Lisbon Treaty entered into force on 1st December 2009. The TFEU establishes the EU's exclusive competence on foreign direct investment, as part of the common commercial policy. Hence, only the Union is allowed to legislate and adopt legally binding acts. Therefore, having investment agreements under the scope of the common commercial policy means that Member States will lose their ability to negotiate and conclude such agreements.
The European Commission used to ask permission from the EU Member States to include provisions on investment in its free trade agreements, but the positions have now been inverted. The competence to negotiate international agreements concerning foreign direct investments has shifted from member states to the EU. The EU Member States will lose their competence to sign and implement their own international investment agreements, unless authorization is granted by the European Commission. The Commission will be the main actor in the negotiation of new BITs and trade agreements. The tendency will be, therefore, to speak with one voice on FDI matters in the world.
It remains to be seen what would be the full consequences, nevertheless, one could say that this will have serious implications on the investment policy instruments of the Member States. Member states would no longer be allowed to pursue their individual interests.
Since the entry into force of the Lisbon Treaty, the European Commission is preparing a new European policy regarding foreign direct investments. On 7 July, the Commission has taken two steps towards the development of a European international investment policy, it adopted a Communication Towards a comprehensive European international investment policy and a proposal for a Regulation establishing transitional arrangements relating to investment agreements between Member States and third countries. The present Communication shows us how the EU intends to use its new competence. The Commission has addressed the objectives, criteria and content of the new EU investment policy.
The most noticeable materialization of the EU Member States’ policies on investment is the so-called Bilateral Investment Treaties. The Commission has pointed out that there around 1200 bilateral investment treaties concluded by EU Member States with third countries, covering all forms of investment. In fact, the EU Member States have almost half of the investment agreements presently in force around the world. Germany has concluded the highest number of BITS, almost 140, followed by the UK with over 120. However, under the Lisbon Treaty they will no longer be able to conclude FDI agreements.
The EU Member States have been made considerable efforts to attract foreign investment as it has an important role “in creating jobs, optimising resource allocation, transferring technology and skills, increasing competition and boosting trade.” According to a report published by UK Trade & Investment (UKTI), in 2008/2009 the UK has kept its position as the number one destination for FDI in Europe. The largest investor in the UK is the United States followed by India. It remains to be seen whether, in the future, the UK will be able to keep such position, under the new Lisbon treaty arrangements.
A Bilateral Investment Treaty establishes the terms and conditions for investment by nationals and companies of a Member State in a third country. They provide investors with several guarantees, such as fair and non-discriminatory treatment, protection from unlawful expropriation, adequate and effective compensation in case of expropriation, free transfer of funds and full protection and security. Moreover, the majority of bilateral investment treaties also include clauses offering investors direct recourse to international arbitration against the country concerned when their rights under the treaty have been infringed.
The Commission has stressed that not all member states agreements “provide for the same high standards” which “leads to an uneven playing field for EU companies investing abroad.” Hence, it has pointed out that an EU investment policy would serve the interests of all investments and investors equally. The Commission intends to provide all EU companies investing overseas with the same level of protection likewise third countries would be able to invest anywhere in the EU with the same investment guarantees.
The Lisbon treaty has not provided a definition of foreign direct investment. If there is no agreement between the EU Member States and the European Commission on such definition, the decision ultimately lies with the European Court of Justice. A common EU investment policy, according to the Commission plans, will integrate investment liberalisation and investment protection. The EU exclusive competence covers therefore provisions on market access and liberalisation, such as binding commitments to pre-establishment national treatment, and investment protection such as for funds transfers.
Initially, the Commission is planning to build investment negotiations with third countries on the body and substance of the BITs which are, presently, in force. However, in the long term, the Commission has said that “we should achieve a situation where investors from the EU and from third countries will not need to rely on BITs entered into by one or the other Member State for an effective protection of its investments.” Therefore, the plan is to replace the existing BITs concluded individually by the EU member states with treaties negotiated by the Commission.
Presently, member states are responsible for investment promotion, both inward and outward investment, using different instruments, such as investment incentives to assistance and support schemes. The Commission has stressed that “it is the Union's responsibility to promote (…) the single market as a destination for foreign investors.” It does not intend “to replace the investment promotion efforts of Member States” but “as long as they fit with the common commercial policy and remain consistent with EU law.”
For the time being, the Commission is not seeking “a one-size-fits-all model for investment agreements with 3rd countries”. It seems that the Commission will take into account, in a specific investment negotiation, the stakeholders’ interests, its partner’s level of development as well as the nature of the existing agreements of Member States with any given third country.
Obviously, the choice of negotiating partners will depend on their willingness to engage with the EU. The Commission has identified several factors for defining priority countries for investment protection negotiations. The EU will select its partners taking into account “Markets with significant economic growth or growth prospects.” The interests of the EU in investment negotiations would also be decided by the stability and predictability of investment climate as ensured by political setting in the partner country. The level of protection of investors in host country would also be an important factor for choosing priority countries for EU investment negotiations.
A common EU policy on investment will take some time to be established but in the meantime the Commission wants outline international investment rules. Thus, in the short term, investment negotiations, would be conducted as part of broader trade negotiations. The Commission wants therefore to include investment protection in the ongoing trade negotiations with Canada, India, Singapore and Mercosur. Then, in medium term, the EU will consider to “pursue stand-alone investment agreements” such as with China and Russia.
The Commission has stressed that a common international investment policy would not only facilitate “the execution of a direct investment itself … but also that it enables and protects all the operations that accompany that investment and make it possible in practice” such as payments and the protection of Intellectual Property Rights. Under the TFEU provisions on capital and payments, all restrictions on payments and capital movements, including those involving direct and portfolio investments, between Member States and between Member States and third countries, are prohibited. These provisions do not expressly provide for the possibility to conclude international agreements on investment, including portfolio investment. But, the Commission has pointed out that the EU exclusive competence to conclude agreements in this area would be implied, to the extent that international agreements on investment affect the scope of the common rules on capitals and payments. In fact, Article 3 (2) TFEU provides that “the Union shall also have exclusive competence for the conclusion of an international agreement when its conclusion is provided for in a legislative act of the Union or is necessary to enable the Union to exercise its internal competence, or in so far as its conclusion may affect common rules or alter their scope.”
The Commission also envisages developing an EU model investment agreement to be applied in any future EU BITs. The Commission has identity several elements that need to be included in future agreements on investment. The principle of non-discrimination will be a key element of EU investment negotiations, based on two standards, ‘most-favoured-nation treatment’ and ‘national treatment’. The Commission will also take into account other standards of investment protection such as “fair and equitable treatment” after admission and “full security and protection treatment." Moreover, the protection of contractual rights granted by a host government to an investor which has been used in Member States BITs would inspire the negotiation of investment agreements at the EU level. The Commission will also include clauses on protection of investors against unlawful expropriation as well as on ensuring the free transfer of funds of capital and payments by investors.
The Commission has pointed out that investments agreements should be consistent with the other policies of the EU such as the protection of the environment, health and safety at work, consumer protection, development policy and competition policy. A common investment policy will also be guided by the principles and objectives of the EU’s external action, including the promotion of the rule of law, human rights and sustainable development. The Commission seems, therefore, keen in assessing and preventing possible negative impacts, resulting from EU Member States’ existing BITs on development, environment and human rights.
Obviously, the EU wants to ensure the effective enforceability of investment provisions. The EU has been ensuring that agreements negotiated in the field of the common commercial policy can be, and are, effectively enforced, through binding dispute settlements. Hence, it has included in all of its recent FTAs a state-to-state dispute settlement system which will, in the future, cover the investment provisions of EU trade and investment agreements. Future EU agreements including investment protection will also include investor-to-state dispute settlements, which would allow an investor to take a claim against a government directly to binding international arbitration. The Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention), is open to signature and ratification by states members of the World Bank or party to the Statute of the International Court of Justice therefore the European Union does not qualify. Nevertheless, the Commission has said that it “will explore with interested parties the possibility that the European Union seek to accede to the ICSID Convention (noting that this would require amendment of the ICSID Convention).”
As above-mentioned, the Lisbon treaty has brought foreign direct investment under the common commercial policy, therefore, the Union has exclusive competence. Consequently, the Member States are solely allowed to conclude agreements in this area if authorised by the Union. As already pointed out, Member States concluded over 1200 bilateral agreements relating to foreign direct investment, including Bilateral Investment Treaties. There is no transitional regime in the TFEU clarifying the status of Member States' agreements, or transitional provisions for such agreements which have now come under the EU exclusive competence. Hence, the Commission also proposed a draft regulation establishing transitional arrangements for bilateral investment agreements between Member States and third countries, subject to the ordinary legislative procedure.
Those Bilateral Investment Treaties concluded by Member states are valid and legally biding under international law, however they will be progressively replaced by future EU agreements relating to the same subject matter. The EU has now exclusive competence for foreign direct investment, and it will develop an investment policy therefore, the procedure established by this proposal is a transitional measure.
The present proposal provides, therefore, a transitory solution by authorising the continued existence of bilateral agreements relating to investment concluded between EU Member States and third countries. Member States are, therefore, required to, after the entry into force of present Regulation, notify the Commission of all bilateral agreements with third countries relating to investment that they wish to keep in force or allow entering into force.
These agreements are valid under international law, the EU could not just declared them invalid. In fact, the proposal reads “In the interest of EU investors and their investments in third countries, and of Member States hosting foreign investors and investments, bilateral agreements that specify and guarantee the conditions of investment should be maintained in force.”
However, the Commission has pointed out that the existence of Bilateral Investment Treaties concluded by Member states may raise concerns over compatibility with the EU law and the EU common commercial policy. The draft proposal lays down the terms, conditions and the procedure under which Member States are authorised to maintain in force, amend or conclude bilateral agreements with third countries relating to investment. In fact, the Commission would be empowered to review the agreements which have been notified, in order to assess whether they conflict with EU law. The Commission would be able to withdraw an authorisation if an agreement conflicts with the EU law, for instance, it provides for transfer clauses that would hinder the implementation of EU financial restrictions against a certain third country, as well as if the agreement undermines negotiations or agreements of the EU in force with third countries, basically, if it contains investment provisions similar to those of an EU agreement and such overlap is not addressed. Moreover, an authorisation could also be withdrawn if the Member States agreements constitute an obstacle to the development and implementation of the EU’s policies relating to investment, particularly the common commercial policy, for instance, “where the existence of agreements undermines the willingness of a third country to negotiate with the Union.”
If the Commission considers that there are grounds to withdraw the authorisation, it first deliver a reasoned opinion to the Member State concerned specifying the steps to be taken so it complies with the above-mentioned requirements. Then, if the consultations between the Commission and the Member State fail to resolve the issue, the Commission withdraws the authorisation for the agreement concerned.
Member States might be, therefore, required to enter into negotiations with a third country to amend or modify existing bilateral agreement relating to investment, in order to bring them in compliance with EU law. The proposal also sets up the conditions whereby Member States are allowed to negotiate and conclude new bilateral agreement with third countries relating to investment. Unsurprisingly, such process would be closely monitored by the Commission.
The draft proposal provides for the general framework under which Member States shall be authorised to enter into negotiations to amend an existing or to conclude a new agreement relating to investment with a third country. Member States are required to notify the Commission of their intent to modify an existing or to conclude a new bilateral agreement with a third country. Such notification must include all “relevant documentation” relating to the re-negotiation or negotiation of an agreement, which can be made available to other Member States and the European Parliament. Nevertheless, Member States may specify whether any of the information provided is to be deemed confidential.
The draft proposal specifies the substantive grounds whereby the Commission would not authorise the opening of formal negotiations by Member States: if they are in conflict with EU law, if a Member State initiative could undermine the objectives of ongoing or imminent EU negotiations with the third country concerned, or constitute an obstacle to the development and the implementation of the EU policies relating to investment. Moreover, the Commission may require a Member State to include in a negotiation “appropriate clauses” such as providing for the termination of the agreement in case of the conclusion of a subsequent agreement between the Union with the same third country.
Furthermore, member states would be required to keep the Commission informed of (re-)negotiations that have been authorised. In order to ensure consistency with the EU's investment policy, the Commission may request to participate as an observer in the negotiations between the Member State and the third country.
Member states are also required to notify the Commission of the outcome of negotiations and to transmit the text of the agreement to the Commission, before signing it. Then, the Commission assesses whether or not the agreement conflicts with EU law, undermines the objectives of imminent or ongoing EU investment negotiations with the third country concerned, or constitute an obstacle to the development and the implementation of the EU policies relating to investment. Hence, if the Commission considers that the negotiations have resulted in an agreement which does not fulfil the above mentioned requirements, the Member State would not be authorised to sign and conclude it.
Moreover, Member States would also be required to inform the Commission of all meetings which take place “under the auspices of covered agreements”, including providing the Commission with the agenda and “all relevant information.” In fact, the Commission may require a member state “ to take a particular position” if the issues on the agenda might affect the implementation of the EU policies relating to investment.
Furthermore, Member States must inform the Commission of any request for dispute settlement lodged under an agreement. In the other hand, Member States before activating any relevant mechanisms for dispute settlement included in an agreement are also required to seek the approval of the Commission as well as activating such mechanisms where requested by the Commission.