The Japan-EU trade deal, the JEEPA, has many facets and implications-economic, geopolitical and legal. On its own, the text of the investment chapter merits attention. The EU and Japan seemed to have scrapped the classic BIT/investor protection architecture as a model, and instead designed a set of disciplines that focuses not on giving guarantees or privileges to firms but rather the elimination of discriminatory barriers to investment. Fair and equitable treatment and protections against expropriation, the norms by which historically investors have been able to demand full market value compensation for regulatory changes, are completely out. Instead, the legal structure seems much more akin to classic WTO architecture.
This becomes immediately evident when one encounters the first substantive legal obligations in the JEEPA investment chapter:
Market Access
1. Neither party shall maintain or adopt with regard to market access through
establishment or operation by an investor of a Party or by an enterprise constituting a
covered investment, either on the basis of its entire [EU: territory, JP:...] or on the basis of a
territorial subdivision, measures that:
a) impose limitations on:
i) the number of enterprises, whether in the form of numerical quotas, monopolies,
exclusive rights or the requirements of an economic needs test;1
(ii) the total value of transactions or assets in the form of numerical quotas or the
requirement of an economic needs test;
(iii) the total number of operations or on the total quantity of output expressed in terms
of designated numerical units in the form of quotas or the requirement of an
economic needs test;
(iv) the participation of foreign capital in terms of maximum percentage limit on foreign
shareholding or the total value of individual or aggregate foreign investment;
(v) the total number of natural persons that may be employed in a particular sector or
that an enterprise may employ and who are necessary for, and directly related to,
the performance of the economic activity in the form of numerical quotas or the
requirement of an economic needs test.
b) restrict or require specific types of legal entity or joint ventures through which an
investor of the other Party may perform an economic activity.
The model here is of course not any BIT but the WTO General Agreement on Trade in Services. At the same time, instead of opting into sectoral coverage for the market access commitment (as with the GATS) , the parties have the possibility of scheduling existing non-conforming measures to which the commitments don't apply (which is like the NAFTA architecture, in a way).
Then there are a National Treatment obligation and disciplines on performance requirements.
The MFN provision in the text signals a clear intent to avoid the kind of treaty shopping that has occurred under investor-state arbitration, where MFN provisions in BITs have been used by investors to argue that they are entitled to better treatment offered in a different agreement between the host state and a third country. Not only does the JEEPA prevent the use of MFN to claim better dispute settlement provisions (a reigning in of MFN already evident in a number of IIAs) but it goes further:
5. Substantive provisions in other international agreements concluded by a Party with a
non-Party
do not in themselves constitute “treatment” under this Article. For greater
certainty, actions or inactions of a Party in relation to such provisions can constitute
treatment
and thus give rise to establishing a breach of this Article, only if the breach:
(i) is established based on this Article and not based on the said provisions, and
(ii) in the case of a covered investment, causes loss or damage to it, which is not
established based on differences in the amount of compensation that could be
obtained by using the said provisions in a dispute settlement case.
In other words, "treatment" simply doesn't apply to cases where other agreements have different substantive obligations. Crucially, the fact that other agreements that the EU (e.g. CETA) or Japan have entered into contain FET or protections against expropriation cannot lead to an MFN-based claim that these norms should be read in, as it were, to the JEEPA in a particular dispute.
There is some uncertainty as to how public policy exceptions for non-conforming investment measures will be brought into the architecture of the JEEPA. In the current text, the option presented is that a general public policy exceptions chapter will apply to investment provisions; this chapter incorporates the exceptions in Article XX of the GATT, that are the subject of an extensive jurisprudence in the WTO Appellate Body. But brackets in the text indicate that this has not been fully decided; the exceptions might yet end up in the investment chapter itself.
What is the meaning of new approach or architecture for international norms on investment? Some have suggested that a clue lies in the overall rubric, which is investment "liberalization"-as opposed to protection. As I have documented in a recent study, the economic case for using international law to protect investors against regulatory change is weak, ambiguous and unfounded at best. At the same time, supply chains involve both external contracting (trade) and internal contracting (investment) and the case for removing protectionist investment barriers is closely linked to that in favor of curbing trade protection. Traditional BITs and investor-state arbitration have had little to do with this more sound economic rationale for international law disciplines in the investment area. While the overall logic is sound, as is taken into account by the possibility of scheduling non-conforming measures, and also by the exceptions chapter, there may be circumstances where the barriers in question could constitute legitimate public policies,even where there are elements of discrimination. That is an important debate, as illustrated by discussions in the WTO about local content requirements and industrial policies in areas like renewable energy.
The bigger point here is the EU and Japan have decided to shift the frame from a system of investor protection in full legitimacy crisis (the BIT/ISDS regime) to an expansion of the basic approach of the GATT/WTO to the investment field, in some sense strengthening the TRIMs Agreement as well as the GATS (mode III). Could this be a first step toward the outlines of a multilateral approach to investment within the WTO framework? Despite the attempt to launch an investment "facilitation" agenda in Geneva, major developing countries like India are skeptical. The question is whether, by dropping FET and expropriation clauses, there is a clear enough signal of a break from the earlier investment regime, with its colonial and neocolonial origins, to make the likes of India think again.
As the overarching Agreement in Principle states, there is one aspect of the investment chapter that remains open, namely the matter of dispute settlement:
there is still no agreement on the whole
chapter, as the issue of investment dispute resolution remains fully open. The EU has tabled its
reformed investment court system on the table in the negotiations with Japan. The EU continues to
insist that there can be no return to old-style ISDS. Under no conditions can old-style ISDS provisions
be included in the agreement. More discussions will be required to arrive at a conclusion on this in the
next months.
But of course the EU is already moving toward multilateralism in dispute settlement; it has an ongoing initiative in partnership with Canada to develop a multilateral investment court instrument. The ultimate result overall may be a serious effort to start multilateral or at least plurilateral negotiations in Geneva. The more that developing countries are confident that this is not the old agenda of protection of multilateral firms against regulatory change, the more chance such an effort has to distance itself from, for example, the failed MAI negotiations of decades ago. But as developing countries denounce BITs, or move to fundamentally different treaty structures (India's new model BIT for example), or reconstitute government/foreign firm relations as a matter of domestic law (South Africa) the more secure they may be in engaging in negotiations about investment liberalization that do not carry the taint and baggage of the ancien regime. At the same time, activists in Canada and Europe concerned about regulatory chill might legitimately ask: if one can do without FET and protections against expropriation in JEEPA, what justifies their existence in CETA? Perhaps, in the end, all roads lead to Geneva.
This is a very quick read of a text that deserves careful study-but that is a clear departure from the status quo. Much more to be said.
