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Prohibitions on Performance Requirements in Investment Treaties

Clinic: National University of Singapore, Fall 2018

Executive Summary

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Prohibitions on performance requirements (“PPRs”) in international investment agreements (“IIAs”) are one of the core issues in investment negotiations today. The controversy stirred from these obligations is a key area of concern for all states which have entered into bilateral investment treaties (“BITs”) and Free Trade Agreements (“FTA”) (collectively, “IIAs”).

This paper attempts to show the legal complexities that may arise in the context of negotiations, implementation and interpretation of PPR obligations. The intricacies inherent in the design and application of PPR obligations – especially in the context of “mixed” trade and investment agreements such as the CPTPP, USMCA and the EU-Vietnam FTA – give rise to a series of key findings:

  • Developed countries have used PRs to advance their development and national interests. While developed countries often support the inclusion of PPR obligations in IIAs negotiations with developing countries, several of these countries (e.g. the US, Japan, UK, Germany and France) and emerging economies (e.g. China and South Korea) have enforced PRs on FDIs in their territories to advance their development and national objectives.

  • The emergence of PPR obligations in IIAs is largely intertwined with the US’ leading role in negotiating these prohibitions bilaterally, regionally and multilaterally. At the bilateral front, the US first included PPR obligations in its US BIT models in the 1980s. The PPR obligations in the NAFTA, however, mark a turning point in how PPRs have evolved into more stringent and broad types from the 1990s until today. At the multilateral front, especially in the 1970s, the US successfully sought confirmation by the GATT panel that certain PRs that required foreign investors to purchase Canadian goods were prohibited under the GATT 1947. In the 1980s, the US also pushed for the inclusion of a negotiating mandate for trade-related investment measures in the Uruguay Round of negotiations, leading ultimately to the adoption of the WTO TRIMs Agreement.

  • States have virtually adopted three approaches to PRs in IIAs: silence, “TRIM-like” and “TRIMs-plus.” The majority of IIAs are entirely silent on PPRs. Some incorporate only trade-related investment measures obligations, making express reference (or using similar obligations) to the obligations in the TRIMs Agreement (local content requirements, export and import restrictions) (“TRIMs-like”). Some incorporate more detailed and stringent PPRs beyond the obligations under the TRIMs Agreement (including prohibitions on technological transfer requirements, on capital restrictions, on R&D requirements, on joint venture requirements, or on local employment requirements) (“TRIMs-plus”). This latter approach to PPR obligations is found, for example, in the NAFTA, CPTPP, USMCA, and the EU-Vietnam FTA.

  • Despite the broadened scope of PPR obligations, states have carved out several exceptions to ensure they can still legally enforce certain types of PRs under certain circumstances. Exceptions to PPRs in the IIAs scrutinized in this paper manifest in three aspects. First, through general treaty exceptions (e.g. temporal exceptions, national security exceptions, and temporary safeguards allowing transitory PRs on capital movements, payments and transfers). Second, exceptions which apply to all types of PPRs (e.g. existing non-conforming measures, sectoral carve outs, PRs not explicitly prohibited in the IIAs). Third, exceptions which apply to some types of PPRs (e.g. to locate production, to carry out R&D, to supply a service, to train/employ workers, to construct/expand facilities, with respect to government procurement, to enforce technology transfer requirements, to qualify for export promotion and foreign aid programs, to qualify for preferential tariffs and preferential quotas, requirements necessary to secure compliance with national laws and to protect the environment). These exceptions, however, may vary considerably from treaty to treaty insofar as each state must carefully carve out relevant sectors or non-conforming measures, amongst other exceptions, from the scope of PPR obligations – often, this will be negotiated as annexes to the treaties.

  • PPRs exceptions are often drafted in such a way that they allow host states to confer an “advantage” upon compliance by investors of certain PRs. This exception applies, for example, for advantages a host state offers to investors to (re)locate production to its territory. This PR provision is found in the NAFTA, CPTPP, USMCA, the EU-Vietnam FTA and several ASEAN IIAs. This exception is likely to relate to the US practice of encouraging foreign investors to relocate their headquarters and operations in the US.

  • Alongside PPR obligations, other substantive protections in IIAs may have similar effects as PPRs when applied. Certain PR or PR-like measures may not fall within the scope of PPR provisions but may nevertheless be inconsistent with other provisions. Notably, this features indirectly through the national treatment, most-favored nation, and fair and equitable treatment provisions. These provisions can operate akin to PPR provisions to varying degrees depending on the drafting of such provisions, as well as tribunals’ interpretation. Therefore, states need to be cautious while negotiating and drafting these provisions, with particular attention to cross referencing to other obligations in the IIA.

  • Out of a universe of around 800 investor-state disputes and more than 500 disputes at the WTO, only a few dozen relate, directly or indirectly, to PPRs. These decisions help us to better understand eventual limitations states may face when designing and implementing PRs. A majority of the investor-state disputes on PPRs involves the US or NAFTA, whereas WTO disputes involve both emerging economies (e.g. China, Indonesia, India) and advanced economies (e.g. Canada, US). Drawing a consistent pattern under investor-state disputes proved to be a difficult exercise since the disputed PR and PPR provisions was not consistently challenged. In any case, such disputes are relevant in demonstrating how PPRs have been delimited, in order to better appreciate how PR and PPR provisions should be ex ante drafted during the negotiations process.

The findings of this paper suggest that PPR obligations have evolved into complex and widely-framed substantive protections for investors in IIAs. Yet, these obligations have applied indistinctively to developed and developing countries alike. Disputes on PPRs, in both the investor-state and WTO Dispute Settlement Body context, have affected developed countries as well since such states have also used PRs to advance their development and national interests. There are indications that this framework might be changing: uncertainty with regards to investor-states disputes may be steering IIAs towards a new direction where investor-state dispute settlement mechanisms only apply to specific provisions (and do not apply to PPRs) – as seen in the recently negotiated USMCA. Though, it is too early to tell what impact, if at all, the recently signed USMCA will have on future IIA negotiations. Nevertheless, the USMCA is still relevant in tracing ongoing developments in the realm of international investment law and trade obligations.

The full memorandum can be read here.

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