In a little-noticed policy change that came into effect in December 2009, the EU has assumed responsibility for negotiating international agreements covering FDI.

The change means that the EU’s executive branch, the European Commission (EC), will add FDI to the current mix of ingredients (tariff reductions, intellectual property protections, etc) contained in free-trade agreements negotiated by the EU with external trading partners.

As part of the policy shift, individual EU member states will scale back their own negotiation of bilateral investment treaties with non-EU countries. For decades, Germany, the UK, the Netherlands and other major capital exporters negotiated their own vast networks of FDI treaties with other governments. Today, there are more than 1000 such bilateral agreements and they protect a large volume of the world’s FDI flows.

Indeed, the agreements have been beloved by foreign investors (and their lawyers) because they typically enable businesses to resolve differences with their host states in international arbitration rather than in local courts, which may be less reliable. What’s more, the agreements have been narrowly focused on protection against nationalisation, discrimination and other pitfalls, without imposing any human rights, labour or corporate social responsibility duties.

 However, the fate of these bilateral treaties remains to be seen.

For the moment, the EC proposes to review the pacts to in order to assess their compatibility with the EU’s international commercial policy. If given a clean bill of health, individual agreements could be ‘grandfathered’ by the EU so that they remain in force until the EU gets around to negotiating new pacts with the same trading partners.

Change of gear: big exporters, such as Germany, will scale back negotiations of their own networks of FDI treaties with other governments under the new rules

But, if some pacts fail to pass muster – perhaps because they go too far in protecting foreign investors from all manner of political risks – the EC could push for such bilateral agreements to be torn up.

Indeed, tensions are brewing.

Critics of these bilateral treaties – including many charities, development organisations, and some academics – say the pacts undermine the capacity of host governments in the developing world to regulate FDI for the common good. In other words, even legitimate public-spirited policies in areas such as health and the environment could be illegal under these foreign investor protection agreements.

Meanwhile, fans of the old bilateral arrangements fear that future EU-negotiated investment agreements could be riddled with exceptions so that foreign investors enjoy much less comprehensive protection from ‘mistreatment’ by host governments.

For now, the EC’s proposed review of existing bilateral investment treaties must receive the blessing of the European Parliament and the EU’s Council of Ministers (which is comprised of political representatives of the member states). Do not be surprised if a spirited lobbying effort breaks out as stakeholders try to influence the future shape of the EU’s international investment policy – and the fate of the more than 1000 bilateral investment treaties that currently regulate foreign investment into and out of the EU.

^{Luke Peterson is a journalist and research consultant based in Ottawa, Ontario. He produces an investigative news bulletin on international investment treaties for a Canadian think tank (www.iisd.org)}