In 2009, the European Commission (EC) acquired the authority to negotiate international treaties relating to FDI, wresting that power from the individual member states thanks to the terms of the so-called Lisbon Treaty. But, nearly a decade later, the EC has encountered obstacles to including investment provisions in broader trade and economic agreements that are being negotiated with third countries including China, Japan, the US and India. 

Prior to 2009, individual member states enjoyed 'competence' over investment negotiations. Germany pioneered the negotiation of so-called bilateral investment treaties in the late 1950s, inking a deal with Pakistan, and later with well over 100 other countries.

Other EU member countries have long followed a similar path. They would negotiate one on one with other countries to ensure investments could flow more freely to places outside of the EU bloc, without fear of mistreatment or expropriation. In the half-century since 1959, individual EU countries concluded more than 1000 bilateral investment treaties with non-EU countries.

Hopes dashed

When the EU acquired authority over external investment flows in 2009, it hoped to negotiate blanket agreements on behalf of all member states with external partners. A single EU treaty with, say, Russia would replace the bilateral treaties that countries such as Germany and the UK had signed earlier with that country, and fill gaps where no bilateral treaties exist. (Poland, Cyprus and Portugal, among others, do not have bilateral investment treaties with Russia.)

Ideally, the EU hopes to include these investment provisions in the broader free-trade agreements that it negotiates with countries around the world. However, two things have knocked its ambitions off track.

First, there has been a major public backlash, particularly in Europe, against some of the features of international investment treaties. Many citizens are uneasy that such treaties allow foreign investors to leapfrog over domestic courts, and drag their host countries to international arbitration – particularly in relation to sensitive regulatory or policy questions such as tax, environmental protection or health and safety laws. Even if foreign investors suffer arbitrary mistreatment in some jurisdictions, this does not mollify critics who worry that investment treaties offer a bludgeon for investors to use against even well-meaning government measures and regulations.

Other critics of investment treaties hail not from the political left but the libertarian right. The Washington, DC-based Cato Institute think tank, for instance, has expressed scepticism on whether governments should expend political capital negotiating special international treaty protections for foreign investors. Instead, Cato analysts argue that investors should purchase political risk insurance if they want protection from overseas perils.

The public backlash has led the EU to try to find a middle ground between investment protection enthusiasts (including lawyers who specialise in international arbitration) and the various critics. The backlash reached a recent peak in the context of efforts to ratify a Canada-EU trade agreement that contains controversial investment provisions. Ultimately, the EC reached a compromise whereby it would treat this agreement as a so-called mixed-competence agreement, meaning it would require the approval of Brussels and of national and regional parliaments across the EU.

A bad template?

The really bad news for the EU is that its Comprehensive Economic and Trade Agreement compromise now appears to be the arduous template by which any future EU investment agreement will come into force. In a second blow to the EU’s investment negotiation ambitions, the European Court of Justice ruled earlier in 2017 that the negotiating mandate acquired by Brussels in 2009 over the investment issue is not an unfettered one. 

While the EU may have exclusive competence over FDI negotiations, this does not extend to portfolio investment flows or to the crucial arbitration mechanisms that are typically part of any investment treaty. Any trade and investment agreement containing the latter features must be treated as a mixed-competence agreement, and thus go through painstaking ratification by parliaments across the EU.

The upshot of the controversy over investment treaties and the recent European Court of Justice ruling is that the EU is likely to abandon its ambition to incorporate foreign investment chapters into broader trade and economic agreements. To do otherwise would only relegate free-trade agreements to unwanted public scrutiny and subject them to country-by-country ratification.

Instead, starting with a nearly completed EU trade pact with Japan, the investment issue is likely to be carved out and negotiated on its own. When Brussels announces the conclusion of a deal with Japan (which could come by the end of 2017) the pact will cover lots of ground, from trade to intellectual property to agriculture. But the deal is unlikely to feature a suite of protections and benefits for foreign investors. Instead, the negotiators will celebrate their trade deal, but agree to keep talking about a future agreement on investment.

When any narrowly tailored agreements on investment get negotiated in the coming years, they are likely to attract withering public scrutiny and to have to run the gauntlet of political approval in all EU capitals. Thus, it remains to be seen how many such EU investment agreements will come into force. 

Meanwhile, the 1000-odd bilateral investment treaties negotiated in a more patchwork and quieter fashion over the past half-century will remain in place. Those treaties may be imperfect, but they will continue to govern at least some of the investment flowing between individual EU countries and external partners. 

Luke Eric Peterson is the publisher of InvestmentArbitrationReporter.com, an online news and analysis service focused on foreign investment legal disputes.