Trade Negotiations Insights • Volume 7 • Number 9 • November 2008

Investment provisions and commitments in the CARIFORUM-EU EPA

by Thomas J. Westcott (1)

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The CARIFORUM-EU EPA, the first of a new series of trade and investment deals between the EU and ACP regions was signed on October 15 2008. This article briefly considers the meaning and effect of the EPA’s investment provisions and commitments with an emphasis on the CARIFORUM obligations towards the EU.

Investment provisions in the CARIFORUM-EU EPA must be considered in the context of the EU’s constrained mandate on investment - a consequence of its organisational structure and the division of ‘competence’ between EU member states and the representative organ. Foreign Direct Investment (FDI) is not yet within the scope of the European Commission’s common commercial policy, despite the inclusion of other trade related issues such as intellectual property. (2) Therefore, the European Commission currently has non-exclusive competency over investment, which means that it applies a trade concept to the negotiation of investment issues. Currently, EU member states negotiate their own bilateral investment treaties (BITs). Economic integration agreements, such as EPAs, remain limited to including investment provisions concerning market access (a trade concept) and the objective of investment liberalisation. Two other objectives of investment treaties, investment protection and investment promotion are largely excluded from the EU’s competence and therefore the EPA. These remain the domain of member state BITs. This restriction leaves the EU open to make commitments concerning only a limited class of investment known as “commercial presence.” EU member states on the other hand, negotiate BITs to cover both FDI and other forms of investment and assets. A fi nal consequence is that EU member states still have to approve the fi nal version of investment provisions included in the EPA.

Investment provisions in the CARIFORUM-EU EPA

In the EPA, there are obligations for both parties relating to commercial presence investment in services and non-services sectors. (3) The Agreement’s coverage of investment centres on the core principles of national treatment (NT), the most favoured nation (MFN) clause (4) and a key liberalising provision, market access. (5) Despite CARIFORUM enthusiasm for broader rules regarding the treatment of foreign investment, the EU could only agree to limited use of investment protection provisions. For example, the EPA does not seek to guarantee investors protection against host government expropriation of their investments without fair compensation. Nor does the EPA include dispute settlement provisions and the means for investors to take claims for breach of treaty to international arbitration. (6) Moreover, there is no promise that host governments accord foreign investors a minimum standard of treatment. On the other hand, there is a guarantee that host governments will not restrict the free movement of capital relating to investments. (7)

Market access for commercial presence investment

Both parties guarantee investors and those with commercial presence market access that is no less favourable than that set out in their schedule of commitments on investment (commercial presence). Market access is assured in Article 6.2 by introducing limitations to the types of measures member states can use to regulate foreign investors and those with commercial presence. A framework for liberalising existing regulatory regimes is achieved by requiring all host states – where applicable – to remove measures currently in place and commit not to introduce measures in the future that: (a) Limit the number of commercial presences whether in the form of numerical quotas, monopolies, exclusive rights or other commercial presence requirements such as economic needs tests; (b) Limit the total value of transactions or assets in the form of numerical quotas or the requirement of an economic needs test; (c) Limit the total number of operations or the total quantity of output expressed in the form of quotas or the requirement of an economic needs test; (d) Limit the participation of foreign capital in terms of maximum percentage limit on foreign shareholding or the total value of individual or aggregate foreign investment; and (e) Restrict or require specific types of establishment (subsidiary, branch, representative offi ce) or joint ventures through which an investor of the other party may perform an economic activity. However, these limitations on foreign capital do not apply to all sectors and laws. Scope is reduced in two ways: 1) Article 5 sets out a list of sensitive sectors that are carved out from the scope of Chapter 2; and 2) Liberalisation through Article 6.2 is confined to selected sectors set out by the signatory states in their schedules and excludes laws and regulations (measures) specified therein. For CARIFORUM, the relevant schedule is Annex 4.V List of commitments on Investment (Commercial Presence) in Economic Activities other than Services Sectors. Note that commercial presence in services sectors (in GATS terminology, mode 3 supply of services) falls within the scope of the provisions of Chapter 2, but sectoral coverage and non-conforming measures are set out for CARIFORUM in the separate services schedule. Signatory CARIFORUM states have adopted a GATS-style schedule for investment in non-services sectors. The schedule sets out those sectors, including all sub-sectors, for which the market access and NT commitments apply. The sectors include: agriculture; hunting and forestry; fishing; mining and quarrying; manufacturing; production, transmission and distribution of electricity, gas, steam and hot water. Critically, the schedule also sets out reservations for measures that do not conform to the Article 6.2 market access liberalisation commitment or the Article 7 national treatment commitment. (8) Reservations are also made for sub-sectors or activities where there is currently no limitation on foreign investment, but where a CARIFORUM state seeks flexibility for possible future regulation of foreign investment in a manner inconsistent with its market access and national treatment obligations. (9) The schedule contains 29 reservations taken out by individual signatory states for adopting possible future measures and three further reservations taken out by all 13 CARIFORUM states for adopting possible future measures.

Liberalisation through binding commitments on existing foreign investment regimes

The EPA contains no indication of what measures currently in place in CARIFORUM states are to be removed for the region to comply with liberalisation. The Caribbean Regional Negotiation Machinery (CRNM) has indicated there will be very little need for legislative change to give effect to EPA commitments. Some CARIFORUM states may amend laws or regulations in their fishing sector to comply with Article 6.2. No details of these changes are discernable from the EPA or its schedules. Liberalisation will therefore principally be achieved through the binding of existing regulatory practice and the resulting limitations placed on future attempts to close the door further to foreign investors. That is, both parties commit to maintaining the current level of openness and procedural ease for the establishment of commercial presences. As noted above, binding of the existing regulatory landscape is limited by open-ended reservations in some sectors taken out by some CARIFORUM states.

Most favoured nation treatment

CARIFORUM states need not automatically pass on the same treatment to EU investors that they provide to foreign investors from small developing and least developed countries. MFN treatment is offered to EU investors under Article 9.1 with exceptions to its application established in subsequent paragraphs. Three exceptions to MFN treatment are worth noting. First, the MFN obligation only requires CARIFORUM states to provide EU investors treatment no less favourable than they provide to investors from a “major trading economy” under an economic integration agreement. “Major trading economy” is defined to include “any industrialised country, or any country accounting for a share of world merchandise exports above one percent.” The reciprocal EU commitment for CARIFORUM investors is greater and requires providing treatment no less favourable than that accorded to investors or commercial presences in the EU of any third country. (10)

Second, Article 9.2 further limits the application of the MFN rule by exempting any treatment of commercial presence within the CARICOM Single Market and Economy and the internal market created by the CARICOM-Dominican Republic Free Trade Agreement (FTA). (11) Whereas the “major trading economy” limitation applies for treatment by signatory CARIFORUM states to their trading partners, this limitation means CARIFORUM states need not treat EU investors as favourably as investors from other CARIFORUM states. A third limitation set out in Article 9.5 covers the negotiation of future FTAs. Where a signatory CARIFORUM state enters an FTA with a third party including more favourable treatment accorded to such third party, CARIFORUM and the EU will enter into consultations to decide whether the signatory CARIFORUM state can deny the EU the more favourable treatment. To summarise, the three cases where MFN treatment need not be extended to EU investors provide CARIFORUM states with considerable flexibility in formulating investment policy. In fact, it reduces the MFN commitment to almost zero.

Other CARIFORUM investment treaties

Other investment treaties in the Caribbean region, such as the Revised Treaty of Chaguaramas and the CARICOM Investment Code, as well as the CARICOM FTAs with the Dominican Republic and Costa Rica, are rather different in scope to the EPA and primarily address investment protection, though of these only the FTA with Costa Rica is fully implemented. BITs concluded between individual CARIFORUM states and EU member states do not impose liberalisation requirements like the EPA. Instead they indirectly liberalise investment by giving investors greater certainty. For example, BITs commonly guarantee that investors will be treated no less favourably than domestic investors, once the foreign investment has been established in the host country.

Implications for the Caribbean states

Commitments faced by signatory CARIFORUM states appear to require no change in current policy (with the possible, unconfirmed, exception of the fishing industry in several countries). First, market access and NT obligations are reportedly in line with the existing treatment of EU investors. Second, what liberalisation there is comes from binding existing laws, noting that many activities within these sectors are unbound. And third, MFN treatment imposes negligible requirements on the current and future regulation of EUsourced commercial presences. The EPA investment-related provisions contain no new institutions or procedures, though further steps and future action are required. The text initialled in December 2007 required, first, that the Bahamas and Haiti were still to prepare their schedules of commitments and exceptions. These schedules were to be incorporated no later than six months after signature of the EPA. (12) However, Haiti did not sign the EPA on October 15. Assuming it signs on at some future point, both these countries will require technical assistance to complete their schedules. Second, parties must undertake “future liberalisation” and commence further negotiations on investment no later than five years from the date of entry into force of the EPA with the aim of adding to the overall commitments. (13) A more detailed discussion of development impacts and implications for other ACP regions is included in the study published by GTZ (see endnote 1).

1 Thomas Westcott is Legal Adviser in the Policies and Capacity Building Branch, Division of Investment and Enterprise, UNCTAD. This article is based on his report commissioned by Deutsche Gesellschaft fur Technische Zusammenarbeit (GTZ) and the German Federal Ministry for Economic Cooperation and Development, available at www.gtz.de/en/ themen/laendliche-entwicklung/24568.htm
2 D. Vis-Dunbar, ‘European treaty may revive debate over power to conclude investment agreements’, Investment Treaty News (IISD), October 3 2007.
3 Article 4 defines “commercial presence.” This article uses the term interchangeably with “investment.”
4 Articles 7 and 9 respectively.
5 Article 6.
6 Article 5, endnote 7.
7 Title III Current Payments and Capital Movements, Article 2 Capital Movements.
8 Note that the schedule does not mention that non-conforming measures listed are reservations against the provisions on market access or national treatment. However, Article 8 (List of Commitments) states: “and, by means of reservations, the market access and national treatment limitations applicable to commercial presences and investors of the other Party in those sectors are set out in lists of commitments…”
9 For example, “Forestry and Logging: DMA, VCT: The State reserves the right to adopt or maintain measures on investment in this sector.”
10 Set out in the preceding paragraph of Article 9.1
11 This type of exception to MFN is known as the Regional Economic Integration Organisation (REIO) exception.
12 Title II, Chapter 1, Article 3 bis.
13 Title II, Chapter 1, Article 3.