The new EU Investment Treaties: Convergence towards the NAFTA model as the new Plurilateral Model

BIT text?

Nikos Lavranos*

1. Background

The EU is about to conclude an FTA with Canada (CETA) which includes an investment chapter. A similar
free trade agreement (FTA) will soon be concluded by the EU with Singapore and India. Moreover, the EU
has obtained a negotiation mandate to conclude an FTA with Japan; very soon FTA with the US and China
will follow suit. The draft text of CETA and the one with Singapore largely follow the North American Free
Trade Agreement (NAFTA) and the 2012 US model bilateral investment treaty (BIT) text. It is safe to assume
that this will also be the case with regard to the FTAs with Japan, US, India and China. Accordingly, the
NAFTA model will have succeeded in being globally accepted and adopted by the most important
economies of the world. Thus, the approach of limiting investment protection by applying the minimum
standard of customary international law, using carve-outs and exceptions for specific sectors, increasing
“policy space” by allowing indirect expropriation for public policy reasons without compensation, using
qualified national treatment and most-favourite nation treatment etc. will have gained general acceptance
on a global level.

Considering that most, if not all, EU Member States have based their investment policy on the “Dutch gold
standard” BITs, the fact that the EU is adopting the NAFTA model is a very significant change. Accordingly,
the main question that will be discussed in this policy brief is whether this move could potentially put the
EU in the role of creating de facto a Plurilateral Model Investment Treaty, which would encompass the EU,
Canada, the US, Japan, India, China and Singapore.

2. Europe’s approach so far: The “Dutch gold standard model BIT”

As the map below illustrates, Europe, including Switzerland, was from 1959 until 2013 the only region in
the world where the “Dutch gold standard model BIT” has survived. More specifically, the “Dutch gold
standard model BIT” means inter alia:
 short, simple treaties;
 broad-based definitions for investors and investment;
 unqualified MFN, NT, FET;
 broad umbrella clause;
 no exceptions for certain sectors;
 no filter mechanisms;
 broad choice of ISDS mechanisms;
 free choice of arbitrators;
 full compensation for direct & indirect expropriation;

*
Dr.iur; LL.M.; this paper is based on a presentation held on 13 February 2013 at the WTI in Bern. The views expressed
in this policy brief are exclusively personal and cannot be attributed to any (governmental) organization. The usual
disclaimer applies. The author can be contacted at: nlavranos@yahoo.com

Electronic copy available at: http://ssrn.com/abstract=2241455

 The world of BITs & FTAs from 1959-2013

Dutch model
NAFTA
NAFTA

NAFTA

TPP
NAFTA

NAFTA

3. The NAFTA model spreading around the globe

Whereas the EU Member States, as well as Switzerland, have been busy in creating a BITs network of
1,500+ BITs, which is approximately half of all existing BITs worldwide, outside Europe the NAFTA-model
has been spreading around the globe. Starting with the Canada-US Free Trade Agreement in the late
1980’s, which was expanded with Mexico into NAFTA in 1994, the NAFTA model – with slight modifications
over time – has been used for example by the US1, China, Japan, Singapore, South Korea, India, Australia,
New Zeeland. It has also been the basis for the recently concluded BIT between Canada and China 2 and is
used for the still ongoing BIT negotiations between the US and China. In addition, the NAFTA model is also
used for multiparty investment treaties in Asia, such as for the recently concluded trilateral investment
agreement between China, Japan and Korea3 as well as for the ongoing negotiations for a Trans Pacific
Partnership (TPP) agreement4, which will encompass Asian as well as North American countries. In other
words, all major economies of the world – except Europe – have been using the NAFTA model.

1
See the 2012 US model BIT text as the most recently updated NAFTA-type model text, available at:
http://www.ustr.gov/sites/default/files/BIT%20text%20for%20ACIEP%20Meeting.pdf.
2
See: http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/fipa-apie/china-
chine.aspx?lang=eng&view=d.
3
See: http://www.meti.go.jp/press/2012/05/20120513001/20120513001-3.pdf.
4
See: http://tppinfo.org/, which is not an entirely neutral website.

Electronic copy available at: http://ssrn.com/abstract=2241455

As mentioned above, the EU comes on the stage as new player negotiating FTAs with a whole bunch of
countries, which use the NAFTA-model, for example regarding , CETA, EU-Singapore, EU-India, EU-Japan,
and soon also regarding EU-US, EU-China etc. As is obvious from the map below, since all big economies of
the world are basing their investment treaties on the NAFTA-model, the NAFTA-model is de facto rapidly
becoming the new standard investment model treaty for the whole world.

The world of BITs & FTAs from 2013 onwards

NAFTA
NAFTA
NAFTA

NAFTA

TPP
NAFTA

NAFTA

4. What does the NAFTA-model mean?

The NAFTA-model as opposed to the "Dutch gold standard model BIT" entails many significant changes, in
particular the following:

 complex, long treaties with lots of exceptions, which will cause more rather than less disputes;
 accepting minimum standard of customary international law instead of FET;
 accepting indirect expropriation without compensation;
 limited access to investor-state dispute settlement;
 filter mechanisms, carve-out and exceptions for certain sectors like financial services;
 no umbrella clause;
 fixed closed roster of arbitrators;
 application of pre-investment review mechanisms (for example Canada Investment Act, US CIFUS);
 additional obligations are imposed on investors (i.e. OECD guidelines for multinationals, CSR,
transparency rules);
 full access of NGOs in ISDS through amicus briefs;

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  Contracting Parties can "correct" awards by binding interpretations;
 more policy space for host states;
 more state-to-state dispute settlement is included;
 additional chapters on sustainability, environment, labour, transparency will be included;
 FTAs are comprehensive agreements in which investment protection can be traded off against
other issues;

In addition, the NAFTA-model also departs from the “Dutch gold standard model BIT” in that it covers
investment protection for both pre- and post-establishment phases of investments. However, the problems
associated with this aspect are not discussed in this policy brief. The non-exhaustive list mentioned above
illustrates the significant transformation that the new EU investment agreements will bring about for the
investment policy of the EU Member States, and ultimately for European investors, which hitherto have
been investing on the basis of the “Dutch gold standard model BIT”.

In a nutshell, the consequences for the EU Member States and European investors can be summarized as
follows:

Negative
Lower investment protection standards
More limited access to ISDS and more difficulties
for investors to bring a claim
More politicization of disputes because of
increased use of state-state dispute settlement
Less chances to get compensation for indirect
expropriation
Prudential carve out-outs for important sectors,
such as financial services
Positive
More “policy space” for host-states, which
increasingly are EU Member States
More influence by EP, NGOs, civil society
More room for protectionist & nationalistic
measures
No need any more (except in rare
circumstances) to compensate for indirect
expropriation taken for reasons to protect
environment, labour, social rights etc.

If this table of consequences is accepted as true, the question arises: how does the NAFTA-model compare
to the “Dutch gold standard model BIT”? It is striking that whereas the Netherlands has never faced a single
investor-state dispute in the past 50 years, the NAFTA states (Canada, US and Mexico) have faced more
than 50 NAFTA Chapter 11 disputes since 1994.5 From this perspective the “Dutch gold standard model BIT”
is clearly superior to the NAFTA-model. The more fundamental question is whether the NAFTA-model leads
to a more balanced, fairer investment agreement as is often claimed, in particular by NGOs? While it is too
early to answer this question for the global level, there are potentially several advantages to the NAFTA-
model, when it is globally adopted.

First, the advantage of a globally adopted model BIT, such as the NAFTA-model, could lead to more
harmonized investment standards, since more or less the same NAFTA-standards would be used in all BITs
throughout the world. Moreover, if the same model BIT is used globally, it could result into an increased
convergence in jurisprudence of arbitral tribunals.

5
See for the complete, detailed overview: http://www.nafta-sec-alena.org/en/view.aspx?conID=616.

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Second, in the long term, this could lead to a general acceptance of new Plurilateral Investment Model BIT
text based on the NAFTA-model. If the EU, US, China, Japan, Singapore and South Korea would express their
willingness to expressly sign up to such a Plurilateral Investment Model BIT text, for assistance by agreeing
on common investment principles, this could encourage other countries to voluntarily sign up to it. An
example of such common investment principles, which could be adopted by other countries are the
recently adopted "US-EU Shared Principles for International Investment". 6 Indeed, the increased “policy
space” that the NAFTA-model seems to promise to host states could be appealing to a wide range of
developing countries and emerging economies, which seem to become increasingly more skeptical towards
the “old school” “Dutch gold standard model BIT”.

Third, if a de facto Plurilateral Investment Agreement is eventually globally accepted by the major
economic powers of the world, the way would be open for a Multilateral Investment Agreement. The
adoption of a Multilateral Investment Agreement, which admittedly would take many years, could in turn
lead towards a global "level playing field" because such an agreement would impose on a global level
similar obligations to all investors (incl. OECD Guidelines, CSR etc) and give a similar level of “policy space”
to all host states.

Finally, if one were to continue to phantasize further, the envisaged Multilateral Investment Agreement
could even include a standing Dispute Settlement Body for Investment, which could include an Appellate
Body for ISDS and a list of arbitrators. The development described above could be schematically
summarized as follows:

Standing Dispute Settlement Body, with

Appellate Body & closed list of arbitrators

Multilateral Investment Agreement

Plurilateral Investment Model text = Platform,

any country can sign in

establishing de facto NAFTA model as a global model

replacing over time all "old-school" BITs

6
See: http://www.ustr.gov/countries-regions/europe-middle-east/europe/european-union.

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5. Outlook

The entrance of the EU as new player in the investment treaty world will have significant impact on the
global landscape of model treaties. As soon as the EU will conclude NAFTA-type investment agreements, in
particular with major trading partners such as the US and China, the NAFTA-model will become the de facto
standard model treaty investment text. This will lead towards a rebalancing of investment treaties and ISDS
in that it will increase the policy space of host states, enhance the influence of parliaments (the EP in the
case of the EU) and NGOs because of increased possibility to use amicus briefs, while at the same time it
will lower the overall level of investment protection and it will reduce the business opportunities for those
arbitrators who will not be on the closed list of arbitrators. However, while the NAFTA-model seems
attractive for host states, the experience of the NAFTA member states indicates that the number of
disputes will be much higher compared to the countries that use the "old school" "Dutch gold standard
model BIT". Thus, host states should be aware of the real possibility that they have to pay a price for more
"policy space". Similarly, investors are well advised to take these developments into account and reconsider
and modify accordingly their investment strategy. The outlook can be schematically summarized as follows:

RESULT: a rebalancing of investment treaties & ISDS

good good for

for EP NGOs bad for
good for bad for more ISDS likely
host states investors arbitrators