Trade Negotiations Insights • Volume 8 • Number 9 • November 2009

The Lisbon Treaty—Implications for Europe’s International Investment Agreements

by Damon Vis-Dunbar

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With the Lisbon Treaty expected to take effect on 1 December 2009, TNI explores its potential impacts on the International Investment Agreements (IIAs) of the European Community and EU Member States. This is part of a series of articles in TNI that analyze the implications of the Lisbon Treaty for Europe’s external economic policies, and the affects on ACP-EU relations.

In contrast to external-trade policy, which falls exclusively under the authority of the European Community, Foreign Direct Investment (FDI) policy is shared between the European Community (EC) and EU Member States. As a result, both the EC and individual EU Member States have entered into International Investment Agreements (IIAs), although each has focused on different aspects of FDI rule-making. The European Commission, with the permission of the EU Member States, has negotiated in the areas of market access and pre-establishment liberalizations (i.e. provisions granting foreign investors the right to set up an investment on terms no less favourable than those applied to domestic investors or investors from third countries). Meanwhile, EU Member States have negotiated commitments on the treatment extended to foreign investors once established in a host state, for which the principal instrument is Bilateral Investment Treaties (BITs).

Enter the Lisbon Treaty. One of the more notable aspects of the Lisbon Treaty, as it relates to external commercial policy, is its provision on FDI. Article 207 brings FDI under the umbrella of Europe’s common commercial policy, making it the exclusive competence of the European Community. While the European Commission has, so far, sought permission from the EU Member States to include provisions on investment in its free trade agreements, the tables could turn under the Lisbon Treaty. Once in force, EU Member States could potentially be stripped of much of their legal authority to implement their own IIAs, unless authorization is granted by the European Community.

The Lisbon Treaty, as a result, holds significant implications for Europe’s economic partners, including the countries of the Africa, Caribbean and Pacific (ACP) regions. Not only could the Lisbon Treaty impact on future investment negotiations with the European Commission, it could also affect the more than two hundred BITs that currently exist between European and ACP Member States.

More questions than answers

Yet the practical implications of the Lisbon Treaty for Europe’s external-investment policies remain uncertain, in part because of questions of how the Treaty will be interpreted. A key question relates to the definition of FDI-a term the Lisbon Treaty fails to clarify. Certain characteristics of FDI are commonly understood; it is doubtful, for instance, the term would include short-term portfolio investment. But how the term FDI relates to the commitments found in IIAs-and, in particular, the investment protection offered in BITs-is less clear.

A broad definition of FDI within the context of IIAs would include investment provisions on market access and post-establishment protections, thus extending the European Community’s authority over much of the territory currently handled by EU Member States in their BITs. Under this scenario, the European Commission could spearhead the negotiation of more ambitious IIAs, perhaps drawing inspiration from the North American Free Trade Agreement’s investment chapter (NAFTA’s Chapter Eleven). The NAFTA broke ground in 1994 by combining provisions on investment market access with robust protections for NAFTA-party investors post-establishment, and today, such an approach is standard in the IIAs of the United States and Canada, as well as non-NAFTA countries like Japan.

In contrast, a narrow definition of FDI would adhere much closer to the status quo, limiting the European Commission to negotiating investment commitments on market access, while not affecting the authority of EU Member States to pursue post-establishment protections in their BITs.

Should EU Member States and the European Commission fail to reach a common understanding on the definition of FDI in the Lisbon Treaty, it would fall to the European Court of Justice to provide certainty. Given that the Lisbon Treaty could come into force as early as December 2009, a short-term solution-such as a regulation granting EU Member states a temporary right to retain their BITs-will likely be necessary, before the lines of authority over external investment policies are more clearly demarcated.

Implications for the ACP countries

In light of the uncertainty surrounding the interpretation of the Lisbon Treaty’s provisions on FDI, its entry into force is unlikely to have an immediate impact on the Economic Partnership Agreement (EPA) negotiations. Down the road, however, the Lisbon Treaty could result in Europe exerting a more unified-and perhaps ambitious-approach to IIAs. For ACP countries, this would pose both a challenge and an opportunity.

While much attention has been lent to the issue of investment liberalization in the context of the EPAs, less focus has gone to the network of investment commitments that already exist between Europe and ACP countries, in the form of BITs. Currently, there are more than 200 BITs between EU and ACP Member States. Whether these BITs achieve their objective of increasing FDI flows is contentious; at least in the absence of other important factors, such as political stability and a growing economy, it seems BITs do little to boost FDI. The benefits of BITs also need to be carefully weighed against the risks. As a number of ACP countries have experienced firsthand, BITs offer foreign investors a powerful tool for challenging government actions they deem to be unfair or discriminatory. These disputes require that governments have the skills and financial resources to adequately defend themselves.

If the Lisbon Treaty prompts Europe to reconsiders it own approach to external-investment policy, as well as the content of its IIAs, ACP countries should take the opportunity to evaluate the extent to which its investment agreements with EU Member States have fostered sustainable development. If the benefits of the existing BITs are deemed negligible, then there may be a unique opportunity to explore alternatives.

Author: Damon Vis-Dunbar is the co-editor of Trade Negotiations Insights. He can be reached at dvisdunbar@ictsd.ch