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PROMISES AND PITFALLS OF THE

EUROPEAN UNION POLICYON FOREIGN

INVESTMENT—HOW WILLTHE NEW

EU COMPETENCE ON FDI AFFECT

THE EMERGING GLOBAL REGIME?

ABSTRACT

This article analyses constitutional changes and policy consequences con-

cerning the transfer to the supranational level of an external competence

in the field of investment resulting from the Treaty on the Functioning of

the European Union (TFEU). It states that EU Member States lose their

competence to conclude investment treaties and to analyse legal innovations

at the EU level. The new comprehensive European investment policy may

enable the EU to utilize its leverage to negotiate favourable terms with

non-Member States and consistency in protection standards worldwide,

leading to an even (as well as a superior) playing field for EU investors.

This horizon, however, is darkened by technical, but important, issues of

investment treaties implementation and the uncertain future of existing in-

vestment treaties signed by Member States. This article shows that these

legal innovations offer a rich canvas against which international legal issues

of ‘systemic importance’ are discussed, while policy lessons covering prefer-

ential trade policy and the next generation of investment treaties are

explored. Legal issues and policy strategies will in turn impact the interna-

tional regime for investment.

* PhD in Law, Research Assistant Professor, Centre for Financial Regulation and Economic

Development (CeFRED); Faculty of Law, The Chinese University of Hong Kong. E-mail:

julien.chaisse@cuhk.edu.hk. The author would like to thank Christian Bellak, Bertram Boie,

Roberto Echandi, and Ching-Ping (Shirley) Lin for helpful initial suggestions. Thanks are also

extended to David Collins, Emmanuel Gillet, Bryan Mercurio, and two anonymous reviewers

for constructive comments on previous drafts. This article is part of the research entitled ‘the

evolving international investment regime’ led by Julien Chaisse at the Faculty of Law of the

Chinese University of Hong Kong (see: www.law.cuhk.edu.hk).

Journal of International Economic Law 15(1), 51–84

doi:10.1093/jiel/jgs001.Advance Access publication 21 February 2012

Journal of International Economic Law Vol. 15 No. 1. Oxford University Press 2012, all rights reserved

at The Chinese University of Hong Kong on March 31, 2012

jiel.oxfordjournals.org/

Downloaded from

I. INTRODUCTION

After a long and arduous process, all EU Member States ratified the Treaty

of Lisbon (officially, the Treaty amending the Treaty on European Union

and the Treaty establishing the European Community).1For the first time in

its history, the EU acquired a wide legal competence for external economic

matters; this is because the Treaty of Lisbon extends the scope of external

trade policy on issues of investment. The implications of these essential in-

novations in EU international treaty-making powers, both on the interna-

tional stage and in the EU bilateral relations, are significant. Of course, the

Global Financial Crisis (2008–09) and the current EU sovereign debt crises

have required governments to address the urgencies of short-term crisis man-

agement instead of long-term productive investment. However, the risk of

recession shows the need for international investment in the EU which will

continue to grow. For the EU itself and its trading partners, the extension of

‘trade’ policy to include investment does not only change the conditions of

future negotiations but also has a systemic dimension.

This article elaborates the impact of the Treaty of Lisbon on the external

actions of the EU, a major capital exporter in the world, and its 27 Member

States. Even if some legal consequences can be identified and other issues

remain unsolved, both are scrutinized in the broader context of their poten-

tial impact on the ‘emerging global regime for investment’.2This article also

addresses the resulting implications for third countries; this is necessary be-

cause the EU’s new competence will play a role in the international invest-

ment regime for at least three major reasons:

Firstly, the EU is the world’s largest exporter of international invest-

ments, and the world’s leading recipient of foreign direct investment

(FDI). By 2010, the EU’s outward FDI totaled US$ 3.88 trillion,

down from US$ 9.15 trillion, while its inward FDI amounted to US$

3.6 trillion, down from US$ 5.36 trillion.3Over the last three years, the

EU accounted for approximately 30% of global FDI flows.4The flows

of international investments in Europe reflect the EU’s open policy with

regard to the movement of capital and, thus, any regulatory innovation

in the EU policy may systematically affect regional and global FDI

flows.

1EU, Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the

European Community, [2007] OJ C 306/1. I use, in the developments below, the new num-

bering of the Treaty on the Functioning of the European Union.

2See Jeswald W. Salacuse, ‘The Emerging Global Regime for Investment’, 51 Harvard

Page 3

? Secondly, the new competence will broadly impact many ongoing

preferential trade agreement5(PTA) negotiations which also contain

investment chapters.6More specifically, it will greatly strengthen the

negotiating power of the EU (more than if every single Member State

negotiates on its own) and the EU can utilize its leverage to negotiate

favourable liberalization terms with non-Member States and consistency

in protection standards worldwide, leading to an even (as well as a

superior) playing field for EU investors.

Thirdly, because the EU Member States together account for almost

half of the investment agreements currently in force around the world,

the new EU competence will largely contribute to shaping the emerging

global regime for investment by calling into question the futures of

almost 1300 bilateral investment treaties (BITs) concluded by the 27

EU countries and third country partners.7

Whereas the idea of a European investment policy has frequently surfaced

since the end of the 1990s, there is not an exhaustive analysis of such a transfer

of competence and, above all, its consequences in terms of legal policy. This

article provides a critical analysis of the new EU competence enshrined in the

Treaty on the Functioning of the European Union (TFEU) but, even more so,

of its likely ramifications on the different regional and global levels. In the first

section,thedynamicsofinternationalinvestmentlawintheworldandintheEU

are discussed while the changes to EU external economic policy are analysed,

focusing on the TFEU. The second section attempts to analyse the options for

future EU investment policy whose features are partly presented in the EU

Commission Communication. The third section contemplates the immediate

challenges of implementation. The fourth section analyses the crucial stage of

transition between the old national BIT system and the future EU agreements.

In the concluding section, some policy issues are explored on the basis of the

findings which confirm the emergence of the EU as a major actor on the inter-

national scene for the regulation of investment, but this section also points out

some issues and concerns which must be addressed by EU policy-makers and

related researchers, in order to obtain the full benefit of the new regime.

5As stated by Lester and Mercurio, many of the so-called FTAs favour certain countries in trade

relations and are basically discriminatory rather than ‘free trade’. The term PTA encompasses

many different kinds of bilateral and regional trade agreements and underscores their common

denominator, which is to establish preferences for the signatories over others in trade relations.

See Simon Lester and Bryan Mercurio (eds), Bilateral and Regional Trade Agreements –

Commentary and Analysis (Cambridge: Cambridge University Press, 2009) at 4–5.

6As of January 2012, the EU is engaged in PTA negotiations with India, Singapore, ASEAN,

Canada, Colombia, Peru, Central America (Costa Rica, El Salvador, Guatemala, Honduras,

Nicaragua, Panama) and Mercosur. See the European Commission’s Directorate-General for

trade.ec.europa.eu/doclib/docs/2006/december/tradoc_118238.pdf (vis-

ited 3 February 2012).

7See UNCTAD, above n 4, at 100–01.

Impact of the new EU Competence on FDI

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II. THE CHANGING HORIZONS OF EU INVESTMENT POLICY

The current European trends in investment treaty practices show that regula-

tory power, substantive agendas and the interests of various stakeholders are

intrinsically intertwined, and that, together they form the EU jumble of invest-

ment regulations. In order to provide an overview of the current legal situ-

ations, the most important features of these practices will be briefly depicted

in this section (Section II.A.). In addition, although some of the most relevant

developments in international investment matters in the last decade have been

witnessed in the EU (both within the EU or in EU external relations), the

Treaty of Lisbon which gives a new competence to the EU will still push for-

ward the new frontier of the Common Commercial Policy by giving birth to a

new broad external economic policy at the supranational level (Section II.B.).

A. Recent European trends in investment treaty practices

Contemporary international regulation of FDI is one of the fastest-growing

areas of international economic regulation. Although national laws and poli-

cies still constitute the most concrete and detailed part of the legal frame-

work of FDI, the current system has become increasingly dependent upon

international treaties. This ‘treatification’8shows the significant recalibration

of international investment law over the last few years. Professor Patrick

Juilliard aptly synthesized this trend by stating that, in the evolution of the

sources of law that govern foreign investments, there have been two victimes

(losers): namely, internal law and customary international law; and two

vainqueurs (winners): namely, BITs and the general principles of interna-

tional law.9According to the United Nations Conference on Trade and

Development (UNCTAD) studies and statistics, the network of international

investment agreements (IIAs) has been expanding considerably over the last

decade, amounting by the end of 2011 to almost 3000 BITs, whereas fewer

than 400 BITs existed at the end of the 1990s.10From Figure 1, one can see

that the EU countries have concluded numerous agreements and the total

number of BITs concluded by EU members now represents almost half of

existing BITs worldwide. Among them, Germany, the UK and France lead

the group by concluding more than 100 BITs, and a selected group of

countries (Portugal, Spain, Cyprus and the Czech Republic) has concluded

in the last two years the greatest number of BITs, and this is reflected in the

proportion of their BITs awaiting ratification.

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In terms of substance, EU Member States’ practice allows us to identify

the features of European BITs.11More specifically, the agreements tend to

adopt the investment control model which materializes the ‘European ap-

proach towards FDI regulation’. This can be seen from the model BITs of

several EU countries. For example, the prototype BIT of the UK12adopts

the investment control model, stating that each contracting party shall

Figure 1. BITs concluded by EU Member States, as of January 2012. European Union

Member States maintain a network of bilateral investment treaties between themselves.

These Intra-EU BITs are included in the data. However, concerns have been expressed by the

European Commission that these treaties have been superseded by European Community law.

On this issue, see Eilmansberger Thomas, ‘Bilateral Investment Treaties and EU Law’, 46

Common Market Law Review 383 (2009), at 387. See also, Dimopoulos Angelos, ‘The Validity

and Applicability of International Investment Agreements between EU Member States under

EU and International Law’, 48 Common Market Law Review 63 (2011), at 64. Source:

Compiled by the author on the basis of UNCTAD Database of Investment Agreements and

national Ministries of Foreign Affairs public information.

11BITs are often negotiated on the basis of ‘BITs model’ developed by leading countries and

promoted by them as templates for investment relations. A model BIT represents the set of

norms which the relevant state holds out to be both reasonable and acceptable as a legal basis

Page 6

encourage and create favourable conditions for nationals or companies of the

other contracting party to invest capital in its territory, and, subject to its

right to exercise powers conferred by its laws, shall admit such capital. It also

states that neither contracting party shall, in its territory, subject nationals or

companies of the other contracting party, as regards their management,

maintenance, use, enjoyment or disposal of their investments, to treatment

less favourable than that which it accords to its own nationals or companies

or to any third state’s nationals or companies.

By addressing the European approach to the entry or admission of

FDI, this article means the approach of the Member States of the EU to-

wards investors from outside the EU. The EU Member treaty approach is

different from the approach combining the national treatment (NT) and the

most-favoured-nation (MFN) treatment model adopted by some other coun-

tries (such as other significant capital exporters, like USA and Canada).

Compared to the above-mentioned European approach, the US model

BIT stipulates NT and MFN, whichever is more favourable to foreign in-

vestors from the States parties at the pre-entry (as well as the post-entry)

stages of investment.13

B. The new frontier of the common commercial policy

In the past, the EU Member States showed great keenness to retain national

control over foreign investment rather than see it move into EU compe-

tence.14Inter alia, this was showcased at the Nice Summit (2000), where

EU Member States agreed to amend Article 133 of the Treaty of Rome

(which governs the Union’s common commercial policy) by extending EU

competence to a number of ‘new’ areas. In a few sensitive sectors such as

audio-visual services (e.g. ‘l’exception culturelle’)15and investment, EU

Member States did not agree on handing over ‘shared’ or ‘mixed’16

13The aim is to widen entry and establishment rights as far as possible, thereby enabling

investors from States signatories to obtain the same rights of access as the most favoured

third country investor.

14See generally, Julien Chaisse, ‘Adapting the European Community Legal Structure to the

International Trade’ 17(6) European Business Law Review 1615 (2006) 35, at 1617.

15Which could be defined as an exemption for cultural goods and services developed towards the

end of the Uruguay Round negotiations. In the context of economic institutions, Canada and

the European Union (with France in the forefront) had ‘written ‘‘exception culturelle’’ on their

flags when they fought in 1993 against the inclusion of audiovisual media into the regime of the

new WTO. Although the ‘‘cultural exception’’ doctrine proved to be a very effective public

relations slogan, its precise meaning has not been clear. Proponents invoked it in order to

argue that culture must not be subject to the laws of free trade. Opponents, however, suspected

that the ‘‘cultural exception’’ doctrine was no more than disguised protectionism’. See

Christoph B. Graber, ‘ThenewUNESCO

Counterbalance to the WTO’, 9 Journal of International Economic Law 553 (2006), at 554.

16International negotiations over such issues require the direct participation of both EU and its

Member State(s), and thus result in mixed agreements. Mixed competence issues have grown

more prominent in recent years, largely as the result of ‘new’ international trade agendas, but

ConventiononCulturalDiversity:a

Journal of International Economic Law (JIEL) 15(1)

at The Chinese University of Hong Kong on March 31, 2012

jiel.oxfordjournals.org/

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competence to the EC. With the ratification of the Treaty of Nice, investment

was one of a few very sensitive issues that remain subject to the rules and

procedures of inter-governmentalism, as opposed to the ‘community ap-

proach’. For this reason, investment was covered by a plethora of BITs between

individual EU Member States and third parties.17BITs were considered to be

the single most important tool in investment relations between countries. But

now, the Treaty of Lisbon extends the Common Commercial Policy to the

second most important field of international economic relations, namely,

FDI (Articles 206 and 207 TFEU). The Article 207 TFEU reads:

The common commercial policy shall be based on uniform principles,

particularly with regard to changes in tariff rates, the conclusion of tariff

and trade agreements relating to trade in goods and services, and the

commercial aspects of intellectual property, foreign direct investment,

the achievement of uniformity in measures of liberalisation, export

policy and measures to protect trade such as those to be taken in the

event of dumping or subsidies. The common commercial policy shall be

conducted in the context of the principles and objectives of the Union’s

external action.

In order to delimit the scope of the EU new competence, it is necessary to

examine the categories of foreign investment, the relevant regulation covered

in Article 207 TFEU and the nature of the EU competence. As for the

implementation of such competence, the rules of decision-making imposing

the qualified majority vote (QMV) as the principle, but subject to special

circumstances under which decisions will need to be taken by unanimity of

the Member States are discussed further.

Firstly, the new Article 207 TFEU includes expressly, and for the first

time, ‘foreign direct investment’ under the Common Commercial Policy

Title II of the TFEU without, however, providing a definition. As a result,

the scope of the EU new competence to regulate foreign investment under

the Treaty of Lisbon is neither clearly identified nor circumscribed by the

Treaty. One can, however, notice that since ‘foreign direct investment’ is the

concept chosen by the Treaty drafters, it cannot be treated as a synonym for

a much broader concept of ‘investment’, which includes portfolio invest-

ments. FDI implies a controlling stake in a business,18and often connotes

also because of the EU’s increased activism in international social accords, environmental

treaties and consumer protection agreements. See Marcus Klamert and Niklas Maydell, ‘Lost

in Exclusivity: Implied Non-Exclusive External Competences in Community Law’, 13

European Foreign Affairs Review 493(2008), at 493.

17Tomas Baert, ‘The Euro-Mediterranean Agreements’, in Gary Sampson and Stephen

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ownership of physical assets such as equipment, buildings and real estate,

whereas portfolio investment19can be much more volatile, as an older EU

Communication20indicates. Therefore, portfolio investments should not be

part of the EU new exclusive competence enshrined in Article 207 TFEU.21

Secondly, the EU concept of FDI can be further defined by asking the

following question: does Article 207 TFEU give competence to the supra-

national Institutions to take action in all aspects of the regulation of foreign

investment? As a premise, the new Article 207 TFEU unifies rules on estab-

lishment in all sectors of foreign investment. This Article is placed under the

Common Commercial Policy, which is based on principles of uniformity and

liberalization. As a result, one can assume that the admission of foreign

investment, both in goods and services, may fall within the scope of a

given competence on the regulation of FDIs. Article 207 TFEU can be

interpreted as granting powers with regard to all foreign persons that are

already established. Such an interpretation does not depend on the neces-

sity for foreign entities to meet the requirement of Article 54 TFEU.22

in Developing and Transitioning Economies Through Renewable Energy Foreign Direct

Investment’, 33 Suffolk Transnational Law Review 319 (2010), at 323.

19For a distinction between foreign direct investment and passive portfolio investments not

involving control, see Richard J. Hunter, ‘Property Risks in International Business’, 15

International Trade Law Journal 23 (2006), at 26.

20In 2002, the EU Commission submitted to the WTO Working Group on the Relationship

between Trade and Investment a report in which it contended that portfolio investment is not

included in the notion of FDI: ‘Portfolio investors, as a general rule do not expect to obtain

additional benefits derived from the management control of the enterprise in which they

invest. Their main concern is the appreciation of the value of their capital and the return

that it can generate regardless of any long-term relationship consideration or control of the

enterprise. This is the main rationale behind portfolio investment that makes it substantially

different from FDI’. See WTO, Working Group on the Relationship between Trade and

Investment, Communication of the European

Investment, WT/WGTI/W/115, 16 April 2002, at 14.

21To this extent, even if the EU concept of investment does not cover portfolio investment, the

future definition of investment in EU treaties could explicitly include portfolio investment (as

a national competence): such agreements would be mixed agreements. See below the discus-

sion on the nature of the competence. See also, Jan Asmus Bischoff, ‘Just a Little BIT of

‘‘Mixity’’? The EU’s Role in the Field of International Investment Protection Law’, 48

Common Market Law Review 1537 (2011), at 1537.

22To better understand the freedom of establishment (Articles 49–55 of the TFEU), Article 49

and Article 54 tend to be read together. According to Article 49 the ‘restrictions on the

freedom of establishment of nationals of a Member State in the territory of another

Member State shall be prohibited. Freedom of establishment shall include the right to

take up and pursue activities as self-employed persons and to set up and manage under-

takings, in particular companies or firms within the meaning of the second paragraph of

Article 54’. This second paragraph defines ‘companies or firms’ as ‘companies or firms

constituted under civil or commercial law, including cooperative societies, and other legal

persons governed by public or private law, save for those which are non-profit-making’.

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Furthermore, the FDI competence may be anticipated to be comprehensive

because it explicitly includes all standards of treatment of FDI (ranging from

the MFN, NT, fair and equitable treatment, dispute settlement procedures

to the rules on expropriation). Meanwhile, the FDI competence may cover

the treatment of EU-controlled or EU-managed undertakings in third coun-

tries which do not fall straightforwardly within the scope of a Union com-

petence on the ground of the principle of establishment.

Thirdly, beyond such competence transfer, the Treaty of Lisbon distin-

guishes three main categories of competences: the Union’s exclusive compe-

tences in areas such as common trading policy,23where it legislates alone

(Article 3 of the TFEU); shared competences between the Union and

Member States (Article 4 of the TFEU), with the States exercising their

competence if the Union does not exercise its own;24and supporting compe-

tences (Article 6 of the TFEU) where the Union can only provide support or

co-ordination (excluding all aspects of harmonization) and, consequently,

has no legislative power in those fields and may not interfere in the exercise

of such competences reserved for the Member States.25As a result, the

Treaty does not only bring FDI into the competence of the EU but also

puts further pressure on Member States to renegotiate existing BITs be-

cause, according to the Treaty, Member States will no longer be able to

negotiate such treaties on their own accord. As discussed above, it is safe

to conclude that the EU now holds exclusive competence over FDI, which is

interpreted to include the classical standards of investment protection.

However, the absence of a definition of ‘FDI’ in the Treaty still leaves

scope for disagreement. In fact, one can be sure that those Member States

which are unhappy with the competence transfer and intend to retain their

existing BITs will ask the CJEU to clarify this issue.26Some candidates to

23Other covered areas are: customs union; establishment of competition rules necessary for the

functioning of the internal market; monetary policy for member states which use the Euro as

legal tender; conservation of the biological resources of the sea as part of the common fish-

eries policy; and the conclusion of an international agreement when this is within the frame-

work of one of the union’s legislative acts or when it is necessary to help it exercise an internal

competence or if there is a possibility of the common rules being affected or of their range

being changed.

24They include: internal market; social policy with regard to specific aspects defined in the

treaty; economic, social and territorial cohesion; agriculture and fisheries, except for the

conservation of the biological resources of the sea; environment; consumer protection; trans-

port; transeuropean networks; energy; area of freedom, security and justice; joint security

issues with regard to aspects of public health as defined in the Lisbon treaty; research,

technological development and space; and development cooperation and humanitarian aid.

25Those fields are: protection and improvement of human healthcare; industry; culture; tour-

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this category might be identified as those EU states which have decided to

conclude illegal BITs27with third countries since December 2009.28The

final say will be the Court’s in order to clearly delimit the scope of EU

competence in the field of external relations,29as it did in relation to the

Treaty Establishing the European Community in 1994. At that time, the EU

Member States and the European Commission disagreed about the coverage

of the commercial policy provisions of former Article 133 TEC in the areas

of intellectual property and services. When the CJEU was consulted, it

stated,30in Opinion 1/94, that only certain aspects of the two sectors

could be considered as falling under former Article 133 TEC and, thereby,

under the EC’s exclusive competence.31To be fair, if the issue of the EU

investment competence remains open from the theoretical point of view,

there is no concern about the practical and policy perspectives. Or even if

the CJEU would decide that EU investment agreements contain an element

which relates to mixed competence, this would not impact much of the

negotiation processes and the final outcomes, either. Because, as will be

discussed below, the EU intends to develop broad encompassing trade and

investment agreements which will include areas outside its exclusive compe-

tence, such as cultural cooperation32or criminal procedures in relation to

27In the same sense, Pieter-Jan Kuijper, ‘Foreign Direct Investment: The First Test of the

Lisbon Improvements in the Domain of Trade Policy’, 37(4) Legal Issues of Economic

Integration (2010), at 262.

28For instance, the Czech Republic did not refrain itself from concluding eight new BITs (with

Albania, Kuwait, Lebanon, Montenegro, Morocco, Serbia, India and Kazakhstan). The same

is true for Portugal, which concluded BITs with Senegal and Congo in 2010. These recent

BITs are illegal not only since the entry into force of the Lisbon Treaty but also since the

signature of the Treaty as indicated in Article 18 of the Vienna Convention on the Law of

Treaties, which provides that Member States which have signed (here, the Lisbon Treaty)

have the obligation to refrain from acts (such as concluding new BITs) which would defeat

the object and purpose of that treaty prior to its entry into force. See Vienna Convention on

the Law of Treaties, article 18, 23 May, 1969, U.N. Doc. A/Conf. 39/27 at 289 (1969), 1155

U.N.T.S. 331. For a commentary of this provision, Charme Joni S. ‘The Interim Obligation

of Article 18 of the Vienna Convention on the Law of Treaties: Making Sense of an Enigma’,

25 George Washington Journal of International Law and Economics 71 (1992), at 74.

29‘Commission and Council fight each other to a stand-off and ultimately the matter will go to

the Court, which will determine the scope of the words—‘‘Foreign Direct Investment’’—in

Article 207 TFEU’. See Kuijper, above n 27, 261–72.

30The ‘ECJ became considerably more circumspect in the first half of the 1990s, when it

rejected an expansive interpretation of the common commercial policy and also became

more restrictive in its interpretations of Opinion 1/76 and of the ERTA case in the domain

Page 11

intellectual property rights (IPR) violations.33A good illustration is the 2010

Preferential Trade Agreement (PTA) between the EU and South Korea; this

is the first of the new generation of PTAs launched in 2007 as part of the

‘Global Europe’ initiative. This PTA includes a dedicated protocol on cul-

tural cooperation which sets up a framework for engaging in policy dialogue

on culture and audiovisual issues.34By this, even if the CJEU adopts a very

broad interpretation of the new investment competence in the future, the

negotiated trade and investment treaties are most likely to be mixed treaties.

In addition to that, even if future EU agreements address only investment

protection (i.e. no trade), they will largely be negotiated and signed as mixed

agreements for two main reasons: (1) portfolio investment uses various in-

direct financial mechanisms and falls outside the Article 207 TFEU compe-

tence on FDI; and (2) as a result of Article 345 TFEU which states that the

treaties shall in no way prejudice the rules governing Member States’ systems

of property ownership, some aspects of expropriation will remain within

Member States’ competence.35

Fourthly, the other limit lies in the decision-making rules because, instead

of requiring a qualified majority, future investment agreements may be sub-

ject to unanimity. More specifically, TFEU Article 207(4) requires unani-

mous Council decisions on international agreements in certain fields,36such

as trade in services, commercial aspects of intellectual property and FDI.

These unanimity requirements, without doubt, have been carried over from

EC Treaty Article 133(5)–(7), where unanimity is mandated for interna-

tional agreements as long as internal EU action would require unanimity.

To sum up, the recent European trends in investment treaty practices have

resulted in an incredibly complex set of obligations both for foreign investors

and EU investors to deal with. As such, the Europe Union has constituted a

key example of a lack of uniformity in international investment regulation, and

their international agreements and in the implementation of such international agreements.

Without prejudice to the fact that UNESCO guidelines are being elaborated, the EU has

drafted a model Protocol on Cultural Cooperation to be included in future trade agreements

33It is not new, because, for instance, Article 61 of the 1994 Agreement on Trade-Related Aspects

of Intellectual Property Rights (TRIPs) requires criminal procedures and penalties in cases of

have developed this kind of TRIPs plus requirements and increase criminalization of certain

violations. See Beatrice Lindstrom, ‘Scaling Back TRIPs-Plus: An Analysis of Intellectual

Property Provisions in Trade Agreements and Implications for Asia and the Pacific’, 42 New

York University Journal of International Law and Politics 917 (2010), at 942–46.

34The protocol also seeks to encourage parties to cooperate in facilitating exchanges regarding

cultural activities, notably in the area of performing arts, publications, protection of cultural

heritage sites and historical monuments, as well as in the audiovisual sector. It also seeks to

Page 12

even a special case going beyond the fragmentation of international investment

law and of public international law generally, as analysed by the International

Law Commission.37This legal situation, however, will change to a large extent

in the future because of the new EU competence. These treaty amendments

make the disappearance of national investment policies and their transfer to

the supranational level unavoidable. But, the EU is well aware that it is

engaged in a global race for attracting FDIs and for protecting its own invest-

ments abroad. Considering that the WTO is not the best forum in the current

state of affairs, progress is more likely to be made in bilateral venues.

Meanwhile, the most important or most promising partners have been singled

out by the EU Commission and will be the first tests for the new EU invest-

ment policy. The ‘negotiation mandate’ for EU–Canada/India/Singapore PTAs

was approved by the General Affairs Council on 12 September 2011.38This

confidential document confirms the trend that the EU will negotiate broad

encompassing PTAs to replace narrow and conventional BITs.39

III. ENHANCING SUBSTANTIVE INVESTMENT TREATIES PROVISIONS

In sharp contrast with the more than 1200 existing BITs concluded by EU

Members, the July 2010 Communication40

mentions broader policy

37Fragmentation is caused by the fact that international law consists of diverse polycentric legal

systems eclipsing the former Westphalian system of nation states. The post-war propensity

towards accelerated cooperation has led to intensive inter-state treaty-making and the emer-

gence of autonomous legal orders beyond the nation state model. See International Law

Commission, Fragmentation of International Law: Difficulties Arising from the Diversification

and Expansion of International Law. Report of the Study Group of the International Law

Commission Finalized by Martii Koskenniemi, 13 April 2006, UN Doc A/AC.4/L.682.

Various factors are responsible for the increased fragmentation: the proliferation of interna-

tional regulations, increasing political fragmentation (juxtaposed with growing regional and

global interdependence in such areas as economics, the environment, energy, resources,

health, and the proliferation of weapons of mass destruction), the emancipation of individuals

from States, the specialization of international regulations. See Paul-Marie Dupuy, ‘The

Danger of Fragmentation or Unification of the International Legal System and the

International Court of Justice’, 31 New York University Journal of International Law &

Policy (1999), at 791. See also, Thomas Cottier et al. ‘Fragmentation and Coherence in

International Trade Regulation: Analysis and Conceptual Foundations’, in Thomas Cottier

and Panagiotis Delimatsis (eds), The Prospects of International Trade Regulation – From

Fragmentation to Coherence (London: Cambridge University Press, 2011), 791.

38The Commission will lead the negotiations according to this mandate given by the Council.

The Council must approve the Commission’s negotiating mandate before talks can begin.

Page 13

objectives. It explicitly refers to the objectives of the overall European foreign

policy (such as the promotion of the rule of law, human rights and sustain-

able development) and to the OECD Guidelines for multinationals.

Does the Commission ambitiously foresee that an EU model BIT will

eventually be developed? The idea is tempting but it is probably not realistic.

This is because the July 2010 Communication also states that ‘a one-size-

fits-all model for investment agreements with third countries would neces-

sarily be neither feasible nor desirable’.41Very little is known about the

extent to which model clauses have been used as a starting point in negoti-

ations by EU Member States and to what extent they are reflected in the

outcome.42The Commission mentions the specificity of each negotiating

context, but it is imaginable that others can easily preclude the development

of a template since, in practice, such a proposal will require the agreement of

all EU institutions (i.e. the Commission, Council and Parliament).

Nevertheless, even with such a model, there is no reason to believe that it

will become an efficient tool for negotiations. A reasonable concern is that,

for instance, Norway developed an ambitious BIT model (including envir-

onmental and labour standards) which was never accepted by third coun-

tries. Also, it is difficult to imagine that a model can meet the demands of

developing, emerging and developed economies at the same time. Therefore,

when the Commission leads future negotiations with third countries, it is

very likely to be on a pragmatic basis and to tap into the experience and

instruments existing between Member States and the third country in ques-

tion. A model may gradually emerge from the practice, but the Commission

does not seem to have any great interest in making such an EU model one of

the priorities of its new investment policy.

The real priorities in the new EU investment policy, however, consist of

two crucial features. Firstly, setting improved standards of investment pro-

tection (III.A.) will provide innovations in rule-making and may rejuvenate

the international investment regime by giving more precise definitions or

Page 14

to the second model and change the paradigm of EU approach towards

investment liberalization (III.B.).

A. Setting improved standards of investment protection

The July 2010 Communication states that the EU’s ‘future action in this

field should be inspired and guided by the best available standards, so as to

offer a level playing field of a high quality to all EU investors’.43An import-

ant challenge of setting standards of investment protection relates to the

substantive rules44which the EU would seek to introduce in trade and in-

vestment agreements. Standards give substance to the ‘treatment’45which

the investor is subject to and as requested by the EU Parliament in its April

2011 resolution—these standards should be better defined in future trea-

ties.46Investment standards establish the substantive protection accorded

to those investors and/or investments and typically include ‘fair and equitable

treatment’, ‘full protection and security’, expropriation conditions and the

non-discrimination standards. But, their treatment standards may vary from

one BIT to another. More noteworthily, tribunals are left with a too large

scope for the interpretation of these norms, which does not satisfy basic

needs of legal predictability.

Although it is difficult to analyse each common provision in all BITs, it is

relevant to focus on the most important legal obligations that the parties to a

BIT accept. Considering, firstly, that these obligations cover the voluntary

limitation of the States’ regulatory powers vis-a `-vis private parties in the

interest of promoting direct investments and are illustrated by the protection

against expropriation without compensation takes effect and by the protec-

tion through standards that control the regulatory behaviour of the host state

and, secondly, that the protection against expropriation and the fair and

equitable treatment are the two principles identified by Behrens as rules of

43EU, above n 40, at 6.

44Salacuse, above n 2, at 445–48. See also, Todd J. Grierson-Weiler and Ian A. Laird,

‘Standards of Treatment’, in Peter Muchlinski (ed), The Oxford Handbook of International

Investment Law (Oxford: Oxord University Press, 2008), 259–304.

45In the ICSID case of Suez, Sociedad General de Aguas de Barcelona S.A. and Vivendi Universal

S.A. v The Argentine Republic, the tribunal defined ‘treatment’ as follows: ‘The word ‘‘treat-

Page 15

constitutional values for the international regime for investment,47these two

core elements of investment protection will now be analysed in greater detail.

1. Redefining the fair and equitable treatment

An investor’s investment decision is not made on the basis of the legal situ-

ation in a given host state at the time of the investment alone, but also on the

expectation that he will be treated, in the future, fairly and equitably. The

fair and equitable treatment seeks to address this situation and is closely

related to the concept of investors’ legitimate expectations and has repeatedly

raised questions before arbitrators such as: to what extent may an investor

legitimately rely on the stability of the legal and factual conditions under

which he made the investment? And what sort of changes in the host state

must the investor anticipate? In addition to the above questions, one can

easily observe that the meaning of the ‘fair and equitable treatment’ standard

may not necessarily be the same in all the treaties where it appears. And the

‘ordinary meaning’ of the ‘fair and equitable treatment’ (FET) standard is

usually defined by terms of almost equal vagueness. In MTD Equity v Chile,

the tribunal stated that ‘in their ordinary meaning, the terms ‘‘fair’’ and

‘‘equitable’’. mean ‘‘just’’, ‘‘even handed’’, ‘‘unbiased’’, ‘‘legitimate’’ ’.48

Similarly, probably no one can say more ambiguously than the tribunal

did in S.D. Myers. In this case, the tribunal affirmed that an infringement

of the FET standard requires ‘treatment in such an unjust or arbitrary

manner that the treatment rises to a level that is unacceptable from an

international perspective’.49In substance, the FET is sometimes understood

to be an independent standard that embodies the concept of the rule of law

(minimum standard of treatment). Meanwhile, as some commentators try to

These variations are well reflected in the EU countries’ treaty practice.

Some EU countries’ BITs do take into account the full range of international

law sources, including general principles, modern treaties and other conven-

tional obligations and, hence, give FET an extended scope of application.

However, some other EU countries’ BITs regard FET as a mere minimum

47See

Protection’, 45 Archiv des Vo ¨lkerrechts 153 (2007), at 459.

48ICSID, MTD Equity v Chile (2004) Case No. ARB/01/07, para 105.

49See PCA, Saluka Investment BV (Netherlands) v Czech Republic (2006) Partial Award, at para