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The COVID-19 pandemic and international trade Contents

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7Foreign Direct Investment

92.As we have already noted (in Chapter 1), the pandemic has had a major impact on global flows of FDI. Definitive data regarding the impact of the pandemic on UK inward investment are not as yet available, but the effect is likely to be significant.288

93.In responding to this situation, governments will need to review and adjust their policies in respect of investment promotion and facilitation. At the same time, the consequences of the pandemic have posed a number of difficult policy issues, notably in respect of International Investment Agreements (IIAs) and arrangements for screening inward investment in respect of national security.

Promoting and facilitating investment

94.Investment promotion agencies (IPAs) are bodies (usually government agencies) responsible for investment promotion (marketing the host country to attract inward investment) and facilitation (making it easier for investors to do business). Dr Zhan, of UNCTAD, explained to us that IPAs also provide “aftercare” services, by dealing with any problems arising after the investment has taken place; and advocacy services, mediating between host governments and investors.

95.Dr Zhan said that, during the pandemic, IPAs had been primarily concerned with the retention of existing investment, as well as trying to ensure that investments passing through the “pipeline” were not lost (some investments in new enterprises go through several stages before the business is fully operational).289 The measures taken by IPAs and governments in respect of inward investors included: helping enterprises navigate through shocks to supply and demand; pandemic-related information services; “administrative or operational support”; incentives to convert or repurpose production for pandemic purposes; “state participation in crisis-affected industries”; and support for local SMEs, to maintain supply chains.290

96.The role of IPA in the UK is played by DIT.291 In May, the Secretary of State told the Chair in correspondence that DIT staff in overseas posts:

in large source markets for FDI into the UK are also speaking to local companies invested in the UK. This outreach is being used to understand the longer-term impact of COVID-19 on their UK operations, and signpost them to any relevant support available.292

97.Courtney Fingar, of the New Statesman Media Group, told us that, as well as “interacting with and communicating with existing investors”, the message being sent to prospective investors was “really paramount”. She said that, while DIT’s webpage included a link for “Support for exporters and inward investors”, the information provided included “a lot more on trade than investment”. Trade and investment were both important, but they were “not the same thing” and needed “to be treated quite differently “. For an investor, it would not be immediately apparent that DIT was the place to seek help and advice. The support measures listed by the Department in respect of the pandemic were mostly not “relevant to inward investors”. Inward investors needed “targeted messaging” and “dedicated information and support”. Ms Fingar drew a contrast with the French IPA, Business France. Prominently displayed on the front of their website was the message “Covid-19. We’re here for you, for our investors. We’re helping you”, with a link to “a page listing Covid-19 support measures directly for inward investors with a drop-down menu of frequently asked questions and all the support”.293 We asked the Secretary of State how DIT was supporting investors and communicating with them. She told us that the Investment Minister, Lord Grimstone, “has been working with and talking to investors”.294

98.Regarding the role of investment in the recovery from the economic effects of the pandemic, Ms Truss wrote to our Chair in May that DIT was “working on an Investment Strategy that secures global investment to boost growth, drive productivity and create jobs.”295 She told us in oral evidence that the Government was “reforming our investment strategy overall to make sure it is levelling up the UK”. It would include the establishment of an “economic campus” in the north of England.296 She added:

We are absolutely focused on this issue because, as we come out of the coronavirus crisis, we are going to see diminished investment availability across the world. We need to make sure that UK companies are getting the lion’s share of that investment.297

She also indicated that she hoped to consult us as the Government launched its new strategy.298

Conclusions and recommendations

99.As part of its role in promoting and facilitating inward Foreign Direct Investment, DIT has a responsibility to provide investors with advice, support and assistance to help them deal with the current unprecedented circumstances. DIT should build on its hard work in this area and do more to communicate proactively to investors what help and information is available to them. It must tell us what the uptake has been for such services during the pandemic, and what it has done to ensure that it is reaching as many investors as possible.

100.We welcome the fact that the Government is reforming its Investment Strategy and the Secretary of State’s indication that we will be consulted over this. The new Investment Strategy should be published in a similar format to that of the Export Strategy, as recommended by our predecessor committee. The Government must set out how the Investment Strategy will dovetail with the updated Export Policy, as well as the Industrial Strategy and the Government’s regional policy—and say how the roles of HM Trade Commissioners, DIT staff in overseas posts and the GREAT campaign will be aligned with it. The Government must also give detailed information on how its plans for an “economic campus” in the north of England, mentioned to us by the Secretary of State, will relate to its Investment Strategy.

International Investment Agreements

101.International Investment Agreements (IIAs) can take the form of: Bilateral Investment Treaties (BITs), dealing just with investment matters; or Treaties with Investment Provisions, including Free Trade Agreements (FTAs) with investment chapters. Evidence submitted to us by several campaigning organisations drew attention to provisions in some IIAs relating to Investor-State Dispute Settlement (ISDS), under which investors are able to sue host states for substantial damages where those states take actions which are regarded as damaging to the investors’ interests.

102.Laura Bannister, of the Trade Justice Movement, told us that the UK was a party to 91 BITs; and, like countries around the world, had taken measures in response to the pandemic that could be considered to be in breach of its obligations under investment agreements. Such actions included advising banks to suspend payments to shareholders, the enforced closure of businesses and telling customers to stay at home. Law firms were “already ramping up” to pursue ISDS claims; and one third-party funder of such cases had said “’Frankly, we’re drinking from a fire hose’, in terms of the level of cases that it is experiencing.” Ms Bannister described the levels of compensation paid in ISDS cases as “extreme”, reaching the level of “hundreds of millions, potentially billions” of pounds. She envisaged the possibility of UK firms bringing “some really ugly cases” against the governments of developing countries. To avoid this situation, there should be an immediate “withdrawal of consent to arbitration”, which would create “legal uncertainties that make it hard for these claims to proceed”. Further, there should be negotiations among parties to investment agreements on the “mutual termination” of ISDS provisions, so that governments can be free to respond appropriately to emergencies such as the pandemic.299 Ms Bannister emphasised that ISDS protection applies only to foreign investors, creating “a very unlevel playing field” with domestic investors.300

103.Ms Fingar thought that ISDS was “a very valid issue to raise”, but she was concerned that the interests of foreign investors should not be counterposed to those of the British public and the “British purse”. She said those investors made a substantial contribution to the UK in both jobs and tax receipts. The issue of ISDS disputes was “a really thorny one”. These processes were put in place to reassure investors that “they would not be taken advantage of” and there was a balance to be struck. Dr Zhan added that the issue with ISDS provisions related to “the older generation of investment treaties”, of which there were some 2,900. These included the UK’s BITs, which had all been negotiated “decades ago” and were now coming to the fore following Brexit (since issues around investment policy are an area of EU competence). The experience of the financial crisis during 2008–9 showed that there was a risk of ISDS cases being brought over emergency measures; UNCTAD had raised this issue, and a group of “eminent persons” had called for an ISDS moratorium during the pandemic. The issue at stake was “how to balance the rights and obligations between firms and states, and between creating a stable investment climate on the one hand and the Government’s right to regulate and flexibility”, particularly in a crisis. Dr Zhan thought that there was a need for reform and the UK should “update its existing investment treaty network”.301

104.We also heard about the implications for investment agreements of potential policies around strengthening supply-chain resilience by means such as onshoring. Ms Bannister said that the Trade Justice Movement was “essentially agnostic about whether localisation is the best approach in responding to this crisis”; but where governments wished to go down that route, they could be constrained by the terms of investment agreements. One instance of this was the presence in some agreements of a ban on performance requirements. Such requirements included stipulating that enterprises must reserve some jobs or seats on boards of directors for local people, use a certain amount of local content in their products or spend a certain amount on local research and development. Such requirements were more common in recent investment agreements; they were not present in any of the UK’s agreements, given that they were of an older generation.302 Dr Zhan noted the proliferation in recent years of industrial policies in over 100 countries, which were potentially inconsistent with the WTO Agreement on Trade-Related Investment Measures, whose provisions include restrictions on performance requirements. He thought that WTO member states would eventually have to revisit this issue. Ms Fingar agreed that “all of this has to be worked out” and said the UK would have to negotiate the issue of local content requirements in relation to FTAs, as well as BITs and WTO rules.303

105.The Secretary of State told us that “any agreement we sign will be absolutely clear about the right of the UK Government to regulate”; overseas corporations would not be “able to ride roughshod over UK law” and this had been considered in all FTA negotiations that the Government had conducted.304 She added that “we will be going through investor chapters with a [fine-]toothed comb” to ensure the Government’s right to regulate was not hampered.305

Recommendations

106.The Government should set out its policy on updating existing UK Bilateral Investment Treaties, and on the terms of future International Investment Agreements, in light of the challenges and issues that the pandemic has highlighted. We welcome the Secretary of State’s commitment to scrutinise closely investment chapters in future Free Trade Agreements with a view to preserving the Government’s right to regulate. More detail should be provided on what provisions regarding the right to regulate the Government would regard as unacceptable in an investment agreement.

Investment screening

Dr Zhan told us that:

at a time of crisis, when you have a lot of companies in difficulties or assets in stress, of course, the price will go down of the assets, and then that may trigger fire sales […] If the buyer is a vulture capitalist or some opportunist, that may be detrimental.306

107.He explained that a number of governments, especially in developed countries, had put in place new screening procedures in respect of inward FDI. This was driven by concerns about national security, as well as public health. With asset prices low, countries feared losing “’strategic assets’, in particular technology and R&D facilities” that were crucial to their competitive advantage. It was important to define what counted as national security and as strategic assets or strategic infrastructure. It was also necessary to determine the nature of investments (whether investors were acquiring overall control or just injecting capital), as well as the investors’ long-term objective (whether to strip out assets or to develop the enterprise in the host country). Governments needed to do this carefully, keeping their economies open for investment, which was particularly important in respect of R&D and technology.307

108.Ms Keynes, of the Economist, told us that there were major differences between countries in how they screened FDI. There was clearly scope to harmonise these, for instance in relation to the capital thresholds that would trigger an investigation and the scope of screening policies. There would be advantages to such coordination. An obvious area of coordination would be the sharing of information on risks, as had been discussed in the EU. Ms Schneider-Petsinger, of Chatham House, explained that EU regulations on FDI screening would enter into force in October 2020. These involved EU-level monitoring of foreign acquisitions and voluntary exchange of information between Member States on pending FDI screening cases. Since national concerns were driving the screening of FDI, collaboration was not necessarily being pursued; but the Committee on Foreign Investment in the United States was talking to the UK and the European Commission. There was also scope for the OECD to play a role.308

109.We asked Ms Fingar about the National Security and Investment Bill which the UK Government intends to bring forward. She told us that the Government’s plans seemed to be “quite in line with the way that other countries are doing it, and much in line with international norms”. Investors wanted a clear mechanism, fair treatment and prompt hearing of their cases; and the planned legislation would allow for that. The envisaged triggers for investigations were clear and “not unreasonable”.309

110.The Secretary of State confirmed it was the Government’s view that “at a time where companies could be low valued due to the coronavirus crisis” it was important to beware of “predatory investments”. She was working closely on this with the Secretary of State for Business, Energy & Industrial Strategy (who had overall responsibility in this area), looking at “those types of investors and screening techniques”. Countries such as Australia and Japan, which were also open for positive investment, were doing the same at the moment.310 Ms Truss said that DIT would not exercise powers under the National Security and Investment Bill.311 The Department’s job was “bringing the investment in” and the Government was making sure any legislation “does not prevent positive investment”. She added that she was “extremely supportive of the whole concept of investment screening”.312

Recommendations

111.As the Secretary of State has acknowledged, investment screening entails balancing national security against the need for inward investment. The Government must set out clearly the basis on which it will strike that balance, as recommended by our predecessor committee. It must ensure that all relevant interests will be taken into account in its planned investment screening regime—and it must clarify what role, if any, is envisaged for DIT in that regime, as also recommended by our predecessor.

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