UK investment policy Contents

3Investment liberalisation and investment protection

47.Both investment liberalisation and investment protection—and the extent to which they are pursued—are key aspects of investment policy. Provisions relating to both feature in a range of international agreements that regulate the terms under which international investment takes place. These include multilateral and plurilateral agreements on investment (involving groups of countries), as well as International Investment Agreements (IIAs), which tend to be bilateral (involving just two states).81 As the UK leaves the EU, it takes back responsibility for these two areas of investment policy—the Union having formal competence in respect of issues around FDI.

48.Dr Axel Berger, of the German Development Institute, explained to us that “Investment liberalisation means that foreign investors have a right to invest”, so the host state does not “have the right to choose which investors should come into the country and which should not”.82 (Investment liberalisation is sometimes referred to in terms of permitting “market access”.)83 Where investment liberalisation is enshrined in international agreements, it often takes the form of “pre-establishment” (or “right of establishment”) provisions. These include granting investors the right to invest on the same terms as domestic firms (“national treatment” provisions) or on the same basis as other foreign investors (“Most Favoured Nation” provisions—MFN).84 Investment liberalisation provisions can also include the elimination of performance requirements, i.e. conditions attached to foreign investors by host states, such as stipulating that a certain quantity of domestic inputs (locally produced raw materials, components, etc.) has to be used.85

49.Investment protection, by contrast, relates to provisions “designed to guard against political risks faced by companies investing in other countries”, as we were told by Professor David Collins, of City, University of London.86 As such, investment protection is generally focused on the “post-establishment” phase, i.e. once an investor is already present in a host state.87 Investment protection provisions have been, and continue to be, hugely controversial, as we discuss below.

50.The formulation of policy in respect of investment in the UK’s post-Brexit multilateral, plurilateral and bilateral agreements falls within DIT’s Core Objective 3, to “Open markets, building a trade framework with new and existing partners which is free and fair”. This comes under the portfolio of the Minister of State for Trade Policy, George Hollingbery; and the lead officials at DIT for this area of work are Crawford Falconer (Second Permanent Secretary and Chief Trade Negotiation Adviser) and John Alty (Director General, Trade Policy Group).88

Multilateral and plurilateral agreements

51.There are a range of multilateral trade and investment agreements, and such agreements are negotiated within the framework of the World Trade Organization (WTO) or, sometimes, another international body, such as the OECD. The term “plurilateral agreements” usually refers to those which involve only a subset of WTO members. The UK is already (before Brexit) in its own right both a full member of the WTO89 and a party to a number of WTO agreements—among which are those that regulate investment.90

52.Within the WTO framework, the Agreement on Trade-Related Investment Measures (TRIMs) and the General Agreement on Trade in Services (GATS) together set a basic framework regarding investment liberalisation. Dr Stephen Woolcock, of the London School of Economics (LSE), told us that TRIMS “bans six core performance requirements”.91 GATS, meanwhile, covers investment in relation to one of the modes of services supply defined by the Agreement, Mode 3 (supply “through commercial presence in the territory of any other Member”),92 on a basis that Dr Woolcock described to us as “fairly limited”.93 Also relevant to investment in respect of Mode 3 services provision is the proposed Trade in Services Agreement (TiSA), plurilateral negotiations on which are currently taking place among WTO members.94 We will consider these negotiations in greater depth in our forthcoming report on Trade in Services.

53.There have also been other attempts to expand the coverage of investment issues at the multilateral level. In 1995, a group of developed countries launched negotiations on a Multilateral Agreement on Investment under the auspices of the OECD, which was intended to expand the scope of investment liberalisation and to cover investment protection. These failed, according to Dr Woolcock, due to “differences between the Americans and the Europeans”, as well as opposition from civil society groups.95 There were also attempts to expand the scope of provisions on investment during the Doha Round of negotiations among WTO members, which began in 2001. However, following disagreements between developed and developing countries, investment was dropped from these negotiations.96

54.The only existing multilateral agreement including investment protection provisions to have been mentioned to us in evidence is the European Energy Charter Treaty (whose application is, as its title indicates, narrowly focused on the energy sector in Europe). The EU is a signatory to this treaty, as are several Member States in their own rights—including the UK.97 Negotiations on modernisation of the treaty are expected to begin in autumn 2019, i.e. around the time Brexit is due to take place, but the UK Government is yet to set out its objectives for these negotiations as a contracting party in its own right.98

55.We did ask the Minister for Investment about the UK’s investment liberalisation policy at the multilateral and plurilateral levels after Brexit. However, he referred only to the UK’s continued membership of the UN and “independent” membership of the WTO.99

International Investment Agreements

56.Investment liberalisation and protection are also addressed at the bilateral level, through IIAs, which can, according to UNCTAD, take the form of:

UNCTAD states that, as at July 2019, a total of 2,353 BITs and 313 TIPs were in force.101

Investment liberalisation in IIAs

57.In our evidence-taking, we were keen to hear about the level of investment liberalisation that has been facilitated through IIAs. Dr Robert Basedow, of the LSE, was sceptical in this regard; he described investment liberalisation provisions as “tend[ing] to lock in a minimum level of openness. They do not normally reflect the real degree of openness of economies” and were best seen as “insurance policies”.102

58.We also took evidence on whether investment liberalisation provisions are desirable in IIAs. Dr Jonathan Bonnitcha, of the University of New South Wales, emphasised to us the need for more evidence to enable assessment on a case-by-case basis of whether this is the case. He stressed that there may be instances where “formal government restrictions are less of an obstacle”; and there may also be occasions where such restrictions can be eliminated unilaterally. Although an investment agreement could help in the latter process, this was not a “general rationale” for including investment liberalisation provisions in such agreements “as standard practice”. He also emphasised that including such provisions in UK IIAs might prevent future UK governments from “pursuing their preferred regulatory policies”. He concluded by arguing that “Absent some compelling justification particular to the partner state(s) in question, the UK should not offer, nor seek to secure, commitments to liberalise certain sectors in bilateral negotiations.”103

Investment protection in IIAs

59.When it came to investment protection provisions in IIAs, we were told that they rely in part on the non-discrimination standards of MFN and national treatment.104 They also go beyond these, encompassing other far-reaching standards of protection. We heard in evidence that prominent among these are Fair and Equitable Treatment clauses, which require governments to treat investors “fairly” and respect their “legitimate expectations”.105 There are also direct and indirect expropriation clauses, in the latter case providing for compensation where a regulatory measure harms, affects or interferes with an investment.106 So-called “umbrella clauses” oblige host states to comply not just with explicit treaty obligations, but also others, such as those contained in contracts with the investor (arguably in effect elevating contract commitments to the status of treaty obligations).107 Capital control (or transfer of funds) clauses require governments to allow effectively unrestricted movement of payments and capital by investors.108 There are also full protection and security clauses, which oblige the host state to take active measures to protect investments against adverse effects from causes such as civil unrest and violence.109

60.While BITs have been the main vehicle for investment protection provisions, such provisions have also been incorporated into FTAs (notably some of those negotiated by the EU, as we discuss further below).110

Investor-State Dispute Settlement—the focus of controversy

61.A key element of investment protection under IIAs is the right granted to investors to raise disputes on their own behalf against host states in cases of alleged violation of protection provisions such as those listed above. These provisions have proved very controversial—most notably in the context of the discussions around the proposed EU-USA Transatlantic Trade and Investment Partnership (TTIP). It is notable that much of our written evidence focused on the extent to which such provisions are appropriate and / or desirable. In consequence, we give this issue full consideration below.

62.Investor-State Dispute Settlement (ISDS) provisions stand in contrast to State-State Dispute Settlement provisions under international agreements (including IIAs)—whereby private investors or corporate bodies have no direct means of seeking redress and must rely on this being done on their behalf by the state to which they belong. We were told that ISDS is premised on the model of commercial arbitration and that substantial amounts have been claimed and awarded by ISDS tribunals.111 The investment protection regime also features treaties that cover the enforcement of arbitral awards, such as the New York Convention.112

63.BITs have typically been signed between traditional “home countries” for investors (capital-exporting developed states) and “host” states (capital-importing developing states).113 Dr Lauge Poulsen stated in written evidence that “the number of investment treaty claims pursued and won by UK investors pales in comparison to the thousands of British investors with assets abroad”, indicating that these provisions are “almost solely used as a last resort”. He argued that the amount of compensation paid to UK investors under UK investment treaties reflected “the broader pattern of investment treaty arbitration as a mechanism primarily serving to resolve large, or very large, disputes”.114

64.Dr Zoe Phillips Williams, of the LSE, explained that, while OECD countries have, as investor “home states”, “been subject to fewer investment claims than developing and transition economies”, it is not true that “investment arbitration is only used by investors in jurisdictions with weak rule of law and unreliable domestic courts”.115 The UK has, though, so far only been the respondent in two investment claims.116 One case was brought against the UK (and France) by the Channel Tunnel Group Ltd and France Manche SA, over the level of security around the Channel Tunnel; the parties reportedly settled the case for a substantial sum.117 The other case involved an Indian investor bringing a case over a commercial lease under the UK-India BIT; it is reported that “Little is known about this claim, including its outcome”.118 The Government has repeatedly stated that there has never been a successful ISDS case against the UK.119

65.We briefly examined ISDS in our report on the Continuing application of EU trade agreements after Brexit (March 2018), urging the Government to “fully consider and explain the implications of including such provisions in post-Brexit UK agreements that replicate relevant EU agreements.120 We again looked at ISDS in our report on UK-US trade relations (May 2018), concluding that, before any future negotiations on a UK-US trade agreement, the UK Government must first “clarify its policy on ISDS” and “identify the purpose of an ISDS mechanism in circumstances where both the US and UK have sophisticated, independent domestic judicial systems.”121 In our report on Trade and the Commonwealth: developing countries (November 2018), we further considered criticisms that ISDS negatively impacts development and human rights, stating that we would return to these issues in the course of the present inquiry.122 In March 2019, the parliamentary Joint Committee on Human Rights found “clear human rights and rule of law concerns” around arbitration in ISDS and argued that “Investor rights should not be privileged over human rights.”123

66.Several UK civil society groups (including trade unions, charities, and other non-governmental organisations) expressed to us their opposition to ISDS, in both EU and UK IIAs. This echoed their and other groups’ opposition to the inclusion of ISDS in TTIP and (in a revised form) the EU-Canada Comprehensive Economic and Trade Agreement (CETA).124 As a result, investment protection proved to be one of the most politically controversial elements of both agreements.125 A central point of criticism from these groups, as summarised by the Trades Union Congress (TUC), is that ISDS “enable[s] foreign investors to challenge legitimate legislation that promotes public welfare”.126 Others also told us that it impinges on governments’ “right to regulate”.127 War on Want cites ISDS cases involving policies in the areas of “climate, energy and environment”, tax, “workers’ rights and equality” and health.128 Concerns about the impact of ISDS claims in such areas are also echoed by some academics.129

67.On the other side of the argument, the IoD told us that ISDS “is the only way to guarantee non-discriminatory treatment as an investor”. The Institute thought that “There is an unfortunate tendency to politicise certain issues relating to ISDS, but investors need protection.”130 Likewise, Jack Knight, Deputy CEO of the Investment Association, stated that his organisation “would seek to enable savers and investors to have […] the panoply of measures for investor protection”.131

Arbitration tribunals

68.A number of specific alleged shortcomings of arbitration tribunals were mentioned to us in evidence by critics of ISDS. We were told that the high cost of arbitration proceedings limits smaller investors’ access.132 There were said to be only limited opportunities for participation by citizens or other non-parties to a dispute.133 It was stated that there was a lack of transparency in proceedings.134 It was claimed that there was a lack of consistency in arbitrators’ rulings and that they had too much discretion in interpreting broad standards of investment protection such as Fair and Equitable Treatment.135 There were also alleged to be conflicts of interest on the part of arbitrators, since they have traditionally also been free to serve as counsels in other arbitration disputes.136 In addition, it was noted that there was no requirement for aggrieved parties to exhaust domestic remedies (i.e. to have tried as far as possible to seek redress under local laws before having recourse to an arbitration tribunal). This, it was said, led to a “parallel justice system” for foreign investors.137

69.Pia Eberhardt, of Corporate Europe Observatory, told us that “Under today’s regime [the arbitrators] are hand-picked by the parties, which it is a bit like you going to your courts and 50% of the judges being your friends or neighbours”.138 Dr Michael Waibel, of Cambridge University, argued that, where a “legal system is highly regarded and its courts are independent, domestic courts may be preferable to investor-state arbitration for reasons of cost, transparency and efficiency”.139 However, Professor Collins told us that even where there was a developed legal system, such as in the US, foreign investors risked facing inefficiency and arbitrariness in the legal system (including between different levels of government). He said: “Sadly, you can’t expect that all of the courts in the US will be as efficient or as non-arbitrary as we might wish them to be […] I am not sure that I would trust the court of Louisiana or Kentucky or something like that.”140

70.War on Want noted that 37% of tribunal cases were won by states and 27% by investors. However, these figures were skewed by the large number of cases that were formally won by states but only because they were dismissed on technical grounds of jurisdiction (relating to whether the asset involved actually constitutes an investment under the terms of the relevant BIT). In addition, 23% of cases were settled, “and many of the settlements will have involved the state making concessions”.141 In respect just of those cases actually decided on their merits, investors won 59% of cases, compared to 41% won by states.142 Professor Collins, however, argued that this ratio was only “slightly in favour of the investors” and it was “not always easy” for them to win once jurisdiction had been established.143

Invoking ISDS provisions

71.Regarding the extent to which ISDS provisions can be invoked, Ruth Bergan, Co-ordinator at the Trade Justice Movement, told us that broad definitions of “investment” and “investor” allowed for very wide use of the dispute procedures. She said that in the UK’s model BIT (its previous standard template for such treaties):

investment covers every kind of asset owned or controlled directly or indirectly, moveable and immoveable property, any other property rights, shares in a company, any other form of participation in a company, intellectual property rights, goodwill, technical processes and know-how.144

And the UK’s model treaty did “not require businesses to have substantive operations within the UK in order to access the benefits of treaties”.145 Professor Collins, however, emphasised that many types of investment, such as “one-off contracts”, are not covered by ISDS.146

Regulatory chill

72.Another allegation levelled at ISDS provisions is that they lead to “regulatory chill”, i.e. they inhibit or constrain states from introducing public interest regulatory measures for fear that overseas investors will bring arbitration cases in response.147 Dr Julia Calvert, of the University of Edinburgh, stated in written evidence that “Given the costs of international arbitration, [investor] threats can be highly influential”.148

73.Dr Williams, in conducting an analysis of the distribution of investor claims against OECD states, had found that in addition to extractive industries, claims “are clearly concentrated in what are, or may have formerly been, public services such as waste management, energy and telecommunications services”. These areas, she argues, “can be highly politicized as they very directly impact citizens’ wellbeing, and thus raise clear distributional concerns for policy-makers”. In addition, her analysis suggests that when compared to non-OECD states, OECD states faced significantly more investor claims “triggered by legislative measures alone” (“laws passed by national and sub-national legislation”), as opposed to “administrative” and “judicial measures”.149

Provisions on expropriation, and Fair and Equitable Treatment

74.Dr Barnali Choudhury, of University College London, told us that of the cases she had examined “involving human rights or environmental measures […] approximately two-thirds” featured tribunals finding “a violation of either (or both) of” two key standards of protection: expropriation and Fair and Equitable Treatment. She stressed that the latter “was, however, the more successful basis for a claim”.150 Dr Calvert told us that “It is important to note that these provisions are broadly worded and are open to interpretation by international arbitrators.”151

75.Ms Eberhardt told us that Fair and Equitable Treatment “has become kind of the catch-all clause that companies use most often and most successfully”. She added that “tribunals have already come to interpret the standard as a legal standstill guarantee for investors. That makes it very difficult for Governments not to pay as they soon as they change the law.” She gave the example of a British investor, Eiser Infrastructure, making a claim against the Spanish Government “because it enacted certain changes to its renewable energy policy”.152

76.Professor Collins, however, stressed that Fair and Equitable Treatment “guards against procedural unfairness in various aspects of administration in the host state” and that “You have to show an egregious treatment by the host state […] it is about the Government substantively interfering with you”. He stressed that it was “not easy to succeed with those claims”.153

77.In written evidence, the Global Justice Movement told us that indirect expropriation clauses could apply in situations “where regulatory changes have impacted the business of an investor”, citing cases of companies challenging a “moratorium on fracking” (Lone Pine Resources vs. Canada) and the introduction of a minimum wage (Veolia vs. Egypt).154 Dr Choudhury, however, noted that while this standard of protection has also been relied upon by tribunals in cases involving “public welfare regulations”, “unlike [Fair and Equitable Treatment], many states have already made concerted efforts to reduce the ambit of indirect expropriation provisions”.155

The effect of investment protection on investment flows

78.Ms Eberhardt told us that “one of the most important justifications” for agreements with investment protection provisions was “that they would bring investment”. However, “the evidence to back up this claim is not there or is very inconclusive.” Brazil had never signed an agreement containing ISDS, yet it was “the biggest recipient of foreign direct investment in Latin America”. Factors such as market size and workforce education levels were much more important in determining investment flows.156 Professor Collins disagreed, saying that some studies “have recently shown that there is an increase in FDI”, such as one “done by the United States International Trade Commission very recently, which shows an increase of about 4% in FDI following the conclusion of bilateral investment treaties”. Studies that were said to show the lack of such a correlation “came out of an era in which world FDI flows were in decline”. However, this did not mean that such agreements “categorically work” in this respect. They worked “more so in some circumstances than in others”. The strongest evidence of their effectiveness was in “transition economies”, although even there they only brought “modest gains”.157 Ms Eberhardt responded that the inconclusiveness of the evidence had led UNCTAD to say it was “misleading” to suggest that investment protection provisions bring investment.158

79.In written evidence, Dr Calvert stressed that research on the relationship between the entry into force of BITs and investment flows showed only “a weak correlation”.159 Dr Basedow, meanwhile, noted the “inconclusiveness of existing research” on the impact of investment liberalisation and investment protection provisions in agreements. This was down to the difficulty of establishing causation (whether countries conclude agreements to boost investment—or to accommodate a surge in investment that is already occurring) and the unreliable nature of investment data (as we discussed in Chapter 2).160 Professor Jason Yackee, from the University of Wisconsin Law School, told us that those who argue ISDS encourages investment often do so on the basis of vested interests, as they make “small fortunes” litigating and arbitrating in ISDS cases. His own research showed “it is very difficult—even impossible—to conclude empirically” that ISDS “encourage[s] greater investment”. He termed “exceptionally weak” (empirically and theoretically) and “essentially nonsensical” the argument that ISDS provisions would encourage greater investment into a country such as the UK, whose legal system was “among the world’s most fair and effective”.161 It is notable that a UK Government study concluded in 2014 it was “unlikely that BITs have been a major driver of the surge in outward FDI that has been seen over recent decades”, although they were factors in investment decisions by “a small but not insignificant proportion of investors”.162

The importance to businesses of investment protection

80.Our evidence did indicate that investment protection provisions may not actually be of great importance to UK businesses investing abroad. The IoD stated that a recent survey of its members had found that “only 3% of business leaders believe investment protection measures […] are an important priority for the UK in developing its post-Brexit trade policy strategy”. It thought that this was likely to be linked to “a lack of familiarity” with such provisions, “particularly amongst [small and medium-sized enterprises]”.163

81.While defending the merits of ISDS in principle, the IoD was also mindful of the potential for controversial ISDS provisions to “hold up more important and relevant contents of trade agreements to most businesses”. Accordingly, the Institute “would urge the Government to consider whether it should approach the inclusion of investment protection measures—or at least ISDS specifically—on a case-by-case basis with its future external commercial policy negotiations.”164

82.Jonathan Geldart, Chair of the Northeast Region for the IoD, meanwhile told us in oral evidence that he did not view IIAs as having “made a huge amount of difference”—a view with which Stephen Adams, of the political risk consultancy Global Counsel, agreed.165 In Tokyo, we found that, while Japanese firms were in favour of better investment protection terms in agreements if they could be obtained, they did not seem very focused on the details.

The evolution of EU policy on investment protection

83.Following the controversy over ISDS in the TTIP negotiations,166 the European Commission developed a new approach to investment protection, which Dr Basedow told us was in line with a “global trend and similar US and Canadian reform efforts”.167 He explained that this approach “limited the scope of protection, refined the definition of the important ‘fair and equitable treatment’ standard and added language on the right to regulate”.168 It also involves a new Investment Court System (ICS), which involves a “standing court-like adjudication platform with tenured and vetted adjudicators and mechanisms to review contested decisions”.169 This arrangement has been included in CETA, as well as several other EU agreements.170

84.The UK Government opposed the inclusion of the investment protection provisions in the provisional application (pending ratification) of CETA, due to its reservations about the ICS. Dr Fox indicated to the European Scrutiny Committee (ESC) in 2016 that this was because the ICS meant “a narrowed scope for investors to bring ISDS [cases]”, in various respects, and removed “the rights of the EU Governments and investors to appoint arbitrators.”171

85.However, some witnesses questioned whether the ICS really did represent a break with the fundamental characteristics of ISDS as hitherto constituted. According to Ms Eberhardt, the ICS “was a relabelling exercise, but the investment court system also includes some important changes from the old ISDS”, notably by making proceedings “transparent and open to the public”. She also described how in future the three “arbitrators” deciding on cases would be picked from a “state-appointed” list. While describing these as “important reforms”, she stressed that “the egregious cases that we have been seeing and the threat of regulatory chill really will not be addressed that much by these changes”.172

86.Professor Collins likewise described the ICS model as involving essentially “procedural change” only.173 He further argued that the ICS would render the process of investment arbitration “longer and more expensive” due to its appellate mechanism.174 Luisa Santos, from BusinessEurope (the Confederation of European Business), in giving evidence to us on EU trade policy, noted that her organisation had initially been sceptical as to whether the new provisions on direct expropriation, as well as those on Fair and Equitable Treatment, offered enough protections to investors.175

87.We also heard that the Commission has in addition recently started work on establishing a Multilateral Investment Court. This would serve as a permanent body that can replace the bilateral mechanisms under the ICS.176 The proposal is being pursued through a working group of the UN Commission on International Trade Law that has been charged with looking into reform of ISDS.177

Alternative approaches

88.As we have noted, it was put to us that investors ought to rely on local courts for redress and could be required in IIAs to explore fully all such avenues before being able to bring a case before a supra-national tribunal.178 Such “domestic exhaustion requirements” were described to us by War on Want as “a customary principle of international law”.179

89.We also heard about the possibility of provisions in IIAs to counterbalance investor rights. Dr Choudhury told us that these included “investor obligations”, whereby investors must acknowledge duties in respect of matters such as corporate governance standards, and the environmental and social impact of their actions.180 Ms Eberhardt told us that, while there was a “debate” about investor obligation provisions, which she welcomed, these were currently included in very few treaties.181 Professor Collins, in contrast, emphasised that the whole purpose of investment protection was to “rebalance” the risks borne by foreign investors.182

90.Another type of counterbalancing measure mentioned by Dr Choudhury was the facilitation of state “counterclaims” (by states against investors), in which non-economic issues might be considered by tribunals in investment disputes. She explained that most arbitral rules allowed for these, although some tribunals had “struggled to determine whether counterclaims are within their jurisdictions”.183 Such provisions were seen as positive by Ms Eberhardt and potentially “interesting” by Professor Collins.184

91.Dr Choudhury also referred to “general exceptions”—including “carve-outs”, where certain sectors or parties are not covered by the provisions on investment protection in an agreement. A prominent example was the tobacco industry carve-out in the proposed Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), “which enables state parties to deny investors the ability to bring an investment arbitration challenging a tobacco control measure”.185 Such provisions were, though, criticised by Ms Eberhardt, who suggested they failed to address what she saw as the fundamental shortcomings of investment protection. Professor Collins, however, saw them as evidence that, rather than there being “an inflexible regime” with “cookie cutter” agreements that were all the same, agreements now “are very fluid and very dynamic; they are bespoke” and can be “tailored to suit the particular country, as it needs”.186

92.Another alternative approach to investment protection within the framework of an IIA is represented by Brazil’s model Cooperation and Facilitation Investment Agreement. Unlike many BITs, this contains no provisions for ISDS; instead, it seeks to avoid disputes arising in the first place, by means of cooperation, mediation and risk mitigation. This is accomplished partly by means of “ombudsman” arrangements, to help foreign investors navigate domestic institutions and prevent disputes from escalating; South Korea also takes a similar approach in this regard.187

93.At the multilateral level, War on Want told us of efforts to establish through the UN a Binding Treaty on Business and Human Rights, “which investment agreements could be required to abide by”.188

94.We were also told about the possibility of alternative forms of investment protection outside the framework of any kind of agreement. One of these was political risk insurance, which, we were told by Ms Bergan, “is available commercially, as well as through the World Bank and from the UK Government” and “covers most of the issues that are covered by investment treaties”.189 Professor Collins, however, stressed that the “data on political risk insurance is very sketchy” and that such insurance is “very expensive”.190 While recognising that the cost of insurance was an issue, Dr Poulsen suggested that “there may not always be a strong policy rationale” for the British Government to be concerned about this. He also noted that investors had “a range of corporate risk mitigating strategies available to manage political risk, which can make international legal obligations less relevant in practice”.191

95.Dr Geoffrey Gertz, of the Brookings Institution (a US think tank), told us in written evidence about another alternative outside the framework of an IIA. He told us that, instead of formal, agreement-based approaches to dispute settlement (ISDS and State-State Dispute Settlement provisions), “less formalized diplomatic interventions” can be undertaken, whereby “Diplomats can assist UK businesses in resolving incipient investment disputes before they become investor-state arbitration cases”. He emphasised that the UK Government “should do more to measure and evaluate its approach to investment diplomacy, including through surveys of UK businesses.”192

Sustainable development and IIAs

96.Dr Berger told us that “for most developing countries investment liberalisation commitments may not be a desirable policy option at the moment”. This was because they wanted to retain the ability to regulate incoming FDI; and it would require “very high administrative capacities” to ensure that particular markets were not liberalised before they were ready for international competition or where such liberalisation would run counter to “an active industrial policy”. Likewise, such administrative capacities would be needed in order to ensure “a mutually beneficial relationship between international and domestic companies”.193 Dr Bonnitcha, meanwhile, argued that “the UK should not seek to compel liberalisation” where it ran counter to a developing country’s wish to impose “certain restrictions or conditions on inbound investment” that would support “the achievement of development outcomes”.194 As noted above, while we heard differing views regarding whether there was enough evidence to conclude that investment protection provisions promote FDI flows, including into developing countries, the prevailing view was that the evidence was inconclusive.195

97.Several witnesses told us of problems that investment protection could potentially pose for sustainable development. Dr Zhan, of UNCTAD, told us that “almost none of the UK’s bilateral investment treaties mentions sustainable development”.196 The Trade Justice Movement wrote in its evidence submission that “There is already evidence that UK BITs are impacting upon the policy space of governments” in a development context.197 Global Justice Now called for “Reviewing and renegotiating relevant bilateral trade and investment agreements to exclude clauses that are hindering development goals (e.g. ISDS clauses)”.198

98.Of the EU Economic Partnership Agreements, which are specifically intended as development-focused trade agreements,199 only the CARIFORUM (Caribbean Forum) Economic Partnership Agreement contains substantive provisions on investment. These are specifically in relation to investment liberalisation and have been carried forward into the UK’s roll-over trade agreement with CARIFORUM.200

IIAs to which the UK is already a party

99.The UK is already party to many IIAs negotiated independently from its membership of the EU. Dr Bonnitcha told us that “the UK has one of the world’s largest network[s] of bilateral investment treaties, which has been built up since the 1970s” and that “Almost all of these treaties are with non-OECD states”.201 UNCTAD’s IIA database currently shows the UK is a party to 103 BITs, of which 93 are in force.202 It was confirmed to us in evidence that the UK’s BITs are focused on investment protection rather than on investment liberalisation.203

100.The UK is also, as an EU Member State, party to various EU agreements concerning investment. In 2009, the Treaty of Lisbon granted the EU exclusive formal competence to negotiate on issues around FDI. This resulted in the broadening of the scope of EU investment agreements to encompass investment protection. Where trade agreements negotiated prior to 2009 had featured investment provisions, these were only about liberalisation.204 Two particular aspects of foreign investment policy, ISDS and portfolio investment, remain a shared competence between the EU and Member States.205 War on Want told us that, following the entry into force of the Treaty of Lisbon, the EU had been seeking to replace Member State BITs with EU-level agreements (either trade agreements or standalone investment agreements) “but there at present is still a mix.”206

101.It appears that CETA is currently the only EU-level trade agreement to be concluded that features investment protection provisions. Additionally, the EU has concluded two Investment Protection Agreements (IPAs), with Singapore and Vietnam,207 and is currently negotiating another such agreement with Japan, as well as standalone investment agreements with China and Myanmar.208

102.As we noted in our report on Continuing application of EU trade agreements after Brexit (March 2018), once Brexit takes effect the UK will no longer be covered by either the trade or investment provisions in EU agreements—unless they can be rolled over (i.e. replicated in the form of new UK-third country agreements).209

103.Evidence from several sources indicated that the BITs to which the UK is a party in its own right will continue to apply after Brexit.210 This includes both extra-EU BITs and the intra-EU BITs that were concluded with 12 states in central and eastern Europe which have since become EU Member States. The status of intra-EU BITs is in some doubt, following moves by the Commission to have EU member states terminate these treaties and a ruling by the European Court of Justice in 2018 that the investor-state arbitration provisions in the BITs are contrary to EU law, on the basis that such treaties interfered with the autonomy of that law.211 In January 2019, all Member States (including the UK) made a commitment to terminate intra-EU BITs in their entirety.212

Government policy in respect of the UK’s post-Brexit IIAs

104.In its May 2018 response to our report on the Continuing application of EU trade agreements after Brexit, the Government stated that it was “considering a wide range of options in the design of future bilateral investment agreements, including dispute settlement mechanisms.”213 In its response in September 2018 to our report on UK-US trade relations, it emphasised that for “future negotiations” it would “consider the appropriate design of investment provisions together with the fuller range of other trade and investment issues”. It would “seek to ensure provisions take account of international best practice and reaffirm the right of the government to regulate in the public interest.” At the same time, it noted that “ISDS tribunals cannot overrule the sovereignty of Parliament, overturn or force any changes to law”.214

105.In February 2019, in response to a Parliamentary Question on ISDS in post-Brexit trade agreements, the Government referred to the fact that it was still considering its response to four online public consultations on potential future FTAs.215 (On 18 July 2019, the Government published a summary of the responses it had received to these consultations.)216

106.Writing to the Chair of the ESC in February 2019 about possible post-Brexit investment protection provisions in relation to Vietnam, in light of the EU’s proposed IPA with that country, the Minister for Trade Policy, Mr Hollingbery, emphasised that “the ICS is just one model” for such provisions. The Government supported “ensuring fair outcomes of claims, high ethical standards for arbitrators and increased transparency of investor-state dispute settlement hearings” and thought these objectives could be “achieved in many different ways”. Regarding the EU’s proposal for a Multilateral Investment Court, the Government would “examine the detail carefully, as it develops” to see whether the proposal improved on existing procedures and achieved the Government’s objectives in a better way than alternative proposals.217 In subsequent correspondence, in May 2019, the Minister said the Government was still considering “a wide range of options”,218 including “modern innovations in policy approaches and in the design of specific treaty provisions”. In due course, it would “also consider whether to negotiate new investment agreements or renegotiate any of its existing 90 [Bilateral Investment] Treaties.”219 The ESC subsequently noted that the Government was “still unable or unwilling to share its position” on the ICS.220

107.When Dr Fox gave evidence to us in March 2019, we asked him about the possible inclusion of ISDS in future UK trade agreements. He responded that the UK was “one of the world’s top users of the investor state dispute resolution mechanisms”. While not a single case had been successful against the UK, British investors overseas benefited from the protection afforded by ISDS. He acknowledged that, in relation to countries with “similar or very similar legal systems” to that of the UK, the case for ISDS provisions was perhaps “less strong”; but “the key determinant” was whether UK investors would have the protection they needed and the confidence to be able to invest. This was important because of the income generated for the UK, which benefited “things like pension funds”.221 When asked again about ISDS in July 2019, Dr Fox reiterated that the Government would “come back to this issue”.222

108.When we asked Mr Alty about the roll-over of EU FTAs with an “investment chapter”, he referred to CETA (which contains investment liberalisation and investment protection provisions) and FTAs with Singapore and Vietnam (which contain investment liberalisation provisions). Since none of the investment provisions concerned had yet been applied, they were not a matter for roll-over; such provisions would, though, be considered in negotiating any future UK agreements with these countries.223

109.When we questioned the Minister for Investment about post-Brexit UK policy on BITs, he stressed the UK’s duty of sincere cooperation with the EU while it was still a member. The Government was “looking at the policy” and would “be happy to share [its] thinking and indeed look for input, most importantly from this Committee […] when we get out of the European Union”.224 It is notable that this is the first time the Government has told us that the duty of sincere cooperation precludes the UK from beginning to formulate its post-Brexit trade and investment policy while still a Member State. We have hitherto been led to believe that the duty of sincere cooperation only prevents the UK from negotiating or signing new FTAs before Brexit. It does not preclude, as Dr Fox put it to us, “limited conversations about potential scoping” with prospective FTA partners;225 and several UK Trade Working Groups are apparently engaged in such conversations.226

110.It is also noteworthy that the Investment Minister appeared to cast doubt on the importance of IIAs. He told us: “investment treaties are not a top priority for business—in fact, I don’t think a single business has ever raised that with me, which suggests that it is not that material.”227 This does sit interestingly alongside evidence (which we have noted above) that businesses do not seem greatly preoccupied with investment protection provisions; as well as the less than compelling evidence for a correlation between the signing of IIAs and increased investment flows.

Investment liberalisation outside agreements

111.As we have noted, Dr Bonnitcha explained to us that investment liberalisation can occur outside the framework of IIAs, on a unilateral basis.228 The Minister for Investment told us that the Department was “tilting towards market access right around the world”—meaning that it was pursuing just such unilateral investment liberalisation. It was working on identifying and targeting “barriers to doing business” that could be tackled outside the context of an agreement. He remarked that the Department’s Chief Trade Negotiation Adviser, Crawford Falconer, “likes to say [that] for every one person you have working on free trade agreements, you need three […] working on market access.”229 One example he cited was the elimination of a restriction on the establishment of English schools in Morocco, a barrier identified via the Market Access Digital Service “now set up” by the Government.230 He also stressed that “There are market access barriers all over the world, and when you just make that minor tweak in regulation, you can have tens or even hundreds of millions of pounds of business as a result.”231 The Secretary of State, when asked about Departmental resourcing of FTA negotiations, also emphasised the importance of market access in DIT’s work.232

Conclusions and recommendations

112.While we appreciate that International Investment Agreements fall within the portfolio of the Trade Policy Minister, we were disappointed by the limited amount that the Investment Minister said to us on this topic. Although we did take evidence from the senior official responsible for International Investment Agreements, the Director General for Trade Policy, he too was only able to provide us with limited information. Regarding the Government’s plans on post-Brexit UK International Investment Agreements neither the Minister nor the Director General for Trade Policy was able to set out even basic lines of policy. The Minister argued that the duty of sincere cooperation, which the UK is currently under as an EU Member State, prevents the Government from formulating such a policy until after Brexit. However, we find it hard to discern any credible legal basis for this claim. Furthermore, we note that the Government is already taking steps to develop a post-Brexit trade policy, through its consultation on a number of prospective trade agreements; and that Trade Working Groups are conducting scoping talks with several prospective trade agreement partners. The Government needs to have a policy in place for the eventuality of a Brexit scenario in which there is no transition period—which could occur on 31 October 2019. We are alarmed that no such policy seems yet to have been formulated.

113.In formulating its policy on International Investment Agreements, the UK cannot just go back to the approach it used before 2009 (when negotiating such treaties became a formal EU competence), given how hugely controversial international investment policy has since become and how significantly the policy environment has, in consequence, changed. We recommend that the Government should clarify where it stands on investment protection standards and dispute resolution mechanisms for investors. It must carefully consider and fully evaluate specific alternatives to conventional Investor-State Dispute Settlement provisions—including the EU’s Investment Court System and its proposal for a Multilateral Investment Court. The Government should also consider the compatibility of investment liberalisation and investment protection provisions in International Investment Agreements with UK policies in the areas of development, climate and human rights.

114.Another area the Government must consider is that of potentially including provisions in International Investment Agreements to counterbalance investor rights, such as enshrining investor obligations, allowing for state counterclaims or “carve-outs” from investment protection. If the Government chooses not to adopt any such provisions, it must explain the reasoning behind that decision.

115.As well as failing to develop a policy in respect of International Investment Agreements, the Government has little to say in respect of its policy at the multilateral and plurilateral levels in relation to investment liberalisation and investment protection. We recommend that the Government set out, in its response to this Report, what approaches it plans to take at these levels.

83 Q108; Dr Jonathan Bonnitcha (UIP0001), Dr Lauge Poulsen (UIP0002), Investment Association (UIP0005), War on Want (UIP0013), Institute of Directors (UIP0015), Dr Robert Basedow (UIP0020)

84 Q108; see also Dr Jonathan Bonnitcha (UIP0001).

85 Q108; Dr Jonathan Bonnitcha (UIP0001)

87 Dr Robert Basedow (UIP0020)

88 Department for International Trade, Single Departmental Plan, 27 June 2019

89 International Trade Committee, First Report of Session 2015–16, UK trade options beyond 2019, HC 817, March 2017, paras 9, 32

90 Dr Robert Basedow (UIP0020); European External Action Service, Treaties Office Database, Summary of Treaty: Official Title Agreement on Trade-Related Investment Measures

92 World Trade Organization, General Agreement on Trade in Services, 1995, Article I

93 Q109; see also Dr Robert Basedow (UIP0020).

94 Dr Robert Basedow (UIP0020)

95 Q110; Dr Robert Basedow (UIP0020)

97 Dr Jonathan Bonnitcha (UIP0001), Dr Lauge Poulsen (UIP0002), Professor Jason Yackeee (UIP0003), Trade Justice Movement (UIP0004), Advertising Association (UIP0008), Dr Zoe Phillips Williams (UIP0016), Dr Robert Basedow (UIP0020); International Energy Charter, “The Energy Charter Treaty”, February 2019

98 European Scrutiny Committee, Sixty-eighth Report of Session 2017–19, HC 301-lxvi, June 2019, paras 4.1–4.9

101 United Nations Conference on Trade and Development, Investment Policy Hub: International Investment Agreements Navigator

102 Qq116–117; see also Dr Jonathan Bonnitcha (UIP0001)

103 Dr Jonathan Bonnitcha (UIP0001)

105 Q133; Dr Barnali Choudhury (UIP0019); Global Justice Now (UIP0007); War on Want (UIP0013)

106 Qq133, 150–151; Dr Barnali Choudhury (UIP0019); War on Want (UIP0013)

107 Q136; War on Want (UIP0013)

108 Trade Justice Movement (UIP0004)

110 Dr Julia Calvert (UIP0010)

111 Q166; Dr Michael Waibel (UIP0011); Trade Justice Movement (UIP0004); War on Want (UIP0013); Dr Lauge Poulsen (UIP0002)

112 Dr Julia Calvert (UIP0010)

113 Qq110, 158; Dr Zoe Phillips Williams (UIP0016); Dr Julia Calvert (UIP0010). There are a few BITs between OECD members, as well as a number between Central and Eastern European countries, and between West European and North American states.

114 Dr Lauge Poulsen (UIP0002)

115 Dr Zoe Phillips Williams (UIP0016); see also Dr Lauge Poulsen (UIP0002).

116 Dr Lauge Poulsen (UIP0002)

117 Traidcraft (UIP0006)

118 Dominic Roughton and David Turner, “United Kingdom”, in Dominic Roughton and Kenneth Beale (eds), The International Comparative Legal Guide to: Investor-State Arbitration 2019 (London, 2018), p 145

119 Written Answer 223240, 25 February 2019; Oral evidence taken on 6 March 2019, HC (2017–19) 436, Q822; Joint Committee on Human Rights, Seventeenth Report of Session 2017–19, Human Rights Protections in International Agreements, HC 1833, Appendix: Government response (9 May 2019); Oral evidence taken on 3 July 2019, HC (2017–19) 436, Q963

120 International Trade Committee, First Report of Session 2017–19, Continuing application of EU trade agreements after Brexit, HC 520, March 2018, para 81

121 International Trade Committee, Second Report of Session 2017–19, UK-US trade relations, HC 481, May 2018, para 119

122 International Trade Committee, Fifth Report of Session 2017–19, Trade and the Commonwealth: developing countries, HC 667, November 2018, paras 113–115

123 Joint Committee on Human Rights, Seventeenth Report of Session 2017–19, Human Rights Protections in International Agreements, HC 1833, para 29

124 War on Want (UIP0013); Trades Union Congress (UIP0009); Global Justice Now (UIP0007); Trade Justice Movement (UIP0004); see also Traidcraft (UIP0006) – Traidcraft is a commercial organisation, rather than a civil-society body, but it is run as a form of social enterprise.

125 Dr Lauge Poulsen (UIP0002); Institute of Directors (UIP0015)

126 Trades Union Congress (UIP0009)

127 War on Want (UIP0013); Global Justice Now (UIP0007)

128 War on Want (UIP0013)

129 Dr Julia Calvert (UIP0010); Dr Barnali Choudhury (UIP0019); Dr Zoe Phillips Williams (UIP0016)

130 Institute of Directors (UIP0015)

132 Q161; Dr Michael Waibel (UIP0011)

133 Dr Julia Calvert (UIP0010)

134 Q164; Dr Robert Basedow (UIP0020)

135 Q143; Dr Julia Calvert (UIP0010)

136 Traidcraft (UIP0006)

137 Q160 [Pia Eberhardt]; see also Traidcraft (UIP0006), War on Want (UIP0013).

139 Dr Michael Waibel (UIP0011); see also Q166.

141 A further 11% of cases were discontinued and 2% involved a breach being found but without damages being awarded – UN Conference on Trade and Development, IIA Issues Note no.3: Special update on Investor-State Dispute Settlement: Facts and Figures, November 2017, p 4.

142 War on Want (UIP0013)

144 Q136 (see also Q22); Trade Justice Movement (UIP0004); Dr Lauge Poulsen (UIP0002)

147 Q162; Dr Zoe Phillips Williams (UIP0016); Dr Julia Calvert (UIP0010)

148 Dr Julia Calvert (UIP0010)

149 Dr Zoe Phillips Williams (UIP0016)

150 Dr Barnali Choudhury (UIP0019)

151 Dr Julia Calvert (UIP0010)

152 Q143. On this case, see also Dr Lauge Poulsen (UIP0002).

154 Global Justice Now (UIP0007)

155 Dr Barnali Choudhury (UIP0019)

159 Dr Julia Calvert (UIP0010)

160 Dr Robert Basedow (UIP0020); see also Dr Lauge Poulsen (UIP0002).

161 Professor Jason Yackee (UIP0003)

162 HM Government, Outward Investment: Selected Economic Issues, January 2014, p 20

163 Institute of Directors (UIP0015)

164 Institute of Directors (UIP0015)

166 Q164; Oral evidence taken on 22 May 2019, HC (2017–19) 2202, Q26; International Trade Committee, Second Report of Session 2017–19, UK-US trade relations, HC 481, May 2018, para 116

167 Dr Robert Basedow (UIP0020)

168 Dr Robert Basedow (UIP0020)

169 Dr Robert Basedow (UIP0020)

171 Oral evidence taken before the European Scrutiny Committee on 26 October 2016, HC (2016–17) 792, Q16

172 Q164; see also War on Want (UIP0013).

175 Oral evidence taken on 22 May 2019, HC (2017–19) 2202, Q34

176 Qq 124, 164; Dr Lauge Poulsen (UIP0002); Traidcraft (UIP0006); Dr Julia Calvert (UIP0010); European Commission, “A future multilateral investment court”, 13 December 2016

177 George Hollingbery MP to Sir William Cash MP, 31 May 2019; Dr Lauge Poulsen (UIP0002)

178 Qq160 [Pia Eberhardt], 166; Traidcraft (UIP0006), Dr Michael Waibel (UIP0011), War on Want (UIP0013)

179 War on Want (UIP0013)

180 Dr Barnali Choudhury (UIP0019)

183 Dr Barnali Choudhury (UIP0019)

185 Dr Barnali Choudhury (UIP0019)

187 Qq152, 166; Dr Lauge Poulsen (UIP0002); Trade Justice Movement (UIP0004)

188 War on Want (UIP0013)

189 Q166; see also Traidcraft (UIP0006), War on Want (UIP0013).

191 Dr Lauge Poulsen (UIP0002)

192 Dr Geoffrey Gertz (UIP0014)

194 Dr Jonathan Bonnitcha (UIP0001)

196 Q75; see also Trade Justice Movement (UIP0004)

197 Trade Justice Movement (UIP0004)

198 Global Justice Now (UIP0007)

199 International Trade Committee, First Report of Session 2017–19, Continuing application of EU trade agreements after Brexit, HC 520, March 2018, para 97; International Trade Committee, Fifth Report of Session 2017–19, Trade and the Commonwealth: developing countries, HC 667, November 2018, Ch 3

200 Foreign and Commonwealth Office, Economic Partnership Agreement between the CARIFORUM States, of the one part, and the United Kingdom of Great Britain and Northern Ireland, of the other part, CP 103 Volume 1, May 2019

201 Dr Jonathan Bonnitcha (UIP0001)

203 Qq75, 136, 143, 145, 151, 158, 172; Dr Jonathan Bonnitcha (UIP0001); Dr Lauge Poulsen (UIP0002)

205 This follows clarification in 2017 (in European Court of Justice Opinion 2/15) concerning the EU-Singapore FTA – War on Want (UIP0013); Dr Robert Basedow (UIP0020); Oral evidence taken on 22 May 2019, HC (2017–19) 2202, Q20; Court of Justice of the European Union, Press Release No. 52/17, 16 May 2017. Any EU agreements that include provisions touching upon such shared competence must be ratified by Member States’ parliaments, as well as the European Parliament.

206 War on Want (UIP0013)

208 Q115; European Commission, “EU-Japan investment negotiations, 11 July 2018

209 International Trade Committee, First Report of Session 2017–19, Continuing application of EU trade agreements after Brexit, HC 520, March 2018; see also Dr Robert Basedow (UIP0020).

210 Q75; Dr Robert Basedow (UIP0020); Dr Lauge Poulsen (UIP0002)

211 Advertising Association (UIP0008); Dr Zoe Phillips Williams (UIP0016); Clément Fouchard and Marc Krestin, “The Judgment of the CJEU in Slovak Republic v. Achmea – A Loud Clap of Thunder on the Intra-EU BIT Sky!”, Kluwer Arbitration Blog, 7 March 2018

213 International Trade Committee, Second Special Report of Session 2017–19, Continuing application of EU trade agreements after Brexit: Government Response to the Committee’s First Report, HC 1042, May 2018, p 9; see also European Committee B, EU-Singapore Free Trade Agreement (FTA) and Investment Protection Agreement (IPA), 10 September 2018, col 6.

214 International Trade Committee, Fourth Special Report of Session 2017–19, UK-US trade relations: Government Response to the Committee’s Second Report, HC 1440, September 2018, p 7

215 Written Answer 223240, 25 February 2019; see also Written Answer 231462, 15 March 2019.

216 Department for International Trade, “Summaries of consultations on future FTAs published”, 18 July 2019

217 George Hollingbery MP to Sir William Cash MP, 25 February 2019

218 See also Joint Committee on Human Rights, Seventeenth Report of Session 2017–19, Human Rights Protections in International Agreements, HC 1833, Appendix: Government response (9 May 2019).

219 George Hollingbery MP to Sir William Cash MP, 31 May 2019

220 European Scrutiny Committee, Sixty-eighth Report of Session 2017–19, HC 301-lxvi, June 2019, para 3.16

221 Oral evidence taken on 6 March 2019, HC (2017–19) 436, Q822

222 Oral evidence taken on 3 July 2019, HC (2017–19) 436, Q963

225 Oral evidence taken on 6 March 2019, HC (2017–19) 436, Q672

226 International Trade Committee, First Report of Session 2017–19, Continuing application of EU trade agreements after Brexit, HC 520, March 2018, Annex 2

227 Q265; see also Qq249, 267.

228 Dr Jonathan Bonnitcha (UIP0001)

232 Oral evidence taken on 3 July 2019, HC (2017–19) 436, Q932

Published: 30 July 2019