Chapter 11 of NAFTA: Investor-to-State dispute settlement proceduresOctober 10-12 2006Goals of investment agreements• Basic goal is to promote foreign investment by:i) Giving foreigners the right to invest in markets.ii) Treating foreign investment as well as domestic investment (e.g. regarding taxes).iii) Protecting foreign investment from government actions that decrease its values (expropriation).Investment requires (large) sunk costs and tends to be more risky than trade in products, therefore requires special protection.History of multinational international investment treaties• (Non-ratified) International Trade Organization contained provisions promoting liberalization of both trade and investment.• GATT incorporated trade provisions but not investment provisions• Late 90’s unsuccessful Multilateral Investment Agreement (Favored by EC and US, resisted by developing nations.)• Early 2000’s continued attempts to introduce Investment Agreement into WTO (and resistance to these attempts).Facts about Bilateral Investment Treaties (BITs)• Over 2000 BITs.• These became important during post WW II period when many former colonies were nationalizing foreign investment.• Dispute tribunals: United Nations Commission on International Law and the World Bank’s International Settlement for Investor Disputes.• Historically these were used to arbitrate disputes regarding narrow commercial interests, where strict confidentiality made sense.•These fora are now used to arbitrate Chapter 11 complaintsDispute tribunal and appeals• Tribunal consists of three members, one chosen by each party and the third chosen by compromise• Only appeals process is via the domestic court system in which the tribunal is legally located. (e.g. Mexico appealed Metalcladcase in a British Columbia court. The dispute between Mexico and US firm was eventually decided in Canadian court.)NAFTA and Chapter 11 (the “Investment Chapter”)• Chapter 11 of NAFTA was used as model for the failed Multilateral Investment Agreement.• Preamble of NAFTA agreement states that objectives include the preservation of public welfare, the promotion of sustainable development, strengthening and enforcing environmental regulations.• Do the investment rights in Chapter 11 conflict with these goals?Mexico’s view of Chapter 11 of NAFTA• By reducing risk, ITs (presumably) promote investment.• Prior to NAFTA (ratified in 1994) Mexico had undertaken unilateral measures to create a more open economy.• One view is that Mexico favored Chapter 11 of NAFTA a means of committing to this open policy (tying the hands of future governments), thereby encouraging investment.• Another view is that Mexico was bullied in accepting Chapter 11, along with environmental side agreements, as the price of greater access to US markets.Why does Host want to sign an IT? (The benign view)(“Host” receives investment, “Source” provides investment.)• IT helps to solve a “time-consistency problem”. Host would like to promise to treat investment well, in order to attract investment. Once the investment is sunk, Host has temptation to extract “rents” or expropriate. Anticipating this temptation, Source is reluctant to invest.• Both Host and Source benefit from investment and both would be better off if Host could credibly commit to behave well.• ITs punish Host for bad behavior, decreasing incentive to behave badly. ITs are a “commitment device”.ITs do more than protect sunk investments (ex post restrictions)• Some ITs (including Chapter 11) also restrict government actions taken before investment is made. (ex ante restrictions)• “Right of establishment“ rules make it illegal for a county to insist on certain requirements, such as minimum export provisions, minimum re-investment of profits. (Those rules might apply even if domestic firms face these kinds of obligations.)Distinction between ex post rules and ex ante rules• Why should a Host want to tie its hands beforeinvestment (ex ante)? IT might reduce the bargaining chips that a host country has, making the bargain (vis a vis the Source, for a particular investment) less favorable to Host.• Host might still benefit from this kind of ex ante restriction, e.g. (a) to rein in corrupt Host officials; (b) to commit future policymakers to a liberal policy; (c) to convince Source that future investments (possibly complementing current investment) will be attractive.Asymmetry of ITs• ITs restrict Host’s behavior (possibly benefiting Host).• ITs do not restrict Source behavior, e.g. Source can shop around leading to “tax competition” amongst Host nations. (Is there anything wrong with “shopping around”? Answer partly depends on whether equilibrium outcome is competitive, or the result of a bargaining game.)• ITs protect “investor rights”. They do not offer protection for rights of those who might be adversely affected by investment, e.g. environmental effects. Does it make sense to include those rights in an IT?Empirical evidence of effects of ITs• Do ITs actually increase FDI?• (i) Regressions fail to find significant effect of ITson bilateral trade.• (ii) Other regressions find that ITs have statistically significant effect on multilateral (as distinct from bilateral) investment. (Possible explanation: Signing IT sends signal to all investors that Host will treat investment fairly.)• Recent evidence finds that evidence in (ii) may be spurious due to use of inadequate statistical modelEmpirical evidence, continued• Measures of corruption and rule of law are statistically significant in explaining FDI.• Detecting influence of IT on investment is a hard empirical problem, because IT may not have an immediate effect.• The “lagged effect” of IT may differ across countries, and be hard to identify using panel data.• There is stronger empirical evidence that larger bilateral FDI stocks increase chance that Host and Source sign BIT. In this sense, ITs are signed as a result of FDI. That is, “FDI causes ITs” rather than the reverse.Why might FDI “cause” (i.e. precede) BITs?• BITs protect existing stock of FDI, not just new FDI.• Source has stronger incentive to push for BIT the larger is its stock of FDI in Host. Larger existing stock makes BIT less attractive for Host.• Individual investors may be willing to undertake investment if they anticipate that future BIT will be triggered
View Full Document
Unlocking...