Lost in the discussion about the Trans-Pacific Partnership is its likely impact on the already-complex “rules of the game” governing global investment. The outcome will have a considerable effect on investors for years to come.
With the US Congress recently granting President Obama “fast-track” Trade Promotion Authority, it is clear that there will be a renewed push to complete negotiations on a variety of trade and investment deals, especially the enormous Trans-Pacific Partnership (TPP) currently being negotiated between the U.S., Mexico, Japan and nine other Pacific Rim nations.
What is far from clear, however, is what this means for the rules and regulations governing global investment moving forward, both for investors and recipient governments alike.
By many measures, the TPP is more of an investment treaty than a typical trade agreement. While it still covers trade-related issues, like reducing tariffs and non-tariff barriers as well as rules of origin and antidumping remedies, a sizable portion of its 29 draft chapters touches on topics that relate directly to investment law, such as protection of intellectual property, competition policy, and the increasingly-contentious investor-state dispute settlement (ISDS).
That investment provisions are being inserted into what countless analysts still refer to as a “free trade agreement” (FTA) is hardly novel. For one, tariffs and trade barriers among the TPP participants are already relatively low.
What is more, the emergence of far-flung supply chains and transnational services over the last several decades have blurred the lines between trade and investment.Indeed, all recent US and EU FTAs include provisions that deal with national treatment, most favored nation (MFN), and other measures of investment protection.
In fact, there is already a web of roughly 2,900 bilateral and plurilateral investment agreements in existence. Between these treaties and the arbitration panels often directed to resolve disputes involving their signatories and investors, there have emerged quasi-consistent “rules of the game” governing foreign investment. Will these be changed, or alternately, bolstered if the TPP passes?
That depends on what the final text looks like, as well as who you ask.
The investment regime changing, BIT by BIT
By virtue of its size (TPP members currently comprise 40% of world GDP) and its possible expansion to South Korea and even China, what is ultimately agreed to behind the closed-door negotiating sessions will have an enormous impact on later investment agreements.
Some of this is due to the fact that the text of ratified trade and investment treaties often serves as a template for future negotiations, as finalized positions are made public and the respective economic ministries update their “model” investment treaties.
In the run up to 2012, for instance, the US was not immune to growing backlash over the lack of ISDS transparency and the shortage of treaty clauses upholding labor and environmental obligations. It also learned from the effects of the global recession and desired to protect itself from any investment claims regarding prudential financial controls. As a result, the US updated its Model Bilateral Investment Treaty (BIT) that year, and those changes have laid the ground for the positions it takes in today’s investment negotiations.
A more technical but equally significant means of “multilateralizing” investment provisions that begin in bilateral or plurilateral accords is via MFN. These “equalizing” clauses have been generously inserted into a range of international agreements, particularly those pertaining to trade and investment, and stipulate that the benefits given by one state to another must be at least as favorable as those extended to a third state.
MFN are often used to “import” pro-investor, procedural provisions into a treaty from other treaties, and have been one of the driving forces behind the liberalization of the international investment regime.
The TPP’s recently-leaked investment chapter unsurprisingly contains an MFN clause, which means that, if ratified in its current form, investors from TPP countries may benefit even more than the agreement’s provisions indicate. However, the reverse also holds true as well: Investors from non-TPP states investing in a TPP signatory state may be able to, for instance, import weaker domestic content or stronger fair and equitable treatment provisions if their country has an investment treaty with the signatory which includes MFN.
Furthermore, states still have access to an additional method by which the TPP acts to further liberalize the international investment regime: “treaty shopping,” whereby a corporation files an investment claim from its subsidiary due to better investment protections in that country’s BIT.
In 2011, Australia discovered this the hard way when it banned the display of trademarks in tobacco packaging. Almost immediately, US-headquartered Philip Morris brought suit through Australia’s investor-friendly BIT with Hong Kong, where its Asian subsidiary is based.
Further harmonization of investment rules not guaranteed
There are indications that the TPP might actually result in a divergence in global investment regulation, particularly in light of the recent backlash against BITs from a number of emerging economies.
It is certainly not hard to see how a two-fold structure overseeing foreign investment may soon take place: one governing states who have signed up to stringent “WTO-plus” and “WTO-extra” investment agreements, often described by the US as “comprehensive and high standard,” and another whose treaties give states far more leeway in regulating inbound investment, passing domestic legislation that might potentially hurt foreign investors, and settling investment disputes within their own court systems.
“Given the strong opposition to investment treaties in South Africa, Indonesia, and parts of Latin America, the adoption of [the] TPP will entrench the growing divide in the international investment regime,” says Lauge Poulsen, a lecturer in international political economy at University College London who specializes in international investment.
In fact, the Pacific Rim is also home to another massive attempt at economic integration, this time led by Beijing, with a narrower agenda and more accommodating rules on trade and investment, which will probably allow for liberalization targets that are flexible and non-binding.
Not at all dissimilar to the recent launch of its Asian Infrastructure Investment Bank, which may emerge as a very real rival to the World Bank, the Regional Comprehensive Economic Partnership (RCEP) has already brought together China, India, Australia, the ASEAN economies and others to the negotiating table as a counterbalance to the US-directed TPP.
Like the TPP negotiations themselves, none of these outcomes are set in stone. Much will depend on whether the talks finish soon enough that the signed deal can get through Congress well before next year’s presidential elections. This may very well prove to be TPP’s biggest test yet.