Countries in negotiations with the EU will have to proceed assuming issues relating to the UK will not be covered
Among various uncertainties following Brexit, those on investment rules as part of the FTAs recently concluded, or being negotiated by the EU, can be significant. The EU is engaged in several trade and investment negotiations, including the Trans-Atlantic trade and investment partnership (TTIP) with the US. It has recently finished negotiating important trade agreements with Canada and Vietnam and is discussing Economic Partnership Agreements (EPAs) with African countries. Discussions on trade and investment with India, and on investment with China, are also significant.
The EU has been a major actor in bilateral free trade and regional trade agreements. Over time, it has taken over the mandate of negotiating trade and investment agreements on behalf of its member states with the rest of the world. This includes negotiating bilateral investment treaties (BITs). The EU’s Lisbon Treaty of 2009 gave it exclusive authority for negotiating foreign investment issues on behalf of members. This meant henceforth there would be only one overarching EU BIT that members would adhere to and partners would have to deal with. The move created confusion over the fates of existing BITs that individual EU members had with other countries. China and India, for example, have BITs with 25 of the EU member countries, signed before the Lisbon Treaty. These BITs have been variously invoked in investment disputes, such as, for example, India’s BIT with the Netherlands. While the confusion was yet to be resolved, Britain’s exit from the EU has added new complications. China is already negotiating a BIT with the EU, while India’s FTA talks with it include trade and investment.
These would now have to proceed on the assumption that investment issues pertaining to Britain would not be resolved within these frameworks.
The implications are significant for China and India as they are now significant capital exporters into EU and Britain. In all probability, they will have to revisit bilateral investment protection agreements with the UK separately. They still have time to absorb the implications of Brexit on investment negotiations with the EU given that their talks are yet to be concluded. In a sense, the delay in concluding their negotiations with the EU can be seen as a blessing in disguise. The situation though is more complicated for other countries that have recently concluded trade and investment negotiations with the EU. These include Canada, Vietnam and the US.
Both Canada and Vietnam are members of the US-led TPP. They have worked out individual FTAs with the EU with the larger objective of gaining preferential market access in Europe so that they have similar market access conditions and are able to trade with broadly identical rules in both the Pacific and Atlantic. With the US and EU negotiating the TTIP, which is almost at its final stages, the urge of other TPP members to work out preferential trade and investment deals with the EU is understandable. EU’s FTAs with Canada and Vietnam contain elaborate provisions on investment. The most significant among these are the Investor-State Dispute Settlement rules (ISDS).
The ISDS empower businesses to arbitrate against sovereign governments of parties of the FTAs. It is not necessary that the ISDS only feature in FTAs and RTAs. On the contrary, they used to mostly feature in BITs earlier. But the EU and US have preferred their inclusion in the FTAs they are negotiating given that investments are integral to cross-border trade in services between countries. Thus the ISDS feature in EU’s FTAs with Canada and Vietnam and are part of the TTIP as well.
The Canada and Vietnam FTAs are done deals. Given that the ISDS provisions in both these agreements have been based on the assumption of cross-holding of companies across Europe, including Britain, the latter’s exit has implications for the protection that both businesses and states would visualize for capital exports into Europe. A necessary implication would be negotiating separate BITs with the UK by Canada and Vietnam, as well as by the US, post-TTIP. But that would take time. The contents of future BITs with the UK would require aligning them as close to investment provisions in FTAs and BITs with the EU as possible.
As Britain and EU work out modalities in the coming months over Britain’s exit, considerable attention will be on the institutional economic relationship between them. International persuasion is likely to play an important role in this regard. Most countries having FTAs with the EU, or working them out, would prefer Europe and Britain to retain a certain degree of institutional synergy. This is particularly important from the perspective of investments. The larger objective of the non-European partners of the EU and Britain would be to ensure that rules governing cross-border management of investments, particularly arbitration, remain similar between EU and Britain, so that, for investment purposes, both continue to be visualised integrated notwithstanding Brexit.
The author is senior research fellow and research lead (trade and economic policy) at the Institute of South Asian Studies, the National University of Singapore. E-mail: email@example.com Twitter@amitendu1.
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