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Most Middle Eastern countries in the Persian Gulf and around the Mediterranean have signed Bilateral Investment Treaties (BITs) with European countries, in particular, Austria, Belgium, France, Germany, Italy and, to a lesser extent, Spain and the United Kingdom. These treaties aim to protect foreign investments from arbitrary expropriation and provide for dispute settlement procedures if these are required. Dispute settlement can involve the two signatory states only, but also empower private companies to have recourse to investor-to-state international legal arbitration. The future of the EU's BITs, however, is currently being redefined in Brussels, the capital of the European Union. Indeed, the new Lisbon Treaty that has organized the European Union (EU) since December 2009 now gives the authorities in Brussels exclusive rights to negotiate international deals on foreign direct investment (FDI). What does this mean for the Middle East?
First, some background. Although the EU is a single customs territory with exclusive rights to negotiate and sign international trade agreements, be it World Trade Organization (WTO) deals or bilateral free trade agreements (FTAs), the right to sign treaties regulating foreign investment with third countries has traditionally been jealously guarded by member states. These states have pursued their own policies to suit their individual economic strategies or to maintain privileged relationships with powerful partners. But times have changed. With the rise of challenging economic powers such as China or Russia and other crucial emerging markets, Europeans have felt the need to pool power to convince their partners to open their markets for investment and to ensure their assets are adequately protected. For outsiders too, it will become easier to deal with one single partner on FDI, especially in the services sector, rather than navigate 27 different entities that are supposed to be one single market but are often a patchwork of diverging regulations.
The drafters of the Lisbon Treaty meant to allow the EU not only to sign investment liberalization deals, but also so-called "post-establishment" agreements regarding protection of investments, which is what BITs do. The EU's 27 member states have signed about 1,700 BITs, of which around 1450 are in force. Under the new treaty, it is likely that the process leading to a future BIT will operate like the 2007 US-EU Open Skies agreement. Here, the EU agreement replaced and superseded all other bilateral agreements on flight rights signed between individual member states and the United States. But before the Brussels machinery comes up with its own BIT, the first major challenge is to clarify the legal status of all the existing BITs. For both practical and political reasons, these cannot just be brushed aside in one stroke.
The EU Commission, the body that negotiates trade deals, is drafting a proposal on how to "grandfather" all these agreements, i.e. to integrate member state BITs into EU law. But this arrangement might require adjustments to certain treaties. Furthermore, the political process surrounding grandfathering will not be as straightforward as some might have hoped.
The Commission is likely to put conditions on treating certain BITs as compatible with EU law. In previous legal battles with Austria, Sweden and Finland, the Commission has used the European Court of Justice's opinions to make these countries change BIT clauses or abandon BITs that allowed unlimited transfer of profits across borders. Under EU law, special circumstances, such as a balance-of-payments crisis or financial sanctions against a third country, should permit restrictions on profit transfers. The Commission might dig out more clauses to make a point about compatibility with EU law. Some member states will be reluctant to let their external FDI policies be determined by Brussels and are likely to pick a fight. Some experts predict that the parties to the process might resort to the European Court of Justice to clarify Brussels versus the member states' powers on the matter.
Now enter the EU Parliament. Since December last year, it has equal powers to the Council of member states to decide on trade and investment policy. Certain Members of the European Parliament (MEPs), mostly on the left side of the political spectrum, have already signaled that they will want to put conditions on grandfathering BITs. Not all member state BITs cater for investor-to-state arbitration proceedings, but a growing number do. For ideological reasons, some MEPs oppose the principle of investor-to-state dispute settlement, so the matter might become politicized. Certain MEPs will insist on conditioning grandfathering on the introduction of environmental, ethical or labor clauses.
Given the still very patchy power configuration among the different institutions under the new treaty, it is unclear how this "Battle of the BITs" will ultimately play out. So: What are the implications of this centralization of European investor protection policies for Middle Eastern policy-makers? From a Middle Eastern perspective, this will have both up and downsides. On the one hand, the EU might in the future be much more demanding on its partners as to the degree of protection of its investments. If investor protection, and even procedures for investor-to-state dispute settlement, is included in future bilateral free trade agreements, the EU will be able to condition better access to its markets on strong commitments by its partners to sign up to these clauses. On the other hand, as many Middle Eastern countries have become major international investors, it will be much easier for them to have their own investments guaranteed. There are very few Middle Eastern BITs with the new EU member states, for example, where there is substantial need for foreign investment, but where the business environment tends to be less favorable than in an average Western European economy, and therefore investments not always as secure. It might well be in the interest of Middle Eastern investors to have only one interlocutor-the authorities in Brussels-to deal with FDI matters in the 27 member states.
But all this will take time. We are still quite far from a model "EU BIT," as some have been predicting, or an equivalent of the NAFTA Chapter 11 and its bilateral investor-state dispute settlement mechanism, integrated into the next EU bilateral trade deal. The EU will move slowly. 2010, at least, will be a year of legal clarification. Furthermore, it must also be clear that these new powers of the EU do not extend to portfolio investment. Financial services in the EU are not fully integrated and regulation is not centralized-even if the EU has attempted to provide a framework. Therefore, Sovereign Wealth Funds and private funds from the Middle East will need to continue to deal with individual member states to see to it that their interests are protected.
First published: Friday 23 April 2010
http://www.majalla.com/en/economics/article46587.ece
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