Rule Making Process Of International Investment

Submitted to : Mr. S.Chaturwedi Faculty For International Trade Law

Submitted by: A. Ramakanth Reddy Roll No.206 Priyanka Singh R oll No.245
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RESEARCH METHODOLOGY

AIMS AND OBJECTIVES The project essentially aims to find out Rule Making process of international investment. RESEARCH METHODOLOGY - The researcher has used secondary sources of reference for the purpose of this project and the methodology used in this project is generally comparative and descriptive. The tool of comparison has been adopted wherever necessary and an attempt has been made to understand and resolve the problem involved therein.

SOURCES OF RESEARCH The major sources of our research includes Secondary source of data collected from Books, Internet, articles, journals and reports.

TABLE OF CONTENTS
i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. xvi.

TRENDS IN INTERNATIONAL INVESTMENT RULE-MAKING OPPORTUNITIES AND CHALLENGES IN INVESTMENT TREATY MAKING DEVELOPMENT OF CURRENT IIA UNIVERSE DOUBLE TAXATION TREATIES PREFERENTIAL TRADE AND INVESTMENT AGREEMENTS SCOPE OF IIA COMPLEXITY OF IIA DIVERSITY OF IIA INTERACTIONS WITHIN THE IIA UNIVERSE INVESTOR-STATE DISPUTES MAIN CHARACTERISTICS OF THE CURRENT IIA UNIVERSE CHALLENGES IN MANAGING THE EXISTING IIA UNIVERSE POSSIBLE REMEDIES ALTERNATE DISPUTE RESOLUTION CONCLUSION BIBLIOGRAPHY

TRENDS IN INTERNATIONAL INVESTMENT RULEMAKING

The global network of IIAs (International Investment Agreement) is expanding rapidly. On average, more than three treaties were concluded per week over the past few years. Whereas a decade ago, the IIA universe counted less than 3,400 treaties, by end 2007 their number had exceeded 5,500. An important recent development is the surge in free trade agreements or other treaties on economic cooperation with investment provisions that complement or substitute "classical" bilateral investment treaties (BITs). The IIA system is also becoming increasingly atomized, complex and diverse. It consists of thousands of individual agreements that lack any system-wide coordination. It is multilayered, i.e. composed of investment treaties at various bilateral, sub regional, regional, interregional, sectoral, plurilateral and multilateral levels that may overlap. The IIA universe is likewise multi-faceted, meaning that it covers not only investment issues per se, but may also extend to related matters such as trade, services, intellectual property, industrial policies, labour issues, movement of personnel, environmental concerns, and others. The system shows uniformity at the core, but increasing variation at the periphery, that is, while there is a considerable degree of commonality concerning the key elements of investment protection, there is much diversity with regard to other IIA related issues. Finally, the IIA universe is dynamic and innovative, both with regard to the evolution of substantive treaty provisions and dispute settlement (UNCTAD 2007a). Another feature of the IIA system is the ongoing trend towards more investment arbitration. In 2007, the number of known treaty-based investor-State dispute settlement cases grew by at least 35, bringing the total number of known treaty based cases to 290 by the end of 2007. While international arbitration is an important means to strengthen the rule of law and to increase legal stability, a number of conflicting awards have also led to new uncertainties concerning the interpretation of core
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investment provisions. These concerns resulted in the revision of several model BITs (UNCTAD 2007b)1. Finally, the role of developing countries in international investment rule-making continues to increase. Some developing countries, such as China and Egypt, are among the most prolific signatories of BITs worldwide. There is also growing South-South cooperation with regard to IIAs, as more and more developing countries are becoming sources of outward investment (UNCTAD 2005a). This new role may have an impact on their bargaining position in future IIA negotiations.

OPPORTUNITIES TREATY-MAKING

AND

CHALLENGES

IN

INVESTMENT

The evolution of the IIA universe into an increasingly complex and diversified system offers both opportunities and challenges. On the one hand, countries nowadays have as many options as never before to conclude the type of IIA that best suits their development objectives, and to draft individual treaty provisions to meet these objectives. On the other hand, countries, in particular developing countries, may have more difficulties to cope with an increasingly intricate and nontransparent IIA patchwork. Three challenges stand out in particular: First, there is the issue of policy coherence. With the growing number and complexity of existing IIAs, it becomes more challenging for countries, in particular developing countries, to keep their IIA network coherent and to at the very least avoid major inconsistencies. Second, a denser treaty network might imply a higher risk that a country loses regulatory flexibility in dealing with foreign investment, and poses new questions concerning the proper balancing of private and public interests in IIAs.2 In response, some countries have started to clarify treaty language with regard to individual IIA provisions, and to introduce more exception clauses to deal with certain public concerns, such as national security, health or the environment, and modified dispute settlement procedures. In addition, the issue of corporate social responsibility in the context of international investment rule-making is gaining importance. A possible rebalancing of private and public interests may also be an issue with
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"Impact of Government Policies and Investment Agreements on FDI Inflows, Indian Council for Research on International Economic Relations

regard to the new role of emerging economies as capital exporters. As a result, they may wish to enhance the protection of their investors abroad. Vice versa, several countries have in recent years re-evaluated their investment liberalization policies and introduced new restrictions. These policy changes might also have an impact on IIA negotiations. Third, there is the issue of how to make the evolving IIA framework more suitable for development purposes. Questions under discussion include a stronger emphasis on investment promotion in IIAs,the issue of what kind of IIA might best further development objectives, and a more frequent recourse to mediation and conciliation as alternatives to investment arbitration. As a result of these considerable challenges of content, there is a risk that developing countries lacking the capacity to participate fully in the evolving IIA system are being marginalized and left behind in further international investment rule-making. There is thus a need for more policy dialogue and capacity-building. UNCTAD (United Nations Conference on Trade and Development) plays an important role in this field through its policy research and analysis, its technical assistance and advisory services, and its maintenance databases on IIAs and investor-State dispute settlement. These various activities can make a valuable contribution to working towards a more transparent, consistent and development-friendly IIA system.

DEVELOPMENT OF CURRENT IIA UNIVERSE

In the late 1980s, a series of political and economic events substantially changed the environment in which IIAs were being negotiated. The result was a second stage in the post-war evolution of the IIA system. The sovereign debt crisis of the 1980s had diminished the willingness of commercial banks to lend to developing countries. With limited aid from international financial institutions and other official sources, developing countries increasingly recognized that the most readily available source of capital for their development needs was foreign investment. Furthermore, foreign direct investment offered the promise of technology, training, know-how and access to markets, and was thus a relatively attractive means of expanding capital. At the same time, the rapid economic development of several East Asian economies, which had pursued policies of export-led growth, relative to those in Sub-Saharan
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Africa and Latin America, which in many cases had pursued import substitution policies, demonstrated the valuable role that participation in the global market economy could play in economic development. Meanwhile, at the end of the 1980s, countries in Eastern Europe or formerly part of the Soviet Union had begun the transition from socialism to market-based economies. The net effect of trends such as these was that, by the late 1980s, large numbers of developing countries were opening their economies to market forces and seeking to attract foreign investment. An UNCTAD survey of 895 national changes in FDI policy during the period between 1991 and 1998 ascertained that 94 per cent of the changes were intended to create a more, rather than less, favourable investment climate.3 Another way in which developing countries sought to attract foreign investment was by concluding IIAs, especially BITs, to provide a stable and transparent investment climate in their countries; this was done in the hope that it would boost investor confidence and contribute to increased investment flows. This led to a substantive increase in the number of BITs being negotiated. While fewer than 400 BITs were concluded in the 30 years from 1959 to 1989, some 2,000 BITs were signed in the next 15 years. As the new century began, several countries began to negotiate bilateral free trade agreements (FTAs) similar to NAFTA in three important respects. First, these agreements included an extensive investment chapter that contained provisions similar to those appearing in BITs. In effect, it was as if a BIT had been incorporated within a free trade agreement. Second, they were often between a developed and a developing country. They went beyond NAFTA in that they often were between countries that were not even in the same region. Third, NAFTA had included a number of provisions that were more elaborate than those typically found in BITs, especially with respect to investor-State dispute resolution, and these more elaborate provisions found their way into the post- 2000 FTAs, particularly those concluded by the United States. These agreements have given rise to a new type of IIAs encompassing both trade and investment components. In addition, these treaties often include further elements as will be explained below. These agreements also typically include provisions that are more specific, complex and sophisticated. Their number is growing rapidly.

Source UNCTAD.

Regional distribution of IIAs (end 2010)

DOUBLE TAXATION TREATIES

The total number of DTTs was over 2,700 by the end of 2007 (figure 5).1 The regional distribution of DTTs (by country group) shows that 38 per cent of all DTTs have been concluded between developing and developed countries, while 16 per cent were concluded between two developing countries. The share of DTTs between developed countries (24 per cent) is significantly higher than in the case of BITs, which may be explained by the fact that double taxation poses a greater threat in these countries than political risk. Countries in Asia and the Pacific are the most active with 1013 DTTs concluded by the end of 2007, followed by Africa
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Source UNCTAD.

(459), Latin America and the Caribbean (319). At the national level, the United States (153), the United Kingdom (151) and France (133) have signed the highest number of treaties. Among developing countries, China (99), the Republic of Korea (81) and India (79) are the front-runners as of end 2007.

PREFERENTIAL TRADE AND INVESTMENT AGREEMENTS

A significant new development in international investment rule-making in more recent years has been to establish investment rules as part of preferential trade and investment agreements (PTIAs). By end 2007, 254 PTIAs existed, involving 63 countries.5 While the total number of PTIAs is still small compared with the number of BITs (less than 10 per cent), it has nearly doubled over the past five years. In addition, at least 75 agreements involving 110 countries were under negotiation at the end of 2007. This suggests an even more pronounced increase in such treaties in the future. PTIAs may establish binding obligations for the contracting parties concerning the admission and protection of foreign investment (UNCTAD 2006b). The scope of the protection commitments in these PTIAs is comparable to that found in BITs. Among the recent examples are the Economic Partnership Agreement (EPA) concluded between Japan and Thailand (2007) and the FTA between the United States and the Republic of Korea (2007). However, other agreements only establish a framework for cooperation between the contracting parties. Such cooperation often takes the form of establishing an institutional framework to follow up on investment issues and identify the timeframes for the launching of future negotiations on investment liberalization and/or protection. A recent example of such an agreement is the Trade and Investment Framework Agreement (TIFA) concluded in 2006 between the United States and ASEAN.

Chakarvarty Raghavan, Third world network features.

SCOPE OF IIAs
Numerically, traditional BITs emphasizing the protection of foreign investment continue to dominate the IIA system. This is particularly true in the case of South-South BITs. Nevertheless, a growing number of BITs include more detailed investment protection provisions, as well as liberalization commitments (UNCTAD 2007c). In addition, investment provisions are increasingly being formulated as part of agreements that encompass a broader range of issues, including notably trade in goods and services, but also intellectual property rights, competition policy, government procurement, temporary entry for business persons, transparency, the environment, and labour rights. Increasingly, countries prefer to address traditional investment protection and newer investment liberalization issues in the context of these broader agreements where investment provisions are only part of a larger framework for economic integration. While BITs continue to be more numerous than PTIAs, the latter occupy a much more prominent place in the IIA universe than they did a decade ago. As a result, the IIA system has become increasingly multi-faceted and more complex.6 Not all recent IIAs, however, have followed the trend of developing a greater scope. Other recent agreements have remained rather narrow in their coverage of investment issues. These treaties are confined to establishing a framework for cooperation on investment promotion. The cooperation provided for is typically aimed at creating favourable conditions for encouraging investment, notably through the exchange of information. It is also common for such agreements to set up consultative committees (or a similar institutional arrangement) between the parties to follow up on the implementation of negotiated commitments, and to discuss and study possible obstacles to market access for trade and to the establishment of investment.

http//incentives/investment/IIA

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COMPLEXITY OF IIAS
International investment rules are becoming increasingly complex in content. This phenomenon may reflect efforts to address more dimensions of a transaction than had been done in other agreements. As already noted, IIAs have increasingly become multi-faceted and are no longer limited to investment issues per se. Greater complexity may also be the result of a desire to define an obligation with greater specificity and thereby to clarify its scope and application. Examples include recent provisions clarifying the meaning of fair and equitable treatment and the concept of indirect expropriation", discussed in the next subsection. The effect of a clarification may be to give the provision a narrower scope than it otherwise might have had. Thus, a more complex provision may be a less stringent provision. On the other hand, greater complexity may also be the result of an effort to impose more rigorous obligations. For example, some provisions on performance requirements have become more complex as countries have sought to expand the scope of the provisions (UNCTAD 2006c). The increased complexity of the agreements may also be seen in the procedural provisions of IIAs. For example, some recent IIAs have made significant innovations in their investor-State dispute resolution procedures, addressing issues such as whether hearings are to be open to the public, whether submissions shall be made publicly available, whether non disputants may be permitted to make submissions, whether preliminary questions may be considered in advance of other questions, or whether related claims may be submitted to a single tribunal for resolution. In the absence of specific language in the IIA, these issues would be left to the tribunal to resolve. By addressing them in the IIA, the parties aim to ensure that these questions are resolved in ways that further their interests, such as the goal of promoting judicial economy and the perceived legitimacy of the process. Also, addressing the issues in the IIA enhances transparency and predictability by giving the disputing parties advance notice of how certain procedural issues will be resolved.

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DIVERSITY OF IIAS
Greater scope and complexity of IIAs, taken together, also have resulted in greater diversity of treaties. The result is that the structure of IIAs has become much more diverse. In the first stage of the post-war era, IIAs consisted largely of multilateral liberalization agreements among countries in the same region and at the same level of economic development and BITs between a developed and a developing country. Nowadays, agreements may be multilateral, plurilateral, regional, interregional or bilateral. And regardless of the level at which they are negotiated, they may involve investment liberalization, protection, promotion or regulation. They may involve countries at the same or at different levels of economic development. They may address only a few issues or provide for comprehensive economic integration. They may be simple or highly complex. Thus, it has become difficult to speak in any meaningful way of a typical IIA.

INTERACTIONS WITHIN THE IIA UNIVERSE

As the number of IIAs increases, there are more occasions where individual contracting parties face overlapping obligations from various agreements. One and the same country may be bound by investment provisions concluded with the same treaty partner at the bilateral, regional, sectoral or multilateral level. For instance, an EU member country may have investment-related obligations vis--vis other EU members under BITs, the EU Treaty, the Energy Charter Treaty, or under the IMF and WTO Agreements. With the more frequent conclusion of FTAs that include investment provisions, these will increasingly overlap with BITs. Thus, circumstances will arise in which more than one IIA is potentially applicable to a particular transaction involving a particular investment. This raises the issue of consistency between overlapping treaties. Furthermore, the MFN clause included in practically all IIAs results in interactions between treaties. By definition, this treaty article has the effect of making more favourable
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provisions from other IIAs applicable within the context of the agreement containing the MFN clause (UNCTAD 1999b). As the IIA universe expands, there are also more occasions for such interactions. However, the result of such interaction in terms of the finally applicable rule has become more difficult to ascertain in the light of some recent contradictory arbitration awards.

INVESTOR-STATE DISPUTES
Another important development has been the surge in investor-State disputes in recent years. At the end of 2007, the number of known treaty-based investor-State dispute settlement (ISDS) cases stood at 290. Most other disputes were initiated under the UNCITRAL Arbitration Rules (80) and the Stockholm Chamber of Commerce (14). Until April 1998, only 14 cases had been brought before the most frequently used arbitration forum concerning BITs ICSID and only two awards and two settlements had been issued. However, since the late 1990s, the number of cases has grown enormously, reaching an annual peak in 2005. The increase in the number of claims can be attributed to several factors. First, increases in international investment flows lead to more occasions for disputes, and more occasions for disputes combined with more IIAs are likely to lead to more cases. Second, with larger numbers of IIAs in place, more investor-State disputes are likely to involve an alleged violation of a treaty provision. Greater transparency in arbitration (e.g. within NAFTA) may also be a factor in giving greater visibility to this legal avenue of dispute settlement (UNCTAD 2005b). Most of the known cases (39 per cent) involved the services sector (including electricity distribution, telecommunications, debt instruments, water services and waste management), 24 per cent were related to mining and oil and gas exploration activities, and another 31 per cent concerned the manufacturing sector.

MAIN CHARACTERISTICS OF THE CURRENT IIA UNIVERSE

The evolution of international investment rules over the past decades has resulted in a complex patchwork of thousands of agreements. Despite its huge size and variety in approaches, a number of characteristics of this system are discernable (UNCTAD 2007a).

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The system is universal, in that nearly every country has signed at least one BIT and the majority of them are members to several, if not numerous, IIAs. This remarkable level of treatymaking activity reflects the willingness of the countries involved to provide an additional layer of protection, stability, predictability and transparency that goes beyond their unilateral efforts to attract FDI. The structure of agreements is atomized. That is, it consists of thousands of individual agreements that lack any system-wide coordination. In the absence of global investment rules, countries continue to conclude investment treaties, thereby further perpetuating and accentuating the IIA universe. The IIA universe is multi-layered. IIAs now exist at the bilateral, regional, intraregional, interregional, sectoral, plurilateral and multilateral level, and IIAs at different levels may overlap. Thus, two countries may have mutual obligations created by agreements at different levels that are simultaneously applicable to the same investment.7 The system is multi-faceted. IIAs include not only provisions that are specific to investment, but also rules that address other related matters, such as trade in goods, trade in services, intellectual property, labour issues or environmental protection. These other provisions may have an impact on the establishment or operation of an investment. Accordingly, a host countrys obligations with respect to investment may arise from many facets of an IIA that are not only investment specific and that may not have been designed with investment policy primarily in mind. The IIA system is also dynamic and innovative. For example, a small, but growing number of IIAs include revisions to the wording of various substantive treaty obligations, such as the meaning of fair and equitable treatment and the concept of indirect expropriation. Another new development is that some recent BITs emphasize in a stronger manner public policy concerns associated with foreign investment through exception clauses, covering, for instance, national security and public order, protection of health and the environment, respect for core labour rights, cultural diversity and prudential measures for financial services. Important innovations also take place in investor- State dispute settlement procedures in the IIAs of some countries in order to increase transparency, promote judicial economy, and foster sound and consistent results.

http//incentives/forinvestment/multilateral/.

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On the one hand, these developments demonstrate that international investment rulemaking is flexible to react to new challenges, such as newly emerging public concerns in respect of foreign investment. On the other hand, it should be no surprise that in a highly atomised IIA universe, individual countries seek individual solutions in addressing these concerns with significant implications for the overall coherence of the system.

CHALLENGES IN MANAGING THE EXISTING IIA UNIVERSE

First, developing countries, in general, possess fewer resources than developed countries and thus are more burdened by capacity challenges. Accordingly, many developing countries may find that their participation in the evolution of the IIA universe is adversely affected quantitatively or qualitatively. For example, a developing country may consider that it lacks the expertise to negotiate the agreements it wishes to negotiate. Alternatively, it may choose to open negotiations, but without having the knowledge needed to obtain concessions it otherwise could have obtained, or without entirely understanding all the possible consequences of the agreement, or without having the ability to fully honour the agreement once it is concluded. Secondly, since capacity challenges affect developing countries more severely than developed countries, the latter may be less sensitive to the need to address them. In the end, capacity challenges may fall most heavily on those countries that are least able to steer the international investment system in the direction necessary to address those challenges. Capacity problems are aggravated by many of the trends in and characteristics of the current international investment system as described above. The hazard is not that developing countries will not be able to participate in the IIA system, because virtually all of them are already involved. The risk, rather, is that they might not be able to participate effectively and that their efforts to engage in the IIA system without sufficient resources might undermine the objectives of policy coherence, a proper balancing of private and public interests in international investment rule-making, and of ensuring that IIAs take the development dimension sufficiently into account. In the end, a lack of capacity among countries may threaten the effectiveness of the entire IIA universe. The system assumes a community of countries knowingly undertaking obligations that result in a stable and transparent framework for investment within their respective territories. If countries are unable to properly understand and assess the content of the
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agreements to which they have agreed because of their complexity, the risk arises that they will enter into agreements that they are unprepared to honour fully. This, in turn, would undermine the value of IIAs.

POSSIBLE REMEDIES
What could be done to enhance more policy coherence in international investment rule-making? Ideally, countries should adopt a preventive strategy and seek to avoid inconsistencies in the first place. Technical assistance programmes provided by international organizations can help developing countries to streamline their IIA network, to prevent inconsistencies from emerging, and to deal with existing incoherence. Also, further policy research can try to shed more light on how relevant the issue of policy coherence is under the development aspect, and what policy areas are mostly affected by it. However, the process of harmonization through individual IIA negotiations has its limitations. As said before, whether such a strategy is feasible and successful largely depends on the bargaining strength of individual countries. It is therefore not a "one-forall" remedy; for many developing countries, it may not be a very promising strategy. The effects of inconsistencies might be mitigated by the MFN clause that is a standard feature in practically all IIAs. This clause prevents a host country from according different treatment to investments of investors of different nationalities and potentially could be used to transform originally inconsistent obligations into consistent ones. It can therefore have a harmonizing effect. However, in order to play its equalizing role, there must be a common understanding under what conditions the MFN clause applies and how far reaching its effects are. In the light of some recent contradictory awards, these questions are far from being clarified. 8 On the contrary, there are more doubts and questions than ever before concerning the scope of this core principle in investment agreements.

http//incentives/forinvestment/.

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ALTERNATIVE DISPUTE RESOLUTION

The development dimension in IIAs has yet another aspect one related to dispute settlement. The usual means to resolve investor-State disputes that cannot be resolved through negotiation between the disputing parties is international arbitration. While this kind of dispute resolution is an important tool of fostering the rule of law and increasing investor confidence, it may also have significant drawbacks. Among the possible inconveniences are that arbitration may take a long time and involve substantial direct and indirect costs for both sides, including the risk of a rupture of an important economic relationship between them. From the host countrys point of view, another inconvenience may derive from the fact that the binding arbitral award imposes constraints on it concerning the regulation of enterprises that go well beyond the limits of the individual case. Also, arbitration has the potential to affect negatively the countrys investment climate as well as public support for foreign investment. In other words, arbitration is not very development-friendly even if the developing host country ultimately prevails in the dispute.

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CONCLUSION
This study has identified some ways in which the current system is responding or could respond to those challenges. However, as long as the IIA universe remains highly atomised, there is a risk that the system will eventually degenerate into an increasingly non-transparent hotchpotch of diverging rules that capacity-constrained developing countries will find more and more difficult to cope with. Therefore, and despite an unpromising current policy environment, the vision of a multilateral framework for investment should not get out of sight.

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BIBLIOGRAPHY
Books Referred:

1. The Law and Policy of the World Trade Organization, Text, Cases and Materials by Peter Van den, Maastricht University, Cambridge University Press. 2. 3. 4. 5. 6. 7. 8. 9. Lectures on International Trade by Jagdish N Bhagawati, Arvind Panagariya and T.N. Srinivaasan, Second Edition, Oxford University Press. Statutes and Conventions on International Trade by Indira Carr and Richard Kidner, Fourth Edition, Cavendish Publishing Limited. The Regulation of International Trade by Michael J. Trebilcock and Robert Howse, Third Edition, Routledge Taylor and Francis Group. International Trade Law: Cases and Materials by Raj Bhala, Michie Law Publishers. International Trade and Business: Law, Policy and Ethics by Gabriel Moens and Peter Gillies, Cavendish Publishing Private Limited. The Economics and Ideology of Free Trade: An Historical Review by Leonard Gomes, Published by Edward Elgar House. Dalhouisen on International Commercial, Financial and Trade Law by Hart Publishing Oxford and Portland, Oregon, 2000. International Trade Law: Theory and Practice by Raj Bhala, Second Edition, Lexis Publishing. 10. The General Agreement on Tariffs and Trade: Law, Economics and Politics by Autar Krishen Koul, Satyam Books Publishers.

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